PLR 1343005: consent granted to aggregate operating mineral interests

Plain-English summary

The IRS granted a foreign mining company treated as a U.S. corporation permission to aggregate separate operating mineral interests in one mine as a single property for depletion purposes. The interests were operated together with common personnel, facilities, and processing arrangements, but the taxpayer had not timely made the required aggregation election. The IRS consented to the aggregation based on the submitted facts, and required the mine to be treated as one property for the current and future tax years unless further consent is obtained. The ruling states that no additional percentage depletion deductions were expected because the added properties had zero tax basis.

Ruling snapshot

• Question: May separate operating mineral interests in one mine be aggregated and treated as one property for depletion?
• Outcome: Approved
• Key authorities: IRC §§ 613, 614, 7874; Treas. Reg. §§ 1.614-2, 1.614-3; Rev. Proc. 64-23

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201343005 Third Party Communication: None
Release Date: 10/25/2013 Date of Communication: Not Applicable
Index Number: 614.02-00
Person To Contact:
-------------------- --------------------------, ID No. ----------------
------------------------------- -----------------
-------------------------------- Telephone Number:
---------------------------------------------- ----------------------
------------------------------- Refer Reply To:
----------- CC:PSI:B06
PLR-105363-13
In Re: Aggregation of Operating Interests Date:
July 18, 2013

LEGEND:
Taxpayer = ---------------------------------------------------------
Sub 1 = ----------------------------------
Sub 2 = -------------------------------------------------------
Company = -------------------------------------------
State 1 = --------------
State 2 = --------
x= ------
y= --
A= -----------
B= ---------
C= ----
Date 1 = ------------------
Date 2 = --------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Year 7 = -------

Dear --------------:

This letter responds to a letter, dated ----------------------------, from Taxpayer’s
representatives requesting that, pursuant to Rev. Proc. 64-23, 1964-1 C.B. 689, the
Commissioner consent to invalid aggregations under § 614(c)(1) of the Internal
Revenue Code, and the treatment as one property of separate contiguous operating
interests included in the depletable interests of the A Mine during Year 5 through
Year 7.
PLR-105363-13 2

According to the information submitted, Taxpayer, a foreign mining company treated as
a U.S. corporation under § 7874(b), is an accrual basis calendar taxpayer that files a
consolidated federal income tax return on behalf of itself and its subsidiaries. Taxpayer
owns x percent of Sub 1, a State 1 corporation, which in turn owns x percent of Sub 2, a
State 2 corporation, which owns the subject mineral properties.

The operating mineral interests included in this ruling request are part of the A Mine.
On Date 1, Sub 2 purchased all of the stock of Company, thereby becoming the owner
of the A Mine and the B Mine properties. The tax basis of the assets of Company did
not change because of the stock acquisition.
The A Mine consists of y operating shafts: the A shaft and the C shaft. The A Mine
dates back to Year 1 and the B Mine dates back to Year 2. The B Mine has not
produced since Year 3. These mines have been owned by various parties and it
appears that Sub 2’s tax basis in the A Mine was determined by reference (within the
meaning of § 1.614-6(c)) to prior transferors’ tax basis dating back to Year 4. Taxpayer
represents that it is unaware of any § 614 property elections that may have been made
by Company or its previous transferors. Taxpayer further represents that to the best of
its knowledge, all operating mineral interests in the A Mine were treated as a single
depletable property by Company prior to its acquisition by Taxpayer, as there was a
single depletion computation on Company’s pre-acquisition short period Year 5 federal
income tax return.

The A Mine consists of multiple operating mineral interests that are operated together
as a unit and have: (i) common field or operating personnel; (ii) common supply and
maintenance facilities; (iii) common processing or treatment plants; and (iv) common
storage facilities. These mineral interests include fee and leased patented and
unpatented mining claims some of which overlap one or more other mining claims. The
mineral reserves are contained in narrow latticed veins. Starting in Year 5, the A Mine
has been in production and has incurred operating and development costs. Each year
beginning in Year 5, additional operating mineral interests in the A Mine have been
added to existing operating mineral interests as mining activity follows the mineral veins.

Due to Taxpayer’s lack of understanding of U.S. federal income tax requirements and
inadequate advice from its tax advisors, Taxpayer did not realize that it had the option
or was required to make an election under § 1.614-3(a)(1) to aggregate contiguous
separate operating mineral interests that constitute part or all of the same operating unit
as one property. Therefore, Taxpayer did not elect to aggregate any of its mineral
interests in the A Mine under § 1.614-3(a)(1).

However, on Taxpayer’s federal income tax returns for Year 5 and Year 6 it computed
depletion deductions in the aggregate for all mineral properties it owned at the A Mine,
as if the original election to aggregate all operating interests had been properly made
and subsequent aggregation elections for additional operating interests that were added
PLR-105363-13 3

to the mine had been timely filed. Taxpayer represents that if it had known of the
requirement to make a timely election under § 1.614-3(a)(1) on its Year 5 and Year 6
federal income tax returns, it would have done so. On Date 2, Taxpayer engaged new
tax advisors to assist in the preparation of its Year 7 federal income tax return. During
the preparation process, Taxpayer discovered that it should have made an election
under § 1.614-3(a)(1) to aggregate its contiguous separate operating mineral interests
in the A Mine on its Year 5 and Year 6 federal income tax returns.

No additional percentage depletion deductions are expected to be allowed to Taxpayer
if permission to aggregate the mineral properties is granted because the mineral
properties added to the A Mine had a zero tax basis.

Taxpayer also represents that its principal purpose for aggregating the separate
contiguous operating mineral interests as one property is to reduce administrative
burden in calculating depletion and provide for consistency in the computation of the
depletion deduction. Therefore, Taxpayer now requests permission to aggregate its
interests in the separate properties as provided for by § 1.614-3(a)(1).

Section 614(a) provides that 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.

Section 614(c)(1) and § 1.614-3(a)(1) of the regulations state that a taxpayer who owns
two or more separate operating mineral interests, which constitute part or all of an
operating unit, may elect to form an aggregation of any two or more such operating
mineral interests and to treat such aggregation as one property. Any operating mineral
interest which the taxpayer does not elect to include within the aggregation on a timely
basis shall be treated as a separate property.

Section 614(c)(3)(A) provides that an election under § 614(c)(1) 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 in
which any expenditure for development or operation in respect of the separate
operating mineral interest is made by the taxpayer after the acquisition of the interest.

Section 614(d) provides that 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 § 613 or would be so required if the mine, well, or other natural
deposit were in the production stage.

Section 1.614-3(a)(1) provides that except in the case of oil and gas wells, a taxpayer
who owns two or more separate operating mineral interests, which constitute part or all
PLR-105363-13 4

of the same operating unit, may elect under § 1.614-3 to form an aggregation of all such
operating mineral interests which comprise any one mine or any two or more mines and
to treat such aggregation as one property. The aggregated property which results from
the exercise of such election shall be considered as one property for all purposes of
subtitle A of the Code. Section 1.614-3(a)(1) further provides that if a taxpayer fails to
make an election under § 1.614-3 to aggregate a particular operating mineral interest
(other than an interest which becomes a part of a mine with respect to which the
interests have been aggregated in a prior taxable year) on or before the last day
prescribed for making such an election, such interest shall be treated as if an election
had been made to treat it as a separate property.

Section 1.614-3(f)(1) provides that except as provided in § 1.614-3(f)(7)(2) and (3), the
election under § 614(c)(1) to treat an operating mineral interest as part of an
aggregation shall be made under § 614(c)(3)(A) not later than the time prescribed by
law for filing the taxpayer's income tax return (including extensions thereof) for
whichever of the following taxable years is the later:

  (i) The first taxable year beginning after December 31, 1957, or

   (ii) The first taxable year in which 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.

Section 1.614-3(f)(8)(i) and (ii) provide that aggregations are invalid because of the
failure to make timely elections and that basic invalid aggregations are those that are
initially invalid.

Rev. Proc. 64-23 sets forth guidelines to aid in determining what constitutes an
"operating unit" in the case of oil and gas properties under § 1.614-2(c) and announces
that under Delegation Order No. 93 dated April 27, 1964, Assistant Regional
Commissioners, Appellate, Associate Chiefs of the Appellate Division and District
Directors of Internal Revenue have been authorized to consent, under the provisions of
§§ 1.614-2(d)(5) and 1.614-3(f), to the reforming of aggregations by a taxpayer where
the taxpayer has formed invalid basic aggregations or made invalid additions to valid or
invalid basic aggregations; and to consent, in the case of oil and gas wells where an
invalid aggregation has been formed under § 614(b) , to the treatment by a taxpayer of
all the properties included in the aggregation, which fall within a single operating unit,
under the provisions of § 614(d) if so requested by the taxpayer.

Section 6 of Rev. Proc. 64-23 states:

  The authority to consent to the treatment of each operating mineral interest under
  subdivisions (ii) and (iii) of sections 1.614-2(d)(5) and 1.614-3(f)(8) of the
  regulations, relating to invalid aggregations, as other than a separate property

PLR-105363-13 5

  has been delegated to Assistant Regional Commissioners, Appellate, Associate
  Chiefs of the Appellate Division, and District Directors.

Under Delegation Order 93 (Rev. 8), 1982-1 C.B. 336, the authority vested in the
Commissioner in § 1.614-2 (d)(5) and § 1.614-3 (f)(8) relating to invalid aggregations as
other than a separate property is delegated to Chief Counsel, Regional Counsels,
Regional Directors of Appeals, Chiefs and Associate Chiefs of Appeals Offices, Appeals
Team Chiefs as to their respective cases, District Directors, and in other than
streamlined districts, Chiefs, District Examination Divisions.

Based solely on the facts and representations submitted, consent is given to Taxpayer
to aggregate all of its mineral properties held in the A Mine. The A Mine aggregation
must be treated as a single property for this tax year and for all subsequent tax years,
unless consent is obtained from the Commissioner to change the aggregation.
Except as specifically set forth above, we express or imply no opinion concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

In accordance with the power of attorney, we are sending copies of this letter to
Taxpayer's authorized representatives. We also are sending a copy of this letter to the
appropriate Industry Director, LB&I. A copy of this ruling must be attached to any
federal income tax return to which it is relevant. Alternatively, taxpayers filing their
returns electronically may satisfy this requirement by attaching a statement to their
return that provides the date and control number of the letter ruling.

                                         Sincerely,
                                         Associate Chief Counsel
                                         (Passthroughs and Special Industries)



                                         Brenda M. Stewart
                                         Senior Counsel, Branch 6
                                         Office of Associate Chief Counsel
                                         (Passthroughs & Special Industries-)