Excess percentage depletion AMT - what does property mean?

• Author: Dutt, Wayne E.

The Federal Circuit Court of Appeals recently held in Hill, Fed. Cir., 9/11/91, aff'g Cl. Ct., 1990, that the tax preference item defined by old Sec. 57(a)(8) (currently Sec. 57(a)(1)) as in force during 1981 and 1982 did not produce a tax preference item until the oil and gas percentage depletion exceeded both the depletable and depreciable bases of the producing property. The IRS unsuccessfully contended that property meant only depletable property, so that the adjusted basis of lease and well equipment could not be used in determining whether excess depletion had occurred.

The adjusted current earnings (ACE) adjustment under Sec. 56(g)(4)(5) permits only a cost depletion deduction. Accordingly, 75% of the excess of percentage depletion over cost depletion will be subject to the alternative minimum tax (AMT).

The Hill decision will be of particular interest to coal and hardrock mining operators who frequently have large property aggregations usually based on the operating unit, as well as significant expenditures for mining equipment. Application of the Hill decision to these mining operations will defer the imposition of the AMT on excess percentage depletion, particularly if additions are being made to the property unit. However, as noted, the ACE adjustment must be considered.

It appears that the Service's position cannot be supported unless the Code and the regulations are changed. Also to be considered is IRS Letter Ruling 9126009, which explained that a separate AMT...