TITLE 26 - US CODE - PART I - DEDUCTIONS

26 USC 611 - Allowance of deduction for depletion

(a) General rule 
In the case of mines, oil and gas wells, other natural deposits, and timber, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary. For purposes of this part, the term mines includes deposits of waste or residue, the extraction of ores or minerals from which is treated as mining under section 613 (c). In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this section for subsequent taxable years shall be based on such revised estimate.
(b) Special rules 

(1) Leases 
In the case of a lease, the deduction under this section shall be equitably apportioned between the lessor and lessee.
(2) Life tenant and remainderman 
In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.

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(3) Property held in trust 
In the case of property held in trust, the deduction under this section shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.
(4) Property held by estate 
In the case of an estate, the deduction under this section shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.
(c) Cross reference 
For other rules applicable to depreciation of improvements, see section 167.

26 USC 612 - Basis for cost depletion

Except as otherwise provided in this subchapter, the basis on which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 1011 for the purpose of determining the gain upon the sale or other disposition of such property.

26 USC 613 - Percentage depletion

(a) General rule 
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 taxpayers taxable income from the property (computed without allowance for depletion and without the deduction under section 199). 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.
(b) Percentage depletion rates 
The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows:
(1) 22 percent 

(A) sulphur and uranium; and
(B) if from deposits in the United Statesanorthosite, 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.
(2) 15 percent 
If from deposits in the United States
(A) gold, silver, copper, and iron ore, and
(B) oil shale (except shale described in paragraph (5)).
(3) 14 percent 

(A) metal mines (if paragraph (1)(B) or (2)(A) does not apply), rock asphalt, and vermiculite; and
(B) 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.
(4) 10 percent 
Asbestos (if paragraph (1)(B) does not apply), brucite, coal, lignite, perlite, sodium chloride, and wollastonite.
(5) 71/2 percent 
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.
(6) 5 percent 

(A) gravel, peat, pumice, sand, scoria, shale (except shale described in paragraph (2)(B) or (5)), and stone (except stone described in paragraph (7));
(B) clay used, or sold for use, in the manufacture of drainage and roofing tile, flower pots, and kindred products; and
(C) if from brine wellsbromine, calcium chloride, and magnesium chloride.
(7) 14 percent 
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
(A) soil, sod, dirt, turf, water, or mosses;
(B) minerals from sea water, the air, or similar inexhaustible sources; or
(C) 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.

(c) Definition of gross income from property 
For purposes of this section
(1) Gross income from the property 
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.
(2) 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.
(3) Extraction of the ores or minerals from the ground 
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.
(4) Treatment processes considered as mining 
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:
(A) In the case of coalcleaning, breaking, sizing, dust allaying, treating to prevent freezing, and loading for shipment;
(B) in the case of sulfur recovered by the Frasch processcleaning, pumping to vats, cooling, breaking, and loading for shipment;
(C) 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 productsorting, concentrating, sintering, and substantially equivalent processes to bring to shipping grade and form, and loading for shipment;
(D) 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 productcrushing, 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;
(E) 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;
(F) in the case of calcium carbonates and other minerals when used in making cementall 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;
(G) in the case of clay to which paragraph (5) or (6)(B) of subsection (b) appliescrushing, grinding, and separating the mineral from waste, but not including any subsequent process;
(H) in the case of oil shaleextraction 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
(I) 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.
(5) Treatment processes not considered as mining 
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.
(d) Denial of percentage depletion in case of oil and gas wells 
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.
(e) Percentage depletion for geothermal deposits 

(1) In general 
In the case of geothermal deposits located in the United States or in a possession of the United States, for purposes of subsection (a)
(A) such deposits shall be treated as listed in subsection (b), and
(B) 15 percent shall be deemed to be the percentage specified in subsection (b).
(2) Geothermal deposit defined 
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.
(3) Percentage depletion not to include lease ­bonuses, etc. 
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).

26 USC 613A - Limitations on percentage depletion in case of oil and gas wells

(a) General rule 
Except as otherwise provided in this section, the allowance for depletion under section 611 with respect to any oil or gas well shall be computed without regard to section 613.
(b) Exemption for certain domestic gas wells 

(1) In general 
The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to
(A) regulated natural gas, and
(B) natural gas sold under a fixed contract,

and 22 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.

(2) Natural gas from geopressured brine 
The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to any qualified natural gas from geopressured brine, and 10 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of such section.
(3) Definitions 
For purposes of this subsection
(A) Natural gas sold under a fixed contract 
The term natural gas sold under a fixed contract means domestic natural gas sold by the producer under a contract, in effect on February 1, 1975, and at all times thereafter before such sale, under which the price for such gas cannot be adjusted to reflect to any extent the increase in liabilities of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates to the contrary by clear and convincing evidence.
(B) Regulated natural gas 
The term regulated natural gas means domestic natural gas produced and sold by the producer, before July 1, 1976, subject to the jurisdiction of the Federal Power Commission, the price for which has not been adjusted to reflect to any extent the increase in liability of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates the contrary by clear and convincing evidence.
(C) Qualified natural gas from geopressured brine 
The term qualified natural gas from geopressured brine means any natural gas
(i) which is determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine, and
(ii) which is produced from any well the drilling of which began after September 30, 1978, and before January 1, 1984.
(c) Exemption for independent producers and royalty owners 

(1) In general 
Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to
(A) so much of the taxpayers average daily production of domestic crude oil as does not exceed the taxpayers depletable oil quantity; and
(B) so much of the taxpayers average daily production of domestic natural gas as does not exceed the taxpayers depletable natural gas quantity;

and 15 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.

(2) Average daily production 
For purposes of paragraph (1)
(A) the taxpayers average daily production of domestic crude oil or natural gas for any taxable year, shall be determined by dividing his aggregate production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and
(B) in the case of a taxpayer holding a partial interest in the production from any property (including an interest held in a partnership) such taxpayers production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayers percentage participation in the revenues from such property.
(3) Depletable oil quantity 

(A) In general 
For purposes of paragraph (1), the taxpayers depletable oil quantity shall be equal to
(i) the tentative quantity determined under subparagraph (B), reduced (but not below zero) by
(ii) except in the case of a taxpayer making an election under paragraph (6)(B), the taxpayers average daily marginal production for the taxable year.
(B) Tentative quantity 
For purposes of subparagraph (A), the tentative quantity is 1,000 barrels.
(4) Daily depletable natural gas quantity 
For purposes of paragraph (1), the depletable natural gas quantity of any taxpayer for any taxable year shall be equal to 6,000 cubic feet multiplied by the number of barrels of the taxpayers depletable oil quantity to which the taxpayer elects to have this paragraph apply. The taxpayers depletable oil quantity for any taxable year shall be reduced by the number of barrels with respect to which an election under this paragraph applies. Such election shall be made at such time and in such manner as the Secretary shall by regulations prescribe.
[(5) Repealed. Pub. L. 101–508, title XI, § 11815(a)(1)(C), Nov. 5, 1990, 104 Stat. 1388–557] 
(6) Oil and natural gas produced from marginal properties 

(A) In general 
Except as provided in subsection (d) and subparagraph (B), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to
(i) so much of the taxpayers average daily marginal production of domestic crude oil as does not exceed the taxpayers depletable oil quantity (determined without regard to paragraph (3)(A)(ii)), and
(ii) so much of the taxpayers average daily marginal production of domestic natural gas as does not exceed the taxpayers depletable natural gas quantity (determined without regard to paragraph (3)(A)(ii)),

and the applicable percentage shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.

(B) Election to have paragraph apply to pro rata portion of marginal production 
If the taxpayer elects to have this subparagraph apply for any taxable year, the rules of subparagraph (A) shall apply to the average daily marginal production of domestic crude oil or domestic natural gas of the taxpayer to which paragraph (1) would have applied without regard to this paragraph.
(C) Applicable percentage 
For purposes of subparagraph (A), the term applicable percentage means the percentage (not greater than 25 percent) equal to the sum of
(i) 15 percent, plus
(ii) 1 percentage point for each whole dollar by which $20 exceeds the reference price for crude oil for the calendar year preceding the calendar year in which the taxable year begins.

For purposes of this paragraph, the term reference price means, with respect to any calendar year, the reference price determined for such calendar year under section 45K (d)(2)(C).

(D) Marginal production 
The term marginal production means domestic crude oil or domestic natural gas which is produced during any taxable year from a property which
(i) is a stripper well property for the calendar year in which the taxable year begins, or
(ii) is a property substantially all of the production of which during such calendar year is heavy oil.
(E) Stripper well property 
For purposes of this paragraph, the term stripper well property means, with respect to any calendar year, any property with respect to which the amount determined by dividing
(i) the average daily production of domestic crude oil and domestic natural gas from producing wells on such property for such calendar year, by
(ii) the number of such wells,

is 15 barrel equivalents or less.

(F) Heavy oil 
For purposes of this paragraph, the term heavy oil means domestic crude oil produced from any property if such crude oil had a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit).
(G) Average daily marginal production 
For purposes of this subsection
(i) the taxpayers average daily marginal production of domestic crude oil or natural gas for any taxable year shall be determined by dividing the taxpayers aggregate marginal production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and
(ii) in the case of a taxpayer holding a partial interest in the production from any property (including any interest held in any partnership), such taxpayers production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayers percentage participation in the revenues from such property.
(H) Temporary suspension of taxable income limit with respect to marginal production 
The second sentence of subsection (a) of section 613 shall not apply to so much of the allowance for depletion as is determined under subparagraph (A) for any taxable year beginning after December 31, 1997, and before January 1, 2008.
(7) Special rules 

(A) Production of crude oil in excess of depletable oil quantity 
If the taxpayers average daily production of domestic crude oil exceeds his depletable oil quantity, the allowance under paragraph (1)(A) with respect to oil produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which would have been allowable under section 613 (a) for all of the taxpayers oil produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (1) or (6), as the case may be) as his depletable oil quantity bears to the aggregate number of barrels representing the average daily production of domestic crude oil of the taxpayer for such year.
(B) Production of natural gas in excess of depletable natural gas quantity 
If the taxpayers average daily production of domestic natural gas exceeds his depletable natural gas quantity, the allowance under paragraph (1)(B) with respect to natural gas produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which would have been allowable under section 613 (a) for all of the taxpayers[1] natural gas produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (1) or (6), as the case may be) as the amount of his depletable natural gas quantity in cubic feet bears to the aggregate number of cubic feet representing the average daily production of domestic natural gas of the taxpayer for such year.
(C) Taxable income from the property 
If both oil and gas are produced from the property during the taxable year, for purposes of subparagraphs (A) and (B) the taxable income from the property, in applying the taxable income limitation in section 613 (a), shall be allocated between the oil production and the gas production in proportion to the gross income during the taxable year from each.
(D) Partnerships 
In the case of a partnership, the depletion allowance shall be computed separately by the partners and not by the partnership. The partnership shall allocate to each partner his proportionate share of the adjusted basis of each partnership oil or gas property. The allocation is to be made as of the later of the date of acquisition of the oil or gas property by the partnership, or January 1, 1975. A partners proportionate share of the adjusted basis of partnership property shall be determined in accordance with his interest in partnership capital or income and, in the case of property contributed to the partnership by a partner, section 704 (c) (relating to contributed property) shall apply in determining such share. Each partner shall separately keep records of his share of the adjusted basis in each oil and gas property of the partnership, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property by the partnership. For purposes of section 732 (relating to basis of distributed property other than money), the partnerships adjusted basis in mineral property shall be an amount equal to the sum of the partners adjusted basis in such property as determined under this paragraph.
(8) Business under common control; members of the same family 

(A) Component members of controlled group treated as one taxpayer 
For purposes of this subsection, persons who are members of the same controlled group of corporations shall be treated as one taxpayer.
(B) Aggregation of business entities under common control 
If 50 percent or more of the beneficial interest in two or more corporations, trusts, or estates is owned by the same or related persons (taking into account only persons who own at least 5 percent of such beneficial interest), the tentative quantity determined under paragraph (3)(B) shall be allocated among all such entities in proportion to the respective production of domestic crude oil during the period in question by such entities.
(C) Allocation among members of the same family 
In the case of individuals who are members of the same family, the tentative quantity determined under paragraph (3)(B) shall be allocated among such individuals in proportion to the respective production of domestic crude oil during the period in question by such individuals.
(D) Definition and special rules 
For purposes of this paragraph
(i) the term controlled group of corporations has the meaning given to such term by section 1563 (a), except that section 1563 (b)(2) shall not apply and except that more than 50 percent shall be substituted for at least 80 percent each place it appears in section 1563 (a),
(ii) a person is a related person to another person if such persons are members of the same controlled group of corporations or if the relationship between such persons would result in a disallowance of losses under section 267 or 707 (b), except that for this purpose the family of an individual includes only his spouse and minor children.
(iii) the family of an individual includes only his spouse and minor children, and
(iv) each 6,000 cubic feet of domestic natural gas shall be treated as 1 barrel of domestic crude oil.
(9) Special rule for fiscal year taxpayers 
In applying this subsection to a taxable year which is not a calendar year, each portion of such taxable year which occurs during a single calendar year shall be treated as if it were a short taxable year.
(10) Certain production not taken into account 
In applying this subsection, there shall not be taken into account the production of natural gas with respect to which subsection (b) applies.
(11) Subchapter S corporations 

(A) Computation of depletion allowance at shareholder level 
In the case of an S corporation, the allowance for depletion with respect to any oil or gas property shall be computed separately by each shareholder.
(B) Allocation of basis 
The S corporation shall allocate to each shareholder his pro rata share of the adjusted basis of the S corporation in each oil or gas property held by the S corporation. The allocation shall be made as of the later of the date of acquisition of the property by the S corporation, or the first day of the first taxable year of the S corporation to which the Subchapter S Revision Act of 1982 applies. Each shareholder shall separately keep records of his share of the adjusted basis in each oil and gas property of the S corporation, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property by the S corporation. In the case of any distribution of oil or gas property to its shareholders by the S corporation, the corporations adjusted basis in the property shall be an amount equal to the sum of the shareholders adjusted bases in such property, as determined under this subparagraph.
(d) Limitations on application of subsection (c) 

(1) Limitation based on taxable income 
The deduction for the taxable year attributable to the application of subsection (c) shall not exceed 65 percent of the taxpayers taxable income for the year computed without regard to
(A) any depletion on production from an oil or gas property which is subject to the provisions of subsection (c),
(B) any deduction allowable under section 199,
(C) any net operating loss carryback to the taxable year under section 172,
(D) any capital loss carryback to the taxable year under section 1212, and
(E) in the case of a trust, any distributions to its beneficiary, except in the case of any trust where any beneficiary of such trust is a member of the family (as defined in section 267(c)(4)) of a settlor who created inter vivos and testamentary trusts for members of the family and such settlor died within the last six days of the fifth month in 1970, and the law in the jurisdiction in which such trust was created requires all or a portion of the gross or net proceeds of any royalty or other interest in oil, gas, or other mineral representing any percentage depletion allowance to be allocated to the principal of the trust.

If an amount is disallowed as a deduction for the taxable year by reason of application of the preceding sentence, the disallowed amount shall be treated as an amount allowable as a deduction under subsection (c) for the following taxable year, subject to the application of the preceding sentence to such taxable year. For purposes of basis adjustments and determining whether cost depletion exceeds percentage depletion with respect to the production from a property, any amount disallowed as a deduction on the application of this paragraph shall be allocated to the respective properties from which the oil or gas was produced in proportion to the percentage depletion otherwise allowable to such properties under subsection (c).

(2) Retailers excluded 
Subsection (c) shall not apply in the case of any taxpayer who directly, or through a related person, sells oil or natural gas (excluding bulk sales of such items to commercial or industrial users), or any product derived from oil or natural gas (excluding bulk sales of aviation fuels to the Department of Defense)
(A) through any retail outlet operated by the taxpayer or a related person, or
(B) to any person
(i) obligated under an agreement or contract with the taxpayer or a related person to use a trademark, trade name, or service mark or name owned by such taxpayer or a related person, in marketing or distributing oil or natural gas or any product derived from oil or natural gas, or
(ii) given authority, pursuant to an agreement or contract with the taxpayer or a related person, to occupy any retail outlet owned, leased, or in any way controlled by the taxpayer or a related person.

Notwithstanding the preceding sentence this paragraph shall not apply in any case where the combined gross receipts from the sale of such oil, natural gas, or any product derived therefrom, for the taxable year of all retail outlets taken into account for purposes of this paragraph do not exceed $5,000,000. For purposes of this paragraph, sales of oil, natural gas, or any product derived from oil or natural gas shall not include sales made of such items outside the United States, if no domestic production of the taxpayer or a related person is exported during the taxable year or the immediately preceding taxable year.

(3) Related person 
For purposes of this subsection, a person is a related person with respect to the taxpayer if a significant ownership interest in either the taxpayer or such person is held by the other, or if a third person has a significant ownership interest in both the taxpayer and such person. For purposes of the preceding sentence, the term significant ownership interest means
(A) with respect to any corporation, 5 percent or more in value of the outstanding stock of such corporation,
(B) with respect to a partnership, 5 percent or more interest in the profits or capital of such partnership, and
(C) with respect to an estate or trust, 5 percent or more of the beneficial interests in such estate or trust.

For purposes of determining a significant ownership interest, an interest owned by or for a corporation, partnership, trust, or estate shall be considered as owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries, as the case may be.

(4) Certain refiners excluded 
If the taxpayer or one or more related persons engages in the refining of crude oil, subsection (c) shall not apply to the taxpayer for a taxable year if the average daily refinery runs of the taxpayer and such persons for the taxable year exceed 75,000 barrels. For purposes of this paragraph, the average daily refinery runs for any taxable year shall be determined by dividing the aggregate refinery runs for the taxable year by the number of days in the taxable year.
(5) Percentage depletion not allowed for lease ­bonuses, etc. 
In the case of any oil or gas property to which subsection (c) applies, for purposes of section 613, the term gross income from the property shall not include any lease bonus, advance royalty, or other amount payable without regard to production from property.
(e) Definitions 
For purposes of this section
(1) Crude oil 
The term crude oil includes a natural gas liquid recovered from a gas well in lease separators or field facilities.
(2) Natural gas 
The term natural gas means any product (other than crude oil) of an oil or gas well if a deduction for depletion is allowable under section 611 with respect to such product.
(3) Domestic 
The term domestic refers to production from an oil or gas well located in the United States or in a possession of the United States.
(4) Barrel 
The term barrel means 42 United States gallons.
[1] So in original. Probably should be “taxpayer’s”.

26 USC 614 - Definition of property

(a) General rule 
For the purpose of computing the depletion allowance in the case of mines, wells, and other natural deposits, the term property means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.
(b) Special rules as to operating mineral interests in oil and gas wells or geothermal deposits 
In the case of oil and gas wells or geothermal deposits
(1) In general 
Except as otherwise provided in this subsection
(A) all of the taxpayers operating mineral interests in a separate tract or parcel of land shall be combined and treated as one property, and
(B) the taxpayer may not combine an operating mineral interest in one tract or parcel of land with an operating mineral interest in another tract or parcel of land.
(2) Election to treat operating mineral interests as separate properties 
If the taxpayer has more than one operating mineral interest in a single tract or parcel of land, he may elect to treat one or more of such operating mineral interests as separate properties. The taxpayer may not have more than one combination of operating mineral interests in a single tract or parcel of land. If the taxpayer makes the election provided in this paragraph with respect to any interest in a tract or parcel of land, each operating mineral interest which is discovered or acquired by the taxpayer in such tract or parcel of land after the taxable year for which the election is made shall be treated
(A) if there is no combination of interests in such tract or parcel, as a separate property unless the taxpayer elects to combine it with another interest, or
(B) if there is a combination of interests in such tract or parcel, as part of such combination unless the taxpayer elects to treat it as a separate property.
(3) Certain unitization or pooling arrangements 

(A) In general 
Under regulations prescribed by the Secretary, if one or more of the taxpayers operating mineral interests participate, under a voluntary or compulsory unitization or pooling agreement, in a single cooperative or unit plan of operation, then for the period of such participation
(i) they shall be treated for all purposes of this subtitle as one property, and
(ii) the application of paragraphs (1), (2), and (4) in respect of such interests shall be suspended.
(B) Limitation 
Subparagraph (A) shall apply to a voluntary agreement only if all the operating mineral interests covered by such agreement
(i) are in the same deposit, or are in 2 or more deposits the joint development or production of which is logical from the standpoint of geology, convenience, economy, or conservation, and
(ii) are in tracts or parcels of land which are contiguous or in close proximity.
(C) Special rule in the case of arrangements entered into a taxable years beginning before January 1, 1964 
If
(i) two or more of the taxpayers operating mineral interests participate under a voluntary or compulsory unitization or pooling agreement entered into in any taxable year beginning before January 1, 1964, in a single cooperative or unit plan of operation,
(ii) the taxpayer, for the last taxable year beginning before January 1, 1964, treated such interests as two or more separate properties, and
(iii) it is determined that such treatment was proper under the law applicable to such taxable year,

such taxpayer may continue to treat such interests in a consistent manner for the period of such participation.

(4) Manner, time, and scope of election 

(A) Manner and time 
Any election provided in paragraph (2) shall be made for each operating mineral interest, in the manner prescribed by the Secretary by regulations, not later than the time prescribed by law for filing the return (including extensions thereof) for whichever of the following taxable years is the later: The first taxable year beginning after December 31, 1963, or the first taxable year in which any expenditure for development or operation in respect of such operating mineral interest is made by the taxpayer after the acquisition of such interest.
(B) Scope 
Any election under paragraph (2) shall be for all purposes of this subtitle and shall be binding on the taxpayer for all subsequent taxable years.
(5) Treatment of certain properties 
If, on the day preceding the first day of the first taxable year beginning after December 31, 1963, the taxpayer has any operating mineral interests which he treats under subsection (d) of this section (as in effect before the amendments made by the Revenue Act of 1964), such treatment shall be continued and shall be deemed to have been adopted pursuant to paragraphs (1) and (2) of this subsection (as amended by such Act).
(c) Special rules as to operating mineral interests in mines 

(1) Election to aggregate separate interests 
Except in the case of oil and gas wells and geothermal deposits, if a taxpayer owns two or more separate operating mineral interests which constitute part or all of an operating unit, he may elect (for all purposes of this subtitle)
(A) to form an aggregation of, and to treat as one property, all such interests owned by him which comprise any one mine or any two or more mines; and
(B) to treat as a separate property each such interest which is not included within an aggregation referred to in subparagraph (A).

For purposes of this paragraph, separate operating mineral interests which constitute part or all of an operating unit may be aggregated whether or not they are included in a single tract or parcel of land and whether or not they are included in contiguous tracts or parcels. For purposes of this paragraph, a taxpayer may elect to form more than one aggregation of operating mineral interests within any one operating unit; but no aggregation may include any operating mineral interest which is a part of a mine without including all of the operating mineral interests which are a part of such mine in the first taxable year for which the election to aggregate is effective, and any operating mineral interest which thereafter becomes a part of such mine shall be included in such aggregation.

(2) Election to treat a single interest as more than one property 
Except in the case of oil and gas wells and geothermal deposits, if a single tract or parcel of land contains a mineral deposit which is being extracted, or will be extracted by means of two or more mines for which expenditures for development or operation have been made by the taxpayer, then the taxpayer may elect to allocate to such mines, under regulations prescribed by the Secretary, all of the tract or parcel of land and of the mineral deposit contained therein, and to treat as a separate property that portion of the tract or parcel of land and of the mineral deposit so allocated to each mine. A separate property formed pursuant to an election under this paragraph shall be treated as a separate property for all purposes of this subtitle (including this paragraph). A separate property so formed may, under regulations prescribed by the Secretary, be included as a part of an aggregation in accordance with paragraphs (1) and (3). The election provided by this paragraph may not be made with respect to any property which is a part of an aggregation formed by the taxpayer under paragraph (1) except with the consent of the Secretary.
(3) Manner and scope of election 
The elections provided by paragraphs (1) and (2) shall be made, in accordance with regulations prescribed by the Secretary, not later than the time prescribed for filing the return (including extensions thereof) for the first taxable year
(A) in which, in the case of an election under paragraph (1), any expenditure for development or operation in respect of the separate operating mineral interest is made by the taxpayer after the acquisition of such interest, or
(B) in which, in the case of an election under paragraph (2), expenditures for development or operation of more than one mine in respect of a property are made by the taxpayer after the acquisition of the property.

An election made under paragraph (1) or (2) for a taxable year shall be binding upon the taxpayer for such year and all subsequent taxable years, except that the Secretary may consent to a different treatment of any interest with respect to which an election has been made.

(d) Operating mineral interests defined 
For purposes of this section, the term operating mineral interest includes only an interest in respect of which the costs of production of the mineral are required to be taken into account by the taxpayer for purposes of computing the taxable income limitation provided for in section 613, or would be so required if the mine, well, or other natural deposit were in the production stage.
(e) Special rule as to nonoperating mineral interests 

(1) Aggregation of separate interests 
If a taxpayer owns two or more separate nonoperating mineral interests in a single tract or parcel of land or in two or more adjacent tracts or parcels of land, the Secretary shall, on showing by the taxpayer that a principal purpose is not the avoidance of tax, permit the taxpayer to treat (for all purposes of this subtitle) all such mineral interests in each separate kind of mineral deposit as one property. If such permission is granted for any taxable year, the taxpayer shall treat such interests as one property for all subsequent taxable years unless the Secretary consents to a different treatment.
(2) Nonoperating mineral interests defined 
For purposes of this subsection, the term nonoperating mineral interests includes only interests which are not operating mineral interests.

26 USC 615 - Repealed. Pub. L. 94455, title XIX, 1901(a)(88), Oct. 4, 1976, 90 Stat. 1779]

Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 211; July 6, 1960, Pub. L. 86–594, § 1, 74 Stat. 333; Sept. 12, 1966, Pub. L. 89–570, § 2(a), 80 Stat. 763; Dec. 30, 1969, Pub. L. 91–172, title V, § 504(a), 83 Stat. 632, related to pre-1970 exploration expenditures.

26 USC 616 - Development expenditures

(a) In general 
Except as provided in subsections (b) and (d), there shall be allowed as a deduction in computing taxable income all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. This section shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this section, as expenditures.
(b) Election of taxpayer 
At the election of the taxpayer, made in accordance with regulations prescribed by the Secretary, expenditures described in subsection (a) paid or incurred during the taxable year shall be treated as deferred expenses and shall be deductible on a ratable basis as the units of produced ores or minerals benefited by such expenditures are sold. In the case of such expenditures paid or incurred during the development stage of the mine or deposit, the election shall apply only with respect to the excess of such expenditures during the taxable year over the net receipts during the taxable year from the ores or minerals produced from such mine or deposit. The election under this subsection, if made, must be for the total amount of such expenditures, or the total amount of such excess, as the case may be, with respect to the mine or deposit, and shall be binding for such taxable year.
(c) Adjusted basis of mine or deposit 
The amount of expenditures which are treated under subsection (b) as deferred expenses shall be taken into account in computing the adjusted basis of the mine or deposit, except that such amount, and the adjustments to basis provided in section 1016 (a)(9), shall be disregarded in determining the adjusted basis of the property for the purpose of computing a deduction for depletion under section 611.
(d) Special rules for foreign development 
In the case of any expenditures paid or incurred with respect to the development of a mine or other natural deposit (other than an oil, gas, or geothermal well) located outside of the United States
(1) subsections (a) and (b) shall not apply, and
(2) such expenditures shall
(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or
(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred.
(e) Cross reference 
For election of 10-year amortization of expenditures allowable as a deduction under subsection (a), see section 59 (e).

26 USC 617 - Deduction and recapture of certain mining exploration expenditures

(a) Allowance of deduction 

(1) General rule 
At the election of the taxpayer, expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine, shall be allowed as a deduction in computing taxable income. This subsection shall apply only with respect to the amount of such expenditures which, but for this subsection, would not be allowable as a deduction for the taxable year. This subsection shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this subsection, as expenditures paid or incurred. In no case shall this subsection apply with respect to amounts paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of oil or gas or of any mineral with respect to which a deduction for percentage depletion is not allowable under section 613.
(2) Elections 

(A) Method 
Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe.
(B) Time and scope 
The election provided by paragraph (1) for the taxable year may be made at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for the taxable year. Such an election for the taxable year shall apply to all expenditures described in paragraph (1) paid or incurred by the taxpayer during the taxable year or during any subsequent taxable year. Such an election may not be revoked unless the Secretary consents to such revocation.
(C) Deficiencies 
The statutory period for the assessment of any deficiency for any taxable year, to the extent such deficiency is attributable to an election or revocation of an election under this subsection, shall not expire before the last day of the 2-year period beginning on the day after the date on which such election or revocation of election is made; and such deficiency may be assessed at any time before the expiration of such 2-year period, notwithstanding any law or rule of law which would otherwise prevent such assessment.
(b) Recapture on reaching producing stage 

(1) Recapture 
If, in any taxable year, any mine with respect to which expenditures were deducted pursuant to subsection (a) reaches the producing stage, then
(A) If the taxpayer so elects with respect to all such mines reaching the producing stage during the taxable year, he shall include in gross income for the taxable year an amount equal to the adjusted exploration expenditures with respect to such mines, and the amount so included in income shall be treated for purposes of this subtitle as expenditures which
(i)  are paid or incurred on the respective dates on which the mines reach the producing stage, and
(ii)  are properly chargeable to capital account.
(B) If subparagraph (A) does not apply with respect to any such mine, then the deduction for depletion under section 611 with respect to the property shall be disallowed until the amount of depletion which would be allowable but for this subparagraph equals the amount of the adjusted exploration expenditures with respect to such mine.
(2) Elections 

(A) Method 
Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe.
(B) Time and scope 
The election provided by paragraph (1) for any taxable year may be made or changed not later than the time prescribed by law for filing the return (including extensions thereof) for such taxable year.
(c) Recapture in case of bonus or royalty 
If an election has been made under subsection (a) with respect to expenditures relating to a mining property and the taxpayer receives or accrues a bonus or a royalty with respect to such property, then the deduction for depletion under section 611 with respect to the bonus or royalty shall be disallowed until the amount of depletion which would be allowable but for this subsection equals the amount of the adjusted exploration expenditures with respect to the property to which the bonus or royalty relates.
(d) Gain from dispositions of certain mining property 

(1) General rule 
Except as otherwise provided in this subsection, if mining property is disposed of the lower of
(A) the adjusted exploration expenditures with respect to such property, or
(B) the excess of
(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value (in the case of any other disposition), over
(ii) the adjusted basis of such property,

shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

(2) Disposition of portion of property 
For purposes of paragraph (1)
(A) In the case of the disposition of a portion of a mining property (other than an undivided interest), the entire amount of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such portion to the extent of the amount of the gain to which paragraph (1) applies.
(B) In the case of the disposition of an undivided interest in a mining property (or a portion thereof), a proportionate part of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies.

This paragraph shall not apply to any expenditure to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditure relates neither to the portion (or interest therein) disposed of nor to any mine, in the property held by the taxpayer before the disposition, which has reached the producing stage.

(3) Exceptions and limitations 
Paragraphs (1), (2), and (3) of section 1245 (b) (relating to exceptions and limitations with respect to gain from disposition of certain depreciable property) shall apply in respect of this subsection in the same manner and with the same effect as if references in section 1245 (b) to section 1245 or any provision thereof were references to this subsection or the corresponding provisions of this subsection and as if references to section 1245 property were references to mining property.
(4) Application of subsection 
This subsection shall apply notwithstanding any other provision of this subtitle.
(5) Coordination with section 1254 
This subsection shall not apply to any disposition to which section 1254 applies.
(e) Basis of property 

(1) Basis 
The basis of any property shall not be reduced by the amount of any depletion which would be allowable but for the application of this section.
(2) Adjustments 
The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (d)(1).
(f) Definitions 
For purposes of this section
(1) Adjusted exploration expenditures 
The term adjusted exploration expenditures means, with respect to any property or mine
(A) the amount of the expenditures allowed for the taxable year and all preceding taxable years as deductions under subsection (a) to the taxpayer or any other person which are properly chargeable to such property or mine and which (but for the election under subsection (a)) would be reflected in the adjusted basis of such property or mine, reduced by
(B) for the taxable year and for each preceding taxable year, the amount (if any) by which
(i)  the amount which would have been allowable for percentage depletion under section 613 but for the deduction of such expenditures, exceeds
(ii)  the amount allowable for depletion under section 611,

properly adjusted for any amounts included in gross income under subsection (b) or (c) and for any amounts of gain to which subsection (d) applied.

(2) Mining property 
The term mining property means any property (within the meaning of section 614 after the application of subsections (c) and (e) thereof) with respect to which any expenditures allowed as a deduction under subsection (a)(1) are properly chargeable.
(3) Disposal of coal or domestic iron ore with a retained economic interest 
A transaction which constitutes a disposal of coal or iron ore under section 631 (c) shall be treated as a disposition. In such a case, the excess referred to in subsection (d)(1)(B) shall be treated as equal to the gain (if any) referred to in section 631 (c).
(g) Special rules relating to partnership property 

(1) Property distributed to partner 
In the case of any property or mine received by the taxpayer in a distribution with respect to part or all of his interest in a partnership, the adjusted exploration expenditures with respect to such property or mine include the adjusted exploration expenditures (not otherwise included under subsection (f)(1)) with respect to such property or mine immediately prior to such distribution, but the adjusted exploration expenditures with respect to any such property or mine shall be reduced by the amount of gain to which section 751 (b) applied realized by the partnership (as constituted after the distribution) on the distribution of such property or mine.
(2) Property retained by partnership 
In the case of any property or mine held by a partnership after a distribution to a partner to which section 751 (b) applied, the adjusted exploration expenditures with respect to such property or mine shall, under regulations prescribed by the Secretary, be reduced by the amount of gain to which section 751 (b) applied realized by such partner with respect to such distribution on account of such property or mine.
(h) Special rules for foreign exploration 
In the case of any expenditures paid or incurred before the development stage for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (other than an oil, gas, or geothermal well) located outside the United States
(1) subsection (a) shall not apply, and
(2) such expenditures shall
(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or
(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred.
(i) Cross reference 
For election of 10-year amortization of expenditures allowable as a deduction under this section, see section 59 (e).