Opinion of the Court

“(i) Amounts recoverable through depreciation deductions, through deferred expenses, and through deductions other than depletion, and

“(ii) The residual value of land and improvements at

the end of operations.” Treas. Reg. $ 1.612–1(b)(1). This, of course, is exactly the conclusion in the case of percentage depletion that we have reached after a long detour through $ 1016. Section 1.612-1(b)(1) applies by its terms, however, only to the determination of mineral deposit basis for the purpose of calculating cost depletion; and the title of $ 1.612–1(b) is “Special rules.” Therefore, reason the Hills, the "general rule” for determining mineral deposit basis under $ 1016 must include the items, such as “[a]mounts recoverable through depreciation deductions,” excluded in the "special rule.” But this argument proves too much. If the Hills stuck to their logic, they would have to claim that they could also add "[t]he residual value of land and improvements at the end of operations” to their bases in their mineral deposit interests, an absurdity that they cannot, and do not try to, support. The simple answer is that when an arguable suggestion of the title of one subsection of a regulation is pitted against the entire Code framework for determining basis, the Code wins, and the title is at most an infelicity.

The infelicity is understandable here. The calculation of percentage depletion is unconnected to the concept of basis; the annual percentage depletion deduction is not measured in relation to basis, nor are the cumulative deductions limited by basis. See 26 U. S. C. $ 613 (1976 ed. and Supp. V). The concepts of basis and percentage depletion meet only in the minimum tax provisions, for the purpose of calculating the item of tax preference in $57(a)(8). Since $ 1.612–1(b)(1) was issued long before the minimum tax was enacted, see 25 Fed. Reg. 11801 (1960); Pub. L. 91–172, $ 301, 83 Stat. 580, that regulation's reference to a “special rule” for "cost" depletion cannot have been intended to indicate that some Opinion of the Court

other rule applied to the calculation of basis for percentage depletion. After the minimum tax was enacted, the Treasury Department inserted a regulation about basis for percentage depletion where one would expect it: among the regulations implementing the minimum tax. That regulation, § 1.57–1(h)(3), directs us to $ 1016, but unfortunately contains no correlative reference to the regulations under $612.

Second, the Hills argue that excluding tangible costs from the adjusted basis of their mineral deposit interests would run counter to regulations specifying the inclusion of certain intangible costs. As we have already noted, 26 U. S. C. $ 263(c) (1976 ed., Supp. V) grants taxpayers an option to deduct as expenses certain “intangible drilling and development costs.” If a taxpayer chooses instead to capitalize those costs, the regulations require the taxpayer to sort the costs into two bins. Costs “represented by physical property" are recoverable through depreciation, either through adjustments to the bases of pre-existing items to which the costs relate, or through an initial entry in a new depreciation account. Treas. Reg. $ 1.612–4(b)(2). Costs “not represented by physical property” are recoverable through depletion, as adjustments to the bases of the mineral deposit interests to which they relate. $ 1.612–4(b)(1); see $ 1.612–4(d) (if a taxpayer fails to elect to expense intangible costs correctly, "he shall be deemed to have elected to recover such costs through depletion to the extent that they are not represented by physical property, and through depreciation to the extent that they are represented by physical property'). Since these latter costs are added to depletable basis, the taxpayers argue, so should the tangible costs that are excluded altogether from the $ 263(e) option. We fail to see the logic of this argument. To the extent that the regulation allowing intangible costs “not represented by physical property" to be added to a mineral deposit's basis deviates from general principles of basis allocation, we see no reason why

Opinion of the Court

one deviation should force the Government, or this Court, to create another. Nor have the Hills explained why this regulation in fact represents a deviation.12 The judgment of the Court of Appeals is


12 The taxpayers also cite Internal Revenue Service Technical Advice Memorandum 8314011 (Dec. 22, 1982), which holds that unamortized deferred development expenditures under $ 616 of the Code are included in the basis of a mineral deposit for purposes of $57(a)(8). As respondents acknowledge, the Code specifically provides that such memoranda “may not be used or cited as precedent.” 26 U. S. C. $6110(1)(3) (1976 ed.). In any case, 8 616 sets up a system for the treatment of development expenditures entirely different from the system at issue here; in particular, $616(c) specifically mandates that expenses deferred under $616(b) “shall be taken into account in computing the adjusted basis of the mine or deposit.” Thus, Technical Advice Memorandum 8314011 simply is not relevant to the question presented in this case.


The next page is purposely numbered 801. The numbers between 564 and 801 were intentionally omitted, in order to make it possible to publish the orders with permanent page numbers, thus making the official citations available upon publication of the preliminary prints of the United States Reports.

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