Texas Attorney General Opinion: V-1037 Page: 4 of 5
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Hon. John Ben Shepperd, Page 4 (V-i037)
You state that this definition has been consistently fol-
lowed and is now being followed by the Secretai y of State in connec-
tion with the administration of the franchise tax law, Long accept-
ance of this definition by the Secretary of State, in the absence of
a statutory definition, should not now be changed without some com-
pelling reason. Moreover, the Legislature has met many times since
the court rendered the opinion in the case of United North and South
Development Co. v. Heath, supra, and Lt may be presumed that f tfMe
definition of the term"surplus" given in that case did not meet the
approval of the Legislature, it would have been changed.
Your opinion request states that the term "intangible
drilling costs" is used as defined in United States Treasury Regu-
lations 103, Section 29.23 (m)-16. This term as there defined is
as follows:
"All expenditures for wages, fuel, repairs, haul-
ing, supplies, etc., incident to and necessary for the
drilling of wells and the preparation of wells for the
production of oil or gas .. "
In the case of Commissioner of Internal Revenue v. Am-
brose, 127 F.2d 47, the Gircuit Court of Appeals of this circuit in
an income tax case in which intangible drilling costs had been de-
ducted as operating expense by the taxpayer approved this deduction
in the following language:
"Article 23(m)-16 of Treasury Regulations 86
relates to intangible dr illing and development costs,
and gives the taxpayer an option either to deduct such
costs from gross income as an expense, or to charge
them to his capital account.
"The lease operator who undertakes his own drill-
ing is granted the option because the intangible costs
are not capital in nature, as they have no salvage value;
they can be allocated; and the expenditures to defray the
intangible costs are made by the taxpayer."
The Federal statute and regulations thereunder give the
taxpayer the option to deduct "intangible drilling costs" as an op-
erating expense or to charge such costs to capital account, thus rec-
ognizing that it is acceptable accounting practice to treat such costs
as operating expense or as invested capital. Of course, if a taxpay-
er should elect to capitalize "intangible drilling costs" in the form
of a reserve for that purpose and allocate it from other availablefunds, amortizing it over a period of years not to exceed the life of
profitable development, there e is nothing in the law that would pre-
clude this, The Secretary of State should accept it as was done in- - _._ 1 -: , .- .- - - -- - - - -- ----,, - - . ... . ..... ..
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Texas. Attorney-General's Office. Texas Attorney General Opinion: V-1037, text, April 7, 1950; (https://texashistory.unt.edu/ark:/67531/metapth265856/m1/4/: accessed July 16, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu.; crediting UNT Libraries Government Documents Department.