Rev. Rul. 81-44

1981-1 C.B. 384, 1981-6 I.R.B. 8.

                       Internal Revenue Service
                                 Revenue Ruling

     PERCENTAGE DEPLETION; OIL AND GAS LEASE BONUSES; INDEPENDENT PRODUCERS

                          Published: February 9, 1981

SECTION 613A.--LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS WELLS, 26 CFR 1.613A-1: Post-1974 limitations on percentage depletion in case of oil and gas wells; general rule

  Percentage depletion; oil and gas lease bonuses; independent producers.  Percentage depletion is not allowable on an oil and gas lease bonus under the exemption for independent producers and royalty owners in section 613A(c) of the Code.

ISSUE

  Under the exemption for independent producers and royalty owners in section 613A(c) of the Internal Revenue Code is percentage depletion allowable on an oil and gas lease bonus?

FACTS

  In March 1978, lessor A granted an oil and gas lease on a tract of land in the United States to corporation X for a consideration of 500x dollars.  A retained a one-eighth landowner's royalty.  The lease had a primary term of 5 years.

LAW AND ANALYSIS

  Section 613A(a) of the Code provides that, except as otherwise provided in section 613A, 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)(1) of the Code provides that:

    Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to-

    (A)  so much of the taxpayer's average daily production of domestic crude oil as does not exceed the taxpayer's depletable oil quantity; and

    (B)  so much of the taxpayer's average daily production of domestic natural gas as does not exceed the taxpayer's depletable natural gas quantity;

    and the applicable percentage (determined in accordance with the table contained in paragraph (5)) shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.

  Percentage depletion under section 613A(c) of the Code is allowable only with respect to production.  The payment of the described lease bonus was independent of whether there was production from the lease.

  Lease bonuses, while taken into account for purposes of section 61 and 612 of the Code (relating to the definition of gross income and cost depletion, respectively), are not to be taken into account in computing the percentage depletion allowance pursuant to section 613A(c).

HOLDING

  Percentage depletion is not allowable on the 500x dollar lease bonus under the exemption for independent producers and royalty owners in section 613A(c) of the Code.

Rev. Rul. 81-44, 1981-1 C.B. 384, 1981-6 I.R.B. 8.