An Engineer's View of Federal Income Taxes

Abstract

History of the Income Tax Although income tax and income tax calculations are discussed, it is not intended that this analysis encourage a valuation engineer to become his own tax expert. Tax matters should be referred to a tax specialist whose field is as broad as that of a petroleum or valuation engineer. Our income tax laws and regulations had their beginning with the Revenue Act of 1913 which levied the first income tax in the United States. Since that time, the revenue acts of 1916, 1918, 1921, 1924 and 1926 have changed or modified the ground rules of the income tax regulations as applied to oil and gas production and income. Federal income tax legislation since 1926 has provided for two types of depletion allowance for oil and gas producers:percentage depletion at 27 per cent of gross income, not to exceed 50 per cent of net income; andcost depletion. For the purpose of computing the depletion allowance, percentage depletion is applied separately to the income from each oil and gas property. Property, for Internal Revenue purposes, means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land (unless aggregated). Until 1954, no specific statutory authority existed for the election to deduct intangible drilling costs as an expense. The revenue acts of 1918 and 1921 gave this election by implication but not specifically. The Internal Revenue Act of 1954 gave specific statutory expression to the taxpayer's first-year option of capitalizing or expensing intangible drilling costs.