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erty which will have value after such period for use in a going concern or business; (g) all deductions from gross income otherwise taken or claimed with respect to such property; (h) the computation by which the total amount to be extinguished by amortization was determined; and (i) the computation by which the proportion of the amortization charge claimed as deduction in the taxable year for which return is being made was determined.59

59 Reg. 45, Art. 187.

CHAPTER 32

ALLOWANCE FOR DEPLETION OF MINES, OIL AND GAS WELLS, OTHER NATURAL DEPOSITS, AND TIMBER

The 1918 Law contains a provision for deducting an allowance of a part of the income derived from the production of mines, oil wells, gas wells or any other natural deposit and timber. The same allowance is permitted to individuals as to corporations and is permitted to nonresident aliens or foreign corporations with respect to property located in the United States. The 1916 Law provided for an allowance for depletion in the case of mines, oil and gas wells.2 That law provided, in the case of oil and gas wells, a reasonable allowance for actual reduction in flow and production, and in the case of mines a reasonable allowance not to exceed the market value in the mine of the product thereof which had been mined and sold during the year for which the return and computation were made. The present law does not limit the depletion in the same way but permits a reasonable allowance according to the peculiar conditions of each case. Both the 1916 Law and the 1918 Law permit the allowance for depletion to be based upon the value of the property as of March 1, 1913, or the cost if the property has been acquired since that date. The 1916 Law made no reference to lessees and the Treasury Department ruled that a lessee could claim no depletion with respect to the value of the natural deposit on March 1, 1913. The present law provides that in the case of leases the deduction

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shall be equitably apportioned between the lessor and lessee. With respect to depletion the Treasury Department has ruled under the 1918 Law as follows: 3

Depletion of Mines, Oil and Gas Wells. A reasonable deduction from gross income for the depletion of natural deposits and for the depreciation of improvements is permitted, based (a) upon cost, if acquired after February 28, 1913, or (b) upon the fair market value as of March 1, 1913, if acquired prior thereto, or (c) upon the fair market value within 30 days after the date of discovery in the case of mines, oil and gas wells discovered by the taxpayer after February 28, 1913, where the fair market value is materially disproportionate to the cost. The essence of this provision is that the owner of such property, whether it be a leasehold or freehold, shall secure through an aggregate of annual depletion and depreciation deductions a return of the amount of capital invested by him in the property, or in lieu thereof an amount equal to the fair market value as of March 1, 1913, of the properties owned prior to that date, or an amount equal to the fair market value within thirty days after the date of discovery of mines, oil or gas wells discovered by the taxpayer on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the market value of the property is materially disproportionate to the cost; plus in any case the subsequent cost of plant and equipment (less salvage value), and underground and overground development, which is not chargeable to current operating expense, but not including land values for purposes other than the extraction of minerals. Operating owners, lessors, and lessees are entitled to de

3 Reg. 45, Arts. 201 to 233, inclusive.

4 Under the 1916 Law no allowance for depletion was permitted in the case of a lessee but the lessee was permitted to claim "depreciation" on the actual bonus or other cost incurred in acquiring and developing property.

duct an allowance for depletion, but a stockholder in a mining or oil or gas corporation is not.5

Capital Recoverable Through Depletion Allowance in the Case of Owner. In the case of an operating owner in fee or a lessor the capital remaining in any year recoverable through depletion allowances is the sum of (a) the cost of the property, or its fair market value as of March 1, 1913, or its fair market value within 30 days after discovery, as the case may be, plus (b) the cost of subsequent improvements and development not charged to current operating expenses, but minus (c) deductions for depletion which have or should have been taken to date, and (d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion." The value of the surface of the land should be taken into consideration. In no case, however, may a lessor take deductions for depletion in any year during the continuance of the lease in excess of the royalties payable thereunder for such year, nor may he include in his capital recoverable through such an allowance any part of development costs not borne by the lessor.9

Capital Recoverable Through Depletion Allowance in the Case of Lessee. In the case of a lessee the capital remaining in any year recoverable through depletion allowances is the sum of (a) the cost of the leasehold, or its 5 Reg. 45, Art. 201.

6 It is to be noted that the ruling contemplates that depletion must be taken consistently from year to year and more depletion than is allocated to the production of one year cannot be taken by reason of the fact that less has been deducted in a past year than could have been properly allocated to such past year.

7 Depreciation should be claimed on rigs, tools, machinery of all kinds, pipes, casing, and other equipment necessary to the operation of the wells or the field. Depletion applies only to the loss due to exhaustion of the natural resource.

8 That is, in the case of an owner the value of the surface of the land should not be considered as a part of the value of the natural deposit.

9 Reg. 45, Art. 202.

fair market value as of March 1, 1913, or its fair market value within 30 days after discovery, as the case may be, plus (b) the cost of subsequent improvements and development not charged to current operating expenses, but minus (c) deductions for depletion which have or should have been taken to date, and (d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion. Any annual or periodical rents or royalties supplementing the bonus or other amount paid for the lease may be charged to current operating expenses or to capital account, and in the latter event will form a part of the capital returnable through deductions for depletion.10

Apportionment of Deductions Between Lessor and Lessee. As the value of property comprehends the interests of both lessor and lessee, no computation, for the purpose of depletion allowances, of the value of these interests separately as of any date which combined exceeds the value of the property in fee simple will be permitted.11 The same principle applies to holders of fractional interests. If the aggregate deduction claimed is deemed excessive, the Commissioner may request the owner or lessee to show that the valuation claimed does not exceed the fair market value of the property at a specified date determined in the manner explained in article 206.12 The lessor and lessee shall, with the approval of the Commissioner, equitably apportion the allowance in the light of the peculiar conditions in each case and on the basis of their respective interests therein. To the return of every taxpayer claiming an allowance for depletion in respect

10 Id. Art. 203.

11 This ruling means that the value of the property as of March 1, 1913, or the value as of thirty days after date of discovery must be apportioned between the lessor and lessee, but if for instance the lessee has paid a bonus in addition to royalties the lessee's depletion should in no case be less than the amount of the bonus regardless of what the value may have been on any particular date.

12 See page 502.

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