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Current Mineral Tax Problems Including Production Payment

Frank M. Cavanaugh, Proceedings of 3rd Annual Rocky Mountain Mineral Law Institute (1957)

I will take up first among areas for principal discussion, the mining definition, and then cover the recent capital gain conflict areas with which you are probably, to some extent, familiar. I will mention something of a lease versus sale development which I think the Commissioner may eventually accept, and say more of the now full blown battle before the Supreme Court on the “carved out” production payment.

A brief restatement of some fundamental mineral tax principles underlying my whole discussion might not be remiss here as a sort of preface—as it seems, there is a lot of theoretical challenge now to what has been accepted tax doctrine. The Government in its recently filed Supreme Court petitions on both our major topics here—the mining definition and the production payment issue—has some rather disturbing references in the way of manufacturing analogy to extractive industry production, and there is some discernible shifting with respect to basic “economic interest” concepts.

The following is still axiomatic to mineral income taxation: Mineral production, unlike manufacturing, starts with acquiring a valuable property right which entitles one to prospect for and extract minerals in place. Since a mineral operator has no interest in surface rights beyond that necessary to extraction, his initial right is generally acquired as a lease with variable duration