Subchapter I—Natural Resources
PART I—DEDUCTIONS
Editorial Notes
Amendments
1990—
1976—
1969—
1966—
§611. Allowance of deduction for depletion
(a) General rule
In the case of mines, oil and gas wells, other natural deposits, and timber, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary. For purposes of this part, the term "mines" includes deposits of waste or residue, the extraction of ores or minerals from which is treated as mining under section 613(c). In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this section for subsequent taxable years shall be based on such revised estimate.
(b) Special rules
(1) Leases
In the case of a lease, the deduction under this section shall be equitably apportioned between the lessor and lessee.
(2) Life tenant and remainderman
In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.
(3) Property held in trust
In the case of property held in trust, the deduction under this section shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.
(4) Property held by estate
In the case of an estate, the deduction under this section shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.
(c) Cross reference
For other rules applicable to depreciation of improvements, see section 167.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1976—Subsec. (a).
1958—Subsec. (d)(4).
Statutory Notes and Related Subsidiaries
Effective Date of 1958 Amendment
Amendment by
§612. Basis for cost depletion
Except as otherwise provided in this subchapter, the basis on which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 1011 for the purpose of determining the gain upon the sale or other disposition of such property.
(Aug. 16, 1954, ch. 736,
§613. Percentage depletion
(a) General rule
In the case of the mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 percent (100 percent in the case of oil and gas properties) of the taxpayer's taxable income from the property (computed without allowance for depletion and without any deduction under section 199A). For purposes of the preceding sentence, the allowable deductions taken into account with respect to expenses of mining in computing the taxable income from the property shall be decreased by an amount equal to so much of any gain which (1) is treated under section 1245 (relating to gain from disposition of certain depreciable property) as ordinary income, and (2) is properly allocable to the property. In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section.
(b) Percentage depletion rates
The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows:
(1) 22 percent
(A) sulphur and uranium; and
(B) if from deposits in the United States—anorthosite, clay, laterite, and nephelite syenite (to the extent that alumina and aluminum compounds are extracted therefrom), asbestos, bauxite, celestite, chromite, corundum, fluorspar, graphite, ilmenite, kyanite, mica, olivine, quartz crystals (radio grade), rutile, block steatite talc, and zircon, and ores of the following metals: antimony, beryllium, bismuth, cadmium, cobalt, columbium, lead, lithium, manganese, mercury, molybdenum, nickel, platinum and platinum group metals, tantalum, thorium, tin, titanium, tungsten, vanadium, and zinc.
(2) 15 percent
If from deposits in the United States—
(A) gold, silver, copper, and iron ore, and
(B) oil shale (except shale described in paragraph (5)).
(3) 14 percent
(A) metal mines (if paragraph (1)(B) or (2)(A) does not apply), rock asphalt, and vermiculite; and
(B) if paragraph (1)(B), (5), or (6)(B) does not apply, ball clay, bentonite, china clay, sagger clay, and clay used or sold for use for purposes dependent on its refractory properties.
(4) 10 percent
Asbestos (if paragraph (1)(B) does not apply), brucite, coal, lignite, perlite, sodium chloride, and wollastonite.
(5) 7½ percent
Clay and shale used or sold for use in the manufacture of sewer pipe or brick, and clay, shale, and slate used or sold for use as sintered or burned lightweight aggregates.
(6) 5 percent
(A) gravel, peat, pumice, sand, scoria, shale (except shale described in paragraph (2)(B) or (5)), and stone (except stone described in paragraph (7));
(B) clay used, or sold for use, in the manufacture of drainage and roofing tile, flower pots, and kindred products; and
(C) if from brine wells—bromine, calcium chloride, and magnesium chloride.
(7) 14 percent
All other minerals, including, but not limited to, aplite, barite, borax, calcium carbonates, diatomaceous earth, dolomite, feldspar, fullers earth, garnet, gilsonite, granite, limestone, magnesite, magnesium carbonates, marble, mollusk shells (including clam shells and oyster shells), phosphate rock, potash, quartzite, slate, soapstone, stone (used or sold for use by the mine owner or operator as dimension stone or ornamental stone), thenardite, tripoli, trona, and (if paragraph (1)(B) does not apply) bauxite, flake graphite, fluorspar, lepidolite, mica, spodumene, and talc (including pyrophyllite), except that, unless sold on bid in direct competition with a bona fide bid to sell a mineral listed in paragraph (3), the percentage shall be 5 percent for any such other mineral (other than slate to which paragraph (5) applies) when used, or sold for use, by the mine owner or operator as rip rap, ballast, road material, rubble, concrete aggregates, or for similar purposes. For purposes of this paragraph, the term "all other minerals" does not include—
(A) soil, sod, dirt, turf, water, or mosses;
(B) minerals from sea water, the air, or similar inexhaustible sources; or
(C) oil and gas wells.
For the purposes of this subsection, minerals (other than sodium chloride) extracted from brines pumped from a saline perennial lake within the United States shall not be considered minerals from an inexhaustible source.
(c) Definition of gross income from property
For purposes of this section—
(1) Gross income from the property
The term "gross income from the property" means, in the case of a property other than an oil or gas well and other than a geothermal deposit, the gross income from mining.
(2) Mining
The term "mining" includes not merely the extraction of the ores or minerals from the ground but also the treatment processes considered as mining described in paragraph (4) (and the treatment processes necessary or incidental thereto), and so much of the transportation of ores or minerals (whether or not by common carrier) from the point of extraction from the ground to the plants or mills in which such treatment processes are applied thereto as is not in excess of 50 miles unless the Secretary finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills.
(3) Extraction of the ores or minerals from the ground
The term "extraction of the ores or minerals from the ground" includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. The preceding sentence shall not apply to any such extraction of the mineral or ore by a purchaser of such waste or residue or of the rights to extract ores or minerals therefrom.
(4) Treatment processes considered as mining
The following treatment processes where applied by the mine owner or operator shall be considered as mining to the extent they are applied to the ore or mineral in respect of which he is entitled to a deduction for depletion under section 611:
(A) In the case of coal—cleaning, breaking, sizing, dust allaying, treating to prevent freezing, and loading for shipment;
(B) in the case of sulfur recovered by the Frasch process—cleaning, pumping to vats, cooling, breaking, and loading for shipment;
(C) in the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and ores or minerals which are customarily sold in the form of a crude mineral product—sorting, concentrating, sintering, and substantially equivalent processes to bring to shipping grade and form, and loading for shipment;
(D) in the case of lead, zinc, copper, gold, silver, uranium, or fluorspar ores, potash, and ores or minerals which are not customarily sold in the form of the crude mineral product—crushing, grinding, and beneficiation by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic), cyanidation, leaching, crystallization, precipitation (but not including electrolytic deposition, roasting, thermal or electric smelting, or refining), or by substantially equivalent processes or combination of processes used in the separation or extraction of the product or products from the ore or the mineral or minerals from other material from the mine or other natural deposit;
(E) the pulverization of talc, the burning of magnesite, the sintering and nodulizing of phosphate rock, the decarbonation of trona, and the furnacing of quicksilver ores;
(F) in the case of calcium carbonates and other minerals when used in making cement—all processes (other than preheating of the kiln feed) applied prior to the introduction of the kiln feed into the kiln, but not including any subsequent process;
(G) in the case of clay to which paragraph (5) or (6)(B) of subsection (b) applies—crushing, grinding, and separating the mineral from waste, but not including any subsequent process;
(H) in the case of oil shale—extraction from the ground, crushing, loading into the retort, and retorting (including in situ retorting), but not hydrogenation, refining, or any other process subsequent to retorting; and
(I) any other treatment process provided for by regulations prescribed by the Secretary which, with respect to the particular ore or mineral, is not inconsistent with the preceding provisions of this paragraph.
(5) Treatment processes not considered as mining
Unless such processes are otherwise provided for in paragraph (4) (or are necessary or incidental to processes so provided for), the following treatment processes shall not be considered as "mining": electrolytic deposition, roasting, calcining, thermal or electric smelting, refining, polishing, fine pulverization, blending with other materials, treatment effecting a chemical change, thermal action, and molding or shaping.
(d) Denial of percentage depletion in case of oil and gas wells
Except as provided in section 613A, in the case of any oil or gas well, the allowance for depletion shall be computed without reference to this section.
(e) Percentage depletion for geothermal deposits
(1) In general
In the case of geothermal deposits located in the United States or in a possession of the United States, for purposes of subsection (a)—
(A) such deposits shall be treated as listed in subsection (b), and
(B) 15 percent shall be deemed to be the percentage specified in subsection (b).
(2) Geothermal deposit defined
For purposes of paragraph (1), the term "geothermal deposit" means a geothermal reservoir consisting of natural heat which is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). Such a deposit shall in no case be treated as a gas well for purposes of this section or section 613A, and this section shall not apply to a geothermal deposit which is located outside the United States or its possessions.
(3) Percentage depletion not to include lease bonuses, etc.
In the case of any geothermal deposit, the term "gross income from the property" shall, for purposes of this section, not include any amount described in section 613A(d)(5).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2018—Subsec. (a).
2017—Subsec. (a).
2005—Subsec. (c)(4)(H).
2004—Subsec. (a).
1996—Subsec. (e)(1)(B).
1990—Subsec. (a).
Subsec. (e)(1)(B).
Subsec. (e)(2) to (4).
1986—Subsec. (e)(4).
1978—Subsec. (c)(1).
Subsec. (e).
1976—Subsec. (a).
Subsec. (c)(2), (4)(I).
1975—Subsec. (b)(1).
Subsec. (b)(3), (4).
Subsec. (b)(7).
Subsec. (d).
1974—Subsec. (c)(4)(E).
1969—Subsec. (b).
Subsec. (c)(4)(H), (I).
1966—Subsec. (b)(2)(B).
Subsec. (b)(3)(B).
Subsec. (b)(5).
Subsec. (b)(6).
Subsec. (b)(7).
Subsec. (c)(4)(G).
1964—Subsec. (b)(2)(B), (6).
1962—Subsec. (a).
1960—Subsec. (b)(3).
Subsec. (b)(5).
Subsec. (b)(6).
Subsec. (c)(2).
Subsec. (c)(4).
Subsec. (c)(5).
1958—Subsec. (d).
Statutory Notes and Related Subsidiaries
Effective Date of 2018 Amendment
Amendment by
Effective Date of 2017 Amendment
Amendment by section 11011(d)(3) of
Amendment by section 13305(b)(4) of
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1990 Amendment
Effective Date of 1986 Amendment
Effective Date of 1978 Amendment
Effective Date of 1976 Amendment
Amendment by section 1901(b)(3)(K) of
Effective Date of 1975 Amendment
Amendment by
Effective Date of 1974 Amendment
Effective Date of 1969 Amendment
Effective Date of 1966 Amendment
Effective Date of 1964 Amendment
Effective Date of 1962 Amendment
Amendment by
Effective Date of 1960 Amendment
"(c)
"(1)
"(2)
"(A)
"(i) the amendments made by subsection (b) [amending this section] shall apply to taxable years with respect to which such election is effective and
"(ii) provisions having the same effect as the amendments made by subsection (b) [amending this section] shall be deemed to be included in the Internal Revenue Code of 1939 and shall apply to taxable years with respect to which such election is effective in lieu of the corresponding provisions of such Code.
"(B)
"(i) the assessment of a deficiency,
"(ii) the refund or credit of an overpayment, or
"(iii) the commencement of a suit for recovery of a refund under section 7405 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] [
is not prevented on the date of the enactment of this paragraph [Sept. 14, 1960] by the operation of any law or rule of law. Such election shall also be effective for any taxable year beginning before January 1, 1961, in respect of which an assessment of a deficiency has been made but not collected on or before the date of the enactment of this paragraph.
"(C)
"(D)
"(E)
"(F)
Effective Date of 1958 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by section 11815(b)(1), (2) of
Election for Clay and Shale Used in Manufacture of Clay Products
Election for Quartzite and Clay Used in Production of Refractory Products
Refund or Credit of Overpayments; Limitations; Interest
§613A. Limitations on percentage depletion in case of oil and gas wells
(a) General rule
Except as otherwise provided in this section, the allowance for depletion under section 611 with respect to any oil or gas well shall be computed without regard to section 613.
(b) Exemption for certain domestic gas wells
(1) In general
The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to—
(A) regulated natural gas, and
(B) natural gas sold under a fixed contract,
and 22 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.
(2) Natural gas from geopressured brine
The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to any qualified natural gas from geopressured brine, and 10 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of such section.
(3) Definitions
For purposes of this subsection—
(A) Natural gas sold under a fixed contract
The term "natural gas sold under a fixed contract" means domestic natural gas sold by the producer under a contract, in effect on February 1, 1975, and at all times thereafter before such sale, under which the price for such gas cannot be adjusted to reflect to any extent the increase in liabilities of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates to the contrary by clear and convincing evidence.
(B) Regulated natural gas
The term "regulated natural gas" means domestic natural gas produced and sold by the producer, before July 1, 1976, subject to the jurisdiction of the Federal Power Commission, the price for which has not been adjusted to reflect to any extent the increase in liability of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates the contrary by clear and convincing evidence.
(C) Qualified natural gas from geopressured brine
The term "qualified natural gas from geopressured brine" means any natural gas—
(i) which is determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine, and
(ii) which is produced from any well the drilling of which began after September 30, 1978, and before January 1, 1984.
(c) Exemption for independent producers and royalty owners
(1) In general
Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to—
(A) so much of the taxpayer's average daily production of domestic crude oil as does not exceed the taxpayer's depletable oil quantity; and
(B) so much of the taxpayer's average daily production of domestic natural gas as does not exceed the taxpayer's depletable natural gas quantity;
and 15 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.
(2) Average daily production
For purposes of paragraph (1)—
(A) the taxpayer's average daily production of domestic crude oil or natural gas for any taxable year, shall be determined by dividing his aggregate production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and
(B) in the case of a taxpayer holding a partial interest in the production from any property (including an interest held in a partnership) such taxpayer's production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer's percentage participation in the revenues from such property.
(3) Depletable oil quantity
(A) In general
For purposes of paragraph (1), the taxpayer's depletable oil quantity shall be equal to—
(i) the tentative quantity determined under subparagraph (B), reduced (but not below zero) by
(ii) except in the case of a taxpayer making an election under paragraph (6)(B), the taxpayer's average daily marginal production for the taxable year.
(B) Tentative quantity
For purposes of subparagraph (A), the tentative quantity is 1,000 barrels.
(4) Daily depletable natural gas quantity
For purposes of paragraph (1), the depletable natural gas quantity of any taxpayer for any taxable year shall be equal to 6,000 cubic feet multiplied by the number of barrels of the taxpayer's depletable oil quantity to which the taxpayer elects to have this paragraph apply. The taxpayer's depletable oil quantity for any taxable year shall be reduced by the number of barrels with respect to which an election under this paragraph applies. Such election shall be made at such time and in such manner as the Secretary shall by regulations prescribe.
[(5) Repealed. Pub. L. 101–508, title XI, §11815(a)(1)(C), Nov. 5, 1990, 104 Stat. 1388–557 ]
(6) Oil and natural gas produced from marginal properties
(A) In general
Except as provided in subsection (d) and subparagraph (B), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to—
(i) so much of the taxpayer's average daily marginal production of domestic crude oil as does not exceed the taxpayer's depletable oil quantity (determined without regard to paragraph (3)(A)(ii)), and
(ii) so much of the taxpayer's average daily marginal production of domestic natural gas as does not exceed the taxpayer's depletable natural gas quantity (determined without regard to paragraph (3)(A)(ii)),
and the applicable percentage shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.
(B) Election to have paragraph apply to pro rata portion of marginal production
If the taxpayer elects to have this subparagraph apply for any taxable year, the rules of subparagraph (A) shall apply to the average daily marginal production of domestic crude oil or domestic natural gas of the taxpayer to which paragraph (1) would have applied without regard to this paragraph.
(C) Applicable percentage
For purposes of subparagraph (A), the term "applicable percentage" means the percentage (not greater than 25 percent) equal to the sum of—
(i) 15 percent, plus
(ii) 1 percentage point for each whole dollar by which $20 exceeds the reference price for crude oil for the calendar year preceding the calendar year in which the taxable year begins.
For purposes of this paragraph, the term "reference price" means, with respect to any calendar year, the reference price determined for such calendar year under section 45K(d)(2)(C).
(D) Marginal production
The term "marginal production" means domestic crude oil or domestic natural gas which is produced during any taxable year from a property which—
(i) is a stripper well property for the calendar year in which the taxable year begins, or
(ii) is a property substantially all of the production of which during such calendar year is heavy oil.
(E) Stripper well property
For purposes of this paragraph, the term "stripper well property" means, with respect to any calendar year, any property with respect to which the amount determined by dividing—
(i) the average daily production of domestic crude oil and domestic natural gas from producing wells on such property for such calendar year, by
(ii) the number of such wells,
is 15 barrel equivalents or less.
(F) Heavy oil
For purposes of this paragraph, the term "heavy oil" means domestic crude oil produced from any property if such crude oil had a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit).
(G) Average daily marginal production
For purposes of this subsection—
(i) the taxpayer's average daily marginal production of domestic crude oil or natural gas for any taxable year shall be determined by dividing the taxpayer's aggregate marginal production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and
(ii) in the case of a taxpayer holding a partial interest in the production from any property (including any interest held in any partnership), such taxpayer's production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer's percentage participation in the revenues from such property.
(7) Special rules
(A) Production of crude oil in excess of depletable oil quantity
If the taxpayer's average daily production of domestic crude oil exceeds his depletable oil quantity, the allowance under paragraph (1)(A) with respect to oil produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which would have been allowable under section 613(a) for all of the taxpayer's oil produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (1) or (6), as the case may be) as his depletable oil quantity bears to the aggregate number of barrels representing the average daily production of domestic crude oil of the taxpayer for such year.
(B) Production of natural gas in excess of depletable natural gas quantity
If the taxpayer's average daily production of domestic natural gas exceeds his depletable natural gas quantity, the allowance under paragraph (1)(B) with respect to natural gas produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which would have been allowable under section 613(a) for all of the taxpayer's natural gas produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (1) or (6), as the case may be) as the amount of his depletable natural gas quantity in cubic feet bears to the aggregate number of cubic feet representing the average daily production of domestic natural gas of the taxpayer for such year.
(C) Taxable income from the property
If both oil and gas are produced from the property during the taxable year, for purposes of subparagraphs (A) and (B) the taxable income from the property, in applying the taxable income limitation in section 613(a), shall be allocated between the oil production and the gas production in proportion to the gross income during the taxable year from each.
(D) Partnerships
In the case of a partnership, the depletion allowance shall be computed separately by the partners and not by the partnership. The partnership shall allocate to each partner his proportionate share of the adjusted basis of each partnership oil or gas property. The allocation is to be made as of the later of the date of acquisition of the oil or gas property by the partnership, or January 1, 1975. A partner's proportionate share of the adjusted basis of partnership property shall be determined in accordance with his interest in partnership capital or income and, in the case of property contributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share. Each partner shall separately keep records of his share of the adjusted basis in each oil and gas property of the partnership, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property by the partnership. For purposes of section 732 (relating to basis of distributed property other than money), the partnership's adjusted basis in mineral property shall be an amount equal to the sum of the partners' adjusted basis in such property as determined under this paragraph.
(8) Business under common control; members of the same family
(A) Component members of controlled group treated as one taxpayer
For purposes of this subsection, persons who are members of the same controlled group of corporations shall be treated as one taxpayer.
(B) Aggregation of business entities under common control
If 50 percent or more of the beneficial interest in two or more corporations, trusts, or estates is owned by the same or related persons (taking into account only persons who own at least 5 percent of such beneficial interest), the tentative quantity determined under paragraph (3)(B) shall be allocated among all such entities in proportion to the respective production of domestic crude oil during the period in question by such entities.
(C) Allocation among members of the same family
In the case of individuals who are members of the same family, the tentative quantity determined under paragraph (3)(B) shall be allocated among such individuals in proportion to the respective production of domestic crude oil during the period in question by such individuals.
(D) Definition and special rules
For purposes of this paragraph—
(i) the term "controlled group of corporations" has the meaning given to such term by section 1563(a), except that section 1563(b)(2) shall not apply and except that "more than 50 percent" shall be substituted for "at least 80 percent" each place it appears in section 1563(a),
(ii) a person is a related person to another person if such persons are members of the same controlled group of corporations or if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), except that for this purpose the family of an individual includes only his spouse and minor children.
(iii) the family of an individual includes only his spouse and minor children, and
(iv) each 6,000 cubic feet of domestic natural gas shall be treated as 1 barrel of domestic crude oil.
(9) Special rule for fiscal year taxpayers
In applying this subsection to a taxable year which is not a calendar year, each portion of such taxable year which occurs during a single calendar year shall be treated as if it were a short taxable year.
(10) Certain production not taken into account
In applying this subsection, there shall not be taken into account the production of natural gas with respect to which subsection (b) applies.
(11) Subchapter S corporations
(A) Computation of depletion allowance at shareholder level
In the case of an S corporation, the allowance for depletion with respect to any oil or gas property shall be computed separately by each shareholder.
(B) Allocation of basis
The S corporation shall allocate to each shareholder his pro rata share of the adjusted basis of the S corporation in each oil or gas property held by the S corporation. The allocation shall be made as of the later of the date of acquisition of the property by the S corporation, or the first day of the first taxable year of the S corporation to which the Subchapter S Revision Act of 1982 applies. Each shareholder shall separately keep records of his share of the adjusted basis in each oil and gas property of the S corporation, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property by the S corporation. In the case of any distribution of oil or gas property to its shareholders by the S corporation, the corporation's adjusted basis in the property shall be an amount equal to the sum of the shareholders' adjusted bases in such property, as determined under this subparagraph.
(d) Limitations on application of subsection (c)
(1) Limitation based on taxable income
The deduction for the taxable year attributable to the application of subsection (c) shall not exceed 65 percent of the taxpayer's taxable income for the year computed without regard to—
(A) any depletion on production from an oil or gas property which is subject to the provisions of subsection (c),
(B) any deduction allowable under section 199A,
(C) any net operating loss carryback to the taxable year under section 172,
(D) any capital loss carryback to the taxable year under section 1212, and
(E) in the case of a trust, any distributions to its beneficiary, except in the case of any trust where any beneficiary of such trust is a member of the family (as defined in section 267(c)(4)) of a settlor who created inter vivos and testamentary trusts for members of the family and such settlor died within the last six days of the fifth month in 1970, and the law in the jurisdiction in which such trust was created requires all or a portion of the gross or net proceeds of any royalty or other interest in oil, gas, or other mineral representing any percentage depletion allowance to be allocated to the principal of the trust.
If an amount is disallowed as a deduction for the taxable year by reason of application of the preceding sentence, the disallowed amount shall be treated as an amount allowable as a deduction under subsection (c) for the following taxable year, subject to the application of the preceding sentence to such taxable year. For purposes of basis adjustments and determining whether cost depletion exceeds percentage depletion with respect to the production from a property, any amount disallowed as a deduction on the application of this paragraph shall be allocated to the respective properties from which the oil or gas was produced in proportion to the percentage depletion otherwise allowable to such properties under subsection (c).
(2) Retailers excluded
Subsection (c) shall not apply in the case of any taxpayer who directly, or through a related person, sells oil or natural gas (excluding bulk sales of such items to commercial or industrial users), or any product derived from oil or natural gas (excluding bulk sales of aviation fuels to the Department of Defense)—
(A) through any retail outlet operated by the taxpayer or a related person, or
(B) to any person—
(i) obligated under an agreement or contract with the taxpayer or a related person to use a trademark, trade name, or service mark or name owned by such taxpayer or a related person, in marketing or distributing oil or natural gas or any product derived from oil or natural gas, or
(ii) given authority, pursuant to an agreement or contract with the taxpayer or a related person, to occupy any retail outlet owned, leased, or in any way controlled by the taxpayer or a related person.
Notwithstanding the preceding sentence this paragraph shall not apply in any case where the combined gross receipts from the sale of such oil, natural gas, or any product derived therefrom, for the taxable year of all retail outlets taken into account for purposes of this paragraph do not exceed $5,000,000. For purposes of this paragraph, sales of oil, natural gas, or any product derived from oil or natural gas shall not include sales made of such items outside the United States, if no domestic production of the taxpayer or a related person is exported during the taxable year or the immediately preceding taxable year.
(3) Related person
For purposes of this subsection, a person is a related person with respect to the taxpayer if a significant ownership interest in either the taxpayer or such person is held by the other, or if a third person has a significant ownership interest in both the taxpayer and such person. For purposes of the preceding sentence, the term "significant ownership interest" means—
(A) with respect to any corporation, 5 percent or more in value of the outstanding stock of such corporation,
(B) with respect to a partnership, 5 percent or more interest in the profits or capital of such partnership, and
(C) with respect to an estate or trust, 5 percent or more of the beneficial interests in such estate or trust.
For purposes of determining a significant ownership interest, an interest owned by or for a corporation, partnership, trust, or estate shall be considered as owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries, as the case may be.
(4) Certain refiners excluded
If the taxpayer or one or more related persons engages in the refining of crude oil, subsection (c) shall not apply to the taxpayer for a taxable year if the average daily refinery runs of the taxpayer and such persons for the taxable year exceed 75,000 barrels. For purposes of this paragraph, the average daily refinery runs for any taxable year shall be determined by dividing the aggregate refinery runs for the taxable year by the number of days in the taxable year.
(5) Percentage depletion not allowed for lease bonuses, etc.
In the case of any oil or gas property to which subsection (c) applies, for purposes of section 613, the term "gross income from the property" shall not include any lease bonus, advance royalty, or other amount payable without regard to production from property.
(e) Definitions
For purposes of this section—
(1) Crude oil
The term "crude oil" includes a natural gas liquid recovered from a gas well in lease separators or field facilities.
(2) Natural gas
The term "natural gas" means any product (other than crude oil) of an oil or gas well if a deduction for depletion is allowable under section 611 with respect to such product.
(3) Domestic
The term "domestic" refers to production from an oil or gas well located in the United States or in a possession of the United States.
(4) Barrel
The term "barrel" means 42 United States gallons.
(Added
Editorial Notes
References in Text
Section 503 of the Natural Gas Policy Act of 1978, referred to in subsec. (b)(3)(C)(i), which was classified to
The Subchapter S Revision Act of 1982, referred to in subsec. (c)(11)(B), is
Amendments
2018—Subsec. (c)(6)(H).
Subsec. (c)(7)(B).
2017—Subsec. (d)(1).
2010—Subsec. (c)(6)(H)(ii).
2008—Subsec. (c)(6)(H).
2006—Subsec. (c)(6)(H).
2005—Subsec. (c)(6)(C).
Subsec. (d)(1)(B) to (E).
Subsec. (d)(4).
2004—Subsec. (c)(6)(H).
2002—Subsec. (c)(6)(H).
1999—Subsec. (c)(6)(H).
1997—Subsec. (c)(6)(H).
1996—Subsec. (c)(3)(A)(i).
1990—Subsec. (c)(1).
Subsec. (c)(3)(A).
Subsec. (c)(3)(A)(ii).
Subsec. (c)(3)(B).
Subsec. (c)(5).
Subsec. (c)(6).
Subsec. (c)(7)(A), (B).
Subsec. (c)(7)(C).
Subsec. (c)(7)(E).
Subsec. (c)(8)(B), (C).
Subsec. (c)(9).
Subsec. (c)(10).
Subsec. (c)(11).
Subsec. (c)(11)(C), (D).
Subsec. (c)(12), (13).
1986—Subsec. (d)(1).
Subsec. (d)(5).
1984—Subsec. (c)(2).
Subsec. (c)(3)(A).
Subsec. (c)(7)(D).
Subsec. (c)(7)(E).
Subsec. (c)(9)(A).
1983—Subsec. (c)(10)(E).
Subsec. (d)(2).
1982—Subsec. (c)(13).
1980—Subsec. (c)(10) to (12).
1978—Subsec. (b)(1)(C).
Subsec. (b)(2), (3).
1977—Subsec. (d)(1).
1976—Subsec. (b)(1)(C).
Subsec. (c)(2), (4).
Subsec. (c)(6)(A)(i).
Subsec. (c)(7)(D).
Subsec. (c)(7)(E).
Subsec. (c)(9)(B).
Subsec. (d)(1).
Subsec. (d)(2).
Subsec. (d)(3).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 11011(d)(4) of
Amendment by section 13305(b)(5) of
Effective Date of 2010 Amendment
Effective Date of 2006 Amendment
Effective Date of 2005 Amendments
Amendment by
Amendment by section 1322(a)(3)(B) of
Effective Date of 2004 Amendment
Effective Date of 2002 Amendment
Effective Date of 1999 Amendment
Effective Date of 1997 Amendment
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by section 11522(b)(1) of
Effective Date of 1986 Amendment
Amendment by section 104(b)(9) of
Amendment by section 412(a)(1) of
Effective Date of 1984 Amendment
Amendment by section 71(b) of
Effective Date of 1983 Amendment
Amendment by section 202(d)(1) of
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1980 Amendment
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(86) of
Effective Date
Savings Provision
For provisions that nothing in amendment by section 401(b)(26) of
For provisions that nothing in amendment by section 11815(a) of
Transfer of Functions
The Federal Power Commission was terminated, and its functions, personnel, property, funds, etc., were transferred to the Secretary of Energy (except for certain functions which were transferred to the Federal Energy Regulatory Commission) by
Coordination With Other Provision
§614. Definition of property
(a) General rule
For the purpose of computing the depletion allowance in the case of mines, wells, and other natural deposits, the term "property" means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.
(b) Special rules as to operating mineral interests in oil and gas wells or geothermal deposits
In the case of oil and gas wells or geothermal deposits—
(1) In general
Except as otherwise provided in this subsection—
(A) all of the taxpayer's operating mineral interests in a separate tract or parcel of land shall be combined and treated as one property, and
(B) the taxpayer may not combine an operating mineral interest in one tract or parcel of land with an operating mineral interest in another tract or parcel of land.
(2) Election to treat operating mineral interests as separate properties
If the taxpayer has more than one operating mineral interest in a single tract or parcel of land, he may elect to treat one or more of such operating mineral interests as separate properties. The taxpayer may not have more than one combination of operating mineral interests in a single tract or parcel of land. If the taxpayer makes the election provided in this paragraph with respect to any interest in a tract or parcel of land, each operating mineral interest which is discovered or acquired by the taxpayer in such tract or parcel of land after the taxable year for which the election is made shall be treated—
(A) if there is no combination of interests in such tract or parcel, as a separate property unless the taxpayer elects to combine it with another interest, or
(B) if there is a combination of interests in such tract or parcel, as part of such combination unless the taxpayer elects to treat it as a separate property.
(3) Certain unitization or pooling arrangements
(A) In general
Under regulations prescribed by the Secretary, if one or more of the taxpayer's operating mineral interests participate, under a voluntary or compulsory unitization or pooling agreement, in a single cooperative or unit plan of operation, then for the period of such participation—
(i) they shall be treated for all purposes of this subtitle as one property, and
(ii) the application of paragraphs (1), (2), and (4) in respect of such interests shall be suspended.
(B) Limitation
Subparagraph (A) shall apply to a voluntary agreement only if all the operating mineral interests covered by such agreement—
(i) are in the same deposit, or are in 2 or more deposits the joint development or production of which is logical from the standpoint of geology, convenience, economy, or conservation, and
(ii) are in tracts or parcels of land which are contiguous or in close proximity.
(4) Manner, time, and scope of election
(A) Manner and time
Any election provided in paragraph (2) shall be made for each operating mineral interest, in the manner prescribed by the Secretary by regulations, not later than the time prescribed by law for filing the return (including extensions thereof) for the first taxable year in which any expenditure for development or operation in respect of such operating mineral interest is made by the taxpayer after the acquisition of such interest.
(B) Scope
Any election under paragraph (2) shall be for all purposes of this subtitle and shall be binding on the taxpayer for all subsequent taxable years.
(c) Special rules as to operating mineral interests in mines
(1) Election to aggregate separate interests
Except in the case of oil and gas wells and geothermal deposits, if a taxpayer owns two or more separate operating mineral interests which constitute part or all of an operating unit, he may elect (for all purposes of this subtitle)—
(A) to form an aggregation of, and to treat as one property, all such interests owned by him which comprise any one mine or any two or more mines; and
(B) to treat as a separate property each such interest which is not included within an aggregation referred to in subparagraph (A).
For purposes of this paragraph, separate operating mineral interests which constitute part or all of an operating unit may be aggregated whether or not they are included in a single tract or parcel of land and whether or not they are included in contiguous tracts or parcels. For purposes of this paragraph, a taxpayer may elect to form more than one aggregation of operating mineral interests within any one operating unit; but no aggregation may include any operating mineral interest which is a part of a mine without including all of the operating mineral interests which are a part of such mine in the first taxable year for which the election to aggregate is effective, and any operating mineral interest which thereafter becomes a part of such mine shall be included in such aggregation.
(2) Election to treat a single interest as more than one property
Except in the case of oil and gas wells and geothermal deposits, if a single tract or parcel of land contains a mineral deposit which is being extracted, or will be extracted, by means of two or more mines for which expenditures for development or operation have been made by the taxpayer, then the taxpayer may elect to allocate to such mines, under regulations prescribed by the Secretary, all of the tract or parcel of land and of the mineral deposit contained therein, and to treat as a separate property that portion of the tract or parcel of land and of the mineral deposit so allocated to each mine. A separate property formed pursuant to an election under this paragraph shall be treated as a separate property for all purposes of this subtitle (including this paragraph). A separate property so formed may, under regulations prescribed by the Secretary, be included as a part of an aggregation in accordance with paragraphs (1) and (3). The election provided by this paragraph may not be made with respect to any property which is a part of an aggregation formed by the taxpayer under paragraph (1) except with the consent of the Secretary.
(3) Manner and scope of election
The elections provided by paragraphs (1) and (2) shall be made, in accordance with regulations prescribed by the Secretary, not later than the time prescribed for filing the return (including extensions thereof) for the first taxable year—
(A) in which, in the case of an election under paragraph (1), any expenditure for development or operation in respect of the separate operating mineral interest is made by the taxpayer after the acquisition of such interest, or
(B) in which, in the case of an election under paragraph (2), expenditures for development or operation of more than one mine in respect of a property are made by the taxpayer after the acquisition of the property.
An election made under paragraph (1) or (2) for a taxable year shall be binding upon the taxpayer for such year and all subsequent taxable years, except that the Secretary may consent to a different treatment of any interest with respect to which an election has been made.
(d) Operating mineral interests defined
For purposes of this section, the term "operating mineral interest" includes only an interest in respect of which the costs of production of the mineral are required to be taken into account by the taxpayer for purposes of computing the taxable income limitation provided for in section 613, or would be so required if the mine, well, or other natural deposit were in the production stage.
(e) Special rule as to nonoperating mineral interests
(1) Aggregation of separate interests
If a taxpayer owns two or more separate nonoperating mineral interests in a single tract or parcel of land or in two or more adjacent tracts or parcels of land, the Secretary shall, on showing by the taxpayer that a principal purpose is not the avoidance of tax, permit the taxpayer to treat (for all purposes of this subtitle) all such mineral interests in each separate kind of mineral deposit as one property. If such permission is granted for any taxable year, the taxpayer shall treat such interests as one property for all subsequent taxable years unless the Secretary consents to a different treatment.
(2) Nonoperating mineral interests defined
For purposes of this subsection, the term "nonoperating mineral interests" includes only interests which are not operating mineral interests.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2014—Subsec. (b)(3)(C).
Subsec. (b)(4)(A).
Subsec. (b)(5).
1990—Subsec. (d).
1978—Subsec. (b).
Subsec. (c).
1976—Subsecs. (b)(3)(A), (4)(A), (e).
Subsec. (c)(2).
Subsec. (c)(3).
Subsec. (c)(4).
1964—Subsec. (b).
Subsec. (c).
Subsec. (d).
Subsec. (e)(2).
1958—Subsec. (b)(4).
Subsecs. (c) to (e).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1976 Amendment
Effective Date of 1964 Amendment
Effective Date of 1958 Amendment
Allocation of Basis in Certain Cases
"(1)
"(A) the numerator of which is the fair market value of such property, and
"(B) the denominator of which is the fair market value of such aggregation.
For purposes of this paragraph, the adjusted basis and the fair market value of the aggregation, and the fair market value of each property included therein, shall be determined as of the day preceding the first day of the first taxable year which begins after December 31, 1963.
"(2)
"(3)
"(A)
"(B)
[§615. Repealed. Pub. L. 94–455, title XIX, §1901(a)(88), Oct. 4, 1976, 90 Stat. 1779 ]
Section, acts Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal effective with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of
§616. Development expenditures
(a) In general
Except as provided in subsections (b) and (d), there shall be allowed as a deduction in computing taxable income all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. This section shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this section, as expenditures.
(b) Election of taxpayer
At the election of the taxpayer, made in accordance with regulations prescribed by the Secretary, expenditures described in subsection (a) paid or incurred during the taxable year shall be treated as deferred expenses and shall be deductible on a ratable basis as the units of produced ores or minerals benefited by such expenditures are sold. In the case of such expenditures paid or incurred during the development stage of the mine or deposit, the election shall apply only with respect to the excess of such expenditures during the taxable year over the net receipts during the taxable year from the ores or minerals produced from such mine or deposit. The election under this subsection, if made, must be for the total amount of such expenditures, or the total amount of such excess, as the case may be, with respect to the mine or deposit, and shall be binding for such taxable year.
(c) Adjusted basis of mine or deposit
The amount of expenditures which are treated under subsection (b) as deferred expenses shall be taken into account in computing the adjusted basis of the mine or deposit, except that such amount, and the adjustments to basis provided in section 1016(a)(9), shall be disregarded in determining the adjusted basis of the property for the purpose of computing a deduction for depletion under section 611.
(d) Special rules for foreign development
In the case of any expenditures paid or incurred with respect to the development of a mine or other natural deposit (other than an oil, gas, or geothermal well) located outside of the United States—
(1) subsections (a) and (b) shall not apply, and
(2) such expenditures shall—
(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or
(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred.
(e) Cross reference
For election of 10-year amortization of expenditures allowable as a deduction under subsection (a), see section 59(e).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1988—Subsec. (e).
1986—Subsec. (a).
Subsecs. (d), (e).
1982—Subsec. (d).
1976—Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1982 Amendment
Amendment by
§617. Deduction and recapture of certain mining exploration expenditures
(a) Allowance of deduction
(1) General rule
At the election of the taxpayer, expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine, shall be allowed as a deduction in computing taxable income. This subsection shall apply only with respect to the amount of such expenditures which, but for this subsection, would not be allowable as a deduction for the taxable year. This subsection shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this subsection, as expenditures paid or incurred. In no case shall this subsection apply with respect to amounts paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of oil or gas or of any mineral with respect to which a deduction for percentage depletion is not allowable under section 613.
(2) Elections
(A) Method
Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe.
(B) Time and scope
The election provided by paragraph (1) for the taxable year may be made at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for the taxable year. Such an election for the taxable year shall apply to all expenditures described in paragraph (1) paid or incurred by the taxpayer during the taxable year or during any subsequent taxable year. Such an election may not be revoked unless the Secretary consents to such revocation.
(C) Deficiencies
The statutory period for the assessment of any deficiency for any taxable year, to the extent such deficiency is attributable to an election or revocation of an election under this subsection, shall not expire before the last day of the 2-year period beginning on the day after the date on which such election or revocation of election is made; and such deficiency may be assessed at any time before the expiration of such 2-year period, notwithstanding any law or rule of law which would otherwise prevent such assessment.
(b) Recapture on reaching producing stage
(1) Recapture
If, in any taxable year, any mine with respect to which expenditures were deducted pursuant to subsection (a) reaches the producing stage, then—
(A) If the taxpayer so elects with respect to all such mines reaching the producing stage during the taxable year, he shall include in gross income for the taxable year an amount equal to the adjusted exploration expenditures with respect to such mines, and the amount so included in income shall be treated for purposes of this subtitle as expenditures which (i) are paid or incurred on the respective dates on which the mines reach the producing stage, and (ii) are properly chargeable to capital account.
(B) If subparagraph (A) does not apply with respect to any such mine, then the deduction for depletion under section 611 with respect to the property shall be disallowed until the amount of depletion which would be allowable but for this subparagraph equals the amount of the adjusted exploration expenditures with respect to such mine.
(2) Elections
(A) Method
Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe.
(B) Time and scope
The election provided by paragraph (1) for any taxable year may be made or changed not later than the time prescribed by law for filing the return (including extensions thereof) for such taxable year.
(c) Recapture in case of bonus or royalty
If an election has been made under subsection (a) with respect to expenditures relating to a mining property and the taxpayer receives or accrues a bonus or a royalty with respect to such property, then the deduction for depletion under section 611 with respect to the bonus or royalty shall be disallowed until the amount of depletion which would be allowable but for this subsection equals the amount of the adjusted exploration expenditures with respect to the property to which the bonus or royalty relates.
(d) Gain from dispositions of certain mining property
(1) General rule
Except as otherwise provided in this subsection, if mining property is disposed of the lower of—
(A) the adjusted exploration expenditures with respect to such property, or
(B) the excess of—
(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value (in the case of any other disposition), over
(ii) the adjusted basis of such property,
shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Disposition of portion of property
For purposes of paragraph (1)—
(A) In the case of the disposition of a portion of a mining property (other than an undivided interest), the entire amount of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such portion to the extent of the amount of the gain to which paragraph (1) applies.
(B) In the case of the disposition of an undivided interest in a mining property (or a portion thereof), a proportionate part of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies.
This paragraph shall not apply to any expenditure to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditure relates neither to the portion (or interest therein) disposed of nor to any mine, in the property held by the taxpayer before the disposition, which has reached the producing stage.
(3) Exceptions and limitations
Paragraphs (1), (2), and (3) of section 1245(b) (relating to exceptions and limitations with respect to gain from disposition of certain depreciable property) shall apply in respect of this subsection in the same manner and with the same effect as if references in section 1245(b) to section 1245 or any provision thereof were references to this subsection or the corresponding provisions of this subsection and as if references to section 1245 property were references to mining property.
(4) Application of subsection
This subsection shall apply notwithstanding any other provision of this subtitle.
(5) Coordination with section 1254
This subsection shall not apply to any disposition to which section 1254 applies.
(e) Basis of property
(1) Basis
The basis of any property shall not be reduced by the amount of any depletion which would be allowable but for the application of this section.
(2) Adjustments
The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (d)(1).
(f) Definitions
For purposes of this section
(1) Adjusted exploration expenditures
The term "adjusted exploration expenditures" means, with respect to any property or mine—
(A) the amount of the expenditures allowed for the taxable year and all preceding taxable years as deductions under subsection (a) to the taxpayer or any other person which are properly chargeable to such property or mine and which (but for the election under subsection (a)) would be reflected in the adjusted basis of such property or mine, reduced by
(B) for the taxable year and for each preceding taxable year, the amount (if any) by which (i) the amount which would have been allowable for percentage depletion under section 613 but for the deduction of such expenditures, exceeds (ii) the amount allowable for depletion under section 611,
properly adjusted for any amounts included in gross income under subsection (b) or (c) and for any amounts of gain to which subsection (d) applied.
(2) Mining property
The term "mining property" means any property (within the meaning of section 614 after the application of subsections (c) and (e) thereof) with respect to which any expenditures allowed as a deduction under subsection (a)(1) are properly chargeable.
(3) Disposal of coal or domestic iron ore with a retained economic interest
A transaction which constitutes a disposal of coal or iron ore under section 631(c) shall be treated as a disposition. In such a case, the excess referred to in subsection (d)(1)(B) shall be treated as equal to the gain (if any) referred to in section 631(c).
(g) Special rules relating to partnership property
(1) Property distributed to partner
In the case of any property or mine received by the taxpayer in a distribution with respect to part or all of his interest in a partnership, the adjusted exploration expenditures with respect to such property or mine include the adjusted exploration expenditures (not otherwise included under subsection (f)(1)) with respect to such property or mine immediately prior to such distribution, but the adjusted exploration expenditures with respect to any such property or mine shall be reduced by the amount of gain to which section 751(b) applied realized by the partnership (as constituted after the distribution) on the distribution of such property or mine.
(2) Property retained by partnership
In the case of any property or mine held by a partnership after a distribution to a partner to which section 751(b) applied, the adjusted exploration expenditures with respect to such property or mine shall, under regulations prescribed by the Secretary, be reduced by the amount of gain to which section 751(b) applied realized by such partner with respect to such distribution on account of such property or mine.
(h) Special rules for foreign exploration
In the case of any expenditures paid or incurred before the development stage for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (other than an oil, gas, or geothermal well) located outside the United States—
(1) subsection (a) shall not apply, and
(2) such expenditures shall—
(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or
(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred.
(i) Cross reference
For election of 10-year amortization of expenditures allowable as a deduction under this section, see section 59(e).
(Added
Editorial Notes
Amendments
1990—Subsecs. (i), (j).
1988—Subsec. (j).
1986—Subsec. (d)(5).
Subsec. (h).
1982—Subsec. (h)(3)(B).
Subsec. (j).
1976—Subsec. (a)(2)(A).
Subsec. (a)(2)(B).
Subsec. (b)(2)(A).
Subsec. (d)(1).
Subsecs. (d)(2), (e)(2), (g)(2).
Subsec. (h)(1).
Subsec. (h)(3).
Subsec. (i).
1969—
Subsec. (a)(1).
Subsec. (h).
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 411(b)(2)(B) of
Amendment by section 413(b) of
Effective Date of 1982 Amendment
Amendment by section 201(d)(9)(D) of
Amendment by section 224(c)(8) of
Effective Date of 1976 Amendment
Amendment by section 1901(a)(89), (b)(3)(K), (21)(C)–(E) of
Effective Date of 1969 Amendment
Amendment by
Effective Date
Savings Provision
For provisions that nothing in amendment by
[PART II—REPEALED]
[§621. Repealed. Pub. L. 101–508, title XI, §11801(a)(28), Nov. 5, 1990, 104 Stat. 1388–521 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Savings Provision
For provisions that nothing in repeal by
PART III—SALES AND EXCHANGES
Editorial Notes
Amendments
1976—
1964—
§631. Gain or loss in the case of timber, coal, or domestic iron ore
(a) Election to consider cutting as sale or exchange
If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than 1 year) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this subsection, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary. For purposes of this subsection and subsection (b), the term "timber" includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.
(b) Disposal of timber
In the case of the disposal of timber held for more than 1 year before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner either retains an economic interest in such timber or makes an outright sale of such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shall be considered as though it were a gain or loss, as the case may be, on the sale of such timber. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. In the case of disposal of timber with a retained economic interest, the date of disposal of such timber shall be deemed to be the date such timber is cut, but if payment is made to the owner under the contract before such timber is cut the owner may elect to treat the date of such payment as the date of disposal of such timber. For purposes of this subsection, the term "owner" means any person who owns an interest in such timber, including a sublessor and a holder of a contract to cut timber.
(c) Disposal of coal or domestic iron ore with a retained economic interest
In the case of the disposal of coal (including lignite), or iron ore mined in the United States, held for more than 1 year before such disposal, by the owner thereof under any form of contract by virtue of which such owner retains an economic interest in such coal or iron ore, the difference between the amount realized from the disposal of such coal or iron ore and the adjusted depletion basis thereof plus the deductions disallowed for the taxable year under section 272 shall be considered as though it were a gain or loss, as the case may be, on the sale of such coal or iron ore. If for the taxable year of such gain or loss the maximum rate of tax imposed by this chapter on any net capital gain is less than such maximum rate for ordinary income, such owner shall not be entitled to the allowance for percentage depletion provided in section 613 with respect to such coal or iron ore. This subsection shall not apply to income realized by any owner as a co-adventurer, partner, or principal in the mining of such coal or iron ore, and the word "owner" means any person who owns an economic interest in coal or iron ore in place, including a sublessor. The date of disposal of such coal or iron ore shall be deemed to be the date such coal or iron ore is mined. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. This subsection shall have no application, for purposes of applying subchapter G, relating to corporations used to avoid income tax on shareholders (including the determinations of the amount of the deductions under section 535(b)(6) or section 545(b)(5)). This subsection shall not apply to any disposal of iron ore or coal—
(1) to a person whose relationship to the person disposing of such iron ore or coal would result in the disallowance of losses under section 267 or 707(b), or
(2) to a person owned or controlled directly or indirectly by the same interests which own or control the person disposing of such iron ore or coal.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2004—Subsec. (b).
1986—Subsec. (c).
1984—Subsec. (a).
Subsecs. (b), (c).
1976—Subsec. (a).
Subsec. (b).
Subsec. (c).
1964—
Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
"(1)
"(2)
"(A)
"(i) to a person who is not a related person with respect to either such person, and
"(ii) pursuant to a qualified fixed contract.
"(B)
"(C)
"(i) was entered into before June 12, 1984,
"(ii) is binding at all times thereafter, and
"(iii) cannot be adjusted to reflect to any extent the increase in liabilities of the person disposing of the coal for tax under
"(D)
Amendment by section 1001(c) of
Effective Date of 1976 Amendment
Effective Date of 1964 Amendment
Amendment by
Revocation of Elections Under Section 631(a)
[§632. Repealed. Pub. L. 94–455, title XIX, §1901(a)(90), Oct. 4, 1976, 90 Stat. 1779 ]
Section, acts Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of
PART IV—MINERAL PRODUCTION PAYMENTS
Editorial Notes
Amendments
1969—
§636. Income tax treatment of mineral production payments
(a) Carved-out production payments
A production payment carved out of mineral property shall be treated, for purposes of this subtitle, as if it were a mortgage loan on the property, and shall not qualify as an economic interest in the mineral property. In the case of a production payment carved out for exploration or development of a mineral property, the preceding sentence shall apply only if and to the extent gross income from the property (for purposes of section 613) would be realized, in the absence of the application of such sentence, by the person creating the production payment.
(b) Retained production payment on sale of mineral property
A production payment retained on the sale of a mineral property shall be treated, for purposes of this subtitle, as if it were a purchase money mortgage loan and shall not qualify as an economic interest in the mineral property.
(c) Retained production payment on lease of mineral property
A production payment retained in a mineral property by the lessor in a leasing transaction shall be treated, for purposes of this subtitle, insofar as the lessee (or his successors in interest) is concerned, as if it were a bonus granted by the lessee to the lessor payable in installments. The treatment of the production payment in the hands of the lessor shall be determined without regard to the provisions of this subsection.
(d) Definition
As used in this section, the term "mineral property" has the meaning assigned to the term "property" in section 614(a).
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.
(Added
Editorial Notes
Amendments
1976—Subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date
"(1)
"(2)
"(3)
"(A) the excess of
"(i) the aggregate amount of production payments carved out and sold by the taxpayer during the 12-month period immediately preceding his taxable year which includes August 7, 1969, over
"(ii) the aggregate amount of production payments carved out before August 7, 1969, by the taxpayer during his taxable year which includes such date, or
"(B) the amount necessary to increase the amount of the taxpayer's gross income, within the meaning of
The preceding sentence shall not apply for purposes of determining the amount of any deduction allowable under section 611 or the amount of foreign tax credit allowable under section 904 of such Code."
PART V—CONTINENTAL SHELF AREAS
Editorial Notes
Amendments
1969—
§638. Continental shelf areas
For purposes of applying the provisions of this chapter (including sections 861(a)(3) and 862(a)(3) in the case of the performance of personal services) with respect to mines, oil and gas wells, and other natural deposits—
(1) the term "United States" when used in a geographical sense includes the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources; and
(2) the terms "foreign country" and "possession of the United States" when used in a geographical sense include the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country or such possession and over which the foreign country (or the United States in case of such possession) has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources, but this paragraph shall apply in the case of a foreign country only if it exercises, directly or indirectly, taxing jurisdiction with respect to such exploration or exploitation.
No foreign country shall, by reason of the application of this section, be treated as a country contiguous to the United States.
(Added