-7-
derived from the extraction of the minerals to which the taxpayer
must look for a return of capital. Sec. 1.611-1(b)(1), (d)(4),
Income Tax Regs.; see also Commissioner v. Southwest Exploration
Co., 350 U.S. 308, 313-314 (1956); Palmer v. Bender, 287 U.S. 551
(1933). Depletion deductions serve to compensate a taxpayer for
minerals consumed in the production of income resulting from
extraction, Anderson v. Helvering, 310 U.S. 404, 408 (1940), so
that when the minerals are exhausted, the taxpayer’s investment
in the mineral deposit remains unimpaired, Paragon Jewel Coal Co.
v. Commissioner, 380 U.S. 624 (1965). Commissioner v. Southwest
Exploration Co., supra; Mo. River Sand Co. v. Commissioner, 83
T.C. 193, 198 (1984), affd. 774 F.2d 334 (8th Cir. 1985).
Whether the taxpayer has the requisite economic interest in a
depletable asset is a factual determination. Ramey v.
Commissioner, 398 F.2d 478, 479 (6th Cir. 1968), affg. 47 T.C.
363 (1967).
The regulations recognize two methods for computing an
allowance for depletion as to mineral deposits. Sec. 1.611-1(a),
Income Tax Regs. The first method, cost depletion under section
612, focuses on the property’s adjusted basis. Id. The second
method, percentage depletion under section 613, focuses on the
property’s gross income. Id. Percentage depletion, the method
at issue here, “is not computed with reference to the [taxpayer]
operator's investment” and does not limit the taxpayer’s
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