Depletion deduction

Accounting and Taxes
1

I know this has been asked before but I'm not sure if there was ever a definitive answer.

Can the depletion deduction be taken on inherited mineral rights?

I'm finding several resources that indicate depletion CAN be taken, and that the IRS publication 535 which states the following is ambiguous:

  • You have acquired by investment any interest in mineral deposits
  • You have a legal right to income from the extraction of the minerals to which you look for a return of your capital investment

The citation I've been referred to that supports taking depletion is as follows:

26 CFR 1.611-1 (b)(1) An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the extraction of the mineral or severance of the timber, to which he must look for a return of his capital.

2

I don't believe it matters how you came to be in possession of the producing minerals. If they are being produced you are entitled to a depletion deduction.

3

Dear Ralph,

I am no CPA, so that is my disclaimer. Sure, you can take either cost basis depletion or percentage depletion.

4

I believe this to be true as well. You own a basket of apples - someone else is making jelly with those apples and selling it. Regardless of who is getting money from the production of the Apple Jelly the apples from YOUR basket are still being depleted.

Lots of people come into this by inheritance - do not lessen what your ancestors have done for you!

Don't get tripped up by the word "inheritance". Let's use the reverse - you inherit a very nice house - you cannot tell your local government that you will not pay taxes on it because you did not pay for it.

Yes, I have been itching to voice this opinion! :)