IRS Grants Aggregation of Nonoperating Mineral Interests Under § 614(e)

IRS Greenlights Aggregation of Nonoperating Mineral Interests for Depletion Calculations

The IRS has approved a taxpayer’s request to aggregate separate nonoperating mineral interests under Section 614(e) of the Internal Revenue Code, allowing the interests to be treated as a single property for depletion calculations. This ruling, though non-precedential, provides clarity for oil, gas, and mining taxpayers seeking to reduce administrative burdens while aligning federal tax treatment with financial accounting practices.

Taxpayer’s Structure and Reliance on Nonoperating Mineral Interests

The taxpayer is a U.S. corporation incorporated in State A, operating on a calendar-year accrual method. It is a wholly owned subsidiary of Holdco, also incorporated in State A, which serves as the common parent of an affiliated group filing consolidated federal income tax returns. Holdco is owned by Parent, a company organized in Location.

The taxpayer’s business model centers on acquiring nonoperating mineral interests—primarily royalties—without engaging in exploration, development, or production activities. Its income derives predominantly from royalty streams tied to mineral properties worldwide. For financial reporting, Parent prepares consolidated financial statements under International Financial Reporting Standards (IFRS), which require separate classification of nonoperating mineral interests as passive income sources.

Interest A and Interest B: The Mineral Interests at the Heart of the Request

The taxpayer’s request centers on two nonoperating mineral interests—Interest A and Interest B—acquired in County A and County B of State B, respectively. Both interests qualify as nonoperating under § 1.614-5(g), which defines such interests as those where the holder does not bear exploration, development, or production costs.

Interest A was acquired on Date 2 for a purchase price of a, including a contingent payment of b. It consists of an undivided c mineral interest in the property, a d royalty, and an undivided e interest under certain lease agreements. The taxpayer retains the right to receive mineral royalties from Interest A without incurring any costs related to exploration, development, or production on the underlying properties.

Interest B was acquired on Date 3 for a purchase price of f, plus a contingent payment of g. It comprises a h Returns Royalty tied to i properties, with the taxpayer similarly bearing no responsibility for exploration, development, or production expenses associated with these properties. Both interests are geographically distinct but are situated in close proximity within State B, with the properties subject to Interest B operated entirely by unrelated third parties.

Why Aggregation? Taxpayer’s Justification for the Request

The taxpayer sought aggregation of its nonoperating mineral interests in Interest A and Interest B to simplify depletion calculations, citing the impracticality of computing cost depletion on a property-by-property basis. Because the taxpayer lacks access to reserve information for individual properties, it proposed relying on publicly available data and operator reports to determine reserves—an approach it argued would be administratively burdensome without aggregation. The taxpayer also emphasized the need for consistency between financial accounting and federal tax treatment, as it planned to use the same reserve data for book cost depletion in its financial statements and regulatory filings.

To address concerns about tax avoidance, the taxpayer represented that the aggregation requests were not motivated by federal income tax planning. First, it noted that neither Interest A nor Interest B bears exploration, development, or production costs, making it unlikely that percentage depletion deductions would be subject to the taxable income limitation under § 1.613-5. The taxpayer explained that only general and administrative costs, severance taxes, and ad valorem taxes would be allocated to the interests, and aggregating them would not increase the percentage depletion deduction. Second, the taxpayer asserted that aggregation would not alter the total cost depletion deductions over the life of the properties, as the total deductions cannot exceed the depletable tax basis allocated to the interests.

IRS’s Legal Framework: § 614(e) and the Aggregation Rules

The IRS evaluates aggregation requests under § 614(e) of the Internal Revenue Code, which permits taxpayers to treat multiple nonoperating mineral interests as a single property for depletion calculations. Section 614(e) applies to nonoperating interests—defined in § 1.614-5(g) as interests where the taxpayer does not bear exploration, development, or production costs, such as royalties or net profits interests. The aggregation must involve interests in a single tract or adjacent tracts, with "adjacent" interpreted under § 1.614-5(d) as tracts in reasonably close proximity, including those separated by intervening mineral rights.

The regulatory framework in § 1.614-5(d) requires taxpayers to file a written application within 90 days of the first taxable year for which aggregation is desired or within 90 days of acquiring an interest to be included in the aggregation, whichever is later. The application must include a complete statement of facts demonstrating that tax avoidance is not a principal purpose of the aggregation, supported by maps and descriptions of the interests and tracts involved. The IRS places significant emphasis on the proximity of the tracts, as non-adjacent properties cannot be aggregated regardless of their physical separation.

The taxpayer bears the burden of proving that the aggregation is not primarily for tax avoidance, with the IRS noting that a substantial reduction in taxes may serve as evidence of such a purpose. Once granted, the aggregation election is binding for the taxable year in which it is made and all subsequent years unless the IRS consents to a change. The IRS also requires that the aggregation not alter the total depletion deductions over the life of the properties, ensuring that the election does not result in an improper increase in deductions.

IRS Grants the Request: Rationale and Conditions

The IRS granted the taxpayer’s request to aggregate the nonoperating mineral interests in Interest A and Interest B under § 1.614-5, concluding that the taxpayer met all statutory requirements for both properties. The agency based its decision on the proximity of the tracts, the nonoperating nature of the interests, and the absence of a tax avoidance motive, noting that the aggregation was not primarily for reducing taxes. The IRS emphasized that the election did not alter the total depletion deductions over the life of the properties, ensuring no improper increase in deductions.

The ruling is conditioned on the taxpayer attaching the Private Letter Ruling (PLR) to its federal income tax return for the year of election and all subsequent years. The IRS also clarified that it expressed no opinion on the calculation of depletion or whether the interests qualified as economic interests under § 611, disclaiming any judgment on those matters. The ruling is non-precedential and applies only to the requesting taxpayer. The taxpayer must maintain general descriptions of the nonoperating interests, accompanied by maps, in its books and records for IRS examination.

What This Ruling Means for Other Taxpayers in the Oil, Gas, and Mining Industries

This IRS ruling signals a pragmatic approach to aggregation of nonoperating mineral interests under Section 614(e), which permits taxpayers to treat multiple nonoperating interests in the same tract as a single property for depletion purposes. The decision reduces administrative burden by allowing consistent financial and tax reporting for taxpayers holding numerous royalties, overriding royalties, or net profits interests. Taxpayers in oil, gas, and mining industries—particularly those managing extensive royalty portfolios—can now rely on this precedent to streamline depletion calculations, provided they can demonstrate that tax avoidance was not a principal purpose of the aggregation.

The IRS emphasized the need for detailed documentation, including general descriptions of nonoperating interests and accompanying maps, to substantiate aggregation elections. While this ruling is non-precedential and applies only to the requesting taxpayer, it suggests the IRS may be receptive to similar requests when facts align closely with those presented. Industries where this ruling could be particularly relevant include oil and gas royalty owners, mining companies with multiple nonoperating interests, and private equity firms investing in mineral rights. Taxpayers should proceed cautiously, ensuring their structures meet the economic substance requirements and that all elections are filed timely with supporting records.