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Accrual of Estimated Prudhoe Bay Well-Site DRR Costs as
Capital Costs or as Current Business Expenses
Although we are satisfied that Exxon’s attempted accrual of
$24 million in estimated DRR costs relating to Prudhoe Bay well
plugging and well-site cleanup would satisfy the all-events test
of the accrual method of accounting, respondent argues that Exxon
may not, without respondent’s permission, accrue such $24 million
into the tax bases of its share of Prudhoe Bay capital asset
costs and claim thereon accelerated depreciation, investment tax
credits (ITC), and intangible drilling costs (IDC). We agree
with respondent.
We believe that Exxon’s claim to such capitalization,
accelerated depreciation, ITC, and IDC constitutes a substantial
deviation from the current ordinary business expense treatment of
Prudhoe Bay well-site DRR costs (at the time of performance of
related DRR work) that Exxon has been using on its Federal
corporation income tax returns as filed and that such a change
would constitute a “change” in Exxon’s method of accounting for
DRR costs for which respondent’s permission is required. See
sec. 446(e), particularly the last sentence of sec. 1.446-
1(e)(2)(ii)(b), and (3)(i), Income Tax Regs. Not having obtained
such permission and absent a finding herein that respondent
abused his discretion in not granting such permission, Exxon is
not allowed to accrue estimated Prudhoe Bay well-site DRR costs
into the capital cost bases of the wells and the well-site
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