Partnership could aggregate royalty interests in three adjacent mineral leases

Plain-English summary

A partnership acquired royalty interests covering three adjacent mineral
leases and used cost depletion, but it lacked reserve information needed to
calculate depletion separately by property. It learned only after the filing
deadlines that additional leases had begun production, so it requested late
permission to aggregate the interests. The partnership represented that the
aggregations would not reduce tax and were sought to reduce administrative
burden and align tax and financial-accounting treatment. The IRS granted filing
relief and approved aggregation first for two leases and later for all three,
effective on the requested dates. Each aggregation is binding for later years
unless the IRS consents to a change, and each royalty must qualify as an
economic interest before aggregation.

Ruling snapshot

• Question: May the partnership file late and aggregate its nonoperating mineral interests in adjacent leases?
• Outcome: Approved for both requested aggregations
• Key authorities: IRC §§ 611, 612, and 614(e); Treas. Reg. §§ 1.611-2, 1.614-5, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202407003 Third Party Communication: None
Release Date: 2/16/2024 Date of Communication: Not Applicable
Index Number: 614.04-00, 9100.00-00
Person To Contact:
--------------- -------------------, ID No. -----------------
----------------------------------------- Telephone Number:
--------------------------------------------- --------------------
------------------------------------ Refer Reply To:
---------------------------- CC:PSI:B6
--------------------------- PLR-111072-23
PLR-111073-23
In Re: ----------------------------------------- Date:
November 15, 2023

LEGEND

Taxpayer = -----------------------------------------------------------------
Corporation 1= ----------------------------
Corporation 2= -----------------------------
Corporation 3= ------------------------------------
State = -------------
Location = ----------------------
Lease 1 = --------------------------------
Lease 2 = -------------------------------
Lease 3 = -------------------------------
Date 1 = ---------------------
Date 2 = ---------------------
Date 3 = ---------------------
Date 4 = ------------------
Date 5 = ----------------------
Date 6 = ------------------
Date 7 = ------------------
Date 8 = ----------------
Date 9 = ----------------
Date 10 = -----------------
Date 11 = -----------------
Date 12 = ------------------
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Date 13 = --------------------
Date 14 = ------------------
Year 1 = -------
Year 2 = -------
a = ------------------------
b = ------------------------
c = ------------------------
d = ------------------------
e = --------------------
f = ------------------------
A = -------
B = -----------

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

  This letter replies to the Taxpayer’s ruling request, dated Date 12. The Taxpayer

has requested the following rulings:

  (1) An extension of time under § 301.9100-3 of the Procedure and Administration

Regulations to submit an application for 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

   (2) In the event that the relief requested in (1) is granted, permission under

§ 614(e) and § 1.614-5(d) to aggregate nonoperating mineral interests pursuant to the
followings Leases:

            (a) Lease 1 and Lease 2, effective Date 1; and
            (b) Lease 1, Lease 2, and Lease 3, effective Date 2.

   The request is submitted in respect of nonoperating mineral interests held in

Location.

                                  FACTUAL BACKGROUND

    Taxpayer represents the following facts:

   Taxpayer is organized as a limited liability company, treated as a partnership,

and incorporated pursuant to the laws of State.

  Taxpayer is organized primarily for the object and purpose of making

investments in assets of all types. Taxpayer is a calendar year taxpayer, utilizes
1
Unless otherwise specified, all “section” references will be to the Internal Revenue Code, the Income
Tax Regulations, or the Procedure and Administration Regulations.
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the accrual method of accounting and prepares its financial statements using the U.S.
Generally Accepted Accounting Principles.

   On Date 3, Taxpayer entered into a royalty agreement with Corporation 1, a

corporation formed under the laws of Location. Taxpayer paid consideration of a to
Corporation 1 in exchange for future royalties on certain lands based on the sale of A
that has been converted from the B extracted from lands in the leases covered by the
royalty agreement. Corporation 1 acted as the developer, producer, and marketer of B.
Shortly after Date 3, Taxpayer inquired with Corporation 1 which leases were actively
producing B. On Date 13, Corporation 1 notified Taxpayer that the only lease actively
producing B is Lease 1. On Date 14, Corporation 3 confirmed that Lease 1 is the only
lease producing B.

   On Date 4, Taxpayer and Corporation 1 amended the royalty agreement,

whereby Taxpayer paid Corporation 1 an additional b in exchange for an increased
royalty rate. The total consideration Taxpayer paid to Corporation 1 was c.

  On Date 5, Corporation 1 and Corporation 2 amalgamated to form Corporation 3.

Corporation 3 became the successor royalty grantor of the royalty agreement with
Taxpayer with ultimate responsibility for economic performance to Taxpayer.

  On Date 6, Corporation 3 indicated to Taxpayer that Lease 3 began producing B

on Date 7. On Date 8, Corporation 3 indicated to Taxpayer that Lease 2 has been
producing B since Date 9.

   For U.S. federal income tax purposes, the properties covered in Lease 1, Lease

2, and Lease 3, consist of mineral royalty interests, and each property has both
currently producing and currently nonproducing portions. All the Leases that Taxpayer
seeks to aggregate in this request are located in Location and classified by Corporation
3 as producing lands, for which Corporation 3 actively extracts B.

    Taxpayer is seeking permission to aggregate Lease 1 and Lease 2 effective on

Date 1 because both Lease 1 and Lease 2 were producing B during taxable Year 1.
Taxpayer was not aware that it was required to submit an application for permission to
aggregate separate nonoperating mineral interests in Lease 1 and Lease 2 until Date 8.
Taxpayer is also seeking permission to aggregate Lease 3 with Lease 1 and Lease 2
effective Date 2 because Lease 3 began producing B during taxable Year 2. Taxpayer
was not aware that it was required to submit an application for permission to aggregate
separate nonoperating mineral interests in Lease 1, Lease 2, and Lease 3 until Date 6.
Taxpayer acknowledges that its aggregation requests are filed after the deadline set
forth in § 1.614-5(e), and as such, Taxpayer is requesting an extension under
§ 301.9100-3.
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  Taxpayer provided a map showing that the lands included in Lease 1, Lease 2,

and Lease 3 are contiguous.

   Taxpayer notes that each of the properties is currently producing B or is

expected to be producing B in the near future on at least some portion of the property;
however, the royalty interests acquired by Taxpayer do not provide any royalties on
production. Taxpayer has claimed cost depletion in respect of the royalty payments
received from Corporation 3 and has not claimed percentage depletion deductions in
respect of any properties.

   These requests seek the aggregation of the nonoperating mineral interests held

at each of the properties, each treated as one property for U.S. federal income tax
purposes, to enable Taxpayer to compute its cost depletion deduction in accordance
with §§ 611 and 612 and § 1.611-2. Aggregation of the royalty interests at the
properties is necessary to compute cost depletion because reserve information is not
available to Taxpayer on a separate property-by-property basis. The adjusted basis for
the aggregated property that will be used to calculate Taxpayer’s cost depletion will be
the cost allocated to the leases with current production. Taxpayer’s combined adjusted
basis in Lease 1 and Lease 2 is equal to d, the allocated portion of consideration paid to
Corporation 1. Taxpayer’s adjusted basis in Lease 3 is equal to e, the allocated portion
of consideration paid to Corporation 1. Taxpayer’s combined adjusted basis in Lease 1,
Lease 2, and Lease 3 is equal to f. Taxpayer represents that granting permission to
aggregate nonoperating mineral interests at each of the properties would reduce
Taxpayer’s administrative burden in calculating depletion and would allow Taxpayer to
implement consistent treatment for financial accounting and U.S. federal income tax
purposes.

  Taxpayer represents that tax avoidance is not the principal purpose of its

aggregation requests and provides that the two separate requested aggregations do not
reduce Taxpayer's federal tax liability. Taxpayer further provides that the sole reason in
requesting the aggregation is to ease Taxpayer's administrative burden of calculating
the depletion deduction for federal income tax purposes.

                            RULINGS REQUESTED

    1. Whether Taxpayer is entitled to an extension of time, under § 301.9100-3 to
     submit an application for permission to aggregate separate nonoperating
     mineral interests under § 614(e) and § 1.614-5(d).

    2. If the ruling requested in (1) is granted, whether Taxpayer is entitled under
     § 614(e) and § 1.614-5(d) to aggregate nonoperating mineral interests
     pursuant to the followings Leases:

         (a) Lease 1 and Lease 2, effective Date 1; and

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         (b) Lease 1, Lease 2, and Lease 3, effective Date 2.

                             LAW AND ANALYSIS

1. Ruling #1: Request for Extension of Time under § 301.9100-3

   Under § 614(e) and § 1.614-5(d), a taxpayer that 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 may request permission to aggregate all the interests
and treat them as one property.

    Section 1.614-5(e) 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.

    Under § 301.9100-1(c), the Commissioner in exercising the Commissioner's

discretion may grant a reasonable extension of time under the rules set forth in
§§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election
(but no more than six months except in the case of a taxpayer who is abroad), under all
subtitles of the Code, except subtitles E, G, H, and I.

    Sections 301.9100-2 and 301.9100-3 provide the standards the Commissioner

will use to determine whether to grant an extension of time under § 301.9100-1(a) to
make a regulatory election. Section 301.9100-2 provides automatic extensions of time
for making certain elections. Section 301.9100-3 provides extensions of time for
making elections that do not meet the requirements of § 301.9100-2.

   Requests for relief under § 301.9100-3 will be granted when the taxpayer

provides the evidence to establish to the satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and the grant of relief will not
prejudice the interests of the Government.

     Here, based on the Taxpayer’s representations, Taxpayer was not timely aware

of the need to submit an aggregation request for Lease 1 and Lease 2, effective Date 1;
or an aggregation request for Lease 1, Lease 2, and Lease 3, effective Date 2. Under
§ 1.614-5(e), the deadline to file an aggregation request for Lease 1 and Lease 2 was
on Date 10. However, Taxpayer did not learn of the need to submit an aggregation
request until Date 8, when Corporation 3 notified Taxpayer that Lease 2 has been
producing B since Date 9. Date 8 was after Date 10. Under § 1.614-5(e), the deadline
to file an aggregation request for Lease 3 with Lease 1 and Lease 2 was on Date 11.
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However, Taxpayer did not learn of the need to submit an aggregation request until
Date 6, when Corporation 3 notified Taxpayer that Lease 3 began producing B on Date

7. Date 6 was after Date 11.

   Based solely on the information submitted and the representations made, we
   conclude that Taxpayer acted reasonably and in good faith and that the relief does not
   prejudice the interests of the Government, as the aggregation request does not provide
   a tax benefit to the Taxpayer. Therefore, we conclude that the requirements of
   § 301.9100-3 have been satisfied. Accordingly, Taxpayer is granted an extension of
   time to submit an application for permission to aggregate separate nonoperating mineral
   interests under § 614(e) and § 1.614-5(d).

   We consider Taxpayer's ruling request, dated Date 12, to be a timely submitted
   application for permission to aggregate nonoperating mineral interests.

   2. Ruling #2: Aggregation Requests

   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 of 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) 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
   PLR-111072-23 7
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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 interest 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
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 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 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.
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   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 the request is made and for all subsequent
taxable years unless consent to make a change is obtained from the Commissioner.

   Taxpayer has represented that it acquired multiple royalty interests through

Leases 1, 2, and 3. Taxpayer also represents that the interests at each property are
owned in two or more tracts of parcels of land that are “adjacent” or “in reasonably close
proximity to each other” as provided in § 1.614-5(d). Additionally, Taxpayer represents
that the maps for each property included in 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.

   Finally, Taxpayer 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 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 § 614(e) and § 1.614-5 have
been met. Based solely on the facts and representations submitted, we grant consent
for Taxpayer to:

  (a) Aggregate the separate nonoperating mineral interests in Lease 1 and Lease
      2, effective Date 1, such that each of the properties is treated as one property
      for U.S. federal income tax purposes. The election applies for Taxpayer's
      taxable year ending after Date 1 and all subsequent taxable years unless
      Taxpayer obtains the Commissioner's consent to make a change.

  (b) Aggregate the separate nonoperating mineral interests in Lease 1, Lease 2,
      and Lease 3, effective Date 2, such that each of the properties is treated as
      one property for U.S. federal income tax purposes. The election applies for
      Taxpayer's taxable year ending after Date 2 and all subsequent taxable years
      unless Taxpayer obtains the Commissioner's consent to make a change.

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                                    CONCLUSION

   Based on the foregoing, we conclude that:

   (1) Taxpayer is granted an extension of time to submit an application for
       permission to aggregate separate nonoperating mineral interests under
       § 614(e) and § 1.614-5(d).

   (2) Taxpayer is granted consent to:

          (a) Aggregate the separate nonoperating mineral interests in Lease 1 and
              Lease 2, effective Date 1, such that each of the properties is treated as
              one property for U.S. federal income tax purposes. The election
              applies for Taxpayer's taxable year ending after Date 1 and all
              subsequent taxable years unless Taxpayer obtains the
              Commissioner's consent to make a change.

          (b) Aggregate the separate nonoperating mineral interests in Lease 1,
              Lease 2, and Lease 3, effective Date 2, such that each of the
              properties is treated as one property for U.S. federal income tax
              purposes. The election applies for Taxpayer's taxable year ending
              after Date 2 and all subsequent taxable years unless Taxpayer obtains
              the Commissioner's consent to make a change.

   Except as specifically set forth above, no opinion is expressed or implied

concerning the federal income tax consequences of the above-described facts under
any other provision of the Code or regulations. Specifically, we neither express nor
imply any opinion concerning Taxpayer’s calculation of depletion or whether Taxpayer’s
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 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 and accompanied by penalty of perjury
statements 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.
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     In accordance with the power of attorney on file with this office, a copy of this

letter is being sent to your 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,




                                      Maggie M. Stehn
                                      Senior Counsel, Branch 6
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosure:
Copy for § 6110 purposes

cc: