Engineering Issues In Tax Depletion Cases

In order for a taxpayer to produce income, he may be required to exhaust his capital assets. With respect to the mining industry, those exhaustible capital assets may result in income tax deductions under the general categories of depreciation, obsolescence, losses and depletion. The percentage depletion deduct ion concept is not based upon "economic" depletion, or "geological" depletion theories. Instead, it is wholly an income tax concept created by Congress. This is significant in that, in its application, tax depletion has no adherence to traditional economic or geological depletion concepts For example, the Internal Revenue Code limits percentage depletion to 50 percent of the miner's net income for the taxable period.1/ Should a particular miner extract and sell 500,000 tons of material during the year, but at a loss, he receives no percentage depletion. The same would apply to an electric utility which mined its own coal. Should its mining costs exceed the "going price" for coal, as established by actual arm's-length sales in the market, the utility has no net income, and is therefore not entitled to percentage depletion.2/