who knows about cost depletion Sch C crude oil wells

[schirallicpa]

Client has scrappy little oil business that actually makes money these days. I take the standard 15% depletion deduction on Sch C. But....NYS says no % depletion, but you can take cost depletion.

Now, in all my years of doing sch C's for these scrappy little oil producers around here, I have never considered cost depletion. I back out % depletion on NY, forget about adding back cost depletion because it has never been enough to worry about. (I have probably forgotten to back off % depletion on a good hand full of returns over the years, and NY has never noticed. ) But today, my client has an add back of % depletion of over 17K and it's creating a larger tax than anticipated. So I am looking at the possible cost depletion.

He has many wells, purchased over many years, and poor record of cost.

Yeah - I know - lost cause. Wondered if anyone else dealt with it.

Thanks.

[schirallicpa]

Boy - nobody likes this question.......

[taxxcpa]

If you used Drake software, you could have obtained the following--but it may not be much helpo if you don't have recoverable reserve data.

This deduction is based on the property's adjusted basis, the number of recoverable units of mineral at the beginning of the year and the number of units sold or for which payment is received during the year. ( Reg § 1.611-2(a) ) An elective safe harbor may be used to determine recoverable oil and gas reserves. FTC ¶ N-2255.2 ; Tax Desk ¶ 270,701 Taxpayer's total cost depletion deductions can't exceed his basis for the mineral property. FTC ¶ N-2250 et seq.; USTR ¶ 6114.020 et seq.; Tax Desk ¶ 270,701

Basis for cost depletion and gain or loss is its cost or other basis plus or minus basis adjustments. ( Code Sec. 612 ) It doesn't include the basis of nonmineral property, such as amounts recoverable through depreciation, or the residual value of land and improvements at the end of operations. ( Reg § 1.612-1((1) ) FTC ¶ N-3000 et seq.; USTR ¶ 6124 , USTR ¶ 6124.001 ; Tax Desk ¶ 270,703 Additional basis adjustments also apply to natural resources. ( Code Sec. 1016(a) )

[schirallicpa]

well.....okay.....I've seen this before......but how does anyone come up with these reserve figures? How can anyone tell you how many units (barrels) of oil will be produced? These are wells that have been around for years. They pump for so long each day. Some days you get more. Some days you get less. But everyday there's something. If it has pumped for 50 years this way, do we expect it to pump 50 more years this way? It might. It might not. This isn't high tech Exxon.

yuk, yuk, yuk.

Ok - I'm going to do some W-2 returns for a while.

[taxxcpa]

well.....okay.....I've seen this before......but how does anyone come up with these reserve figures? How can anyone tell you how many units (barrels) of oil will be produced? These are wells that have been around for years. They pump for so long each day. Some days you get more. Some days you get less. But everyday there's something. If it has pumped for 50 years this way, do we expect it to pump 50 more years this way? It might. It might not. This isn't high tech Exxon.

yuk, yuk, yuk.

Ok - I'm going to do some W-2 returns for a while.

You're right. Major oil companies have reservoir engineers who estimate recoverable reserves. If the wells don't have enough gas pressure to produce without pumping, that might be a sign that future production is limited.

Another option that I used to use in making audit claims based on estimates is the SWAG factor (Scientific Wild A$$ Guess).

If the investor has access to Dwights reports (if they still exist), that might give some kind of clue. There might also be information available from the RR Commission if it is in Texas or the equivalent agency in whatever state the procuction is located in. If the wells are joint interest properties and your client does not operate the wells, then he might get something from the operator.

[schirallicpa]

The SWAG factor is probably my best bet. It's really the biggest "who knows" there ever was. Fortunately part of my tax problem went away while I "tinkered" with the return a little more.

Thanks for the laugh today! I needed it!!

And thanks for the other suggestions as well. I appreciate your input.