¶1dissenting: Respondent’s loss capitalization rule is based on the legal theory that where a taxpayer does not expect to make a profit while an oil payment is being paid out, the excess of expenses over current income must be considered expenses to secure future income, not deductible under section 162(a) but subject to capitalization by reason of section 263(a)(1). The majority rejects this reasoning, and I concur. But the majority then proceeds to sustain the deficiencies on a ground which respondent has assiduously refrained from arguing, i.e., that a portion of the operating costs as such should be capitalized as a cost of acquiring the working interest. Moreover, we are not informed how this “portion” is to be computed as a general rule — only that, in the case at bar, we will accept respondent’s calculation despite its discredited parentage. Insofar as the majority opinion goes beyond rejection of the loss capitalization theory I respectfully dissent.
¶2I do not question the power of the Court to find and adopt a different legal theory to sustain respondent’s deficiency, but I do question the wisdom of doing so in an area where fine distinctions are frequently fundamental yet “hardly can be held in the mind longer than it takes to state them,” Burton-Sutton Oil Co. v. Commissioner, 328 U.S. 25, 38 (1946) (separate opinion, Frankfurter, J.), when neither party has been given an opportunity to brief the merits of the new theory, and the Court can define its new theory only in generalities. Petitioner’s counsel has ably presented his refutation of the loss capitalization doctrine, and his position has been accepted by the Court. I am not prepared to determine, a priori, that he has no argument against the Court’s new-found theory.
¶3Perhaps of even greater importance, respondent has not been heard on the matter. We know that the tax administrators were early confronted with the necessity of making certain choices as to how oil and gas transactions should be taxed, and that they attempted to find a theoretical foundation for their choices. See, e.g., G.C.M. 22730, 1941-1 C.B. 214. And tax literature tells us that the Revenue Service has issued rulings with apparent consistency allowing the working-interest owner to deduct all operating expenses except those subject to disallowance under the so-called loss capitalization theory. See Heard, “Capitalization of Excess Operating Expenses in ABC Transactions—Fallacy and Fallout,” 18 Oil & Gas Inst. 451 (Sw. Legal Fdn. 1967); Loftin, “Recent Developments in Oil and Gas Taxation,” 17 Oil & Gas Inst. 430 (Sw. Legal Fdn. 1966). While we are not advised of the legal reasoning supporting these rulings, we may assume that it is symmetrical with the rationale of other administrative positions in this area. One may wonder if the majority’s new theory, once its generalities have been charted in specific directions, will fit the symmetry.
¶4What is equally disturbing is the majority’s failure to provide any real guidance for tax administrators or taxpayers as to what portion of the operating expenses we will require to be capitalized in the next case. Perhaps it will be based on an “allocation theory” which would allocate on the same basis as the oil produced is allocated, but this is not certain for the majority declines to pass on the question. Indeed, by disposing of this case on a computation having no necessary relationship to the amount of tax resulting from the application of its new theory, the majority sidesteps a host of questions (e.g., Should a portion of the expenses attributable to the royalty interest also be capitalized ? Is the rule to be limited to ABC transactions ?). Neither taxpayers nor tax administrators can be so cavalier.
¶5When we are dealing with an area where tax consequences often control the economics of business transactions reasonable certainty of the law is essential. See Galvin, “G.C.M. 22730 — Twenty-Five Years Later,” 18 Oil & Gas Inst. 511 (Sw. Legal Fdn. 1967). We should not attempt to take half a step without letting those interested know where the next foot will fall. Having rejected the loss capitalization rule, I would enter decision for petitioner. I would leave the “allocation” theory to a case wherein it is presented and briefed by the parties — if and when respondent decides to use the theory at all.