Rev. Rul. 84-46

1984-1 C.B. 146, 1984-13 I.R.B. 8.

                       Internal Revenue Service
                                 Revenue Ruling

           DEPLETION;  PERCENTAGE;  TAXABLE INCOME FROM THE PROPERTY

                           Published: March 26, 1984

Section 411. - -Minimum Vesting Standards, 26 CFR 1.411-4: Forfeitures, suspensions, etc.

Section 442. - -Change of Annual Accounting Period, 26 CFR 1.442-1: Change of annual accounting period.

Section 613. - -Percentage Depletion, 26 CFR 1.613-5:  Taxable income from the property.

  Depletion;  percentage;  taxable income from the property. A payment to a nonqualified compensation plan that is deductible under section 404(a)(5) of the Code for computing the taxpayer-employer's taxable income is also a deductible mining expense in the same tax year for computing the taxable income limitation on the percentage depletion deduction under section 613(a).

ISSUE

  Whether an employer's payment to a nonqualified, deferred compensation plan, covering past service liability of its employees with respect to mineral properties no longer being operated by the employer, is a deductible mining expense in the taxable year of payment for purposes of computing the taxable income limitation on the percentage depletion allowance deduction under section 613(a) of the Internal Revenue Code?

FACTS

  The taxpayer is a nonintegrated miner of iron ore.  For purposes of computing percentage depletion under section 613(a) of the Code, the taxpayer did not elect to aggregate mineral properties.

  In 1976, the taxpayer established a nonqualified, deferred compensation plan to which it made a lump sum payment.  The plan was established for the purpose of providing individuals additional compensation for services performed by them on certain mineral properties prior to 1965.  None of the mineral properties operated by the taxpayer prior to 1965 was still in operation in 1976.

  The entire amount paid to the plan is deductible in computing taxpayer's taxable income in 1976 pursuant to section 404(a)(5) of the Code.

LAW AND ANALYSIS

  The percentage depletion allowance under section 613(a) of the Code is computed as a percentage of the gross income from the mineral property and is limited to 50 percent of the taxpayer's taxable income from the mineral property.  In determining the 50 percent taxable income limitation on percentage depletion, all allowable deductions that are attributable to the mineral property are to be subtracted from gross income from the mineral property.

  Section 1.613-5(a) of the Income Tax Regulations provides that the term  "taxable income from the property" means gross income from the property less all allowable deductions which are attributable to mining processes.  Where a taxpayer has more than one mineral property, deductions which are not directly attributable to a specific mineral property shall be fairly apportioned among the several properties on a reasonable basis.  Section 1.613-5(a) concludes by stating that the amount of any particular item to be taken into account shall be determined in accordance with the principles set forth in paragraph (d)(2) and (3) of section 1.613-4 of the Regulations.

  Section 1.613-4(d)(2) states that the amount of any particular item to be taken into account shall be the amount used in determining the taxpayer's taxable income for tax purposes.

  In Montreal Mining Co. v. Commissioner, 41 B.T.A. 399 (1940), the Board of Tax Appeals considered the relationship of a deduction for payment of workmen's compensation claims to the 50 percent taxable income limitation in a substantially similar predecessor of what is now section 613(a).  The claims related to prior years' service by the workers.  The taxpayer argued that the deduction for payment of the claims should not enter the depletion allowance limitation computation for the current year of payment because such payment did not relate to the current year's production.  The Board, relying on Helvering v. Wilshire Oil Co., 308 U.S. 90 (1939), which involved a similar issue, rejected the taxpayer's position and required inclusion of the deduction for payment of the workmen's compensation claims in the computation of taxable income for the year of payment for purposes of the 50 percent taxable income limitation on the depletion allowance.  See Rialto Mining Corp. v. Commissioner, 5 T.C.M. (CCH) 519 (1946), involving current year payment of back wages that was held to be deductible in the year of payment for purposes of the 50 percent taxable income limitation on the depletion allowance.

HOLDING

  Since the payment to the nonqualified plan is deductible under section 404(a)(5) of the Code for purposes of computing the taxpayer employer's 1976 taxable income, such payment is a deductible mining expense in 1976 for purposes of computing the taxable income limitation on the percentage depletion allowance deduction under section 613(a) of the Code.

Rev. Rul. 84-46, 1984-1 C.B. 146, 1984-13 I.R.B. 8.