Taxpayer allowed to aggregate non-operating mineral interests

Tax Hot Topics newsletter The IRS issued a private letter ruling (PLR 201852017) providing that a taxpayer may aggregate its separate non-operating mineral interests such that each of the properties is treated as one property for federal income tax purposes. Aggregation of the interests reduces the taxpayer’s administrative burden in calculating depletion and allows the taxpayer to implement consistent treatment for federal income tax and financial accounting purposes.

Pursuant to Section 614(e) and Treas. Reg. Secs. 1.614-5(d) & (e), a taxpayer that owns two or more separate non-operating mineral interests in either a single parcel of land or adjacent parcels of land, may be permitted to treat all such interests as a single property. To do so, a taxpayer must submit a timely written request to the IRS that includes maps or descriptions of the interests to be aggregated, a complete statement of the facts and establish that the principal purpose for forming the aggregation is not tax avoidance. The taxpayer in the PLR provided all the information requested and was granted permission to aggregate the interests.

In this case, the three properties under consideration in the request consist of mineral royalty interests and contain both producing and nonproducing portions. All the interests are located in tracts of land that are either contiguous, touching at one point (checkerboard pattern of ownership) or reasonably close in proximity to each other. The taxpayer provided maps to the IRS that indicated which areas were considered non-operating and are the subject of the request. The interests met the requirement to be in contiguous or adjacent parcels of land.

The taxpayer acquired the right to receive the royalty on the mineral interest from an unrelated third party. The taxpayer was not responsible for exploration, development, production or marketing of the crude oil. Because the royalties are not based on production, the taxpayer claimed cost depletion in respect of the royalty payments and not the percentage depletion in respect of the production on the properties.

In order to compute the cost depletion, the taxpayer requested permission to aggregate the royalty interests because reserve information is not available on a property-by-property basis. Because the interests were not related to costs for exploration, development or production, it is highly unlikely that the depletion would be subject to certain taxable income limitations and aggregation would not alter that result. Additionally, aggregating the interests at each property would not alter the total depletion deductions allowed at each property. Therefore, the taxpayer also met the requirement that the principal purpose of this request was not tax avoidance.

Sharon Kay
Washington National Tax Office
T +1 202 861 4140

John Suttora
Managing Director
Washington National Tax Office
T +1 202 521 1523

Debbie Shi
Washington National Tax Office
T +1 202 521 1501

Caleb Cordonnier
Washington National Tax Office
T +1 202 521 1555

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