Rev. Rul. 67-451

Advice has been requested whether the basis, in ground water in the Ogallala formation under farms located in the Southern High Plains area of Texas and New Mexico, is to be adjusted by the depletion sustained but not allowed in years prior to the issuance of Revenue Ruling 65-296, C.B. 1965-2, 181.

In Revenue Ruling 65-296, the Internal Revenue Service announced that it will follow the decision of the United States Court of Appeals for the Fifth Circuit in United States v. Marvin Shurbet, et ux. , 347 F.2d 103 (1965), and will allow cost depletion to taxpayers in the Southern High Plains under facts similar to those in the Shurbet case.

Revenue Procedure 66-11, C.B. 1966-1, 624, was issued to furnish guidelines for taxpayers entitled to cost depletion deductions for the exhaustion of their capital investment in ground water. Section 3.02 of that Procedure states that taxpayers claiming cost depletion deductions must establish to the satisfaction of the district director both the amount of water present at acquisition and their cost basis of the water.

Section 612 of the Internal Revenue Code of 1954 provides that the basis for cost depletion shall be the adjusted basis provided in section 1011. Section 1011 states that the adjusted basis shall be the basis under section 1012, which is cost, adjusted as provided in section 1016.

Section 1016(a)(2) of the Code provides, in part, that the adjustments to basis shall be made in respect of any period since February 28, 1913, for depletion to the extent of the amount allowed as deductions, but not less than the amount allowable.

The Court in United States v. Marvin Shurbet et ux. , 347 F.2d 103 (1965), affirming the decision of United States District Court for the Southern District of Texas, 242 F.Supp. 736, entered on May 24, 1963, held that, in the case of farmers who obtain water for irrigation purposes from the Ogallala formation under the High Plains of Texas, a deduction for cost depletion was allowable and shall be allowed during years in which there is a decrease in the ground water level under their properties.

Accordingly, the basis must be adjusted as provided in section 1016(a)(2) of the Code for any cost depletion deductions which were in fact claimed and allowed for any prior taxable year. In addition, the basis must be adjusted for all taxable years in which cost depletion deductions are allowable under Revenue Ruling 65-296.

However, under authority of section 7805(b) of the Code, basis will not be adjusted in the Shurbet type of cases for any taxable year ending prior to May 24, 1963, the date of the District Court decision, if both of the following facts are present: (i) the deduction for cost depletion was not claimed and allowed for such taxable year, and (ii) claims for credit or refund for such taxable year by reason of such deduction for cost depletion were barred by the running of the statute of limitations or other rules of law on May 24, 1963. Therefore, under these circumstances, taxpayers in the Southern High Plains area will not be required to reduce their basis in ground water by cost depletion which was not allowed for such taxable years.