Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-78

1968-1 C.B. 294

Sec. 612

IRS Headnote

Where a portion of an oil and gas property is unitized and the lessee of the property relinquishes the remaining leased acreage falling outside the productive unit boundaries, the lessor is not required to restore to gross income any of the depletion allowance taken on the lease bonus income received.

Full Text

Rev. Rul. 68-78

Advice has been requested whether a lessor must restore to gross income any part of the depletion allowance taken on an oil and gas lease bonus, where a portion of the mineral property is unitized and the lessee relinquishes the remaining leased acreage falling outside the productive unit boundaries.

The lessor granted a lease covering a single tract of land to an oil company and received a bonus upon granting the lease. Depletion was taken by the lessor on the lease bonus income in the year of receipt. The lease was for a five-year term and provided for delay rentals to maintain the lease. The lessee was given the right to pool or combine the acreage and royalty with other land or leases in the immediate vicinity of the well to comply with spacing or unitization orders of the State regulatory agency. A portion of the lease was unitized and the remaining portion of the lease was relinquished by the lessee.

Section 611(a) of the Internal Revenue Code of 1954 provides that there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion in the case of mines, oil and gas wells, other natural deposits, and timber. Further, section 1.612-3(a)(2) of the Income Tax Regulations provides that if the grant of an economic interest in a mineral deposit or standing timber with respect to which a bonus was received expires, terminates, or is abandoned before there has been income derived from the extraction of mineral or cutting of timber, the payee shall adjust his capital account by restoring thereto the depletion deduction taken on the bonus and a corresponding amount must be returned as income in the year of such expiration, termination, or abandonment.

In this case the economic interest has not expired or terminated and has not been completely abandoned. Accordingly, the lessor is not required to restore to gross income any of the depletion taken on the oil and gas lease bonus. See Clara Driscoll v. Commissioner of Internal Revenue , 147 F.2d 493, 496 (1945).