Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-73

1979-1 C.B. 218

Section 613

IRS Headnote

Depletion; gross income from property; exclusion of bonus. An allocable part of a bonus paid by a taxpayer for the grant of a mineral lease on a tract of land that the taxpayer later developed for the production of a mineral must be excluded in determining the gross income from the property for the purpose of computing the limitation of the percentage depletion allowance of 50 percent of taxable income from the property (computed without the allowance for depletion).

Full Text

Rev. Rul. 79-73

ISSUE

Is an allocable part of the bonus a taxpayer paid in respect to a mineral property excluded in determining the "gross income from the property" for the purpose of computing the limitation of the percentage depletion allowance of fifty percent of "taxable income from the property (computed without the allowance for depletion)"?

FACTS

The taxpayer paid a bonus of 200x dollars in 1970 for the grant of a mineral lease on a certain tract of land. In taxable year 1974, the taxpayer developed the tract of land for the production of the mineral and received income from the sale of the mineral produced. During the taxable year in question, the taxpayer produced and sold 100y units, from the total estimated recoverable units of 1,000y, for 240x dollars. The taxpayer paid a royalty of 30x dollars and incurred deductible expenses of 120x dollars.

LAW AND ANALYSIS

Section 613 of the Internal Revenue Code of 1954 and the Income Tax Regulations promulgated thereunder provide, in the case of a mineral property, for a depletion allowance equal to a percentage of "gross income from the property" and such allowance is limited to fifty percent of the "taxable income from the property (computed without the allowance for depletion)."

Section 1.613-2(c)(5)(ii) of the regulations provides for the exclusion, in determining the "gross income from the property," of a part of the bonus payment paid in respect to the property that is allocable to the mineral sold from the property in the taxable year. In addition, that section illustrates, by example, that section 613 of the Code and the regulations thereunder do not provide rules for the determination of gross income and taxable income under sections 61 and 63 of the Code.

The following computation illustrates the above paragraph:

Item
No. Depletion Computation
1 Sales price _________ $240 x
Less:
2 1/8 royalty (1/8 of
item no. 1) _______ $30x
3 Bonus exclusion (100 y
bbls. sold/1,000 y
bbls. estimated to be
available times the
bonus) ____________ 20x 50 x
____ _______
4 Gross income from property
for depletion computation _ $190 x
5 Direct expenses _____________ 120 x
_______
6 Taxable income from the
property __________________ 70 x
Depletion computed under
section 613 of the Code
7 At 22 percent times item no. 4 41.8x
8 Limited to 50 percent times
item no. 6 ________________ 35 x
9 Cost depletion under section
612 (assuming bonus is
only item capitalized) ____ 20 x
10 Depletion allowance (item
no. 8) ____________________ 35 x
Gross income computation and
taxable income computation
A Gross income computation
under section 61 (item
no. 1 minus item no. 2) ___ 210 x
Less:
B Direct expenses (item no. 5)_ 120 x
C Depletion deduction
(item no. 10) _____________ 35 x
_______
D Taxable income computation
under section 63 (item no. A
minus item nos. B and C) __ 55 x

HOLDING

An allocable portion of the 200x dollars the taxpayer paid as a bonus in respect to its mineral property must be excluded in determining the "gross income from the property" for the purpose of computing the limitation on the percentage depletion allowance of fifty percent of "taxable income from the property (computed without the allowance for depletion)."