OWNING NATURAL RESOURCES (T/G 402) covers the tax laws unique to land and its mineral deposits (including continental shelf areas); the sub division, leasing, exploration and mining thereof; the meaning of "economic interests" therein, and the capital basis of "deposits in place" (for depletion allowance purposes). Also covered:

• Depletion rules: Cost vs. Percentage
• Improvements & "receding face" costs
• Estimating number of recoverable units
• Why each mine is separate property
• Rights of landowner & lessee
• Special rule: Capital gain/Ordinary loss

Owning Natural Resources
Book:  402

Table of Content

1.  THE “REAL” IN REAL ESTATE                           1-1

    Measurement of Land                                 1-2
    Conveyance and Recording                            1-4
    Partitioning of Rights                              1-5
    Section 1221: A “Nondefinition”                     1-7
    What’s the Distinction?                             1-9
    Sample Regulatory Wording                           1-11
    Property “Primarily for Sale”                       1-13
    How “Sale or Exchange” Defined                      1-15
    The “Economic Interest” Test                        1-16
    Sale vs. Lease of Minerals                          1-17
    Easement Grants                                     1-19

2.  TRADE OR BUSINESS PROPERTY                          2-1

    Introduction to Section 1231                        2-2
    Timber, Coal, or Iron Ore                           2-4
    The General Rule (Simplified)                       2-5
    Now the Conditions                                  2-6
    Involuntary Conversions                             2-8
    Hypothetical Loss Scenario                          2-9
    Recapture of Net 1231 Losses                        2-11
    Timber and Timber Products                          2-12
    Leases and Leaseholds                               2-13
    Oil, Gas, & Mineral Leases                          2-15

3.  LAND SUBDIVIDED FOR SALE                            3-1

    Real Property “Tract” Defined                       3-2
    Regulatory Liberalness                              3-4
    For Noncorporate Owners                             3-5
    Substantial “Evidence” Activities                   3-6
    Three Preconditions Mandated                        3-8
    When Improvements Nonsubstantial”                   3-10
    The 5% Ordinary Income Rule                         3-11
    Nonactive 5-Year Periods                            3-13
    What If Loss on Sales?                              3-15

4.  MINERAL DEPOSITS DEFINED                            4-1
    
    Mineral Lands & Deposits                            4-2
    Tax Code Depletion Sections                         4-4
    Mines vs. Mineral Deposits                          4-6
    Specifics of “Economic Interest”                    4-8
    Why “Mining” Is Defined                             4-9
    May Aggregate or Separate                           4-11
    Timber Depletion: Nonmineral                        4-13
    Geothermal Wells & Deposits                         4-14
    Continental Shelf Areas                             4-15

5.  THE DEPLETION DEDUCTION                             5-1

    Applicable Law Introduction                         5-2
    Estimate “Recoverable Units”                        5-4
    Revised Estimates Required                          5-6
    Separate Depletion Accounts                         5-8
    Deductible by Whom?                                 5-10
    Lease vs. Sale Problems                             5-12
    Interesting Case Examples                           5-13
    Basis as Measure of Depletion                       5-14
    Determining Cost of Deposits                        5-16
    Maintaining Normal Output                           5-18

6.  PERCENTAGE DEPLETION                                6-1

    Introduction to Section 613                         6-2
    Percentage Depletion Rates                          6-3
    The “Catchall” 14% Rate                             6-5
    Applicable “Gross Income”                           6-7
    First Marketable Product Point                      6-8
    Tug-of-Point War                                    6-11
    Multi-Mineral Products                              6-12
    The 50% Limitation                                  6-13
    Taxable Income from Mining                          6-15
    Where Controversies Arise                           6-17
    Statement Attached to Return                        6-20
    Minimum Guarantee:  Cost Depletion                  6-21
    
7.  EXPLORATION COST TREATMENT                          7-1

    Overview of Section 617                             7-2
    Exploration Expenditures Explained                  7-4
    Certain Expenditures Not Applicable                 7-5
    Must “Elect” to Deduct                              7-6
    Recapture Rules Synopsized                          7-8
    Adjusted Exploration Expenditures                   7-11
    Disposition of Mining Property                      7-12
    Producing Stage Recapture                           7-14
    The 10-Year Election                                7-15

8.  DEVELOPMENT EXPENDITURES                            8-1

    Overview of Section 616                             8-2
    Official Guidelines                                 8-3
    Example Court Rulings                               8-5
    Certain Items Not Eligible                          8-6
    Election to Defer                                   8-8
    Excess Over Net Receipts                            8-10
    Manner of Election                                  8-12
    Basis Adjustments Required                          8-13
    Foreign Mineral Deposits                            8-15

9.  OIL & GAS DRILLING                                  9-1

    Intangible Drilling Costs                           9-2
    The IDC Expense Option                              9-3
    Nonoptional (Nonintangible) Items                   9-6
    How the Majors Treat IDCs                           9-8
    Nonproductive Wells                                 9-9
    Offshore Platform Challenges                        9-10
    Amortization Option:  5 Years                       9-12
    Foreign Wells                                       9-13

10. OIL & GAS DEPLETION                                 10-1

    Introduction to Section 613A                        10-2
    Exception for Independents                          10-3
    Average Daily Production                            10-5
    Maximum Depletable Quantity                         10-6
    Taxable Income Limitations                          10-7
    Effect of “Depletable Quantity”                     10-10
    Partnerships and S Corporations                     10-11
    Retailing/Refining Limitations                      10-12
    Unused Depletion Carried Over                       10-15

11. MINERAL PRODUCTION PAYMENT                          11-1

    Qualifications Required                             11-2
    Addressed by Section 636                            11-4
    Mortgage Loan Treatment                             11-6
    The Practical Effect                                11-7
    Exception: Pledges for Exploration                  11-8
    Retained Production Payment: Sale                   11-10
    Examples re Section 636(b)                          11-12
    Retained Production Payment: Lease                  11-13
    Monetary Instrument Role                            11-15
    What is “Economically Equivalent”?                  11-17

12. DISPOSITIONS & RECAPTURES                           12-1

    What Is a “Sale”                                    12-2
    Recapture Gain Explained                            12-3
    General Rule:  Ordinary Income                      12-5
    The “Lesser of”; “Excess of”?                       12-6
    Partial Dispositions                                12-8
    Separate Records, Each Owner                        12-10
    Other Recapture Property                            12-12
    Recapture Computations: From 4797                   12-14
    The “Mechanics” of Recapture                        12-15
    What About Loss Computations?                       12-17
    Abandonment of Property                             12-19