Consent granted to aggregate separate non-operating silver royalty interests as one property

Plain-English summary

A company that owns silver royalty interests, but does not mine or operate the properties itself, asked the IRS for permission to treat its scattered royalty interests in one region as a single "property" for tax purposes. Under Section 614 of the tax code, each separate mineral interest in each tract of land is normally its own property, which makes calculating depletion (the deduction that recovers the cost of a wasting resource) burdensome when interests span many tracts. Section 614(e) lets a taxpayer combine two or more non-operating interests in adjacent or nearby tracts into one property, but only if avoiding tax is not a principal purpose. The company represented that its interests are royalties bearing none of the exploration or production costs, that the tracts are contiguous or close together, and that the goal is to simplify depletion accounting and match its financial reporting, not to reduce taxes. The IRS agreed the requirements of the regulations were met and granted consent to treat the combined royalty interests as one property. This ruling is the silver-royalty companion to PLR 202501002, which involved a related member of the same corporate group.

Ruling snapshot

• Question: May the taxpayer aggregate its separate non-operating silver royalty interests in a region so that they are treated as one property under § 614(e)?
• Outcome: approved
• Key authorities: IRC § 614(e); Treas. Reg. §§ 1.614-1, 1.614-2, 1.614-5(d), (e), (g); IRC §§ 611, 612, 613

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202501003                                              Third Party Communication: None
 Release Date: 1/3/2025                                         Date of Communication: Not Applicable
 Index Number: 614.04-00
                                                                Person To Contact:
 ------------------                                             ------------------------, ID No. ------------
 ------------------------------                                 Telephone Number:
 ----------------------------------------------                 --------------------
 ----------------------------------------------                 Refer Reply To:
 --------------------------------------                         CC:PSI:B06
  ----------------------------                                  PLR-106498-24
                                                                Date:
                                                                September 30, 2024

 In Re: ----------------------------------------------------
 ----------------------




LEGEND

Taxpayer A                          =        ------------------------------------------------------------------------
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Taxpayer B                          =        ------------------------------------------------------------------------
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Parent                              =        ------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Subsidiary A                        =        ----------------------------------------
Subsidiary B                        =        -----------------------------------------
Subsidiary C                        =        ----------------------------------
Company                             =        --------------------------------------------------------------
Country A                           =        ----------
Country B                           =        ------------------
County                              =        ---------
Date 1                              =        ---------------------
Date 2                              =        ---------------------
Date 3                              =        -------------------
State A                             =        -------------
State B                             =        --------
Region                              =        ---------------------------

Dear ------------:
PLR-106498-24                                        2

       This letter responds to your request, dated Date 1, seeking permission to
aggregate separate nonoperating mineral interests under § 614(e) of the Internal
Revenue Code and § 1.614-5(d) of the Income Tax Regulations.1 The request is
submitted with respect to nonoperating mineral interests held in mineral properties
located within Region of State B.

                                     FACTUAL BACKGROUND

        Taxpayer B represents the following facts:

       Taxpayer B is a State A corporation and is a wholly-owned subsidiary of
Taxpayer A, which is also a State A corporation. Taxpayer A is a wholly-owned
subsidiary of Parent, also a State A Corporation. Taxpayer A wholly owns the
membership interests of Subsidiary A, Subsidiary B, and Subsidiary C, which are all
treated as disregarded entities for U.S. federal income tax purposes. Taxpayer A,
Taxpayer B, and Parent are an affiliated group of corporations that file a consolidated
U.S. federal income tax return with Parent serving as the common parent. Parent is
wholly-owned by Company. Company is a Country A corporation, and is publicly traded
in Country A and Country B.

        Taxpayer B acquires mineral, oil, and natural gas royalties, and other
nonoperating mineral interests worldwide. Taxpayer B does not explore, develop, or
operate on any of the properties in which it owns an interest, relying instead on non-
operating income streams, predominantly royalties on mineral interests, as the basis for
its income. Company prepares its financial statements based on International Financial
Reporting Standards as issued by International Accounting Standards Board.

      The mineral interests that Taxpayer B requests to aggregate are located in
County within Region of State B (“Royalty Interests”).

        For U.S. federal income tax purposes, the Royalty Interests are treated as owned
directly by Taxpayer B. The Royalty Interests were acquired on Date 2 by Taxpayer B
and consist of royalty interests on silver production from various properties within
Region located in State B. Taxpayer B represents that the Royalty Interests afford
Taxpayer B the right to mineral royalties and do not bear the costs of exploration,
development, or production on the properties. Each of the properties at which the
Royalty Interests are located are operated by other unrelated companies. Furthermore,
Taxpayer B represents the interests are located in tracts of land that are either
contiguous, touching at one point (checker-board pattern of ownership), or reasonably
close in proximity to each other. Taxpayer B has submitted tract descriptions and a
map or maps of the properties that show the total area circumscribed by each
aggregation of nonoperating interests requested by Taxpayer B. Taxpayer B considers


1 Unless otherwise specified, all “section” references will be to the Internal Revenue Code, the Income

Tax Regulations, or the Procedure and Administration Regulations.
PLR-106498-24                                 3

these interests to be nonoperating mineral interests because Taxpayer B does not incur
any of the costs of production.

        The request seeks the aggregation of the separate nonoperating mineral
interests within Region such that the separate interests within Region are treated as one
property for U.S. federal income tax purposes. That aggregation would enable
Taxpayer B to compute their cost depletion deduction in accordance with §§ 611 and
612 and § 1.611-2. Taxpayer B represents the aggregation of the nonoperating
interests in Region is necessary to compute cost depletion because reserve information
is not available to Taxpayer B on a separate property-by-property basis. In order to
determine the appropriate reserves for each property, Taxpayer B will generally be
required to rely on publicly available information and life of reserve reports provided by
the properties' operators. Taxpayer B and Corporation will rely on the same reserve
information to compute book cost depletion in the aggregations in the preparation of
Corporation's financial statements and regulatory filings. Granting permission to
aggregate the nonoperating mineral interests at each of the areas into separately
aggregated properties will reduce the administrative burden in calculating depletion and
allow Taxpayer B to implement consistent treatment for financial accounting and U.S.
federal income tax purposes.

        Taxpayer B represents that a principal purpose of submitting the request for the
aggregation of royalty interests held at each property is not the avoidance of tax.
Taxpayer B supports this representation with two justifications. First, the interests
subject to this ruling request do not bear the costs of exploration, development, or
production of the properties. Therefore, it is highly unlikely that the percentage
depletion deduction for each interest would be subject to the taxable income limitation
contained in § 1.613-5, as only general and administrative costs plus any severance
and ad valorem taxes will be allocated to each interest for the purpose of computing the
taxable income limitation. Aggregating the nonoperating mineral interests within Region
is not expected to alter this result, as no additional percentage depletion deductions are
expected to be allowed if permission to aggregate is granted. Second, aggregating the
interests will not alter the total amount of cost depletion deductions allowed at each
property over its life, as the total cost depletion deductions allowed for a property cannot
exceed the depletable tax basis allocated to the interests at that property. Accordingly,
no cost depletion deductions in excess of those to which Taxpayer B would otherwise
be entitled in the absence of such aggregations are expected to result from the
requested Royalty Interests aggregations.

                                 RULING REQUESTED

       Pursuant to § 1.614-5(d), Taxpayer B requests to aggregate the separate
nonoperating mineral interests with respect to the Royalty Interests within Region, such
that each of the properties described above is treated as one property.
PLR-106498-24                                 4




                                  LAW AND ANALYSIS

       In the case of mines, wells, and other natural deposits, § 614(a) and § 1.614-
1(a)(1) define the term “property” to mean each separate interest owned by the taxpayer
in each mineral deposit in each separate tract or parcel of land.

        Section 1.614-1(a)(2) defines the term “interest” as an economic interest in a
mineral deposit. It includes working interests or operating interests, royalties, overriding
royalties, net profits interests, and, to the extent not treated as loans under § 636,
production payments.

       Section 614(e)(1) provides that 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 a showing by the taxpayer that
a principal purpose of forming the aggregation is not the avoidance of tax, permit the
taxpayer to treat all such interests as one property for all subsequent taxable years
unless the Secretary consents to a different treatment.

       Section 614(e)(2) and § 1.614-5(g) define the term “nonoperating mineral
interests” to include only interests described in § 614(a) that are not operating mineral
interests within the meaning of § 1.614-2.

       Section 1.614-2(b) defines the term “operating mineral interest” to mean a
separate mineral interest as described in § 614, in respect of which the costs of
production are required to be taken into account by the taxpayer for purposes of
computing the limitation of 50 percent of taxable income from the property in
determining the deduction for percentage depletion under § 613, or such costs would be
so required to be taken into account if the mine, well, or other natural deposit were in
the production stage. The term does not include royalty interests or similar interests,
such as production payments or net profits interests.

        Section 1.614-5(d) provides that upon proper showing to the Commissioner, a
taxpayer who 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, shall be
permitted, under § 614(e), to form an aggregation of all such interests in each separate
kind of mineral deposit and treat such aggregation as one property. Permission shall be
granted by the Commissioner only if the taxpayer establishes that a principal purpose in
forming the aggregation is not the avoidance of tax. The fact that the aggregation of
nonoperating mineral interests will result in a substantial reduction in tax is evidence
that the avoidance of tax is a principal purpose of the taxpayer. An aggregation formed
under § 1.614-5(d) shall be considered as one property for all purposes of the Internal
Revenue Code. In no event may nonoperating interests in tracts or parcels of land that
PLR-106498-24                                 5

are not adjacent be aggregated and treated as one property. The term “two or more
adjacent tracts or parcels of land” means tracts or parcels of land that are in reasonably
close proximity to each other depending on the facts and circumstances of each case.
Adjacent tracts or parcels of land do not necessarily have any common boundaries, and
may be separated by intervening mineral rights.

         Section 1.614-5(e)(1) provides that an application for permission to aggregate
separate nonoperating interests under § 614(e) and § 1.614-5(d) must be made in
writing to the Commissioner and must be filed within 90 days after the beginning of the
first taxable year beginning after December 31, 1957, for which aggregation is desired
or within 90 days after the acquisition of one of the nonoperating mineral interests that is
to be included in the aggregation, whichever is later.

        Section 1.614-5(e)(4) provides that the application for permission to aggregate
nonoperating mineral interests under § 614(e) and § 1.614-5(d) shall include a complete
statement of the facts upon which the taxpayer relies to show that the avoidance of tax
is not a principal purpose of forming the aggregation. Such application shall also
include a description of the nonoperating mineral interests within the tract or tracts of
land involved. A general description, accompanied by maps appropriately marked,
which accurately circumscribes the scope of the aggregation and shows that the
taxpayer is aggregating all the nonoperating mineral interests in a particular kind of
mineral deposit within the tract or tracts of land involved will be sufficient. If the
Commissioner grants permission, a copy of the letter granting such permission shall be
attached to the taxpayer’s return for the first taxable year for which such permission
applies. If the taxpayer has already filed such return, a copy of the letter of permission
shall be filed with the district director for the district in which such return was filed and
shall be accompanied by an amended return or returns if necessary or, if appropriate, a
claim for credit or refund.

      Section 1.614-5(e)(5) provides that the election to aggregate separate
nonoperating mineral interests under § 614(e) and § 1.614-5(d) is binding upon the
taxpayer for the first taxable year for which made and for all subsequent taxable years
unless consent to make a change is obtained from the Commissioner.

Therefore, to obtain permission, the taxpayer must:

   1) Apply for permission within 90 days after the beginning of the first taxable year
      for which aggregation is desired, or within 90 days after the acquisition of one of
      the properties to be included in the aggregation (§ 1.614-5(e)(1)).
   2) Provide maps, descriptions of the nonoperating interests, and a complete
      statement of the facts (§ 1.614-5(e)(4)).
   3) Establish that the principal purpose for forming the aggregation is not tax
      avoidance.
PLR-106498-24                                6

   A substantial reduction in taxes is evidence that avoidance of taxes is the principal
purpose (§§ 1.614-5(d) and 1.614-5(e)).

      Taxpayer B represents that the Royalty Interests were acquired on Date 2.
Pursuant to § 1.614-5(e)(1), Taxpayer has until Date 3 to submit a timely application to
aggregate the Royalty Interests. This request was filed on Date 1.

       Taxpayer B represents that each of the Royalty Interests are “nonoperating
mineral interests” as that term is defined in § 1.614-5(g), and that the interests are
interests that do not bear the costs of exploration, development, or production.
Taxpayer B also represents that the interests at each property are owned in two or more
tracts or parcels of land that are “adjacent” or “in reasonably close proximity to each
other” as provided in § 1.614-5(d). Finally, Taxpayer B represents that the maps for
each property included within the ruling request demonstrate that the nonoperating
interests at each distinct area are in reasonably close proximity to each other, as these
interests are either contiguous, touch at a corner, or are separated by intervening
mineral rights but included in a single operating mineral interest.

      Taxpayer B represents that an abandonment loss on any aggregated
nonoperating mineral interest will not be taken until all the mineral rights in the entire
aggregated or combined distinct properties are proven to be worthless or until the entire
aggregated or combined distinct properties are disposed of or abandoned pursuant to §
1.614-6(d).

       Lastly, Taxpayer B represents that the principal purpose of forming the requested
aggregation at each property is not tax avoidance. The purpose of forming the
requested aggregation is to reduce administrative burden in calculating depletion and
allow Taxpayer B to implement consistent treatment for financial accounting and federal
income tax purposes.

       Based on the representations made and consideration of the descriptions and
maps submitted, we conclude that the requirements of § 1.614-5 have been met.
Based solely on the facts and representations submitted, we grant consent for Taxpayer
B to aggregate the separate nonoperating mineral interests in Royalty Interests, such
that the nonoperating mineral interests are treated as a single property for U.S. federal
income tax purposes.

       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. Specifically, we express or imply no opinion
concerning Taxpayer B’s calculation of depletion or whether Taxpayer B’s interests in
the properties are economic interests. This ruling is conditioned on each royalty interest
qualifying as an economic interest under § 611 before the aggregation. General
descriptions of the nonoperating interests accompanied by maps are to be on file with
the books and other records that are necessary for examination by the Service.
PLR-106498-24                                           7


      The rulings contained in this letter are directed only to the taxpayer requesting it.
Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

      The rulings contained in this letter are based upon information and
representations submitted by Taxpayer B 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 B’s authorized representatives. We are also 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,



                                                  Rika Valdman
                                                  Senior Technician Reviewer, Branch 6
                                                  Office of Associate Chief Counsel
                                                  (Passthroughs & Special Industries)
Enclosure:
   Copy for § 6110 purposes

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