Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 67-99

1967-1 C.B. 68

Sec. 179

IRS Headnote

Equipment used, accessory to and necessary for the operation of oil and gas wells on a lease, is `tangible personal property' for purposes of the additional first-year depreciation allowance under section 179 of the Internal Revenue Code of 1954.

Revenue Rulings 61-142, C.B. 1961-2, 53, and 65-308, C.B. 1965-2, 74, are distinguished.

Full Text

Rev. Rul. 67-99

Advice has been requested whether equipment used, accessory to and necessary for the operation of oil and gas wells on a lease, qualifies as `tangible personal property' for purposes of the additional first-year depreciation allowance provided by section 179 of the Internal Revenue Code of 1954, in view of the Service position stated in Revenue Ruling 61-142, C.B. 1961-2, 53, and Revenue Ruling 65-308, C.B. 1965-2, 74.

The oil and gas well lease equipment involved consists of pumps, `lease tanks,' heaters, rods, treaters, separators, valves, regulators, `Christmas trees,' tubing, casing intended to be removed, and similar equipment. The equipment is generally affixed to the land and is used accessory to and necessary for the operation of oil and gas wells on a lease. In some instances, local law considers this equipment as `personal property,' and, in other instances the equipment is included with the oil and gas lease and considered as real property.

A taxpayer, other than a trust, may elect under section 179 of the Code, in the first year depreciation is allowable on `tangible personal property,' to include an additional depreciation allowance of 20 percent of the cost of the property subject to certain limitations. Depreciable tangible personal property which has a useful life of 6 years or more may qualify for this additional allowance. Section 1.179-3 of the Income Tax Regulations provides, in part, that the term `tangible personal property' includes any tangible property except land and land improvements, such as, buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Assets accessory to the operation of a business, such as machinery * * * generally constitute tangible personal property for purposes of section 179, even though such assets may be termed fixtures under local laws.

Revenue Ruling 61-142 held that a prefabricated grain bin delivered and assembled on the ground was inherently a permanent structure on land, because of its assembled structural character as a building, and was not `tangible personal property.'

Revenue Ruling 65-308 held that gas mains laid under public streets did not qualify as `tangible personal property' because they were improvements added to land in the form of inherently permanent structures.

However, both of these rulings are distinguishable from the present factual situation wherein the equipment has neither the characteristics of a building, nor can it be classified merely as an improvement added to the land. It is equipment, accessory to and necessary for operation of the oil and gas wells, used in operating the lease. This oil and gas well lease equipment serves to make the oil and gas from the lease accessible. Therefore, it primarily benefits the oil and gas well production from the lease. In general, when production ceases, most of the equipment will be removed from the property and sold or reused on other properties.

Accordingly, equipment used, accessory to and necessary for the operation of oil and gas wells on a lease, is `tangible personal property' for purposes of the additional first-year depreciation allowance under section 179 of the Code.

Revenue Rulings 61-142, C.B. 1961-2, 53, and 65-308, C.B. 1965-2, 74, are distinguished.