(a) In general. The basis upon which the deduction for cost depletion under section 611 is to be allowed in respect of any mineral or timber property is the adjusted basis provided in section 1011 for the purpose of determining gain upon the sale or other disposition of such property except as provided in paragraph (b) of this section. The adjusted basis of such property is the cost or other basis determined under section 1012, relating to the basis of property, adjusted as provided in section 1016, relating to adjustments to basis, and the regulations under such sections. In the case of the sale of a part of such property, the unrecovered basis thereof shall be allocated to the part sold and the part retained.
(b) Special rules. (1) The basis for cost depletion of mineral or timber property does not include:
(i) Amounts recoverable through depreciation deductions, through deferred expenses, and through deductions other than depletion, and
(ii) The residual value of land and improvements at the end of operations
In the case of any mineral property the basis for cost depletion does not include amounts representing the cost or value of land for purposes other than mineral production. Furthermore, in the case of certain mineral properties, such basis does not include exploration or development expenditures which are treated under section 615(b) or 616(b) as deferred expenses to be taken into account as deductions on a ratable basis as the units of minerals benefited thereby are produced and sold. However, there shall be included in the basis for cost depletion of oil and gas property the amounts of capitalized drilling and development costs which, as provided in § 1.612-4, are recoverable through depletion deductions. In the case of timber property, the basis for cost depletion does not include amounts representing the cost or value of land.
(2) Where a taxpayer elects to treat the cutting of timber as a sale or exchange of such timber, the basis for cost depletion shall be the fair market value of such timber as of the first day of the taxable year in which such timber is cut and such value shall be considered for such taxable year and all subsequent taxable years as the cost of such timber for all purposes for which such cost is a necessary factor. See section 631(a).
(c) Cross references. In cases where the valuation, revaluation, or mineral content of deposits is a factor, see paragraphs (c), (d), (e), and (f) of § 1.611-2. In cases where the valuation, revaluation, or quantity of timber is a factor, see paragraphs (e), (f), and (g) of § 1.611-3. For definitions of the terms property, fair market value, mineral enterprise, mineral deposit, and minerals, see paragraph (d) of § 1.611-1. For rules with respect to treatment of depletion accounts on taxpayers' books, see paragraph (b) of § 1.611-2 in the case of mineral property, and paragraph (c) of § 1.611-3 in the case of timber property.
Notes of Decisions
Cited in
6
cases, 1963–1999 · leading case:
Jameson v. Comm'r, 1999 T.C. Memo. 43 (Tax Ct. 1999).
Jameson v. Comm'r, 1999 T.C. Memo. 43 (Tax Ct. 1999).
· cites it 2× “Where only a portion of the timber is cut, basis is allocated to cut and standing timber in proportion to timber units.”
Rosenthal v. Comm'r, 48 T.C. 515 (Tax Ct. 1967).
· cites it 2× “, which refer to the computation of the deduction for cost depletion in respect of timber to be made by reference to its adjusted basis provided in sections 1011, 1012, and 1016 relating to basis for the purpose of determining gain upon the sale or other disposition of such…”
Clemente, Inc. v. Comm'r, 50 T.C.M. 497 (Tax Ct. 1985).
· cites it 4× “672 commercial acres, and the residual interest in the remaining 7 acres of the 15 acres of the Gulf Tract are not eligible for the depletion allowance, in order to calculate Greggo & Ferrara's cost basis in the gravel, an allocation must be made of the consideration paid…”
Warren v. Comm'r, 40 T.C. 991 (Tax Ct. 1963).
· cites it 2× “The computation also fails to allow any residual values for the various tracts.”
Willamette Indus., Inc. v. Comm'r, 41 T.C.M. 629 (Tax Ct. 1980).
· cites it 4× “Section 1.612-1(a), Income Tax Regs. The adjusted basis of timber does not include the cost or value of land on which the timber is located.”
Hunt v. Comm'r, 37 T.C.M. 646 (Tax Ct. 1978).
· cites it 2× “The regulations provide that the basis for cost depletion of mineral property does not include the "residual value of land and improvements at the end of operations." They further state that "the basis for cost depletion does not include amounts representing the cost or value of…”
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