The Reich Case- Economic Implications Of Depletion Allowances

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Journal Article: The Reich Case- Economic Implications Of Depletion Allowances

The Reich case was tried in the 1969 Tax Court of the United States and the Court held that geothermal steam is a gas and is an exhaustible resource at The Geysers field. Accordingly, all geothermal steam producers are now entitled to deduct as current expense the intangible costs of developing and drilling geothermal steam wells and all producers who can demonstrate that their geothermal steam resource is depletable are entitled to what is now a 22 percent depletion allowance. The key expert witness in the case was Dr. Henry J. Ramey, Jr. and a summary is presented of his monograph which was submitted as evidence. His conclusion, based on a reservoir engineering analysis, was that the geothermal resource at the Big Geysers area had, as of 1968, a 20 to 46 years of productive life remaining. In the economics portion of the paper, it is demonstrated that the corporate income tax discriminates against risky and capital-intensive industries such as oil and gas and geothermal. The central economic argument in favor of percentage depletion allowances and expensing privileges is that these provisions remove the discriminatory bias of corporate income taxes. The economic consequences of depletion allowances are 1. - a short- and long-run increase in production; 2. - a short- and long-run increase in investment in renewal-exploration, discovery, and development; 3. - lower prices; 4. - a ratio of reserves to output-the Life Index-which tends to be constant; 5. - a short-run increase in profits which encourages the entry of new firms and a long-run situation in which average rates of return are again equalized across industries.

R. E. Peterson and K. K. Seo

Published Journal 
Geothermics, Date Not Provided



R. E. Peterson,K. K. Seo. . The Reich Case- Economic Implications Of Depletion Allowances. Geothermics. (!) .