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efforts10 or full cost11 methods permitted by GAAP and (2)
deduction of the higher of cost or percentage depletion for tax
purposes. In the case of True Ranches, tax to GAAP differences
arose primarily from the deduction of prepaid feed expenses for
tax purposes. Because feed expenses and other costs of raising
livestock were deducted in the years paid, no cost basis was
allocated to raised (as opposed to purchased) livestock.
True Oil maintained a qualified profit-sharing plan. The
contribution formula required that intangible drilling costs not
be deducted in computing annual profit for plan purposes.
Without this adjustment, True Oil might never have reported a
profit and therefore, would not have been required to make any
contributions to the plan to provide retirement benefits for
employees.
D. Family Members’ Employment in True Companies
Jean True worked in the family businesses in various
capacities. She coordinated construction, renovation, and
maintenance of the True companies’ buildings and managed customer
10The successful efforts method capitalizes oil and gas
exploration costs if they produce commercial reserves but
otherwise currently deducts the cost of dry holes. See Brock et
al., Petroleum Accounting Principles, Procedures, & Issues, at
224-225 (3d ed. 1990).
11The full cost method capitalizes all oil and gas
exploration costs whether or not they result in dry holes. An
annual (downward) adjustment may be required if such capitalized
costs exceed the market value of underlying reserves. See id. at
230, 337-338, 350.
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