§613 — Percentage depletion
84 cases·11 followed·12 distinguished·1 questioned·3 criticized·1 limited·3 overruled·53 cited—13% support
Statute Text — 26 U.S.C. §613
In the case of the mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 percent (100 percent in the case of oil and gas properties) of the taxpayer’s taxable income from the property (computed without allowance for depletion and without any deduction under section 199A). For purposes of the preceding sentence, the allowable deductions taken into account with respect to expenses of mining in computing the taxable income from the property shall be decreased by an amount equal to so much of any gain which (1) is treated under section 1245 (relating to gain from disposition of certain depreciable property) as ordinary income, and (2) is properly allocable to the property. In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section.
The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows:
sulphur and uranium; and
if from deposits in the United States—anorthosite, clay, laterite, and nephelite syenite (to the extent that alumina and aluminum compounds are extracted therefrom), asbestos, bauxite, celestite, chromite, corundum, fluorspar, graphite, ilmenite, kyanite, mica, olivine, quartz crystals (radio grade), rutile, block steatite talc, and zircon, and ores of the following metals: antimony, beryllium, bismuth, cadmium, cobalt, columbium, lead, lithium, manganese, mercury, molybdenum, nickel, platinum and platinum group metals, tantalum, thorium, tin, titanium, tungsten, vanadium, and zinc.
If from deposits in the United States—
gold, silver, copper, and iron ore, and
oil shale (except shale described in paragraph (5)).
metal mines (if paragraph (1)(B) or (2)(A) does not apply), rock asphalt, and vermiculite; and
if paragraph (1)(B), (5), or (6)(B) does not apply, ball clay, bentonite, china clay, sagger clay, and clay used or sold for use for purposes dependent on its refractory properties.
Asbestos (if paragraph (1)(B) does not apply), brucite, coal, lignite, perlite, sodium chloride, and wollastonite.
Clay and shale used or sold for use in the manufacture of sewer pipe or brick, and clay, shale, and slate used or sold for use as sintered or burned lightweight aggregates.
gravel, peat, pumice, sand, scoria, shale (except shale described in paragraph (2)(B) or (5)), and stone (except stone described in paragraph (7));
clay used, or sold for use, in the manufacture of drainage and roofing tile, flower pots, and kindred products; and
if from brine wells—bromine, calcium chloride, and magnesium chloride.
All other minerals, including, but not limited to, aplite, barite, borax, calcium carbonates, diatomaceous earth, dolomite, feldspar, fullers earth, garnet, gilsonite, granite, limestone, magnesite, magnesium carbonates, marble, mollusk shells (including clam shells and oyster shells), phosphate rock, potash, quartzite, slate, soapstone, stone (used or sold for use by the mine owner or operator as dimension stone or ornamental stone), thenardite, tripoli, trona, and (if paragraph (1)(B) does not apply) bauxite, flake graphite, fluorspar, lepidolite, mica, spodumene, and talc (including pyrophyllite), except that, unless sold on bid in direct competition with a bona fide bid to sell a mineral listed in paragraph (3), the percentage shall be 5 percent for any such other mineral (other than slate to which paragraph (5) applies) when used, or sold for use, by the mine owner or operator as rip rap, ballast, road material, rubble, concrete aggregates, or for similar purposes. For purposes of this paragraph, the term “all other minerals” does not include—
soil, sod, dirt, turf, water, or mosses;
minerals from sea water, the air, or similar inexhaustible sources; or
oil and gas wells.
For the purposes of this subsection, minerals (other than sodium chloride) extracted from brines pumped from a saline perennial lake within the United States shall not be considered minerals from an inexhaustible source.
For purposes of this section—
The term “gross income from the property” means, in the case of a property other than an oil or gas well and other than a geothermal deposit, the gross income from mining.
The term “mining” includes not merely the extraction of the ores or minerals from the ground but also the treatment processes considered as mining described in paragraph (4) (and the treatment processes necessary or incidental thereto), and so much of the transportation of ores or minerals (whether or not by common carrier) from the point of extraction from the ground to the plants or mills in which such treatment processes are applied thereto as is not in excess of 50 miles unless the Secretary finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills.
The term “extraction of the ores or minerals from the ground” includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. The preceding sentence shall not apply to any such extraction of the mineral or ore by a purchaser of such waste or residue or of the rights to extract ores or minerals therefrom.
The following treatment processes where applied by the mine owner or operator shall be considered as mining to the extent they are applied to the ore or mineral in respect of which he is entitled to a deduction for depletion under section 611:
In the case of coal—cleaning, breaking, sizing, dust allaying, treating to prevent freezing, and loading for shipment;
in the case of sulfur recovered by the Frasch process—cleaning, pumping to vats, cooling, breaking, and loading for shipment;
in the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and ores or minerals which are customarily sold in the form of a crude mineral product—sorting, concentrating, sintering, and substantially equivalent processes to bring to shipping grade and form, and loading for shipment;
in the case of lead, zinc, copper, gold, silver, uranium, or fluorspar ores, potash, and ores or minerals which are not customarily sold in the form of the crude mineral product—crushing, grinding, and beneficiation by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic), cyanidation, leaching, crystallization, precipitation (but not including electrolytic deposition, roasting, thermal or electric smelting, or refining), or by substantially equivalent processes or combination of processes used in the separation or extraction of the product or products from the ore or the mineral or minerals from other material from the mine or other natural deposit;
the pulverization of talc, the burning of magnesite, the sintering and nodulizing of phosphate rock, the decarbonation of trona, and the furnacing of quicksilver ores;
in the case of calcium carbonates and other minerals when used in making cement—all processes (other than preheating of the kiln feed) applied prior to the introduction of the kiln feed into the kiln, but not including any subsequent process;
in the case of clay to which paragraph (5) or (6)(B) of subsection (b) applies—crushing, grinding, and separating the mineral from waste, but not including any subsequent process;
in the case of oil shale—extraction from the ground, crushing, loading into the retort, and retorting (including in situ retorting), but not hydrogenation, refining, or any other process subsequent to retorting; and
any other treatment process provided for by regulations prescribed by the Secretary which, with respect to the particular ore or mineral, is not inconsistent with the preceding provisions of this paragraph.
Unless such processes are otherwise provided for in paragraph (4) (or are necessary or incidental to processes so provided for), the following treatment processes shall not be considered as “mining”: electrolytic deposition, roasting, calcining, thermal or electric smelting, refining, polishing, fine pulverization, blending with other materials, treatment effecting a chemical change, thermal action, and molding or shaping.
Except as provided in section 613A, in the case of any oil or gas well, the allowance for depletion shall be computed without reference to this section.
In the case of geothermal deposits located in the United States or in a possession of the United States, for purposes of subsection (a)—
such deposits shall be treated as listed in subsection (b), and
15 percent shall be deemed to be the percentage specified in subsection (b).
For purposes of paragraph (1), the term “geothermal deposit” means a geothermal reservoir consisting of natural heat which is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). Such a deposit shall in no case be treated as a gas well for purposes of this section or section 613A, and this section shall not apply to a geothermal deposit which is located outside the United States or its possessions.
In the case of any geothermal deposit, the term “gross income from the property” shall, for purposes of this section, not include any amount described in section 613A(d)(5).
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.613-1 Percentage depletion; general rule
- Treas. Reg. §Treas. Reg. §1.613-1(a) In general.
- Treas. Reg. §Treas. Reg. §1.613-1(b) Denial of percentage depletion in case of oil and gas wells.
- Treas. Reg. §Treas. Reg. §1.613-2 Percentage depletion rates
- Treas. Reg. §Treas. Reg. §1.613-2(a) In general.
- Treas. Reg. §Treas. Reg. §1.613-2(b) Definition of terms.
- Treas. Reg. §Treas. Reg. §1.613-2(c) Rules for application of paragraph (a) of this section.
- Treas. Reg. §Treas. Reg. §1.613-2(i) §1.613-2(i)
- Treas. Reg. §Treas. Reg. §1.613-2(v) §1.613-2(v)
- Treas. Reg. §Treas. Reg. §1.613-3 Gross income from the property
- Treas. Reg. §Treas. Reg. §1.613-4 Gross income from the property in the case of minerals other than oil and gas
- Treas. Reg. §Treas. Reg. §1.613-4(a) §1.613-4(a)
- Treas. Reg. §Treas. Reg. §1.613-4(b) §1.613-4(b)
- Treas. Reg. §Treas. Reg. §1.613-4(c) For taxable years beginning after October 9, 1969, in the case of minerals (other than sodium chloride) extracted from brines pumped from a saline perennial lake (as defined in paragraph (b) of § 1.
- Treas. Reg. §Treas. Reg. §1.613-4(d) For taxable years beginning after December 30, 1969, in the case of oil shale (as defined in paragraph (b) of § 1.
- Treas. Reg. §Treas. Reg. §1.613-4(e) §1.613-4(e)
- Treas. Reg. §Treas. Reg. §1.613-4(f) Definition of mining—(1) In general.
- Treas. Reg. §Treas. Reg. §1.613-4(g) Nonmining processes—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.613-4(h) Application to treat, as mining, transportation in excess of 50 miles.
- Treas. Reg. §Treas. Reg. §1.613-4(i) Extraction from waste or residue.
- Treas. Reg. §Treas. Reg. §1.613-4(j) Definition of controlled group.
- Treas. Reg. §Treas. Reg. §1.613-4(v) The term fine pulverization refers to any grinding or other size reduction process applied to reduce the normal topsize of a mineral product to less than .
- Treas. Reg. §Treas. Reg. §1.613-5 Taxable income from the property
- Treas. Reg. §Treas. Reg. §1.613-5(a) General rule.
- Treas. Reg. §Treas. Reg. §1.613-5(b) Special rule; decrease in mining expenses resulting from gain recognized under section 1245(a)(1).
84 Citing Cases
Ordinary income from an oil and gas well may be eligible for cost depletion under section 612 or percentage depletion under section 613A. Section 613A(d)(5) provides that percentage depletion for income from oil and gas wells does not apply to "any lease bonus, advance royalty, or other amount payable without regard to production from property." See also sec.
Petitioner calculated its depletion deductions using the percentage depletion method under section 613, as opposed to the cost depletion method under section 612, for regular tax purposes for all of its mines during the years at issue.
Jasper George Taylor III, Charles Washington Hall, William H. Caudill, and John B. Kinchen, for petitioners. Sheri Wilcox, for respondent. OPINION PARR, Judge: In these consolidated cases, respondent determined the following deficiencies in windfall profit tax (WPT) for the taxable periods of 1983, 1984, and 1985, respectively: $3,
It determined its depletion deductions using percentage depletion described in section 613 and the regulations thereunder.
- 6 - [*6] Petitioner determined its depletion deduction using percentage depletion described in section 613 and the regulations thereunder.
partnership.items "more appropriately determined at the partnership level than at the partner level * * * [t]he partnership aggregate and each partner's share of' a number oflisted items including "[i]tems ofincome, gain, loss, deduction, or credit ofthe partnership" and also including "[t]he depletion allowance under section 613A with respect to oil and gas wells".
partnership.items "more appropriately determined at the partnership level than at the partner level * * * [t]he partnership aggregate and each partner's share of' a number oflisted items including "[i]tems ofincome, gain, loss, deduction, or credit ofthe partnership" and also including "[t]he depletion allowance under section 613A with respect to oil and gas wells".
Id The second method, percentage depletion under section 613, focuses on the property's gross income.
613A(c)(4) equates 6,000 cubic feet (cf) of gas with 1 barrel of oil for purposes of computing the taxpayer's daily depletable natural gas quantity, which in turn is used in the computation of the taxpayer's allowance for depletion pursuant to secs. 611 and 613. - 21 - Strevig's quarterly reserve report for the fourth quarter of 1986 reports
ctible in computing its taxable income and not properly chargeable to capital account, and (E) the amount of the shareholder’s deduction for depletion for any oil and gas property held by the S corporation to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such shareholder under section 613A(c)(13)(B).
Accordingly, for purposes of computing the amount of average daily production to which the depletion allowance will apply, section 613A(c)(2) provides that the average daily production for a taxpayer with a partial interest is equal to the total production of the property times the taxpayer's percentage participation in the revenue from such property.
Accordingly, for purposes of computing the amount of average daily production to which the depletion allowance will apply, section 613A(c)(2) provides that the average daily production for a taxpayer with a partial interest is equal to the total production of the property times the taxpayer's percentage participation in the revenue from such property.
Accordingly, for purposes of computing the amount of average daily production to which the depletion allowance will apply, section 613A(c)(2) provides that the average daily production for a taxpayer with a partial interest is equal to the total production of the property times the taxpayer's percentage participation in the revenue from such property.
Section 1704(p) of the Act provides that the expense disallowance rule of section 162(k) does not apply to any "deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness".
In the case of a production payment carved out for exploration or development of a mineral property, the pre- ceding sentence shall apply only if and to the extent gross income from the property (for purposes of section 613) would be realized, in the absence of the application of such sentence, by the person creating the production payment.
In the case of a production payment carved out for exploration or development of a mineral property, the pre- ceding sentence shall apply only if and to the extent gross income from the property (for purposes of section 613) would be realized, in the absence of the application of such sentence, by the person creating the production payment.
ed for·tax years after 1974, with certain exceptions. Tax Reduction Act of 1975, Pub. L. 94-12, sec. 501, 89 Stat. 47. Most taxpayers who took a depletion deduction after February 1, 1975, were not permitted to - 20 - use percentage depletion under section 613. Sec. 613A(a). It is under the fixed contract exception contained in section 613A(b)(1)(B) that petitioners claim that they continue to enjoy the benefit of a 22-percent depletion rate. The conference report on the Tax Reduction Act of 197
s repealed for tax years after 1974, with certain exceptions. Tax Reduction Act of 1975, Pub. L. 94-12, sec. 501, 89 Stat. 47. Most taxpayers who took a depletion deduction after February 1, 1975, were not permitted to use percentage depletion under section 613. Sec. 613A(a). It is under the fixed contract exception contained in section 613A(b)(l)(B) that petitioners claim that they continue to enjoy the benefit of a 22-percent depletion rate. The conference report on the Tax Reduction Act of 19