Internal Revenue Service
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 Rev. Rul. 77-33

1977-1 C.B. 165

Section 613

IRS Headnote

Depletion; gross income from property; limitation; use of market or field price. Section 1.613-4(c)(6) of the regulations modifies the presumption, concerning the limitation on gross income from the property when a representative market or field price is used, by specifying that in the case of minerals other than oil and gas the presumption is applied to the product or products actually sold rather than to only the first marketable product or group of products actually sold.

Full Text

Rev. Rul. 77-33

Advice has been requested whether section 1.613-4(c)(6) of the Income Tax Regulations, as added by T.D. 7170, 1972-1 C.B. 178, modifies the presumption contained in section 1.613-3(c)(6) concerning the limitation on gross income from the property when a representative field or market price is used to compute gross income from mining.

Section 1.613-3(c)(6) of the regulations provides, in part, as follows:

It shall be presumed that a price is not a representative market or field price for the taxpayer's ore or mineral if the sum of such price plus the total of all costs of the nonmining processes (including nonmining transportation) which the taxpayer applies to his ore or mineral regularly exceeds the taxpayer's actual sales price of his first marketable product or group of products. See paragraph (d)(1)(iv) of this section for the definition of the term "first marketable product or group of products". For example, if the total of all costs of nonmining processes applied by the taxpayer to coal for the purpose of making coke is $12.00 per ton, and if the taxpayer's actual sale price for such coke is $18.00 per ton, a price of $7.00 per ton would not be representative market or field price for the taxpayer's coal.

Section 1.613-4(a) of the regulations provides, in part, as follows:

The rules contained in this section are applicable to the determination of gross income from the property in the case of minerals other than oil and gas and the rules contained in sec. 1.613-3 are not applicable to such determination, notwithstanding provisions to the contrary in sec. 1.613-3.

Section 1.613-4(c)(6) of the regulations provides, in part, as follows:

It shall be presumed that a price is not a representative market or field price for the taxpayer's ore or mineral if the sum of such price plus the total of all costs of the nonmining processes (including nonmining transportation) which the taxpayer applies to his ore or mineral regularly exceeds the taxpayer's actual sales price of his product. For example, if on a regular basis the total of all costs of nonmining processes applied by the taxpayer to coal for the purpose of making coke is $12.00 per ton, and if the taxpayer's actual sale price for such coke is $18.00 per ton, a price of $7.00 per ton would not be a representative market or field price for the taxpayer's coal which is used for making coke.

Section 1.613-4(c)(6) of the regulations, as added by T.D. 7170, contains essentially the same provisions as section 1.613-3(c)(6). However, section 1.613-4(c)(6) contains the phrase "of his product" in lieu of the phrase "of his first marketable product or group of products," and drops the reference to the definition of the "first marketable product or group of products." Section 1.613-4(c)(6) also modifies the example and clarifies the language to indicate that the acceptability of the representative market or field price is determined with respect to the actual sales price of the product sold, and thus is not restricted to the actual sales price of only the first marketable product.

Accordingly, section 1.613-4(c)(6) of the regulations modifies the presumption concerning the limitation on gross income from the property when a representative market or field price is used by specifying that, in the case of minerals other than oil and gas, the presumption is applied to the product or products actually sold rather than to only the first marketable product or group of products actually sold.