United States

Section 1254 Recapture of Intangible Drilling and Development Costs

Apr 29, 2010
From the Global Energy Institute

Upon the disposition of certain natural resource property within the meaning of Section 614, taxpayers are required to recapture all or some of the intangible costs paid or incurred since 1975 as ordinary income. The amount of ordinary income that must be recognized is the lesser of the "Section 1254 costs" with respect to the property or the gain realized on the disposition. The regulations address the application of the Section 1254 recapture rules in a multitude of situations. This white paper discusses the Section 1254 recapture of intangible drilling and development costs and depletion.

The paper discusses the definitions of placed in service, properties subject to recapture, and the disposition of a portion of a property. The paper also includes an analysis of the definition of nonproductive wells as discussed in the regulations, other IRS guidance, congressional reports, the windfall profit tax, and oil and gas industry terminology.

This white paper then discusses the recapture rules under Section 1254 related to the liability for recapture in the case of a carried arrangement, disposition in certain nonrecognition transactions, disposition in an installment sale, disposition/distribution by a partnership, disposition by an S corporation or of S corporation stock, and charitable contributions.

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