REVENUE RULE 92-37

1992-1 C.B. 195, 1992-21 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

BASIS FOR CALCULATING SURVIVING SPOUSE'S DEPLETION ALLOWANCE ON COMMUNITY PROPERTY

Published: May 26, 1992

Section 612  Basis for Cost Depletion, 26 CFR 1.612-1: Basis for allowance of cost depletion

(See Also Sections 611, 1011, 1014; 1.611-1.)

Basis for calculating surviving spouse's depletion allowance on community property. A surviving spouse's basis for calculating cost depletion on property which represents the surviving spouse's one-half share of community property for the taxable year of the decedent's death is the surviving spouse's adjusted basis in the property as of the end of the surviving spouse's taxable year. [Full text in this issue.]

ISSUE

How does a surviving spouse compute cost depletion for the year of the decedent's death on oil and gas property owned as community property?

FACTS

D and S were married residents of a community property state who filed joint returns on a calendar year basis. D and S owned community property that included working interests and royalty interests in oil and gas properties. The oil and gas properties were subject to the allowance for depletion but did not qualify for percentage depletion. D died on March 18, 1989, at which time D's interest in the community property passed to D's estate.

For the taxable year beginning January 1, 1989, a joint return was filed with respect to S's calendar year and D's short taxable year beginning on January 1, 1989, and ending on the date of D's death, March 18, 1989.

LAW AND ANALYSIS

Section 611(a) of the Internal Revenue Code provides that, in the case of oil and gas wells, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion. The allowance for depletion is computed as to each separate property. Section 614 defines the term "property" as each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.

When economic interests in mineral property are community property, each spouse owns "property" within the meaning of section 614 of the Code. Because the allowance for depletion is computed as to each separate property and each spouse owns separate depletable interests in the community oil and gas property, the depletion allowance is determined separately for each spouse.

The Code provides two methods of computing the annual depletion allowance, the cost depletion method and the percentage depletion method. Under section 1.611-1(a) of the Income Tax Regulations, the allowance for depletion for any taxable year is computed using the method that yields the greater depletion allowance.

Section 1.611-2(a) of the regulations describes the proper method of computing the cost depletion allowance. It provides that, "[a]fter the . . . basis applicable to the mineral property has been determined for the taxable year," a taxpayer computes cost depletion for the taxable year by dividing the adjusted basis in the property, as provided in section 612 of the Code and the regulations thereunder, by the number of units of mineral remaining as of the beginning of the taxable year, and then multiplying the depletion unit so determined by the number of units of mineral sold within the taxable year. Thus, in general, only one cost depletion computation is made for a taxable year.

Section 1.611-2(a) of the regulations refers to section 612 of the Code and the regulations thereunder for determining the basis upon which cost depletion is allowed. Section 612 provides that, except as otherwise provided in subchapter I, the basis on which depletion is to be allowed in respect of any property is the adjusted basis provided in section 1011. Under section 1011 and section 1.612-1, the adjusted basis of mineral property is the cost or other basis determined under section 1012 or other applicable sections of subchapter O, and subchapters C, K, and P, adjusted as provided in section 1016 and the applicable regulations.

Section 1014 of the Code, a provision of subchapter O, governs the basis of property in the bands of a person acquiring property from a decedent In general, the basis of property acquired from a decedent is the fair market value of the property on the date of the decedent's death. Under section 1014(b)(6), property that represents the surviving spouse's one-half share of community property under the laws of any State or possession of the United States, or of any foreign country, is considered to have been acquired from or to have passed from the decedent if at least one-half of the whole community interest in the property is included in determining the value of the decedent's gross estate for federal estate tax purposes.

In the present situation, D's one-half interest in the community property is included in D's estate. Therefore, S's one-half share of the property is deemed to have been acquired from D for purposes of the basis provisions of section 1014 of the Code, and S receives a fair market value basis in the property.

For the taxable year beginning January 1, 1989, D had a short taxable year ending on the date of D's death, March 18, 1989 and S had a 12-month taxable year. As permitted by section 6013 of the Code, a joint return was filed with respect to D's short taxable year and S's 12-month taxable year. The depletion deduction properly reported on the joint return for the taxable year beginning January 1, 1989, includes D's depletion allowance attributable to D's share of the community oil and gas property for D's short taxable year and S's depletion allowance attributable to S's share of the community oil and gas property for S's 12-month year.

Under the general rule for computing cost depletion, S's cost depletion allowance for the taxable year is computed after S's adjusted basis in the property is determined under sections 612 and 1011 of the Code. The adjusted basis of S's oil and gas property for the taxable year includes all of the basis adjustments required by subchapters O, C, K, and P. Thus, the proper basis for calculating S's cost depletion allowance for 1989 is S's basis in the property as of December 31, 1989. (The result would be the same if separate returns were filed for D's final short taxable year and S's 12-month taxable year.)

In this instance, D's death triggers the application of section 1014 of the Code. Section 1011 directs that section 1014 is applied in determining S's basis in the oil and gas property for S's taxable year ending December 31, 1989.

HOLDING

A surviving spouse's basis for calculating cost depletion on property that represents the surviving spouse's one-half share of community oil and gas property for the taxable year of the decedent's death is the surviving spouse's adjusted basis in the property as of the end of the surviving spouse's taxable year.

DRAFTING INFORMATION

The principal author of this revenue ruling is Lisa J. Shuman of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Ms. Shuman on (202) 566-4840 (not a toll-free call).

Rev. Rul. 92-37, 1992-1 C.B. 195, 1992-21 I.R.B. 5.