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percentage depletion deduction based upon a percentage of a
taxpayer's "gross income from the property". Section 611(a)
provides that reasonable depletion allowance in all cases is to
be made under regulations prescribed by the Secretary.
Although the statute was silent as to the definition of
"gross income from the property" as it related to the facts in
Exxon Corp. v. Commissioner, supra, section 1.613-3(a), Income
Tax Regs., provided that "gross income from the property" is:
the amount for which the taxpayer sells the oil or gas
in the immediate vicinity of the well. If the oil or
gas is not sold on the premises but is manufactured or
converted into a refined product prior to sale, or is
transported from the premises prior to sale, the gross
income from the property shall be assumed to be
equivalent to the representative market or field price
of the oil or gas before conversion or transportation.
Exxon argued that, under the literal terms of section 1.613-
3(a), Income Tax Regs., where the gas is transported from the
premises prior to sale, the Commissioner cannot use a net-back
methodology to determine gross income from the property.
The Commissioner argued that not only was Exxon's
interpretation of the regulation at issue flawed, it also was
inconsistent with the legislative history behind percentage
depletion. Exxon essentially argued that, under the ordinary or
plain meaning rule, the literal terms of the regulation at issue
must be followed without further analysis.
We held that the rules of statutory construction require us
to determine whether the "plain meaning" of a regulation would
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