§1254 — Title 26 Internal Revenue Code | U.S. Code

Summary

When someone disposes of certain oil, gas, geothermal, or other mineral property, part of the gain is worked out as the smaller of two amounts. One amount is the total of past capital costs that were deducted instead of being added to the property's cost, plus any depletion deductions that lowered the property's basis. The other amount is the extra money received (for a sale, exchange, or involuntary conversion) or the property's fair market value (for other kinds of dispositions) minus the adjusted basis. If only part of the property is sold, the rules say how to allocate those past costs: sell a portion, apply the full costs to that part up to the gain; sell an undivided interest, split the costs in proportion. A "section 1254 property" is any mineral property with those kinds of charged costs or depletion adjustments. The past costs must be reduced for items already included in income, and the Treasury can make rules like other recapture laws, including special rules for gains tied to S‑corporation stock.

Title 26, §1254

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)If any section 1254 property is disposed of, the lesser of—

(A)the aggregate amount of—

(i)expenditures which have been deducted by the taxpayer or any person under section 263, 616, or 617 with respect to such property and which, but for such deduction, would have been included in the adjusted basis of such property, and

(ii)the deductions for depletion under section 611 which reduced the adjusted basis of such property, or

(B)the excess of—

(i)in the case of—

(I)a sale, exchange, or involuntary conversion, the amount realized, or

(II)in the case of any other disposition, the fair market value of such property, over

(ii)the adjusted basis of such property,

(2)For purposes of paragraph (1)—

(A)In the case of the disposition of a portion of section 1254 property (other than an undivided interest), the entire amount of the aggregate expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies.

(B)In the case of the disposition of an undivided interest in a section 1254 property (or a portion thereof), a proportionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies.

(3)The term “section 1254 property” means any property (within the meaning of section 614) if—

(A)any expenditures described in paragraph (1)(A) are properly chargeable to such property, or

(B)the adjusted basis of such property includes adjustments for deductions for depletion under section 611.

(4)The amount of the expenditures referred to in paragraph (1)(A)(i) shall be properly adjusted for amounts included in gross income under section 617(b)(1)(A).

(b)Under regulations prescribed by the Secretary—

(1)rules similar to the rule of subsection (g) of section 617 and to the rules of subsections (b) and (c) of section 1245 shall be applied for purposes of this section; and

(2)in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section 751 shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expenditures referred to in subsection (a)(1)(A) of this section.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1988—Subsec. (a)(4). Pub. L. 100–647 added par. (4). 1986—Pub. L. 99–514 amended section generally, substituting “geothermal, or other mineral properties” for “or geothermal property” in section catchline, revising and restating subsec. (a), pars. (1) to (4) as pars. (1) to (3), and reenacting subsec. (b) without change except for substituting “rule of subsection (g)” for “rules of subsection (g)” in par. (1). 1982—Subsec. (b)(2). Pub. L. 97–354 substituted “an S corporation” for “an electing small business corporation (as defined in section 1371(b))”. 1978—Pub. L. 95–618, § 402(c)(3), substituted “oil, gas, or geothermal” for “oil or gas” in section catchline. Subsec. (a)(1), (2). Pub. L. 95–618, § 402(c)(1), substituted “oil, gas, or geothermal property” for “oil or gas property” wherever appearing. Subsec. (a)(3). Pub. L. 95–618, § 402(c)(2), substituted “Oil, gas, or geothermal” for “Oil or gas” in heading and in text substituted “The term ‘oil, gas, or geothermal property’ means” for “The term ‘oil or gas property’ means”.

Statutory Notes and Related Subsidiaries

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

of 1986 Amendment Pub. L. 99–514, title IV, § 413(c), Oct. 22, 1986, 100 Stat. 2229, provided that: “(1) In general.—The

Amendments

made by this section [amending this section and section 617 of this title] shall apply to any disposition of property which is placed in service by the taxpayer after December 31, 1986. “(2) Exception for binding contracts.—The

Amendments

made by this section shall not apply to any disposition of property placed in service after

December 31, 1986, if such property was acquired pursuant to a written contract which was entered into before

September 26, 1985, and which was binding at all times thereafter.”

Effective Date

of 1982 AmendmentAmendment by Pub. L. 97–354 applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as an

Effective Date

note under section 1361 of this title.

Effective Date

of 1978 AmendmentAmendment by Pub. L. 95–618 applicable with respect to wells commenced on or after Oct. 1, 1978, in taxable years ending on or after such date, see section 402(e) of Pub. L. 95–618, set out as a note under section 263 of this title.

Effective Date

Pub. L. 94–455, title II, § 205(e), Oct. 4, 1976, 90 Stat. 1535, provided that: “The

Amendments

made by this section [enacting this section and amending section 163, 170, 301, 312, 341, 453, and 751 of this title] shall apply with respect to taxable years ending after December 31, 1975.”

§1254 Gain From Disposition of Interest in Oil, Gas, Geothermal, or Other Mineral Properties

Summary

Title 26, §1254

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Statutory Notes and Related Subsidiaries

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