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proceeds from that gas. This larger amount against which the
depletion allowance was taken was derived from determining gross
income under the "representative market" or "field price" method
under the regulations. The issue in Exxon Corp. was the method
of computing “gross income from the property” for purposes of the
depletion allowance. See sec. 613(a). The statute itself was
silent on this issue. The regulation defined gross income in
terms of the representative market or field price, which in that
case produced hypothetical gross income far in excess of actual
gas sales.
The Commissioner argued that Exxon was not entitled to a
percentage depletion deduction based upon a hypothetical "gross
income from the property", which exceeded Exxon's actual gross
income from the sale of gas. The Commissioner maintained that
the "gross income from property", for purposes of percentage
depletion, must not exceed the actual gross income from the sale
of gas, and under those circumstances, the Commissioner was
entitled to employ a net-back methodology in determining "gross
income from the property". Exxon argued that under the plain
meaning of section 1.613-3(a), Income Tax Regs., it was required
to compute its percentage depletion deduction by using the
representative market or field price of the gas.
Section 611 allows a "reasonable allowance for depletion" in
the case of oil and gas wells "according to the peculiar
conditions in each case". Section 613(a) provides for a
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