[Federal Register Volume 60, Number 6 (Tuesday, January 10, 1995)]
[Rules and Regulations]
[Pages 2497-2509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-172]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8586]
RIN 1545-AC35


Treatment of Gain From Disposition of Certain Natural Resource 
Recapture Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document provides final regulations relating to the tax 
treatment of gain from the disposition of certain natural resource 
recapture property (section 1254 property after enactment of the Tax 
Reform Act of 1986 and oil, gas, or geothermal property before 
enactment of the Tax Reform Act of 1986). Changes to the applicable tax 
law were made by the Tax Reform Act of 1986, the Tax Reform Act of 
1984, the Energy Tax Act of 1978, the Tax Reform Act of 1976, the Tax 
Reform Act of 1969, and the Act of September 12, 1966. The regulations 
provide the public with guidance in complying with the changed tax 
laws.

DATES: These regulations are effective January 10, 1995.
    For dates of applicability, see Sec. 1.1254-6.

FOR FURTHER INFORMATION CONTACT: Brenda M. Stewart (202-622-3120, not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) 
under control number 1545-1352. The estimated annual burden per 
respondent varies from four to six hours, depending on individual 
circumstances, with an estimated average of five hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.

Background

    On June 11, 1980, the IRS published proposed amendments to the 
Income Tax Regulations (26 CFR part 1) under sections 170, 301, 312, 
341, 453, 751, 1254, and 1502 of the Internal Revenue Code of 1954 in 
the Federal Register (45 FR 39512). These amendments were proposed to 
conform the regulations to section 205 (a), (b), and (c) (1) and (2) of 
the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1533, and section 
402(c) of the Energy Tax Act of 1978, Pub. L. 95-618, 92 Stat. 3202, 
and to make certain other technical amendments to conform the 
regulations to section 1(c) of the Act of September 12, 1966, Pub. L. 
89-570, 80 Stat. 762, to section 211(b)(6) of the Tax Reform Act of 
1969, Pub. L. 91-172, 83 Stat. 570, and to sections 1042(c)(2), 
1101(d)(2), 1901(a)(93), and 2110(a) of the Tax Reform Act of 1976, 90 
Stat. 1637, 1658, 1780, 1905). A public hearing was held on September 
9, 1980. After considering all comments regarding the proposed 
regulations, the proposed regulations (except for the provisions 
relating to an electing small business corporation (hereinafter 
referred to as an S corporation)), are adopted as revised by this 
Treasury decision. The rules under Sec. 1.751-1(c)(6)(ii) are 
clarified, but no substantive change is intended except to insert 
additional recapture sections under the Internal Revenue Code of 1986 
(Code).
    Because of the substantial changes made to the tax treatment of S 
corporations by section 5(a)(37) of the Subchapter S Revision Act of 
1982, Pub. L. 97-354, 96 Stat. 1696, section 492 of the Tax Reform Act 
of 1984, Pub. L. 98-369, 98 Stat. 853, and sections 411 and 413 of the 
Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2225, 2227, 
Sec. 1.1254-3 of the proposed regulations (relating to an electing 
small business), [[Page 2498]] has not been adopted. Instead, a notice 
of proposed rulemaking, designated as Sec. 1.1254-4, relating to the 
recapture of natural resource recapture property by an S corporation 
and its shareholders will be proposed to conform the regulations to 
these laws.

I. Intangible Drilling and Development Costs Recapture in a Partnership

    The proposed regulations require a partnership to compute the 
amount of intangible drilling and development costs to be recaptured 
(entity approach) and, subject to the substantial economic effect test, 
to allocate that amount among the partners in accordance with their 
respective distributive shares as provided in the partnership 
agreement. Some commentators argue that the proposed regulations are 
inconsistent with partner level (aggregate approach) computation of 
depletion and gain upon the sale of partnership oil and gas property 
under section 613A(c)(7)(D).
    Under the entity approach of the proposed regulations, some 
recapture of section 1254 costs may be shifted from the partners who 
claimed the deductions to other partners who did not receive the 
benefit of the deductions. Under the aggregate approach, depending on 
the allocation of gain or amount realized upon sale, some section 1254 
costs may not be recaptured though total partnership gain exceeds total 
partnership section 1254 costs.
    The commentators suggest that, consistent with section 
613A(c)(7)(D), the final regulations should adopt the aggregate 
approach. They argue that under the aggregate approach, a partner can 
more readily compute both the extent of the deductions that were 
previously allocated to the partner and the appropriate adjustment 
required by section 1254(a)(4) (as in effect before enactment of the 
Tax Reform Act of 1986). The commentators contend that it is difficult 
for a partnership to obtain this information from the individual 
partners. In addition, they cite section 58(i) (as in effect before 
enactment of the Tax Reform Act of 1986), which allowed general 
partners to elect to amortize intangible drilling and development costs 
over a 5 year period and limited partners to elect to amortize 
intangible drilling and development costs over a 10 year period. 
Section 59(e) now provides an analogous amortization election.
    Consistent with the commentators' suggestion, the final regulations 
adopt the aggregate approach. Recapture is determined at the partner 
level. However, the regulations contain an anti-abuse rule providing 
that recapture is determined at the partnership level if the 
Commissioner determines that the amount realized or gain recognized 
from the disposition of section 1254 property is allocated to partners 
with a principal purpose of avoiding recapture under section 1254.

II. Recapture of Distributions on the Liquidation of a Partnership

    In general, the section 1254 recapture provisions override 
nonrecognition provisions in the Code. However, section 1254 (b)(1) 
states that rules similar to the rules of section 1245 (b) and (c) 
shall be prescribed by regulation. Accordingly, the final regulations 
limit the amount subject to recapture in certain tax-free transactions 
to gain that would be recognized without regard to section 1254. 
Section 1.1254-2(c)(3) lists the transfers in which recapture is 
limited. All transfers listed involve transferred basis.
    Commentators point out that under the proposed regulations 
recapture is required upon the liquidation of a partnership interest 
because section 732(b) provides that the basis of property received in 
a liquidation is a substitute basis equal to the basis of the partner's 
interest in the partnership. However, under section 1245(b)(6)(A), 
recapture upon the distribution of partnership assets in liquidation is 
limited. Accordingly, the commentators suggest that a similar rule 
should be adopted for section 1254 purposes.
    The final regulations adopt the commentators' suggestion. The basis 
of natural resource recapture property distributed by a partnership to 
a partner is deemed to be determined by reference to the adjusted basis 
of the property to the partnership.

III. Recapture Reduction

    Under section 1254(a)(4) (as in effect before enactment of the Tax 
Reform Act of 1986), the amount of intangible drilling and development 
costs subject to recapture is reduced by the amount, if any, by which 
the ``deduction for depletion'' under section 611 ``would have been 
increased'' if intangible drilling and development costs had been 
charged to a capital account rather than currently expensed under 
section 263(c). The proposed regulations, therefore, require taxpayers 
to use the excess of the hypothetical cost or percentage depletion 
deduction over the amount allowed under section 611 (either cost or 
percentage depletion) in determining the constructive increase in 
depletion.
    By contrast, many commentators argued that, notwithstanding the 
language of the statute, according to the legislative history, the 
recapture amount should be reduced even in situations where expensing 
intangible drilling and development costs did not result in decreased 
depletion deductions.
    The final regulations reject this view and instead continue to 
follow the statute, which, as noted above, provides that recapturable 
intangible drilling and development costs are reduced by the amount by 
which the ``deduction for depletion'' claimed under section 611 ``would 
have been increased.'' Thus, the amount of recapturable intangible 
drilling and development costs is reduced by only the excess, if any, 
of the hypothetical cost or percentage depletion deduction (computed as 
if intangible drilling and development costs subject to depletion had 
been capitalized) over the amount of the cost or percentage depletion 
deduction the taxpayer actually claimed. Consequently, unless the 
hypothetical cost or percentage depletion amount is greater than the 
actual depletion deduction claimed, no depletion deduction is foregone, 
and all intangible drilling and development costs attributable to the 
property are recapturable.
    The final regulations are clarified to remove uncertainties 
regarding the method for calculating the reduction in the amount of 
recapturable intangible drilling and development costs.

IV. Nonproductive Wells

    Some commentators state that intangible drilling and development 
costs allocable to nonproductive wells should not be subject to 
recapture. They point out that, even if a taxpayer elects to capitalize 
intangible drilling and development costs, intangible drilling and 
development costs of nonproductive wells are not added to basis because 
the operator normally deducts these amounts under Sec. 1.612-4(b)(4) on 
the return for the first taxable year after abandonment of a 
nonproductive well.
    One reason for the enactment of section 1254 was to prevent the 
conversion of intangible drilling and development costs currently 
deducted against ordinary income into capital gain in certain limited 
risk situations. See H.R. Rep. 94-658, 94th Cong., 1st Sess. 94 (1975). 
For example, if a well proves to be nonproductive causing a nonrecourse 
debt to become worthless, the taxpayer generally recognizes income that 
is treated as capital gain upon foreclosure of the debt, because a 
foreclosure is deemed to be a sale of the property. Consequently, 
ordinary income deductions would be converted [[Page 2499]] into 
capital gains to the extent of the leveraged amounts.
    Aside from foreclosure of a nonrecourse debt, however, a 
nonproductive well provides no opportunity for converting an ordinary 
income stream into capital gain. Accordingly, the final regulations 
provide that section 1254 costs attributable to nonproductive wells are 
not recapturable, except in certain limited risk situations.

V. Depreciation

    Some commentators argue that depreciable costs associated with 
drilling should not be separated from depletable costs in calculating 
the hypothetical depletion deduction. Commentators also point out that 
it is difficult to identify the amount of intangible drilling and 
development costs that could have been deducted as depreciation, 
because it is not current industry practice to separate depreciable 
costs from depletable costs. In response to these comments, the final 
regulations do not require depreciable costs to be separated from 
depletable costs in calculating the hypothetical depletion deduction.

VI. Property Interest Subject to Recapture

    Under the proposed regulations, each operating mineral interest in 
an ``oil, gas, or geothermal property,'' as well as any nonoperating 
mineral interest retained by a lessor or sublessor of a property to 
which intangible drilling and development costs were properly 
chargeable when held by such person prior to the creation of the lease 
or sublease, is subject to recapture.
    In Houston Oil and Minerals Corp. v. Commissioner, 92 T.C. 1331 
(1989), aff'd, 922 F.2d 283 (5th Cir. 1991), Louisiana Land and 
Exploration Co. v. Commissioner, 92 T.C. 1340 (1989), and Southland 
Royalty Co. v. United States, 91-1 U.S.T.C. 50,083 (Cls. Ct. 1991), 
the Internal Revenue Service took the position that section 1254 
requires recapture of intangible drilling and development costs upon 
the disposition of a nonoperating mineral interest carved out of an 
operating mineral interest. The courts, however, held instead that the 
disposition of an overriding royalty interest carved out of an 
operating mineral interest to which intangible drilling and development 
costs were charged does not trigger recapture because the overriding 
royalty interest is not ``oil, gas, or geothermal property'' within the 
meaning of section 1254(a)(3).
    The Tax Court in Houston Oil and Minerals Corp., 92 T.C. at 1339, 
and Louisiana Land and Exploration Co., 92 T.C. at 1348, and the Claims 
Court in Southland Royalty Co., 91-1 U.S.T.C. at 87,337, noted that 
because the Tax Reform Act of 1986 amended section 1254 to include 
within the definition of ``oil, gas, or geothermal property'' property 
the basis of which has been adjusted for depletion, nonoperating 
mineral interests come within the ambit of section 1254 after 1986. 
Consequently, the courts reasoned, the issue considered in these cases 
would arise only with respect to property placed in service before 
1987.
    The regulations have been amended to treat a nonoperating mineral 
interest carved out of an operating mineral interest with respect to 
which section 1254 costs have been deducted as property to which 
section 1254 costs are properly chargeable. Thus, the final regulations 
make clear that natural resource recapture property includes a 
nonoperating mineral interest if the nonoperating mineral interest was 
carved out of an operating mineral interest to which section 1254 costs 
were properly chargeable by the holder of the operating mineral 
interest. See Sec. 1.1254-1(b)(2). Consistent with the opinions in the 
litigated cases, however, this provision will be effective only with 
respect to property placed in service after December 31, 1986.

VII. Disposition

    Commentators urge that the regulations state who is liable for 
recapture if an operating mineral interest shifts automatically or at 
the option of the person who will receive the interest, as, for 
example, a farm-out. In response to these comments, the final 
regulations provide that liability for potential recapture of 
intangible drilling and development costs attributable to the entire 
operating mineral interest held by the carrying party prior to 
reversion or conversion remains attributable to the reduced operating 
mineral interest retained by the carrying party after a portion of the 
operating mineral interest has reverted to the carried party or after 
the conversion of an overriding royalty interest that converts, at the 
option of the grantor or successor in interest, to an operating mineral 
interest after a certain amount of production.

VIII. Like Kind Exchanges and Involuntary Conversions

    Commentators state that under Sec. 1.1254-4(d) of the proposed 
regulations liability for recapture of intangible drilling and 
development costs remains with the property with respect to which the 
costs were incurred and does not transfer to the property received in a 
like kind exchange or involuntary conversion. However, under the final 
regulations recapture liability transfers to the property received by 
the transferor who received the benefit of the deductions for section 
1254 costs. This result is consistent with the section 1245(b)(4) and 
Sec. 1.1245-2(c)(4) rules for recapture of depreciation. Because 
section 1254(b)(1) states that the regulations should prescribe rules 
similar to rules in section 1245 (b) and (c) for like kind exchanges, 
involuntary conversions, and other nontaxable transfers, the final 
regulations more closely mirror the section 1245 recapture rules for 
such transactions.

IX. Filing Requirements

    The proposed regulations provide allocation rules for the recapture 
of section 1254 costs on the sale of a portion of, or an undivided 
interest in, natural resource recapture property. Under the proposed 
regulations, a taxpayer is required to attach to the tax return 
documents sufficient to establish allocation of intangible drilling and 
development costs to the disposed of portion or undivided interest, 
notwithstanding that the intangible drilling and development costs do 
not in fact relate to that portion or undivided interest. Commentators 
suggest that it is more practical simply to require a taxpayer to state 
on the tax return that the section 1254 costs do not relate to the 
property disposed of and to retain verifying documentation. In response 
to the commentators' suggestion, the final regulations contain a book 
and records retention requirement.
    Effective dates: These regulations are effective January 10, 1995 
and Secs. 1.1254-1 through 1.1254-3 and Sec. 1.1254-5 apply to any 
disposition of natural resource recapture property occurring after 
March 13, 1995. The rule in Sec. 1.1254-1(b)(2)(iv)(A)(2), concerning a 
nonoperating mineral interest carved out of an operating mineral 
interest with respect to which an expenditure has been deducted, 
applies to any disposition occurring after March 13, 1995 of property 
(within the meaning of section 614) that is placed in service by the 
taxpayer after December 31, 1986. For dispositions of natural resource 
recapture property occurring on or before March 13, 1995, taxpayers 
must take reasonable return positions taking into consideration the 
statute and its legislative history.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant [[Page 2500]] regulatory action as defined in EO 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 
6) do not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, the notice of proposed rulemaking preceding 
these regulations was submitted to the Small Business Administration on 
its impact on small business.

Drafting Information

    The principal author of these final regulations is Brenda M. 
Stewart, Office of Assistant Chief Counsel (Passthroughs and Special 
Industries), IRS. However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.1254-1 also issued under 26 U.S.C. 1254(b).
    Section 1.1254-2 also issued under 26 U.S.C. 1254(b).
    Section 1.1254-3 also issued under 26 U.S.C. 1254(b).
    Section 1.1254-4 also issued under 26 U.S.C. 1254(b).
    Section 1.1254-5 also issued under 26 U.S.C. 1254(b).
    Section 1.1254-6 also issued under 26 U.S.C. 1254(b). * * *


Sec. 1.301-1   [Amended]

    Par. 2. Section 1.301-1 is amended as follows:
    1. Paragraph (d)(1)(iii) is amended by removing the language ``or 
1252(a)'' and adding ``1252(a), or 1254(a)'' in its place.
    2. Paragraph (h)(2)(ii)(b) is amended by removing the language ``or 
section 1252(a) (relating to gain from disposition of farm land)'' and 
adding ``section 1252(a) (relating to gain from disposition of farm 
land), or section 1254(a) (relating to gain from disposition of 
interest in natural resource recapture property)'' in its place.
    3. Paragraph (j)(1) is amended by removing the language ``or 
1252(a)'' and adding ``1252(a), or 1254(a)'' in its place.


Sec. 1.312-3  [Amended]

    Par. 3. Section 1.312-3 is amended by removing ``or 1252(a)'' and 
adding ``1252(a), or 1254(a)'' in its place.


Sec. 1.341-6  [Amended]

    Par. 4. Section 1.341-6 is amended as follows:
    1. In paragraph (b)(1), the last sentence is amended by removing 
the language ``and 1252 (relating to gain from disposition of farm 
land)'' and adding ``1252 (relating to gain from disposition of farm 
land), and 1254 (relating to gain from disposition of interest in 
natural resource recapture property)'' in its place.
    2. In paragraph (b)(2)(i), the first sentence is amended by 
removing ``or 1252)'' and adding ``1252, or 1254)'' in its place.
    3. In paragraph (b)(2)(iii), the second sentence is amended by 
removing ``or 1252)'' and adding ``1252, or 1254)'' in its place.
    4. In paragraph (b)(3), the first sentence is amended by removing 
``or 1252)'' and adding ``1252, or 1254)'' in its place.
    5. In paragraph (h)(4), the first sentence is amended by removing 
``or 1252)'' and adding ``1252, or 1254)'' in its place.
    6. Paragraph (n) is amended by:
    a. Removing the language ``and 1252'' from the paragraph heading 
and adding ``1252, and 1254'' in its place.
    b. Removing from the text the language ``and 1252(a) (relating to 
gain from disposition of farm land)'' and adding ``1252(a) (relating to 
gain from disposition of farm land), and 1254(a) (relating to gain from 
disposition of interest in natural resource recapture property)'' in 
its place.


Sec. 1.453-9  [Amended]

    Par. 5. Section 1.453-9, paragraph (c)(1)(ii) is amended by:
    1. Removing from the second sentence the language ``or 1252(a)(1)'' 
and adding ``1252(a)(1), or 1254(a)(1)'' in its place.
    2. Removing from the third sentence the language ``and paragraph 
(d)(3) of Sec. 1.1252-1'' and adding in its place ``paragraph (d)(3) of 
Sec. 1.1252-1, and paragraph (d) of Sec. 1.1254-1''.
    Par. 6. Section 1.751-1, paragraphs (c)(4), (c)(5), and (c)(6) are 
revised to read as follows:


Sec. 1.751-1  Unrealized receivables and inventory items.

* * * * *
    (c) * * *
    (4)(i) With respect to any taxable year of a partnership ending 
after September 12, 1966 (but only in respect of expenditures paid or 
incurred after that date), the term unrealized receivables, for 
purposes of this section and sections 731, 736, 741, and 751, also 
includes potential gain from mining property defined in section 
617(f)(2). With respect to each item of partnership mining property so 
defined, the potential gain is the amount that would be treated as gain 
to which section 617(d)(1) would apply if (at the time of the 
transaction described in section 731, 736, 741, or 751, as the case may 
be) the item were sold by the partnership at its fair market value.
    (ii) With respect to sales, exchanges, or other dispositions after 
December 31, 1975, in any taxable year of a partnership ending after 
that date, the term unrealized receivables, for purposes of this 
section and sections 731, 736, 741, and 751, also includes potential 
gain from stock in a DISC as described in section 992(a). With respect 
to stock in such a DISC, the potential gain is the amount that would be 
treated as gain to which section 995(c) would apply if (at the time of 
the transaction described in section 731, 736, 741, or 751, as the case 
may be) the stock were sold by the partnership at its fair market 
value.
    (iii) With respect to any taxable year of a partnership beginning 
after December 31, 1962, the term unrealized receivables, for purposes 
of this section and sections 731, 736, 741, and 751, also includes 
potential gain from section 1245 property. With respect to each item of 
partnership section 1245 property (as defined in section 1245(a)(3)), 
potential gain from section 1245 property is the amount that would be 
treated as gain to which section 1245(a)(1) would apply if (at the time 
of the transaction described in section 731, 736, 741, or 751, as the 
case may be) the item of section 1245 property were sold by the 
partnership at its fair market value. See Sec. 1.1245-1(e)(1). For 
example, if a partnership would recognize under section 1245(a)(1) gain 
of $600 upon a sale of one item of section 1245 property and gain of 
$300 upon a sale of its only other item of such property, the potential 
section 1245 income of the partnership would be $900. [[Page 2501]] 
    (iv) With respect to transfers after October 9, 1975, and to sales, 
exchanges, and distributions taking place after that date, the term 
unrealized receivables, for purposes of this section and sections 731, 
736, 741, and 751, also includes potential gain from stock in certain 
foreign corporations as described in section 1248. With respect to 
stock in such a foreign corporation, the potential gain is the amount 
that would be treated as gain to which section 1248(a) would apply if 
(at the time of the transaction described in section 731, 736, 741, or 
751, as the case may be) the stock were sold by the partnership at its 
fair market value.
    (v) With respect to any taxable year of a partnership ending after 
December 31, 1963, the term unrealized receivables, for purposes of 
this section and sections 731, 736, 741, and 751, also includes 
potential gain from section 1250 property. With respect to each item of 
partnership section 1250 property (as defined in section 1250(c)), 
potential gain from section 1250 property is the amount that would be 
treated as gain to which section 1250(a) would apply if (at the time of 
the transaction described in section 731, 736, 741, or 751, as the case 
may be) the item of section 1250 property were sold by the partnership 
at its fair market value. See Sec. 1.1250-1(f)(1).
    (vi) With respect to any taxable year of a partnership beginning 
after December 31, 1969, the term unrealized receivables, for purposes 
of this section and sections 731, 736, 741, and 751, also includes 
potential gain from farm recapture property as defined in section 
1251(e)(1) (as in effect before enactment of the Tax Reform Act of 
1984). With respect to each item of partnership farm recapture property 
so defined, the potential gain is the amount which would be treated as 
gain to which section 1251(c) (as in effect before enactment of the Tax 
Reform Act of 1984) would apply if (at the time of the transaction 
described in section 731, 736, 741, or 751, as the case may be) the 
item were sold by the partnership at its fair market value.
    (vii) With respect to any taxable year of a partnership beginning 
after December 31, 1969, the term unrealized receivables, for purposes 
of this section and sections 731, 736, 741, and 751, also includes 
potential gain from farm land as defined in section 1252(a)(2). With 
respect to each item of partnership farm land so defined, the potential 
gain is the amount that would be treated as gain to which section 
1252(a)(1) would apply if (at the time of the transaction described in 
section 731, 736, 741, or 751, as the case may be) the item were sold 
by the partnership at its fair market value.
    (viii) With respect to transactions which occur after December 31, 
1976, in any taxable year of a partnership ending after that date, the 
term unrealized receivables, for purposes of this section and sections 
731, 736, 741, and 751, also includes potential gain from franchises, 
trademarks, or trade names referred to in section 1253(a). With respect 
to each such item so referred to in section 1253(a), the potential gain 
is the amount that would be treated as gain to which section 1253(a) 
would apply if (at the time of the transaction described in section 
731, 736, 741, or 751, as the case may be) the items were sold by the 
partnership at its fair market value.
    (ix) With respect to any taxable year of a partnership ending after 
December 31, 1975, the term unrealized receivables, for purposes of 
this section and sections 731, 736, 741, and 751, also includes 
potential gain under section 1254(a) from natural resource recapture 
property as defined in Sec. 1.1254-1(b)(2). With respect to each 
separate partnership natural resource recapture property so described, 
the potential gain is the amount that would be treated as gain to which 
section 1254(a) would apply if (at the time of the transaction 
described in section 731, 736, 741, or 751, as the case may be) the 
property were sold by the partnership at its fair market value.
    (x) For purposes of section 751(c) and this paragraph (c)(4), any 
arm's-length agreement between the buyer and seller, or between the 
partnership and distributee partner, will generally establish the fair 
market value of the property described in this paragraph (c)(4).
    (5) For purposes of subtitle A of the Internal Revenue Code, the 
basis of any potential gain described in paragraph (c)(4) of this 
section is zero.
    (6)(i) If (at the time of any transaction referred to in paragraph 
(c)(4) of this section) a partnership holds property described in 
paragraph (c)(4) of this section and if--
    (A) A partner had a special basis adjustment under section 743(b) 
in respect of the property;
    (B) The basis under section 732 of the property if distributed to 
the partner would reflect a special basis adjustment under section 
732(d); or
    (C) On the date a partner acquired a partnership interest by way of 
a sale or exchange (or upon the death of another partner) the 
partnership owned the property and an election under section 754 was in 
effect with respect to the partnership, the partner's share of any 
potential gain described in paragraph (c)(4) of this section is 
determined under paragraph (c)(6)(ii) of this section.
    (ii) The partner's share of the potential gain described in 
paragraph (c)(4) of this section in respect of the property to which 
this paragraph (c)(6)(ii) applies is that amount of gain that the 
partner would recognize under section 617(d)(1), 995(c), 1245(a), 
1248(a), 1250(a), 1251(c) (as in effect before the Tax Reform Act of 
1984), 1252(a), 1253(a), or 1254(a) (as the case may be) upon a sale of 
the property by the partnership, except that, for purposes of this 
paragraph (c)(6) the partner's share of such gain is determined in a 
manner that is consistent with the manner in which the partner's share 
of partnership property is determined; and the amount of a potential 
special basis adjustment under section 732(d) is treated as if it were 
the amount of a special basis adjustment under section 743(b). For 
example, in determining, for purposes of this paragraph (c)(6), the 
amount of gain that a partner would recognize under section 1245 upon a 
sale of partnership property, the items allocated under Sec. 1.1245-
1(e)(3)(ii) are allocated to the partner in the same manner as the 
partner's share of partnership property is determined. See Sec. 1.1250-
1(f) for rules similar to those contained in Sec. 1.1245-1(e)(3)(ii).
* * * * *
    Par. 7. Sections 1.1254-0 through 1.1254-6 are added to read as 
follows:


Sec. 1.1254-0  Table of contents for section 1254 recapture rules.

    This section lists the major captions contained in Secs. 1.1254-1 
through 1.1254-6.

Sec. 1.1254-1  Treatment of gain from disposition of natural 
resource recapture property.

(a) In general.
(b) Definitions.
    (1) Section 1254 costs.
    (2) Natural resource recapture property.
    (3) Disposition.
(c) Disposition of a portion of natural resource recapture property.
    (1) Disposition of a portion (other than an undivided interest) 
of natural resource recapture property.
    (2) Disposition of an undivided interest.
    (3) Alternative allocation rule.
(d) Installment method.

Sec. 1.1254-2  Exceptions and limitations.

(a) Exception for gifts and section 1041 transfers.
    (1) General rule.
    (2) Part gift transactions.
(b) Exception for transfers at death.
(c) Limitation for certain tax-free transactions.
    (1) General rule. [[Page 2502]] 
    (2) Special rule for dispositions to certain tax exempt 
organizations.
    (3) Transfers described.
    (4) Special rules for section 332 transfers.
(d) Limitation for like kind exchanges and involuntary conversions.
    (1) General rule.
    (2) Disposition and acquisition of both natural resource 
recapture property and other property.

Sec. 1.1254-3  Section 1254 costs immediately after certain 
acquisitions.

(a) Transactions in which basis is determined by reference to cost 
or fair market value of property transferred.
    (1) Basis determined under section 1012.
    (2) Basis determined under section 301(d), 334(a), or 358(a)(2).
    (3) Basis determined solely under former section 334(b)(2) or 
former section 334(c).
    (4) Basis determined by reason of the application of section 
1014(a).
(b) Gifts and certain tax-free transactions.
    (1) General rule.
    (2) Transactions covered.
(c) Certain transfers at death.
(d) Property received in a like kind exchange or involuntary 
conversion.
    (1) General rule.
    (2) Allocation of section 1254 costs among multiple natural 
resource recapture property acquired.
(e) Property transferred in cases to which section 1071 or 1081(b) 
applies.

Sec. 1.1254-4  Special rules for S corporations and their 
shareholders. [Reserved].

Sec. 1.1254-5  Special rules for partnerships and their partners.

(a) In general.
(b) Determination of gain treated as ordinary income under section 
1254 upon the disposition of natural resource recapture property by 
a partnership.
    (1) General rule.
    (2) Exception to partner level recapture in the case of abusive 
allocations.
    (3) Examples.
(c) Section 1254 costs of a partner.
    (1) General rule.
    (2) Section 1254 costs of a transferee partner after certain 
acquisitions.
(d) Property distributed to a partner.
    (1) In general.
    (2) Aggregate of partners' section 1254 costs with respect to 
natural resource recapture property held by a partnership.

Sec. 1.1254-6  Effective date of regulations.


Sec. 1.1254-1  Treatment of gain from disposition of natural resource 
recapture property.

    (a) In general. Upon any disposition of section 1254 property or 
any disposition after December 31, 1975 of oil, gas, or geothermal 
property, gain is treated as ordinary income in an amount equal to the 
lesser of the amount of the section 1254 costs (as defined in paragraph 
(b)(1) of this section) with respect to the property, or the amount, if 
any, by which the amount realized on the sale, exchange, or involuntary 
conversion, or the fair market value of the property on any other 
disposition, exceeds the adjusted basis of the property. However, any 
amount treated as ordinary income under the preceding sentence is not 
included in the taxpayer's gross income from the property for purposes 
of section 613. Generally, the lesser of the amounts described in this 
paragraph (a) is treated as ordinary income even though, in the absence 
of section 1254(a), no gain would be recognized upon the disposition 
under any other provision of the Internal Revenue Code. For the 
definition of the term section 1254 costs, see paragraph (b)(1) of this 
section. For the definition of the terms section 1254 property, oil, 
gas, or geothermal property, and natural resource recapture property, 
see paragraph (b)(2) of this section. For rules relating to the 
disposition of natural resource recapture property, see paragraphs 
(b)(3), (c), and (d) of this section. For exceptions and limitations to 
the application of section 1254(a), see Sec. 1.1254-2.
    (b) Definitions--(1) Section 1254 costs--(i) Property placed in 
service after December 31, 1986. With respect to any property placed in 
service by the taxpayer after December 31, 1986, the term section 1254 
costs means--
    (A) The aggregate amount of expenditures that have been deducted by 
the taxpayer or any person under section 263, 616, or 617 with respect 
to such property and that, but for the deduction, would have been 
included in the adjusted basis of the property or in the adjusted basis 
of certain depreciable property associated with the property; and
    (B) The deductions for depletion under section 611 that reduced the 
adjusted basis of the property.
    (ii) Property placed in service before January 1, 1987. With 
respect to any property placed in service by the taxpayer before 
January 1, 1987, the term section 1254 costs means--
    (A) The aggregate amount of costs paid or incurred after December 
31, 1975, with respect to such property, that have been deducted as 
intangible drilling and development costs under section 263(c) by the 
taxpayer or any other person (except that section 1254 costs do not 
include costs incurred with respect to geothermal wells commenced 
before October 1, 1978) and that, but for the deduction, would be 
reflected in the adjusted basis of the property or in the adjusted 
basis of certain depreciable property associated with the property; 
reduced by
    (B) The amount (if any) by which the deduction for depletion 
allowed under section 611 that was computed either under section 612 or 
sections 613 and 613A, with respect to the property, would have been 
increased if the costs (paid or incurred after December 31, 1975) had 
been charged to capital account rather than deducted.
    (iii) Deductions under section 59 and section 291. Amounts 
capitalized pursuant to an election under section 59(e) or pursuant to 
section 291(b) are treated as section 1254 costs in the year in which 
an amortization deduction is claimed under section 59(e)(1) or section 
291(b)(2).
    (iv) Suspended deductions. If a deduction of a section 1254 cost 
has been suspended as of the date of disposition of section 1254 
property, the deduction is not treated as a section 1254 cost if it is 
included in basis for determining gain or loss on the disposition. On 
the other hand, if the deduction will eventually be claimed, it is a 
section 1254 cost as of the date of disposition. For example, a 
deduction suspended pursuant to the 65 percent of taxable income 
limitation of section 613A(d)(1) may either be included in basis upon 
disposition of the property or may be deducted in a year after the year 
of disposition. See Sec. 1.613A-4(a)(1). If it is included in the basis 
then it is not a section 1254 cost, but if it is deductible in a later 
year it is a section 1254 cost as of the date of the disposition.
    (v) Previously recaptured amounts. If an amount has been previously 
treated as ordinary income pursuant to section 1254, it is not a 
section 1254 cost.
    (vi) Nonproductive wells. The aggregate amount of section 1254 
costs paid or incurred on any property includes the amount of 
intangible drilling and development costs incurred on nonproductive 
wells, but only to the extent that the taxpayer recognizes income on 
the foreclosure of a nonrecourse debt the proceeds from which were used 
to finance the section 1254 costs with respect to the property. For 
this purpose, the term nonproductive well means a well that does not 
produce oil or gas in commercial quantities, including a well that is 
drilled for the purpose of ascertaining the existence, location, or 
extent of an oil or gas reservoir (e.g., a delineation well). The term 
nonproductive well does not include an injection well (other than an 
injection well drilled as part of a project that does not result in 
production in commercial quantities).
    (vii) Calculation of amount described in paragraph (b)(1)(ii)(B) of 
this section (hypothetical depletion offset)--(A) In general. In 
calculating the amount [[Page 2503]] described in paragraph 
(b)(1)(ii)(B) of this section, the taxpayer shall apply the following 
rules. The taxpayer may use the 65-percent-of-taxable-income limitation 
of section 613A(d)(1). If the taxpayer uses that limitation, the 
taxpayer is not required to recalculate the effect of such limitation 
with respect to any property not disposed of. That is, the taxpayer may 
assume that the hypothetical capitalization of intangible drilling and 
development costs with respect to any property disposed of does not 
affect the allowable depletion with respect to property retained by the 
taxpayer. Any intangible drilling and development costs that, if they 
had not been treated as expenses under section 263(c), would have 
properly been capitalized under Sec. 1.612-4(b)(2) (relating to items 
recoverable through depreciation under section 167 or cost recovery 
under section 168) are treated as costs described in Sec. 1.612-4(b)(1) 
(relating to items recoverable through depletion). The increase in 
depletion attributable to the capitalization of intangible drilling and 
development costs is computed by subtracting the amount of cost or 
percentage depletion actually claimed from the amount of cost or 
percentage depletion that would have been allowable if intangible 
drilling and development costs had been capitalized. If the remainder 
is zero or less than zero, the entire amount of intangible drilling and 
development costs attributable to the property is recapturable.
    (B) Example. The following example illustrates the principles of 
paragraph (b)(1)(vii)(A).


    Example. Hypothetical depletion offset. In 1976, A purchased 
undeveloped property for $10,000. During 1977, A incurred $200,000 
of productive well intangible drilling and development costs with 
respect to the property. A deducted the intangible drilling and 
development costs as expenses under section 263(c). Estimated 
reserves of 150,000 barrels of recoverable oil were discovered in 
1977 and production began in 1978. In 1978, A produced and sold 
30,000 barrels of oil at $8 per barrel, resulting in $240,000 of 
gross income. A had no other oil or gas production in 1978. A 
claimed a percentage depletion deduction of $52,800 (i.e., 22% of 
$240,000 gross income from the property). If A had capitalized the 
intangible drilling and development costs, assume that $200,000 of 
the costs would have been allocated to the depletable property and 
none to depreciable property. A's cost depletion deduction if the 
intangible drilling and development costs had been capitalized would 
have been $42,000 (i.e., (($200,000 intangible drilling and 
development costs + $10,000 acquisition costs) x 30,000 barrels of 
production)/ 150,000 barrels of estimated recoverable reserves). 
Since this amount is less than A's depletion deduction of $52,800 
(percentage depletion), no reduction is made to the amount of 
intangible drilling and development costs ($200,000). On January 1, 
1979, A sold the oil property to B for $360,000 and calculated 
section 1254 recapture without reference to the 65-percent-of-
taxable-income limitation. A's gain on the sale is the entire 
$360,000, because A's basis in the property at the beginning of 1979 
is zero (i.e., $10,000 cost less $52,800 depletion deduction for 
1978). Since the section 1254 costs ($200,000) are less than A's 
gain on the sale, $200,000 is treated as ordinary income under 
section 1254(a). The remaining amount of A's gain ($160,000) is not 
subject to section 1254(a).


    (2) Natural resource recapture property--(i) In general. The term 
natural resource recapture property means section 1254 property or oil, 
gas, or geothermal property as those terms are defined in this section.
    (ii) Section 1254 property. The term section 1254 property means 
any property (within the meaning of section 614) that is placed in 
service by the taxpayer after December 31, 1986, if any expenditures 
described in paragraph (b)(1)(i)(A) of this section (relating to costs 
under section 263, 616, or 617) are properly chargeable to such 
property, or if the adjusted basis of such property includes 
adjustments for deductions for depletion under section 611.
    (iii) Oil, gas, or geothermal property. The term oil, gas, or 
geothermal property means any property (within the meaning of section 
614) that was placed in service by the taxpayer before January 1, 1987, 
if any expenditures described in paragraph (b)(1)(ii)(A) of this 
section are properly chargeable to such property.
    (iv) Property to which section 1254 costs are properly 
chargeable.--(A) An expenditure is properly chargeable to property if--
    (1) The property is an operating mineral interest with respect to 
which the expenditure has been deducted;
    (2) The property is a nonoperating mineral interest (e.g., a net 
profits interest or an overriding royalty interest) burdening an 
operating mineral interest if the nonoperating mineral interest is 
carved out of an operating mineral interest described in paragraph 
(b)(2)(iv)(A)(1) of this section;
    (3) The property is a nonoperating mineral interest retained by a 
lessor or sublessor if such lessor or sublessor held, prior to the 
lease or sublease, an operating mineral interest described in paragraph 
(b)(2)(iv)(A)(1) of this section; or
    (4) The property is an operating or a nonoperating mineral interest 
held by a taxpayer if a party related to the taxpayer (within the 
meaning of section 267(b) or section 707(b)) held an operating mineral 
interest (described in paragraph (b)(2)(iv)(A)(1) of this section) in 
the same tract or parcel of land that terminated (in whole or in part) 
without being disposed of (e.g., a working interest which terminated 
after a specified period of time or a given amount of production), but 
only if there exists between the related parties an arrangement or plan 
to avoid recapture under section 1254. In such a case, the taxpayer's 
section 1254 costs with respect to the property include those of the 
related party.
    (B) Example. The following example illustrates the provisions of 
paragraph (2)(iv)(A)(4) of this section:


    Example. Arrangement or plan to avoid recapture. C, an 
individual, owns 100% of the stock of both X Co. and Y Co. On 
January 1, 1998, X Co. enters into a standard oil and gas lease. X 
Co. immediately assigns to Y Co. 1% of the working interest for one 
year, and 99% of the working interest thereafter. In 1998, X Co. and 
Y Co. expend $300 in intangible drilling and development costs 
developing the tract, of which $297 are deducted by X Co. under 
section 263(c). On January 1, 1999, Y Co. sells its 99% share of the 
working interest to an unrelated person. Based on all the facts and 
circumstances, the arrangement between X Co. and Y Co. is part of a 
plan or arrangement to avoid recapture under section 1254. 
Therefore, Y Co. must include in its section 1254 costs the $297 of 
intangible drilling and development costs deducted by X Co.


    (v) Property the basis of which includes adjustments for depletion 
deductions. The adjusted basis of property includes adjustments for 
depletion under section 611 if--
    (A) The basis of the property has been reduced by reason of 
depletion deductions; or
    (B) The property has been carved out of or is a portion of property 
the basis of which has been reduced by reason of depletion deductions.
    (vi) Property held by a transferee. Property held by a transferee 
is natural resource recapture property if the property was natural 
resource recapture property in the hands of the transferor and the 
transferee's basis in the property is determined with reference to the 
transferor's basis in the property (e.g., a gift) or is determined 
under section 732.
    (vii) Property held by a transferor. Property held by a transferor 
of natural resource recapture property is natural resource recapture 
property if the transferor's basis in the property received is 
determined with reference to the transferor's basis in the property 
transferred by the transferor (e.g., a like kind exchange). For 
purposes of this paragraph (b)(2), property described in this paragraph 
(b)(2)(vii) is treated as placed in service at the time the 
[[Page 2504]] property transferred by the transferor was placed in 
service by the transferor.
    (3) Disposition--(i) General rule. The term disposition has the 
same meaning as in section 1245, relating to gain from dispositions of 
certain depreciable property.
    (ii) Exceptions. The term disposition does not include--
    (A) Any transaction that is merely a financing device, such as a 
mortgage or a production payment that is treated as a loan under 
section 636 and the regulations thereunder;
    (B) Any abandonment (except that an abandonment is a disposition to 
the extent the taxpayer recognizes income on the foreclosure of a 
nonrecourse debt);
    (C) Any creation of a lease or sublease of natural resource 
recapture property;
    (D) Any termination or election of the status of an S corporation;
    (E) Any unitization or pooling arrangement;
    (F) Any expiration or reversion of an operating mineral interest 
that expires or reverts by its own terms, in whole or in part; or
    (G) Any conversion of an overriding royalty interest that, at the 
option of the grantor or successor in interest, converts to an 
operating mineral interest after a certain amount of production.
    (iii) Special rule for carrying arrangements. In a carrying 
arrangement, liability for section 1254 costs attributable to the 
entire operating mineral interest held by the carrying party prior to 
reversion or conversion remains attributable to the reduced operating 
mineral interest retained by the carrying party after a portion of the 
operating mineral interest has reverted to the carried party or after 
the conversion of an overriding royalty interest that, at the option of 
the grantor or successor in interest, converts to an operating mineral 
interest after a certain amount of production.
    (c) Disposition of a portion of natural resource recapture 
property--(1) Disposition of a portion (other than an undivided 
interest) of natural resource recapture property--(i) Natural resource 
recapture property subject to the general rules of Sec. 1.1254-1. For 
purposes of section 1254(a)(1) and paragraph (a) of this section, 
except as provided in paragraphs (c)(1) (ii) and (3) of this section, 
in the case of the disposition of a portion (that is not an undivided 
interest) of natural resource recapture property, the entire amount of 
the section 1254 costs with respect to the natural resource recapture 
property is treated as allocable to that portion of the property to the 
extent of the amount of gain to which section 1254(a)(1) applies. If 
the amount of the gain to which section 1254(a)(1) applies is less than 
the amount of the section 1254 costs with respect to the natural 
resource recapture property, the balance of the section 1254 costs 
remaining after allocation to the portion of the property that was 
disposed of remains subject to recapture by the taxpayer under section 
1254(a)(1) upon disposition of the remaining portion of the property. 
For example, assume that A owns an 80-acre tract of land with respect 
to which A has deducted intangible drilling and development costs under 
section 263(c). If A sells the north 40 acres, the entire amount of the 
section 1254 costs with respect to the 80-acre tract is treated as 
allocable to the 40-acre portion sold (to the extent of the amount of 
gain to which section 1254(a)(1) applies).
    (ii) Natural resource recapture property subject to the exceptions 
and limitations of Sec. 1.1254-2. For purposes of section 1254(a)(1) 
and paragraph (a) of this section, except as provided in paragraph 
(b)(3) of this section, in the case of the disposition of a portion 
(that is not an undivided interest) of natural resource recapture 
property to which section 1254(a)(1) does not apply by reason of the 
application of Sec. 1.1254-2 (certain nonrecognition transactions), the 
following rule for allocation of costs applies. An amount of the 
section 1254 costs that bears the same ratio to the entire amount of 
such costs with respect to the entire natural resource recapture 
property as the value of the property transferred bears to the value of 
the entire natural resource recapture property is treated as allocable 
to the portion of the natural resource recapture property transferred. 
The balance of the section 1254 costs remaining after allocation to 
that portion of the transferred property remains subject to recapture 
by the taxpayer under section 1254(a)(1) upon disposition of the 
remaining portion of the property. For example, assume that A owns an 
80-acre tract of land with respect to which A has deducted intangible 
drilling and development costs under section 263(c). If A gives away 
the north 40 acres, and if 60 percent of the value of the 80-acre tract 
were attributable to the north 40 acres given away, 60 percent of the 
section 1254 costs with respect to the 80-acre tract is allocable to 
the north 40 acres given away.
    (2) Disposition of an undivided interest--(i) Natural resource 
recapture property subject to the general rules of Sec. 1.1254-1. For 
purposes of section 1254(a)(1), except as provided in paragraphs 
(b)(2)(ii) and (b)(3) of this section, in the case of the disposition 
of an undivided interest in natural resource recapture property (or a 
portion thereof), a proportionate part of the section 1254 costs with 
respect to the natural resource recapture property is treated as 
allocable to the transferred undivided interest to the extent of the 
amount of gain to which section 1254(a)(1) applies. For example, assume 
that A owns an 80-acre tract of land with respect to which A has 
deducted intangible drilling and development costs under section 
263(c). If A sells an undivided 40 percent interest in the 80-acre 
tract, 40 percent of the section 1254 costs with respect to the 80-acre 
tract is allocable to the transferred 40 percent interest in the 80-
acre tract. However, if the amount of gain recognized on the sale of 
the 40 percent undivided interest were equal to only 35 percent of the 
amount of section 1254 costs attributable to the 80-acre tract, only 35 
percent of the section 1254 costs would be treated as attributable to 
the undivided 40 percent interest. See paragraph (c)(3) of this section 
for an alternative allocation rule.
    (ii) Natural resource recapture property subject to the exceptions 
and limitations of Sec. 1.1254-2. For purposes of section 1254(a)(1) 
and paragraph (a) of this section, except as provided in paragraph 
(b)(3) of this section, in the case of a disposition of an undivided 
interest in natural resource recapture property (or a portion thereof) 
to which section 1254 (a)(1) does not apply by reason of Sec. 1.1254-2, 
a proportionate part of the section 1254 costs with respect to the 
natural resource recapture property is treated as allocable to the 
transferred undivided interest. See paragraph (c)(3) of this section 
for an alternative allocation rule.
    (3) Alternative allocation rule--(i) In general. The rules for the 
allocation of costs set forth in section 1254(a)(2) and paragraphs 
(c)(1) and (2) of this section do not apply with respect to section 
1254 costs that the taxpayer establishes to the satisfaction of the 
Commissioner do not relate to the transferred property. Except as 
provided in paragraphs (c)(3)(ii) and (iii) of this section, a taxpayer 
may satisfy this requirement only by receiving a private letter ruling 
from the Internal Revenue Service that the section 1254 costs do not 
relate to the transferred property.
    (ii) Portion of property. Upon the transfer of a portion of a 
natural resource recapture property (other than an undivided interest) 
with respect to which section 1254 costs have been incurred, a taxpayer 
may treat section 1254 costs as not relating to the transferred portion 
if the transferred portion does not include any part of any 
[[Page 2505]] deposit with respect to which the costs were incurred.
    (iii) Undivided interest. Upon the transfer of an undivided 
interest in a natural resource recapture property with respect to which 
section 1254 costs have been incurred, a taxpayer may treat costs as 
not relating to the transferred interest if the undivided interest is 
an undivided interest in a portion of the natural resource recapture 
property, and the portion would be eligible for the alternative 
allocation rule under paragraph (c)(3)(ii) of this section.
    (iv) Substantiation. If a taxpayer treats section 1254 costs 
incurred with respect to a natural resource recapture property as not 
relating to a transferred interest in a portion of the property, the 
taxpayer must indicate on his or her tax return that the costs do not 
relate to the transferred portion and maintain the records and 
supporting evidence that substantiate this position.
    (d) Installment method. Gain from a disposition to which section 
1254(a)(1) applies is reported on the installment method if that method 
otherwise applies under section 453 or 453A of the Internal Revenue 
Code and the regulations thereunder. The portion of each installment 
payment as reported that represents income (other than interest) is 
treated as gain to which section 1254(a)(1) applies until all of the 
gain (to which section 1254(a)(1) applies) has been reported, and the 
remaining portion (if any) of the income is then treated as gain to 
which section 1254(a)(1) does not apply. For treatment of amounts as 
interest on certain deferred payments, see sections 483, 1274, and the 
regulations thereunder.


Sec. 1.1254-2  Exceptions and limitations.

    (a) Exception for gifts and section 1041 transfers--(1) General 
rule. No gain is recognized under section 1254(a)(1) upon a disposition 
of natural resource recapture property by a gift or by a transfer in 
which no gain or loss is recognized pursuant to section 1041 (relating 
to transfers between spouses). For purposes of this paragraph (a), the 
term gift means, except to the extent that paragraph (a)(2) of this 
section applies, a transfer of natural resource recapture property 
that, in the hands of the transferee, has a basis determined under the 
provisions of sections 1015(a) or (d) (relating to basis of property 
acquired by gift). For rules concerning the potential reduction in the 
amount of the charitable contribution in the case of natural resource 
recapture property, see section 170(e) and Sec. 1.170A-4. See 
Sec. 1.1254-3(b)(1) for determination of potential recapture of section 
1254 costs on property acquired by gift. See Sec. 1.1254-1(c)(1)(ii) 
and (c)(2)(ii) for apportionment of section 1254 costs on a gift of a 
portion of natural resource recapture property.
    (2) Part gift transactions. If a disposition of natural resource 
recapture property is in part a sale or exchange and in part a gift, 
the gain that is treated as ordinary income pursuant to section 
1254(a)(1) is the lower of the section 1254 costs with respect to the 
property or the excess of the amount realized upon the disposition of 
the property over the adjusted basis of the property. In the case of a 
transfer subject to section 1011(b) (relating to bargain sales to 
charitable organizations), the adjusted basis for purposes of the 
preceding sentence is the adjusted basis for determining gain or loss 
under section 1011(b).
    (b) Exception for transfers at death. Except as provided in section 
691 (relating to income in respect of a decedent), no gain is 
recognized under section 1254(a)(1) upon a transfer at death. For 
purposes of this paragraph, the term transfer at death means a transfer 
of natural resource recapture property that, in the hands of the 
transferee, has a basis determined under the provisions of section 
1014(a) (relating to basis of property acquired from a decedent) 
because of the death of the transferor. See Sec. 1.1254-3(a)(4) and (c) 
for the determination of potential recapture of section 1254 costs on 
property acquired in a transfer at death.
    (c) Limitation for certain tax-free transactions--(1) General rule. 
Upon a transfer of property described in paragraph (c)(3) of this 
section, the amount of gain treated as ordinary income by the 
transferor under section 1254(a)(1) may not exceed the amount of gain 
recognized to the transferor on the transfer (determined without regard 
to section 1254). In the case of a transfer of both natural resource 
recapture property and property that is not natural resource recapture 
property in one transaction, the amount realized from the disposition 
of the natural resource recapture property is deemed to be equal to the 
amount that bears the same ratio to the total amount realized as the 
fair market value of the natural resource recapture property bears to 
the aggregate fair market value of all the property transferred. The 
preceding sentence is applied solely for purposes of computing the 
portion of the total gain (determined without regard to section 1254) 
that may be recognized as ordinary income under section 1254(a)(1).
    (2) Special rule for dispositions to certain tax-exempt 
organizations. Paragraph (c)(1) of this section does not apply to a 
disposition of natural resource recapture property to an organization 
(other than a cooperative described in section 521) that is exempt from 
the tax imposed by chapter I of the Internal Revenue Code. The 
preceding sentence does not apply to a disposition of natural resource 
recapture property to an organization described in section 511 (a)(2) 
or (b)(2) (relating to imposition of tax on unrelated business income 
of charitable, etc., organizations) if, immediately after the 
disposition, the organization uses the property in an unrelated trade 
or business as defined in section 513. If any property with respect to 
which gain is not recognized by reason of the exception of this 
paragraph (c)(2) ceases to be used in an unrelated trade or business of 
the organization acquiring the property, that organization is, for 
purposes of section 1254, treated as having disposed of the property on 
the date of the cessation.
    (3) Transfers described. The transfers referred to in paragraph 
(c)(1) of this section are transfers of natural resource recapture 
property in which the basis of the natural resource recapture property 
in the hands of the transferee is determined by reference to its basis 
in the hands of the transferor by reason of the application of any of 
the following provisions:
    (i) Section 332 (relating to certain liquidations of subsidiaries). 
See paragraph (c)(4) of this section.
    (ii) Section 351 (relating to transfer to a corporation controlled 
by transferor).
    (iii) Section 361 (relating to exchanges pursuant to certain 
corporate reorganizations).
    (iv) Section 721 (relating to transfers to a partnership in 
exchange for a partnership interest).
    (v) Section 731 (relating to distributions by a partnership to a 
partner). For purposes of this paragraph, the basis of natural resource 
recapture property distributed by a partnership to a partner is deemed 
to be determined by reference to the adjusted basis of such property to 
the partnership.
    (4) Special rules for section 332 transfers. In the case of a 
distribution in complete liquidation of a subsidiary to which section 
332 applies, the limitation provided in this paragraph (c) is confined 
to instances in which the basis of the natural resource recapture 
property in the hands of the transferee is determined, under section 
334(b)(1), by reference to its basis in the hands of the transferor. 
Thus, for example, the limitation may apply in respect of a liquidating 
distribution of natural resource recapture property by a subsidiary 
corporation to the parent corporation, but does not apply in 
[[Page 2506]] respect of a liquidating distribution of natural resource 
recapture property to a minority shareholder. This paragraph (c) does 
not apply to a liquidating distribution of natural resource recapture 
property by a subsidiary to its parent if the parent's basis for the 
property is determined under section 334(b)(2) (as in effect before 
enactment of the Tax Reform Act of 1986), by reference to its basis for 
the stock of the subsidiary. This paragraph (c) does not apply to a 
liquidating distribution under section 332 of natural resource 
recapture property by a subsidiary to its parent if gain is recognized 
and there is a corresponding increase in the parent's basis in the 
property (e.g., certain distributions to a tax-exempt or foreign 
corporation).
    (d) Limitation for like kind exchanges and involuntary 
conversions--(1) General rule. If natural resource recapture property 
is disposed of and gain (determined without regard to section 1254) is 
not recognized in whole or in part under section 1031 (relating to like 
kind exchanges) or section 1033 (relating to involuntary conversions), 
the amount of gain taken into account by the transferor under section 
1254(a)(1) may not exceed the sum of--
    (i) The amount of gain recognized on the disposition (determined 
without regard to section 1254); plus
    (ii) The fair market value of property acquired that is not natural 
resource recapture property and is not taken into account under 
paragraph (d)(1)(i) of this section (that is, qualifying property under 
section 1031 or 1033 that is not natural resource recapture property).
    (2) Disposition and acquisition of both natural resource recapture 
property and other property. For purposes of this paragraph (d), if 
both natural resource recapture property and property that is not 
natural resource recapture property are acquired as the result of one 
disposition in which both natural resource recapture property and 
property that is not natural resource recapture property are disposed 
of--
    (i) The total amount realized upon the disposition is allocated 
between the natural resource recapture property and the property that 
is not natural resource recapture property disposed of in proportion to 
their respective fair market values;
    (ii) The amount realized upon the disposition of the natural 
resource recapture property is deemed to consist of so much of the fair 
market value of the natural resource recapture property acquired as is 
not in excess of the amount realized from the natural resource 
recapture property disposed of, and the remaining portion (if any) of 
the amount realized upon the disposition of such property is deemed to 
consist of so much of the fair market value of the property that is not 
natural resource recapture property acquired as is not in excess of the 
remaining portion; and
    (iii) The amount realized upon the disposition of the property that 
is not natural resource recapture property is deemed to consist of so 
much of the fair market value of all the property acquired which was 
not taken into account under paragraph (d)(2)(ii) of this section. 
Except as provided in section 1060 and the regulations thereunder, if a 
buyer and seller have adverse interests as to such allocation of the 
amount realized, any arm's-length agreement between the buyer and 
seller is used to establish the allocation. In the absence of such an 
agreement, the allocation is made by taking into account the 
appropriate facts and circumstances.


Sec. 1.1254-3  Section 1254 costs immediately after certain 
acquisitions.

    (a) Transactions in which basis is determined by reference to cost 
or fair market value of property transferred--(1) Basis determined 
under section 1012. If, on the date a person acquires natural resource 
recapture property, the person's basis for the property is determined 
solely by reference to its cost (within the meaning of section 1012), 
the amount of section 1254 costs with respect to the natural resource 
recapture property in the person's hands is zero on the acquisition 
date.
    (2) Basis determined under section 301(d), 334(a), or 358(a)(2). 
If, on the date a person acquires natural resource recapture property, 
the person's basis for the property is determined solely by reason of 
the application of section 301(d) (relating to basis of property 
received in a corporate distribution), section 334(a) (relating to 
basis of property received in a liquidation in which gain or loss is 
recognized), or section 358(a)(2) (relating to basis of other property 
received in certain exchanges), the amount of the section 1254 costs 
with respect to the natural resource recapture property in the person's 
hands is zero on the acquisition date.
    (3) Basis determined solely under former section 334(b)(2) or 
former section 334(c). If, on the date a person acquires natural 
resource recapture property, the person's basis for the property is 
determined solely under the provisions of section 334(b)(2) (prior to 
amendment of that section by the Tax Equity and Fiscal Responsibility 
Act of 1982) or (c) (prior to repeal of that section by the Tax Reform 
Act of 1986) (relating to basis of property received in certain 
corporate liquidations), the amount of section 1254 costs with respect 
to the natural resource recapture property in the person's hands is 
zero on the acquisition date.
    (4) Basis determined by reason of the application of section 
1014(a). If, on the date a person acquires natural resource recapture 
property from a decedent, the person's basis is determined, by reason 
of the application of section 1014(a), solely by reference to the fair 
market value of the property on the date of the decedent's death or on 
the applicable date provided in section 2032 (relating to alternate 
valuation date), the amount of section 1254 costs with respect to the 
natural resource recapture property in the person's hands is zero on 
the acquisition date. See paragraph (c) of this section for the 
treatment of certain transfers at death.
    (b) Gifts and certain tax-free transactions--(1) General rule. If 
natural resource recapture property is transferred in a transaction 
described in paragraph (b)(2) of this section, the amount of section 
1254 costs with respect to the natural resource recapture property in 
the hands of the transferee immediately after the disposition is an 
amount equal to--
    (i) The amount of section 1254 costs with respect to the natural 
resource recapture property in the hands of the transferor immediately 
before disposition; minus
    (ii) The amount of any gain taken into account as ordinary income 
under section 1254(a)(1) by the transferor upon the disposition.
    (2) Transactions covered. The transactions to which paragraph 
(b)(1) of this section apply are--
    (i) A disposition that is a gift or in part a sale or exchange and 
in part a gift;
    (ii) A transaction described in section 1041(a); or
    (iii) A disposition described in Sec. 1.1254-2(c)(3) (relating to 
certain tax-free transactions).
    (c) Certain transfers at death. If natural resource recapture 
property is acquired in a transfer at death, the amount of section 1254 
costs with respect to the natural resource recapture property in the 
hands of the transferee immediately after the transfer includes the 
amount, if any, of the section 1254 costs deducted by the transferee 
before the decedent's death, to the extent that the basis of the 
natural resource recapture property (determined under section 1014(a)) 
is required to be reduced under the second sentence of section 
1014(b)(9) (relating to adjustments to basis where the property 
[[Page 2507]] is acquired from a decedent prior to death).
    (d) Property received in a like kind exchange or involuntary 
conversion--(1) General rule. If natural resource recapture property is 
disposed of in a like kind exchange under section 1031 or involuntary 
conversion under section 1033, then immediately after the disposition 
the amount of section 1254 costs with respect to any natural resource 
recapture property acquired for the property transferred is an amount 
equal to--
    (i) The amount of section 1254 costs with respect to the natural 
resource recapture property disposed of; minus
    (ii) The amount of any gain taken into account as ordinary income 
under section 1254(a)(1) by the transferor upon the disposition.
    (2) Allocation of section 1254 costs among multiple natural 
resource recapture properties acquired. If more than one parcel of 
natural resource recapture property is acquired at the same time from 
the same person in a transaction referred to in paragraph (d)(1) of 
this section, the total amount of section 1254 costs with respect to 
the parcels is allocated to the parcels in proportion to their 
respective adjusted bases.
    (e) Property transferred in cases to which section 1071 or 1081(b) 
applies. Rules similar to the rules of section 1245(b)(5) shall apply 
under section 1254.


Sec. 1.1254-4  Special rules for S corporations and their shareholders. 
[Reserved].


Sec. 1.1254-5  Special rules for partnerships and their partners.

    (a) In general. This section provides rules for applying the 
provisions of section 1254 to partnerships and their partners upon the 
disposition of natural resource recapture property by the partnership 
and certain distributions of property by a partnership. See section 751 
and the regulations thereunder for rules concerning the treatment of 
gain upon the transfer of a partnership interest.
    (b) Determination of gain treated as ordinary income under section 
1254 upon the disposition of natural resource recapture property by a 
partnership--(1) General rule. Upon a disposition of natural resource 
recapture property by a partnership, the amount treated as ordinary 
income under section 1254 is determined at the partner level. Each 
partner must recognize as ordinary income under section 1254 the lesser 
of--
    (i) The partner's section 1254 costs with respect to the property 
disposed of; or
    (ii) The partner's share of the amount, if any, by which the amount 
realized upon the sale, exchange, or involuntary conversion, or the 
fair market value of the property upon any other disposition, exceeds 
the adjusted basis of the property.
    (2) Exception to partner level recapture in the case of abusive 
allocations. Paragraph (b)(1) of this section does not apply in 
determining the amount treated as ordinary income under section 1254 
upon a disposition of section 1254 property by a partnership if the 
partnership has allocated the amount realized or gain recognized from 
the disposition with a principal purpose of avoiding the recognition of 
ordinary income under section 1254. In such case, the amount of gain on 
the disposition recaptured as ordinary income under section 1254 is 
determined at the partnership level.
    (3) Examples. The provisions of paragraphs (a) and (b) of this 
section are illustrated by the following examples which assume that 
capital accounts are maintained in accordance with section 704(b) and 
the regulations thereunder:

    Example 1. Partner level recapture--In general. A, B, and C, 
have equal interests in capital in Partnership ABC that was formed 
on January 1, 1985. The partnership acquired an undeveloped domestic 
oil property on January 1, 1985, for $120,000. The partnership 
allocated the property's basis to each partner in proportion to the 
partner's interest in partnership capital, so each partner was 
allocated $40,000 of basis. In 1985, the partnership incurred 
$60,000 of productive well intangible drilling and development costs 
with respect to the property. The partnership elected to deduct the 
intangible drilling and development costs as expenses under section 
263(c). Each partner deducted $20,000 of the intangible drilling and 
development costs. Assume that depletion allowable under section 
613A(c)(7)(D) for each partner for 1985 was $10,000. On January 1, 
1986, the partnership sold the oil property to an unrelated third 
party for $210,000. Each partner's allocable share of the amount 
realized is $70,000. Each partner's basis in the oil property at the 
end of 1985 is $30,000 ($40,000 cost--$10,000 depletion deductions 
claimed). Each partner has a gain of $40,000 on the sale of the oil 
property ($70,000 amount realized--$30,000 adjusted basis in the oil 
property). Assume that each partner's depletion allowance would not 
have been increased if the intangible drilling and development costs 
had been capitalized. Each partner's section 1254 costs with respect 
to the property are $20,000. Thus, A, B, and C each must treat 
$20,000 of gain recognized as ordinary income under section 1254(a).
    Example 2. Special allocation of intangible drilling and 
development costs. K and L form a partnership on January 1, 1997, to 
acquire and develop a geothermal property as defined under section 
613(e)(2). The partnership agreement provides that all intangible 
drilling and development costs will be allocated to partner K, and 
that all other items of income, gain, or loss will be allocated 
equally between the two partners. Assume these allocations have 
substantial economic effect under section 704(b) and the regulations 
thereunder. The partnership acquires a lease covering undeveloped 
acreage located in the United States for $50,000. In 1997, the 
partnership incurs $50,000 of intangible drilling and development 
costs that are allocated to partner K. The partnership also has 
$30,000 of depletion deductions, which are allocated equally between 
K and L. On January 1, 1998, the partnership sells the geothermal 
property to an unrelated third party for $160,000 and recognizes a 
gain of $140,000 ($160,000 amount realized less $20,000 adjusted 
basis ($50,000 unadjusted basis less $30,000 depletion deductions)). 
This gain is allocated equally between K and L. Because K's section 
1254 costs are $65,000 and L's section 1254 costs are $15,000, K 
recognizes $65,000 as ordinary income under section 1254(a) and L 
recognizes $15,000 as ordinary income under section 1254(a). The 
remaining $5,000 of gain allocated to K and $55,000 of gain 
allocated to L is characterized without regard to section 1254.
    Example 3. Section 59(e) election to capitalize intangible 
drilling and development costs. Partnership DK has 50 equal 
partners. On January 1, 1995, the partnership purchases an 
undeveloped oil and gas property for $100,000. The partnership 
allocates the property's basis equally among the partners, so each 
partner is allocated $2,000 of basis. In January 1995, the 
partnership incurs $240,000 of intangible drilling and development 
costs with respect to the property. The partnership elects to deduct 
the intangible drilling and development costs as expenses under 
section 263(c). Each partner is allocated $4,800 of intangible 
drilling and development costs. One of the partners, H, elects under 
section 59(e) to capitalize his $4,800 share of intangible drilling 
and development costs. Therefore, H is permitted to amortize his 
$4,800 share of intangible drilling and development costs over 60 
months. H takes a $960 amortization deduction in 1995. Each of the 
remaining 49 partners deducts his $4,800 share of intangible 
drilling and development costs in 1995. Assume that depletion 
allowable for each partner under section 613A(c)(7)(D) for 1995 is 
$1,000. On December 31, 1995, the partnership sells the property for 
$300,000. Each partner is allocated $6,000 of amount realized. Each 
partner that deducted the intangible drilling and development costs 
has a basis in the oil property at the end of 1995 of $1,000 ($2,000 
cost - $1,000 depletion deductions claimed). Each of these partners 
has a gain of $5,000 on the sale of the oil property ($6,000 amount 
realized - $1,000 adjusted basis in the property). The section 1254 
costs of each partner that deducted intangible drilling and 
development costs are $5,800 ($4,800 intangible drilling and 
development costs deducted + $1,000 depletion deductions claimed). 
Because each partner's section 1254 costs ($5,800) exceed each 
partner's share of amount realized less each [[Page 2508]] partner's 
adjusted basis ($5,000), each partner must treat his $5,000 gain 
recognized on the sale of the oil property as ordinary income under 
section 1254(a). Because H elected under section 59(e) to capitalize 
the $4,800 of intangible drilling and development costs and 
amortized only $960 of the costs in 1995, the $3,840 of unamortized 
intangible drilling and development costs are included in H's basis 
in the oil property. Therefore, at the end of 1995 H's basis in the 
oil property is $4,840 (($2,000 cost + $4,800 capitalized intangible 
drilling and development costs) - ($960 intangible drilling and 
development costs amortized + $1,000 depletion deduction claimed)). 
H's gain on the sale of the oil property is $1,160 ($6,000 amount 
realized - $4,840 adjusted basis). H's section 1254 costs are $1,960 
($960 intangible drilling and development costs amortized + $1,000 
depletion deductions claimed). Because H's section 1254 costs 
($1,960) exceed H's share of amount realized less H's adjusted basis 
($1,160), H must treat the $1,160 of gain recognized as ordinary 
income under section 1254(a).

    (c) Section 1254 costs of a partner--(1) General rule. A partner's 
section 1254 costs with respect to property held by a partnership 
include all of the partner's section 1254 costs with respect to the 
property in the hands of the partnership. In the case of property 
contributed to a partnership in a transaction described in section 721, 
a partner's section 1254 costs include all of the partner's section 
1254 costs with respect to the property prior to contribution. Section 
1.1254-1(b)(1)(iv), which provides rules concerning the treatment of 
suspended deductions, applies to amounts not deductible pursuant to 
section 704(d).
    (2) Section 1254 costs of a transferee partner after certain 
acquisitions--(i) Basis determined under section 1012. If a person 
acquires an interest in a partnership that holds natural resource 
recapture property (transferee partner) and the transferee partner's 
basis for the interest is determined by reference to its cost (within 
the meaning of section 1012), the amount of the transferee partner's 
section 1254 costs with respect to the property held by the partnership 
is zero on the acquisition date.
    (ii) Basis determined by reason of the application of section 
1014(a). If a transferee partner acquires an interest in a partnership 
that holds natural resource recapture property from a decedent and the 
transferee partner's basis is determined, by reason of the application 
of section 1014(a), solely by reference to the fair market value of the 
partnership interest on the date of the decedent's death or on the 
applicable date provided in section 2032 (relating to alternate 
valuation date), the amount of the transferee partner's section 1254 
costs with respect to property held by the partnership is zero on the 
acquisition date.
    (iii) Basis determined by reason of the application of section 
1014(b)(9). If an interest in a partnership that holds natural resource 
recapture property is acquired before the death of the decedent, the 
amount of the transferee partner's section 1254 costs with respect to 
property held by the partnership shall include the amount, if any, of 
the section 1254 costs deducted by the transferee partner before the 
decedent's death, to the extent that the basis of the partner's 
interest (determined under section 1014(a)) is required to be reduced 
under section 1014(b)(9) (relating to adjustments to basis when the 
property is acquired before the death of the decedent).
    (iv) Gifts and section 1041 transfers. If an interest in a 
partnership is transferred in a transfer that is a gift, a part sale or 
exchange and part gift, or a transfer that is described in section 
1041(a), the amount of the transferee partner's section 1254 costs with 
respect to property held by the partnership immediately after the 
transfer is an amount equal to--
    (A) The amount of the transferor partner's section 1254 costs with 
respect to the property immediately before the transfer; minus
    (B) The amount of any gain recognized as ordinary income under 
section 1254 by the transferor partner upon the transfer.
    (d) Property distributed to a partner--(1) In general. The section 
1254 costs for any natural resource recapture property received by a 
partner in a distribution with respect to part or all of an interest in 
a partnership include--
    (i) The aggregate of the partners' section 1254 costs with respect 
to the natural resource recapture property immediately prior to the 
distribution; reduced by
    (ii) The amount of any gain taken into account as ordinary income 
under section 751 by the partnership or the partners (as constituted 
after the distribution) on the distribution of the natural resource 
recapture property.
    (2) Aggregate of partners' section 1254 costs with respect to 
natural resource recapture property held by a partnership--(i) In 
general. The aggregate of partners' section 1254 costs is equal to the 
sum of each partner's section 1254 costs. The partnership must 
determine each partner's section 1254 costs under either paragraph 
(d)(2)(i)(A) (written data) or paragraph (d)(2)(i)(B) (assumptions) of 
this section. The partnership may determine the section 1254 costs of 
some of the partners under paragraph (d)(2)(i)(A) of this section and 
of others under paragraph (d)(2)(i)(B) of this section.
    (A) Written data. A partnership may determine a partner's section 
1254 costs by using written data provided by a partner showing the 
partner's section 1254 costs with respect to natural resource recapture 
property held by the partnership unless the partnership knows or has 
reason to know that the written data is inaccurate. If a partnership 
does not receive written data upon which it may rely, the partnership 
must use the assumptions provided in paragraph (d)(2)(i)(B) of this 
section in determining a partner's section 1254 costs.
    (B) Assumptions. A partnership that does not use written data 
pursuant to paragraph (d)(2)(i)(A) of this section to determine a 
partner's section 1254 costs must use the following assumptions to 
determine the partner's section 1254 costs:
    (1) The partner deducted his or her share of deductions under 
section 263(c), 616, or 617 for the first year in which the partner 
could claim a deduction for such amounts, unless in the case of 
expenditures under section 263(c) or 616, the partnership elected to 
capitalize such amounts;
    (2) The partner was not subject to the following limitations with 
respect to the partner's depletion allowance under section 611, except 
to the extent a limitation applied at the partnership level: the 
taxable income limitation of section 613(a); the depletable quantity 
limitations of section 613A(c); or the limitations of section 
613A(d)(2), (3), and (4) (exclusion of retailers and refiners).


Sec. 1.1254-6  Effective date of regulations.

    Sections 1.1254-1 through 1.1254-3 and Sec. 1.1254-5 are effective 
with respect to any disposition of natural resource recapture property 
occurring after March 13, 1995. The rule in Sec. 1.1254-
1(b)(2)(iv)(A)(2), relating to a nonoperating mineral interest carved 
out of an operating mineral interest with respect to which an 
expenditure has been deducted, is effective with respect to any 
disposition occurring after March 13, 1995 of property (within the 
meaning of section 614) that is placed in service by the taxpayer after 
December 31, 1986.


Sec. 1.1502-14  [Amended]

    Par. 8. In Sec. 1.1502-14, the first sentence of paragraph (c)(1) 
is amended by removing the language ``or 1250(a)(1)'' and adding ``1250 
(a)(1) or 1254(a)(1)'' in its place. [[Page 2509]] 

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 9. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 10. Section 602.101 (c) is amended by adding the following 
entries in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described        control  
                                                                number  
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
1.1254-1(c)(3).............................................    1545-1352
1.1254-5(d)(2).............................................    1545-1352
                                                                        
                                                                        
                  *        *        *        *        *                 
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: November 22, 1994.
Leslie B. Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-172 Filed 1-9-95; 8:45 am]
BILLING CODE 4830-01-U