Rev. Rul. 80-43

1980-1 C.B. 133, 1980-7 I.R.B. 9.

                       Internal Revenue Service
                                 Revenue Ruling

       DEPLETION; PROVEN OIL OR GAS PROPERTY; SMALL BUSINESS CORPORATION
                                    ELECTION

                          Published: February 19, 1980

Section 613A.--Limitations on Percentage Depletion in Case of Oil and Gas Wells

(Also Section 1372; 26 CFR 1.1372-1.)

  Depletion; proven oil or gas property; small business corporation election. The election to be treated as a small business corporation under section 1372(a) of the Code is not a transfer, within the meaning of section 613A(c)(9), of an interest in any proven oil or gas property.

ISSUE

  Is the filing of an election to be treated as a small business corporation under section 1372(a) of the Internal Revenue Code a transfer, within the meaning of section 613A(c)(9), of an interest in any proven oil or gas property?

FACTS

  M is a corporation that owns and operates proven oil and gas properties.  In 1978, M made a valid election to be treated as a 'small business corporation' in accordance with the provisions of section 1372 of the Code.

LAW AND ANALYSIS

  Section 613A(a) of the Code provides that, except as otherwise provided in that section, the allowance for depletion under section 611 with respect to any oil or gas well shall be computed without regard to section 613.

  Section 613A(c)(9)(A) of the Code provides that, in the case of a transfer  (including a sublease) after December 31, 1974, of an interest (including an interest in a partnership or trust) in any proven oil or gas property, the allowance for percentage depletion that is provided under section 613A(c)(1) does not apply to the transferee (or sublessee) with respect to production of crude oil or natural gas attributable to such interest, and such production shall not be taken into account for any computation by the transferee (or sublessee) under section 613A(c).

  Section 1372(a) of the Code allows a small business corporation, as defined in section 1371, to elect not to be subject to the taxes imposed by Chapter 1 of the Code, but to have all its income taxed directly to its shareholders.

  Section 1373(a) of the Code provides that the undistributed taxable income of an electing small business corporation for any taxable year shall be included in the gross income of the shareholders of such corporation in the manner and to the extent set forth in section 1373.  Section 1373(b) provides that each person who is a shareholder of an electing small business corporation on the last day of a taxable year of such corporation shall include in gross income, for the taxable year in which or with which the taxable year of the corporation ends, the amount the shareholder would have received as a dividend, if on such last day there had been distributed pro rata to its shareholders by such corporation an amount equal to the corporation's undistributed taxable income. Section 1373(c) defines 'undistributed taxable income' as taxable income determined without regard to certain deductions, not relevant here, reduced by the taxes imposed by sections 56 and 1378(a) and by the amount of money distributed as dividends during the taxable year to the extent that any such amount is a distribution out of earnings and profits of the taxable year as specified in section 316(a)(2).

  A 'transfer' of any proven oil or gas property means a change in legal or equitable ownership in the oil or gas property.  Any change that increases a taxpayer's proportionate share of income from an oil or gas property is also a transfer.

  The filing of an election under section 1372(a) of the Code does not cause a transfer of legal or equitable ownership of any property from or to M. M owns the same oil and gas properties before and after the election.  The amount included in the gross income of a shareholder of an electing small business corporation under section 1373 is an 'adjusted' taxable income from which the allowance for depletion has been deducted.  Thus, the shareholder's proportionate share of income from an oil or gas property is not increased as a result of the election under section 1372(a).

HOLDING

  The filing of an election under section 1372(a) of the Code is not a transfer within the meaning of section 613A(c)(9) of an

interest in any proven oil or gas properties.

Rev. Rul. 80-43, 1980-1 C.B. 133, 1980-7 I.R.B. 9.