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October 28, 2014


I’ll be candid. I always thought of Elizabeth Taylor as a good looking Hollywood star who exercised her choices in men as well as screen roles, a rich celebrity spoiled by beauty and success, a pretty face with not a lot of brainpower behind that lovely countenance and the voluptuous body upon which it was perched. I have reason to now believe that I was wrong in my assessment of her I.Q. and sense of fair play since learning of her responses and suggestions (and especially a quip) for changes in the script on location of “Giant,” a great if old (1956) Texas oil movie based on the book “Giant” by Edna Ferber in which Taylor starred along with the great James Dean just prior to his tragic death in a car wreck.

I have blogged before on one of the suggestions she made on a change in the Giant script via a quip while shooting on location without knowing until a few days ago that the same thought which occurred to me had occurred to her 58 years ago when she was making this movie. It has to do with the statutory right of oil companies and wildcat drillers (who are interwoven) to take a “depletion allowance” on their presumed reserves, an uninterrupted right such oil welfare beneficiaries have had since 1926 in the pre-Hoover Republican days of Calvin Coolidge during the “Roaring Twenties” immediately preceding the Great Depression. I had no idea until very recently that Elizabeth Taylor had rightly chimed in on such a giveaway as set forth in Edna Ferber’s book (Giant) on the set of the movie by the same name. Now I know, but first, some prelude to set the stage for my enlightenment and reassessment of Elizabeth Taylor’s intelligence quotient and her sense of equal protection of the laws.

It’s not just oil companies and drillers who like the so-called “depletion allowance.” Those who invest in such drilling like it, too, as demonstrated in the 2001 tax return of George and Laura Bush, who claimed a $733 “depletion allowance” item on their income taxes which reduced their liability and increased yours and mine who have to pick up the slack. In 1926, ten years after Congress approved the expensing of all of the “intangible drilling costs” in the first year of a well’s life to those drilling, the Congress added the “depletion allowance” (formally known as the “excess of percentage over cost depletion deferral”) to the list of welfare goodies made available to oil companies and wildcatting drillers.

The theory advanced for the depletion allowance was that when you sunk a well almost 90 years ago, you didn’t know how much it would yield or for how long, so the tax code should account for such “depletion” of its “reserves.” While only small companies can claim it now since a 1975 amendment, the cost to our treasury is still huge, especially in these days of heightened exploration via fracking.

Oil producers may now deduct 15 percent (it began at 27.5 percent in 1926) of any gross income from a well, even though with test wells and modern geology dry holes are rare and “reserves” are well known. Thus, as Justice Oliver Wendell Holmes, Jr. once noted in so many words in another context: “The reason for the rule has long since evaporated, but the rule persists.” As here applied, there is now no undergirding rationale for the “depletion” giveaway. Its continuation is a matter of momentum and greed, not need. It is a statutory artifact that has been voided by the state of the art in drilling and (with its billions in costs to taxpayers) should be repealed as a “horse and buggy” rule that has seen its day.

Aside from whether we should have a so-called “depletion allowance” at all, there is a major problem with how such an “allowance” is computed for tax purposes under this statute either before or as amended in 1975, and it is this: That unlike normal depreciation of a business asset, this deduction can be claimed indefinitely!

Thus if a driller deducts 15 percent as such an allowance for 7 years, the reduction will have exceeded any depreciable value of the asset, but the “depletion allowance” just “keeps on going on” even though the asset is fully depreciated by year to year depletion credits. I say that when such an asset is fully depreciated or depleted that any further deduction available to the oil drilling companies and their investors for such an asset is neither depreciation nor depletion. It is a continuing gift pure and simple from taxpayers to oil drillers and their investors such as George and Laura Bush, is unrelated to how much oil is or is not in the ground, amounts to a glaring internal inconsistency as applied and is an affront to common sense (how can you devalue an asset beyond its admitted value?).

If a congressional failure to recognize this and do something about it does not amount to corporate welfare in the form of gifts from taxpayers to oil drillers and their investors, then I am not writing this blog and two and two are not four. If it is not politically possible to rid ourselves of this “buggy whip” piece of legislation altogether, at least we should end this gift when “reserves” have been fully “depleted” by the drillers’ own reckoning. Have we suspended the laws of mathematics?

I will discuss what some presidents and Elizabeth Taylor had to say about the unfair and unnecessary continuation of the “depletion allowance” to the oil industry and its investors in Part II. Stay tuned.   GERALD   E


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