Title 61--REVENUE DEPARTMENT OF REVENUE [61 PA. CODE CH. 125] Allowance of Deduction for Cost Depletion and Percentage Depletion [36 Pa.B. 959] The Department of Revenue (Department) has adopted a statement of policy under § 3.2 (relating to statements of policy). The statement of policy adds §§ 125.51 and 125.52 (relating to allowance of deduction for cost depletion; and percentage depletion) to read as set forth in Annex A. This statement of policy takes effect immediately upon publication in the Pennsylvania Bulletin.
This statement of policy is promulgated by the Department to clarify the scope and application of allowances of deductions for cost depletion to the Personal Income Tax. The allowance of deductions for percentage depletion is not generally acceptable by standards of the accounting profession and constitutes an unconstitutional item of tax preference under the Pennsylvania Constitution after the cost of recoverable units has been fully recovered. In addition, the Department is defining the allowable set of circumstances for a deduction for percentage depletion.
Specific questions regarding information provided in this statement of policy should be directed to the Department of Revenue, Office of Chief Counsel, Dept. 281061, Harrisburg, PA 17128-1061.
(Editor's Note: The regulations of the Department, 61 Pa. Code Chapter 125, are amended by adding a statement of policy in §§ 125.51 and 125.52 to read as set forth in Annex A.)
GREGORY C. FAJT,
SecretaryFiscal Note: 15-432. No fiscal impact; (8) recommends adoption.
Annex A TITLE 61. REVENUE PART I. DEPARTMENT OF REVENUE Subpart B. GENERAL FUND REVENUES ARTICLE V. PERSONAL INCOME TAX CHAPTER 125. PERSONAL INCOME TAX PRONOUNCEMENTS--STATEMENTS OF POLICY DEPLETION § 125.51. Allowance of deduction for cost depletion.
(a) General rule. In the case of mines, oil and gas wells, other natural deposits, and timber, there will be allowed as a deduction in computing income a reasonable allowance for depletion. In any case in which it is ascertained as a result of operations or development work that the recoverable units are greater or less than the prior estimate thereof, the prior estimate (but not the basis for depletion) will be revised and the allowance under this section for subsequent taxable years will be based on the revised estimate.
(b) Recoverable units. Recoverable units are the number of units (for example--tons, pounds, ounces or barrels) of minerals, oil or gas in the ground and economically worth extracting, estimated according to the best available information and industry standards.
(c) Special rules.
(1) Leases. In the case of a lease, the deduction under this section will be apportioned between the lessor and lessee in accordance with Federal Income Tax requirements.
(2) Life tenant and remainderman. In the case of property held by one person for life with remainder to another person, the deduction under this section will be computed as if the life tenant were the absolute owner of the property and will be allowed to the life tenant.
(3) Property held in trust. In the case of property held in trust, the deduction under this section will be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of those provisions, on the basis of the trust income allocable to each.
(4) Property held by estate. In the case of a decedent's estate, the deduction under this section will be apportioned between the estate and the heirs, legatees and devisees on the basis of the income of the estate allocable to each.
(5) Basis for depletion. The basis on which depletion is to be allowed in respect of any property will be the adjusted basis for the purpose of determining the gain upon the sale or other disposition of the property.
§ 125.52. Percentage depletion.
(a) Deduction. A deduction for percentage depletion will be allowed only in the following set of circumstances:
(1) The deduction is allowable in computing Federal taxable income.
(2) Insufficient information is available to estimate the amount of recoverable units in accordance with industry standards.
(3) The cost of the recoverable units is fixed and certain.
(4) The cost of the recoverable units has not been fully recovered.
(b) Effective date. This section will apply for taxable years beginning on or after January 1, 2005.
[Pa.B. Doc. No. 06-330. Filed for public inspection February 24, 2006, 9:00 a.m.]
