JUSTICE O'CONNOR delivered the opinion of the Court.
These consolidated cases present the question whether §§ 611-613A of the Internal Revenue Code (Code), 26 U. S. C. §§ 611-613A, entitle taxpayers to an allowance for percentage depletion on lease bonus or advance royalty income received from lessees of their oil and gas mineral interests.
Ever since enacting the earliest income tax laws, Congress has subsidized the development of our Nation's natural resources. Toward this end, Congress has allowed holders of economic interests in mineral deposits, including oil and gas wells, to deduct from their taxable incomes the larger of two
Taxpayers have historically preferred the allowance for percentage, as opposed to cost, depletion on wells that are good producers because the tax benefits are significantly greater. Prior to 1975, it was well settled that taxpayers leasing their interests in mineral deposits to others were entitled to percentage depletion on any bonus
Even under pre-1975 law, however, depletion deductions eventually had to be attributed to actual production. Lessors receiving bonus or advance royalty income without oil or gas being produced during the life of the lease have been required to recapture their depletion deductions and restore the previously deducted amounts to income. See Douglas v. Commissioner, 322 U.S. 275, 285 (1944). Furthermore,
The 1970's, however, brought about an abrupt redirection in the Nation's energy policy. Escalating energy prices and the Arab oil embargo awakened the public to the Nation's growing reliance on foreign energy sources. Some thought the major integrated oil companies were reaping excessive oil and gas profits at the public's expense, while reinvesting little of their concomitant tax depletion subsidies in domestic energy production.
Thus, beginning with tax year 1975, only taxpayers who met the terms of this new provision were eligible for the percentage depletion allowance.
During 1975, Fred Engle and his wife assigned their two Wyoming oil and gas leases to third parties, retaining overriding royalties in each lease. As partial consideration for these assignments, the Engles received a total of $7,600 in advance royalties. This $7,600 constituted the entire income the Engles received from the property in 1975 since there was no oil and gas production that year. On their joint federal income tax return for 1975, the Engles claimed a percentage depletion deduction equal to 22% of the advance royalties received. The Commissioner disallowed the deduction because the advance royalties were not received "with respect to" any "average daily production" of oil or gas as, in his view, was required by the 1975 amendments to the Code.
The Tax Court, with one judge dissenting, upheld the Commissioner's determination. 76 T.C. 915 (1981). It agreed that new § 613A tied the oil and gas percentage
Also during 1975, the families of Philip D. Farmar and A. A. Sugg, joint owners of 46,515 acres of land in Irion County, Tex., leased their oil and gas interests to various lessees. Under the leases, the Farmars and Suggs were to receive as royalties 20% of all oil and gas produced and sold from the property or 20% of the value of all oil and gas produced from the leases. The leases also provided that the Farmars and Suggs were to receive annual cash bonuses, beginning with a small sum in 1975 and continuing with large sums through 1979, over the life of the lease. These bonuses were payable even if no oil or gas was produced from the property. In 1976, oil and gas was discovered on the Irion property and was produced in substantial amounts. The Farmars and Suggs claimed percentage depletion deductions on both the bonuses and royalties received in that year. The Commissioner disallowed the percentage depletion deductions on the lease bonuses, again because income of this type was not received "with respect to" any "average daily production."
The Commissioner sought a writ of certiorari from the adverse decision of the Court of Appeals for the Seventh Circuit, and the Farmars and Suggs sought a writ of certiorari from the adverse decision of the Court of Claims. We granted both writs, 459 U.S. 1102 (1983), and consolidated the cases so that we could decide the effect the Tax Reduction Act of 1975 had on percentage depletion of oil and gas income.
The 1975 amendments to the Code did not repeal any of the provisions that previously entitled taxpayers to an allowance for percentage depletion on lease bonus or advance royalty income arising from oil and gas mineral interests. Rather, the 1975 amendments added new § 613A, which, as its title indicates, is a "Limitatio[n] on percentage depletion in case of oil and gas wells." Our sole task in this case is to determine whether Congress, in enacting the § 613A "limitation," intended to deny the allowance for percentage depletion on advance royalty or lease bonus income altogether.
Our starting point, of course, is the language of the statute itself. That language authorizes any independent producer
The Commissioner contends that new § 613A finally adopts the position he took a half century ago in the Herring case — namely, that taxpayers are not entitled to percentage depletion on any income not attributable to specific units of production during the taxable year.
The taxpayers, by contrast, suggest that Congress did not intend, by enacting new § 613A, to change the tax treatment of lease bonus or advance royalty income at all. Rather, they contend that the percentage depletion allowance is available regardless of whether physical extraction occurred during the year for which the deduction is claimed. Under their view, the reference to "average daily production" in § 613A constitutes a limitation on the amount of, rather than a prerequisite to, the deduction a taxpayer may claim. Furthermore, the requirement that the allowance be "with respect to" production is simply the pre-1975 recapture requirement reenacted: depletion deductions must always "be with respect to" actual or prospective extraction. Since lease bonus and advance royalty receipts are income arising from the property, the taxpayers conclude that they are eligible for percentage depletion so long as they do not exceed the § 613A limitation and production eventually occurs on the property. See Brief for Respondents in No. 82-599, pp. 5-9; Brief for Petitioners in No. 82-774, pp. 7-16.
The Commissioner's and taxpayers' interpretations do not exhaust the possible readings of this linguistic maze. For example, § 613A could also be read to change the timing, though not the availability, of the percentage depletion allowance.
Each of these possible interpretations of new § 613A can be reconciled with the language of the statute itself. Congress' repeated references to "production" during the "taxable year" could not have been completely inadvertent, but each of the possible interpretations gives meaning to those references. Our duty then is "to find that interpretation which can most fairly be said to be imbedded in the statute, in the sense of being most harmonious with its scheme and with the general purposes that Congress manifested." NLRB v. Lion Oil Co., 352 U.S. 282, 297 (1957) (Frankfurter, J., concurring in part and dissenting in part). The circumstances of the enactment of particular legislation may be particularly relevant to this inquiry, Watt v. Alaska, 451 U.S. 259, 266 (1981), and it is to those circumstances that we now turn.
The 1975 amendments to the Code responded both to the public outcry concerning the country's growing dependence on foreign energy and to the alleged excessive profits that major integrated oil companies were earning. Congress wanted to encourage domestic production
If the Commissioner's interpretation were adopted, taxpayers would receive percentage depletion on income derived from oil and gas interests only if the payment associated with that income could be attributed directly to specific units of production. On that view, lessors and lessees interested in favorable tax benefits will not use financing arrangements that provide for prepayments on production, that spread income to nonproduction periods or, more importantly, that shift the risks of nonproduction to the parties better able to bear them.
Ironically, the Commissioner defends his interpretation by reference to the oil and gas crisis that existed in 1975. See Reply Brief for Commissioner 7. He argues that if lessors are allowed percentage depletion only on income directly attributable to production, they will have strong incentives to encourage lessees to produce oil and gas immediately from the property. No one disputes this premise. Requiring lessors to defer percentage depletion deductions to years of actual production would indeed optimize the incentives for early production of the property. But the Commissioner has not suggested that the percentage depletion deductions on
The reasonableness of each possible interpretation of the statute can also be measured against the legislative process by which § 613A was enacted. When the 1975 amendments were introduced, neither the bill, H. R. 2166, 94th Cong., 1st Sess. (1975), nor the accompanying Ways and Means Committee Report, see H. Rep. No. 94-19 (1975), provided for repeal of the percentage depletion allowance on oil and gas wells. Rather, the provision repealing the percentage depletion allowance was introduced only during debate on the House floor. See 121 Cong. Rec. 4651-4652 (1975). This floor amendment did not contain any of the exemptions ultimately enacted as part of § 613A, including the exemption for independent producers and royalty owners. It was only when H. R. 2166 reached the Senate floor that the exemption for independent producers and royalty owners was added. See id., at 7813. The Congress then enacted H. R. 2166, with slight alteration by the Conference Committee, as it was amended on the Senate floor.
At no time during either the Senate's or the Conference Committee's consideration of H. R. 2166 was a repeal of the percentage depletion allowance on lease bonus or advance royalty income suggested. Rather, both the Senate and the
Thus, in exempting independent producers and royalty owners from the repeal, the Senate and the Conference Committee expressed a clear intent to retain the percentage depletion rules as they then existed. Again, the congressional intent is more in harmony with interpretations of the statute
The Commissioner attempts to find legislative support for his interpretation not in the history of the enacting Congress, but in the history of a previous Congress. In H. R. 17488, 93d Cong., 2d Sess. (1974), the House proposed to repeal the percentage depletion allowance for oil and gas production and, at the same time, to exempt certain independent producers from the repeal. The House Ways and Means Committee Report on H. R. 17488 emphasized that "a lease bonus paid to the lessor of mineral lands in a lump sum or in installments is independent of any actual production from the lease and thus would not be within any of the exemptions." H. R. Rep. No. 93-1502, p. 46 (1974). The Commissioner suggests that " `[t]he idea of a special exemption for small entities, expressly involving production, was very much in the air of the 94th Congress, and it is not unlikely that the prior report was known to several, if not many, of the members who considered § 613A,' and almost certainly to those who proposed that Section 613A be added to the tax reduction bill." Reply Brief for Commissioner 6 (quoting 231 Ct. Cl., at 654, 689 F. 2d, at 1024).
In the 94th Congress, however, the House Ways and Means Committee reported out another bill, H. R. 2166, in lieu of H. R. 17488. This bill retained the percentage depletion allowance and differed from H. R. 17488 in many other respects. See 121 Cong. Rec. 4651-4652 (1975). Thus, it cannot be said that a subsequent Congress, or even the House Ways and Means Committee itself,
We have noted that "[t]he true meaning of a single section of a statute in a setting as complex as that of the revenue acts, however precise its language, cannot be ascertained if it be considered apart from related sections, or if the mind be isolated from the history of the income tax legislation of which it is an integral part." Helvering v. Morgan's, Inc., 293 U.S. 121, 126 (1934). When the Commissioner's, the taxpayers', and the commentators' interpretations of § 613A are viewed in these terms, it becomes clear to us that Congress did not mean, as the Commissioner's interpretation suggests, to withdraw the percentage depletion allowance on
The 1975 Congress was concerned with shrinking domestic production levels and with assisting smaller producers to compete with the larger ones. Since most depletion deductions are on royalty payments attributable to actual production, Congress, in its haste, not surprisingly defined the class of taxpayers exempted from the percentage depletion repeal in terms of certain production levels. Section 613A clearly provides that income attributable to production over a certain level will not be eligible for percentage depletion. But nothing in the statute bars percentage depletion on income received prior to actual production. To the contrary, we agree that so long as the income can, by some allocation method, be attributed to production below the ceilings Congress established, lease bonus and advance royalty income come within the four corners of the percentage depletion provisions. Lease bonuses and advance royalties are payments received in advance for oil and gas to be extracted, see Herring v. Commissioner, 293 U.S. 322 (1934), and therefore should be subject to the § 613(a) computation of, and § 611 allowance for, oil and gas depletion.
Unable to find persuasive support for his position in the text, general purpose, or specific history of the Tax Reduction Act of 1975, the Commissioner reminds us both that the "choice among reasonable interpretations is for the Commissioner, not the courts," National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472, 488 (1979), and that his choice, if found to "implement the congressional mandate in some reasonable manner," must be upheld. United States v. Correll, 389 U.S. 299, 307 (1967). "But that principle [only sets] the framework for judicial analysis; it does not displace it. We find that the [Commissioner's interpretation] is . . . unreasonable," and we therefore cannot defer to it. United
Holders of economic interests in oil and gas deposits have consistently been entitled to a percentage depletion allowance on all income arising from their property, including lease bonuses and advance royalties, for the past 50 years. See Herring v. Commissioner, supra. Our cases have taken a longrun view of the relation between income and production, and we have interpreted the Code to allow percentage depletion on all income so long as actual extraction eventually occurs. See Douglas v. Commissioner, 322 U.S. 275 (1944). We usually presume that "Congress is . . . aware of [our longstanding] interpretation of a statute and adopt[s] that interpretation when it re-enacts [the] statute without [explicit] change . . . ." Lorillard v. Pons, 434 U.S. 575, 580 (1978); see also Albemarle Paper Co. v. Moody, 422 U.S. 405, 414, n. 8 (1975). Had Congress meant to eliminate the percentage depletion allowance on lease bonus and advance royalty income, we believe it would have addressed our decisions to the contrary more explicitly. See Mastro Plastics Corp. v. NLRB, 350 U.S. 270, 289 (1956). Since Congress did not, we find the Commissioner's shortrun view of the relation between income and production to be at odds with the amended statutory scheme.
The percentage depletion provisions, as modified in 1975, plainly were intended to encourage independent producers and royalty owners to explore and develop the Nation's domestic oil and gas deposits. See supra, at 217-218. Yet the Commissioner would discourage these small producers from using the financing arrangements that would optimize their combined efforts to produce oil and gas. See supra, at 218-220. Not only would the Commissioner deny lessors percentage depletion on lease bonus and advance royalty income, but he also would continue to require lessees to reduce their depletion allowances by the amounts lessors would have been allowed, under pre-1975 law, to deplete. See Rev. Rul.
Finally, the Commissioner has not persuaded us of any "insurmountable" practical problems that would render his position more tenable. We do not doubt that § 613A's various production requirements and limitations make accurate calculation of the percentage depletion allowance difficult in the absence of actual production figures. See 76 T. C., at 926. But we believe the Commissioner can resolve these problems in a number of reasonable ways, for example, by requiring lessors to defer depletion deductions to years of actual production or by requiring lessors to adjust deductions taken with amended returns filed in later tax years.
In cases such as these, where the effective and expeditious enforcement of our Nation's tax laws is at issue, what we do not decide is as important as what we do decide. These cases do not concern whether taxpayers must include bonuses and advance royalties in their income in the year of receipt. No one questions that taxpayers must do that. See North American Oil Consolidated v. Burnet, 286 U.S. 417 (1932). Nor do these cases concern the appropriate tax period in which the percentage depletion deduction should be used to offset taxable income. That issue is a significant one, but none of the parties has directly raised it for our review. Cf. 26 CFR § 1.461-1 (1983) (assets having useful life beyond close of year not necessarily deductible in year expenditure made). Rather, our decision holds only that §§ 611-613A of the Code entitle taxpayers to an allowance for percentage depletion on lease bonus or advance royalty income at some time during the productive life of the lease.
Accordingly, since the Commissioner has never contested the tax period in which the Engles claimed their percentage depletion deduction, the judgment of the Court of Appeals
It is so ordered.
JUSTICE BLACKMUN, with whom JUSTICE BRENNAN, JUSTICE WHITE, and JUSTICE MARSHALL join, dissenting.
The Court's decision today is a troubling one, perhaps less for where the Court has ended up than for how it arrived there. Under the principles that traditionally have governed this Court's approach to statutory interpretation in the field of federal tax law, the Commissioner's administrative interpretation is entitled to prevail so long as it is not " `unreasonable and plainly inconsistent with the revenue statutes.' " Bingler v. Johnson, 394 U.S. 741, 749-750 (1969), quoting Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948); accord, Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 533, n. 11 (1979); Fulman v. United States, 434 U.S. 528, 533 (1978). While the Court professes to adhere to this rule today, ante, at 224-225, a review of the Court's reasoning suggests that the Court has chosen to honor the rule in the breach. Because I regard the Commissioner's interpretation as consistent with the language of the controlling statute, its legislative history, and the policies underlying § 613A of the 1954 Code, 26 U. S. C. § 613A, and because his interpretation surely is as reasonable in these respects as the rival interpretations advanced by the taxpayers and the Court, I must dissent.
The Court concedes that interpreting § 613A to disallow percentage depletion for advance royalties and lease bonuses
The Herring rule also produces what the Court itself characterizes as difficult practical problems under § 613A(c). Because the depletion limitations contained in § 613A(c) are couched in terms of quantities of output, a taxpayer who claims percentage depletion on advance royalties or lease bonuses before production has occurred cannot possibly establish ex ante how many barrels of oil or cubic feet of gas his advance payment represents. The problem is exacerbated by the fact that the limitations of § 613A(c) vary depending on the type of fuel produced and the nature of the extraction process, factors that often cannot be known before production begins. See §§ 613A(c)(4) and (6). A review of the academic literature, see ante, at 216-217, and n. 13, appears to have convinced the Court that these problems can be overcome
The Court's assertion that the Commissioner can resolve the problems caused by retention of percentage depletion for advance royalties and lease bonuses "in a number of reasonable ways," ante, at 226-227, stands the normal rationale for judicial deference to administrative interpretations of the tax laws on its head. One reason for that deference is that the Commissioner is better able than any court, including this one, to assess the practical consequences of particular interpretations and to resolve statutory ambiguities in ways that minimize administrative difficulties. Rather than give due regard to this expertise in the first instance in construing § 613A, the Court has embraced an interpretation whose practical complications the Court itself recognizes and has left the Commissioner to bring order to the confusion that the Court now has created. Ockham's razor is nowhere in evidence.
Given that the Congress not only abolished percentage depletion for major oil producers but significantly curtailed it
Given the poverty of § 613A's legislative history as a source for the Court's conclusion that the Commissioner's interpretation is unreasonable, the Court ultimately must rest its analysis on its characterization of the underlying purpose of Congress. Reasoning principally from the fact that the Tax Reduction Act of 1975 was enacted during a period of national concern over energy shortages, the Court assumes that Congress' fundamental purpose was to "increase production by the independent producers and royalty owners." Ante, at 219.
With due respect, this analysis simply ignores the terms and structure of the statute that it purports to construe. Section 613A(c) cannot have been meant to increase production by independent producers over pre-existing levels; it did not create a new tax subsidy but merely preserved an old one. More importantly, that subsidy was not preserved intact but rather was deliberately scaled back. The maximum depletable oil quantity was reduced from 2,000 barrels in 1975 to 1,000 barrels in 1980 and thereafter. See § 613A(c)(3)(B). Even independent producers whose output fell within the 1,000-barrel limit had their production subsidies
When read as a whole, therefore, § 613A not only fails to increase incentives for independent producers but actually reduces them. This is hardly a remarkable result, since § 613A is the product of a hard-bargained compromise between the Senate conferees, who sought to preserve a stable subsidy for independent producers, and the House conferees, who sought to abolish percentage depletion for independent producers and royalty owners outright. See, e. g., 121 Cong. Rec. 8918 (1975) (remarks of Rep. Ullman). However, it ill accords with the Court's pristine view of § 613A as a carefully calibrated attempt to provide maximum production incentives to independent producers. Even if disallowing percentage depletion of advance royalties and lease bonuses limits the total subsidy available to independent producers and royalty owners, it is hard to see how this makes the Commissioner's interpretation unreasonable or incorrect when § 613A on its face achieves the same result.
The Court purports to accept the principle that the "choice among reasonable interpretations [of federal tax laws] is for the Commissioner, not the courts." National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472, 488 (1979). Ante, at 224. However, given the compatability of the language of § 613A with the Commissioner's views, the record of legislative compromise that lies behind the statute, the extent to which § 613A restricts percentage depletion for independent producers and royalty owners as well as for major integrated oil and gas companies, and the conceded practical complications caused by attempts to graft Herring's depletion rule onto the new provision, the Court's rejection of the Commissioner's interpretation of § 613A is impossible to square with that principle.
For a detailed study of the history of percentage depletion, see Baker. The Nature of Depletable Income, 7 Tax L. Rev. 267 (1952).
"I am concerned and disappointed that the oil depletion allowance has been eliminated or severely limited [by § 613A]. I do not think this will be good for the country. In this time of national energy crisis, what we need — desperately — is more production. The way to get more production is to offer incentives for more drilling. We have worked in reverse." Id., at 8944 (emphasis added).
Presumably the Court has other legislators in mind when it states that the Commissioner's interpretation ignores "the views of those who sought [§ 613A's] enactment, and the purpose they articulated." Ante, at 227.