Mineral royalty owners may aggregate qualifying interests by property

Plain-English summary

Two related corporations owned royalty interests in several U.S. mining and oil and gas properties and sought to aggregate the interests at each property for depletion purposes. They represented that the interests were nonoperating, were in adjacent tracts or tracts reasonably close to each other, and were not being aggregated principally to avoid tax. Aggregation would let them use common reserve information and reduce the administrative burden of computing cost depletion. Based on the submitted facts, descriptions, and maps, the IRS allowed the separate interests at each listed property to be treated as one property. The consent depended on each royalty interest qualifying as an economic interest under section 611, and the IRS did not rule on the taxpayers' depletion calculations.

Ruling snapshot

• Question: Could the taxpayers aggregate separate nonoperating mineral interests at each listed property?
• Outcome: Approved, subject to each royalty interest qualifying as an economic interest.
• Key authorities: IRC §§ 611, 612, 613, 614(e), 636; Treas. Reg. §§ 1.614-1, 1.614-2, 1.614-5

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201746019                                              Third Party Communication: None
Release Date: 11/17/2017                                       Date of Communication: Not Applicable
Index Number: 614.04-00
                                                               Person To Contact:
---------------------                                          -----------------------, ID No -----------------
-----------------------------                                  Telephone Number:
----------------------------------------------                 -------------- -------
----------------------------------                             Refer Reply To:
                                                               CC:PSI:B06
Re: --------------------------------------------               PLR-109221-17
    EIN: ----------------                                      Date:
    ---------------------------------------------              August 14, 2017
    EIN: ----------------
    Request to aggregate nonoperating
mineral interests

LEGEND

Taxpayer A                 =        ---------------------------------------------------------------------------------
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Taxpayer B                 =        ---------------------------------------------------------------------------------
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Holding Company =                   ---------------------------------------------------------------------------------
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Corporation                =        ---------------------------------------------------------------
Date 1                     =        --------------------
Date 2                     =        --------------------------
Date 3                     =        --------------------
Date 4                     =        --------------------
Date 5                     =        ------------------
State                      =        -------------
Year 1                     =        -------
Year 2                     =        -------
Year 3                     =        -------
a                          =        --
b                          =        --
c                          =        --
A                          =        ---------------------------------------------------------------------------------
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B                          =        ---------------------------------------------------------------------------------
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C                          =        ---------------------------------------------------------------------------------
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D                          =        ---------------------------------------------------------------------------------
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PLR-109221-17                                             2

E                          =        ---------------------------------------------------------------------------------
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F                          =        ------------------------------------------------------------------
G                          =        --------------------------------------------------------------
H                          =        ---------------------------------------------------------------------------------
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I                          =        ---------------------------------------------------------------------------------
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J                          =        ---------------------------------------------------------------------------------
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K                          =        ----------------------------------------------------

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

        This letter replies to a letter, dated Date 1, and revised by letter of Date 5, in
which Taxpayer A requests permission to form aggregations of separate nonoperating
mineral interests under § 614(e) of the Internal Revenue Code (Code) and § 1.614-5(d)
of the Income Tax Regulations (Regulations) on behalf of itself and Taxpayer B. The
request is submitted with respect to nonoperating mineral interests held in a mining
properties and b oil and gas field(s), each located in the United States.

         The facts and representations submitted are summarized as follows:

       Taxpayer A is incorporated pursuant to the laws of State and is a wholly owned
subsidiary of Holding Company, which is also incorporated pursuant to the laws of
State. Taxpayer B is a wholly-owned subsidiary of Taxpayer A that was incorporated
pursuant to the laws of State. Together, Holding Company, Taxpayer A, and Taxpayer
B are an affiliated group of corporations that file a consolidated U.S. federal income tax
return with Holding Company serving as the common parent. Holding Company is
wholly-owned by Corporation.

        Corporation, along with its subsidiaries identified in this letter and its non-U.S.
subsidiaries, is an international mineral resource and investment company that acquires
mineral, oil, and natural gas royalties and other nonoperating mineral interests
worldwide. Corporation does not explore, develop, or operate on any of the properties
in which it holds interests, relying instead on passive income streams, predominantly
royalties on mineral interests, as the basis of its income. Corporation prepares its
financial statements based on International Financial Reporting Standards as issued by
the International Accounting Standards Board.

       The mineral interests that are the subject of the request are located in the
following areas:
PLR-109221-17                                  3

1. A
2. B
3. C
4. D
5. E
6. F
7. G
8. H
9. I

        For U.S. federal income tax purposes, all of these mineral interests are owned
directly by Taxpayer A, with the exception of the interests at the C project, which are
owned directly by Taxpayer B.

       With the exception of the I interests, the nonoperating mineral interests at the
properties listed in this letter consist of gold and other mineral royalty interests including
gross royalties and net smelter return royalty interests. While each of these properties
containing gold and other mineral royalty interests was acquired by Taxpayer A or
Taxpayer B at different times between Year 1 and Year 2, each of the properties are
nonproducing. Taxpayer A and Taxpayer B have not claimed cost depletion deductions
with respect to any of the nonproducing properties. Taxpayer A does note that D
project is currently producing, however, the royalty interests acquired by Taxpayer A do
not provide any royalties on gold production until Year 3 and so Taxpayer A has not
claimed any depletion allowance on this property. Taxpayer A has claimed percentage
depletion with respect to advanced minimum royalties payments received from the
operator of the A properties, but otherwise Taxpayer A and Taxpayer B have not
claimed percentage depletion deductions with respect to any of the nonproducing
properties. Furthermore, the claimed percentage depletion does not exceed Taxpayer
A’s adjusted tax basis in the interests located at the A mine, and Taxpayer A’s depletion
deductions would have remained unchanged if they had been calculated using the cost
depletion method because the annual minimum royalties were not payments for
production.

        The I interests were acquired on Date 2. These interests consist of nonoperating
oil and gas production royalty interests including overriding royalty interests and fee
royalties. A fee royalty is a payment for production paid to a lessor, in this instance
Taxpayer A. Along with the fee royalties and overriding royalty interests Taxpayer A
received when it acquired the I interests, Taxpayer A also received a possibility of
reverter for all of the operating mineral interests for which it received a fee royalty, with
two exceptions. Taxpayer A received one I interest that is not currently subject to a
lease, J, and the lease associated with K recently expired. Taxpayer A does not at this
time request permission to aggregate the two unleased I interests with the other
acquired I interests.
PLR-109221-17                                 4

       Each production royalty interest held by Taxpayer A and Taxpayer B will be
referred to hereinafter as a “royalty interest.” These royalty interests afford Taxpayer A
and 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,
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 A submitted tract descriptions and a map or maps for each property
that shows the total area circumscribed by each aggregation of nonoperating interests
requested by Taxpayer A and Taxpayer B. Taxpayer A and Taxpayer B consider these
interests to be nonoperating mineral interests and have represented that these interests
are nonoperating mineral interests.

       The request seeks the aggregation of the nonoperating mineral interests held at
each of the c properties into c individual properties, each treated as one property for
U.S. federal income tax purposes, in order to enable Taxpayer A and Taxpayer B to
compute their cost depletion deduction in accordance with §§ 611 and 612 of the Code
and § 1.611-2 of the Regulations. Aggregation of the royalty interests at the c
properties is necessary to compute cost depletion because reserve information is not
available to Taxpayer A and Taxpayer B on a separate property-by-property basis. In
order to determine the appropriate reserves for each property, Taxpayer A and
Taxpayer B will generally be required to rely on publicly available information and life of
mine reports provided by the properties’ operators. Taxpayer A and Taxpayer B, and
their parent, Corporation, will rely on the same reserve information to compute book
cost depletion in the aggregate for each mine in the preparation of Corporation’s
financial statements and regulatory filings. Granting permission to aggregate
nonoperating mineral interests at each of the properties will reduce administrative
burden in calculating depletion and allow Taxpayer A and Taxpayer B to implement
consistent treatment for financial accounting and federal income tax purposes.

       Taxpayer A and Taxpayer B represent 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 A and Taxpayer B make this representation for two
reasons. First, the interests subject to this ruling request do not bear the costs of
exploration, development, or production at 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 of the Regulations, 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
interests at each property is not expected to alter this result, so that no additional
percentage depletion deductions are expected to be allowed if permission to aggregate
is granted. Second, aggregating the interests at each property 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
PLR-109221-17                                   5

allocated to the interests at that property. Accordingly, no cost depletion deductions in
excess of those to which Taxpayer A and Taxpayer B are entitled are expected at each
property.

The following ruling is requested:
       That, pursuant to § 1.614-5(d) of the Regulations, Taxpayer A’s and Taxpayer
B’s application to aggregate the separate nonoperating mineral interests at the c listed
properties such that each of the c listed properties is separately treated as one property
is granted.

                                      Law and Analysis

       In the case of mines, wells, and other natural deposits, § 614(a) of the Code and
§ 1.614-1(a)(1) of the Regulations 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) of the Regulations 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 of the Code, production payments.

       Section 614(e)(1) of the Code 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) of the Code and § 1.614-5(g) of the Regulations 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) of the Regulations defines the term “operating mineral
interest” to mean a separate mineral interest as described in § 614 of the Code, 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) of the Regulations provides that upon proper showing to the
Commissioner, a taxpayer who owns two or more separate nonoperating mineral
PLR-109221-17                                  6

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) of the Code, 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 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) of the Regulations provides that an application for
permission to aggregate separate nonoperating interests under § 614(e) of the Code
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) of the Regulations provides that the application for
permission to aggregate nonoperating mineral interests under § 614(e) of the Code 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) of the Regulations provides that the election to aggregate
separate nonoperating mineral interests under § 614(e) of the Code 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
PLR-109221-17                                7

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 (section 1.614-5(e)(1)).
   2) Provide maps, descriptions of the nonoperating interests, and a complete
      statement of the facts (section 1.614-5(e)(4)).
   3) Establish that the principal purpose for forming the aggregation is not tax
      avoidance. A substantial reduction in taxes is evidence that avoidance of taxes
      is the principal purpose (section 1.614-5(d) and section 1.614-5(e)).

       Taxpayer A represents that the I interests were acquired on Date 2. Therefore,
Taxpayer A has until Date 3 to submit a timely request to aggregate the I interests.
With respect to the interests located at the other a properties, pursuant to § 1.614-
5(e)(1) of the Regulations, Taxpayer A and Taxpayer B should have until Date 4 to
submit a timely application to aggregate the remaining a properties.

        Taxpayer A represents that to the best of Taxpayers’ and Taxpayers’
representatives’ knowledge that the interests owned at each of the c properties are
“nonoperating mineral interests” with the exception of the two unleased I interests as
that term is defined in § 1.614-5(g) of the Regulations, and that the interests are
interests that do not bear the costs of exploration, development, or production.
Taxpayer A also represents that to the best of Taxpayers’ and Taxpayers’
representatives’ knowledge 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) of the Regulations. Additionally, Taxpayer A
represents that to the best of Taxpayers’ and Taxpayers’ representatives’ knowledge
the maps for each property included with the ruling request demonstrate that the
nonoperating interests at each property 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 mine.

       Lastly, Taxpayer A and Taxpayer B represents that to the best of Taxpayers’ and
Taxpayers’ representatives’ knowledge 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 A and 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 of the Regulations
have been met. Based solely on the facts and representations submitted, we grant
consent for Taxpayers to aggregate the separate nonoperating mineral interests at the c
PLR-109221-17                                 8

properties, A, B, C, D, E, F, G, H, and I, such that each of the c properties is separately
treated as one 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 Taxpayers’ calculation of depletion or whether Taxpayers’ interests in the
properties are economic interests. This ruling is conditioned on each royalty interest
qualifying as an economic interest under § 611 of the Code 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.

      The rulings contained in this letter are based upon information and
representations submitted by Taxpayer A 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
Taxpayers’ 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,



                                              Peter C. Friedman
                                              Senior Technician Reviewer, Branch 6
                                              Office of Associate Chief Counsel
                                              (Passthroughs & Special Industries)