Allocation of Income and Deductions in Oil and Gas Ventures

THE PROBLEM

In the field of federal taxation, the demands of individual problems frequently obscure the need for perspective in relating a particular area to the basic framework of our tax structure. Especially is this true of the allocation of the tax benefits and burdens attendant to oil, gas, and mineral ventures among those who participate in them. It is an everyday experience for tax practitioners active in the area to arrange the mechanics of the tens of thousands of mineral explorations which are undertaken each year so as to achieve, if they can, a desired incidence of taxable income and expense. For them, the task is ordinarily thought of as one controlled by form and procedurematters of title, at times divorced from beneficial ownership; the existence of debt, but perhaps without liability; the possession of operating rights and obligations, although control may in fact be elsewhere; and other concepts which have acquired a unique importance in the oil, gas and mineral tax area.

Recent developments suggest a new look at the adequacy of this approach. Judicial lines of demarkation, frequently ignored in everyday tax administration, have been reinforced by new decisions.1 Trial court decrees,2 [106] followed administratively for years notwithstanding higher authority to the contrary,3 have been further discredited.4 Attempts to provide adequate guides