Gas & Oil Royalties - Depletion Allowance

[Max W]

Client is a non-Working partner in oil & gas production and receives royalties.

 

Rights to royalties were through inheritance. 

Is he allowed to take the depletion allowance?

 

TIA

[Elrod]

Who Can Claim Depletion?

If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. More than one person can have an economic interest in the same mineral deposit or timber. In the case of leased property, the depletion deduction is divided between the lessor and the lessee.

You have an economic interest if both the following apply.

• You have acquired by investment any interest in mineral deposits or standing timber.

• You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment.

A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. A production payment carved out of, or retained on the sale of, mineral property is not an economic interest.

Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax.

Basis adjustment for depletion.   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater.

 

 

 

http://www.irs.gov/publications/p535/ch09.html

[Max W]

That doesn't answer the inheritance part which I think is covered by the following:

 

Transferees who cannot claim percentage depletion.   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. For a definition of the term “transfer,” see section 1.613A-7(n) of the regulations. For a definition of the term “interest in proven oil or gas property,” see section 1.613A-7(p) of the regulations.

Under 1-613A-7(n), inheritance is one of the transfers.

So, for the years between 1974 and 1990, no depletion allowance.