Rev. Rul. 65-296

The Internal Revenue Service will follow the decision of the U.S. Court of Appeals for the Fifth Circuit in United States v. Marvin Shurbet, et ux. , 347 Fed.(2d) 103 (1965), in the disposition of cases involving taxpayers in the Southern High Plains of Texas and New Mexico who extract ground water from the Ogallala formation beneath their land for irrigation purposes.

In that case, the court held that the taxpayers are entitled to a cost depletion deduction for the exhaustion of their capital investment in the ground water extracted and disposed of by them in their business of irrigation farming. The court specifically stated, however, that its decision was not meant to furnish a precedent for the allowance of cost depletion except under the peculiar conditions of the Southern High Plains.

Accordingly, cost depletion will be allowed to taxpayers in the Southern High Plains under facts similar to those in the Shurbet case. However, taxpayers claiming cost depletion on underground water will be required to prove both their depletion basis (especially where the water deposit was acquired with the purchase of the land for a single price) and the amount of exhaustion of the water deposit beneath their land during the taxable year.

¹ Also released as Technical Information Release No. 780, dated Nov. 19, 1965.