[Federal Register Volume 65, Number 26 (Tuesday, February 8, 2000)]
[Proposed Rules]
[Pages 6090-6091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2730]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-103882-99]
RIN 1545-AX06


Depletion; Treatment of Delay Rental

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Notice of proposed rulemaking and notice of public hearing.

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SUMMARY:  This document contains proposed amendments conforming 
regulations relating to delay rental to the requirements of section 
263A relating to capitalization and inclusion in inventory of costs of 
certain expenses. Changes to the applicable law were made by the Tax 
Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of 
1988. The proposed regulations provide the public with guidance 
concerning the application of section 263A to delay rental.

DATES:  Written comments must be received by May 8, 2000. Outlines of 
topics to be discussed at the public hearing scheduled for May 26, 
2000, at 10 a.m. must be received by May 5, 2000.

ADDRESSES:  Send submissions to: CC:DOM:CORP:R (REG-103882-99), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-103882-99), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
regslist.html. The public hearing will be held in room 2615, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:  Concerning the regulation, Brenda M. 
Stewart, (202) 622-3120; concerning submissions and the hearing, LaNita 
Van Dyke, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 612 to conform them to the 
requirements of section 263A. Section 263A was enacted by the Tax 
Reform Act of 1986, Public Law 99-514 (100 Stat. 2085), and amended by 
the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647 
(102 Stat. 3342).

Explanation of Provisions

    Under the terms of a lease of mineral property, the lessee 
acquires, for a stated term, the right and obligation to obtain 
production of minerals from the property. A lease may provide that for 
each year that the lessee fails to make efforts to obtain production, 
the lessee must pay a ``delay rental'' to the lessor.
    Section 1.612-3(c)(1) of the final regulations defines a delay 
rental as an amount paid for the privilege of deferring development of 
the property

[[Page 6091]]

and which could have been avoided by abandonment of the lease, or by 
commencement of development operations, or by obtaining production. 
Section 1.612-3(c)(2) of the final regulations provides that since a 
delay rental is in the nature of rent, it is ordinary income to the 
payee and not subject to depletion. The payor may at his election 
deduct the delay rental as an expense, or charge it to depletable 
capital account under section 266.
    Section 263A was enacted subsequent to the issuance of Sec. 1.612-
3(c) of the final regulations. The uniform capitalization rules of 
section 263A generally require the capitalization of all direct costs 
and certain indirect costs properly allocable to property produced by 
the taxpayer. Capitalization may be required even though production 
(development) has not yet begun. Sec. 1.263A-2(a)(3)(ii). In some 
situations, a delay rental may be required to be capitalized under 
section 263A. Accordingly, the proposed regulation clarifies that 
subsequent to the enactment of section 263A, the payor of a delay 
rental may elect to expense currently the delay rental or charge it to 
depletable capital account under section 266 to the extent that the 
delay rental is not required to be capitalized under section 263A and 
the regulations thereunder.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, a Regulatory Flexibility Analysis is not required. Pursuant 
to section 7805(f) of the Internal Revenue Code, this notice of 
proposed rulemaking will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments that are submitted 
timely (a signed original and eight copies) to the IRS. The IRS and 
Treasury request comments on the clarity of the proposed regulations 
and they may be made easier to understand. All comments will be made 
available for public inspection and copying.
    A public hearing has been scheduled for May 26, 2000, at 10 a.m. in 
room 2615, Internal Revenue Building, 1111 Constitution Avenue NW., 
Washington, DC. Because of access restrictions, visitors will not be 
admitted beyond the Internal Revenue Building lobby more than 15 
minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments (a signed original and eight (8) copies) by May 
8, 2000. The outline of topics to be discussed at the hearing must be 
received by May 5, 2000.
    A period of 10 minutes will be allotted for each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of this proposed regulation is Brenda M. 
Stewart of the Office of Assistant Chief Counsel (Passthroughs and 
Special Industries), Internal Revenue Service. However, other personnel 
from the IRS and Treasury Department participated in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Par. 2. In Sec. 1.612-3, the second sentence of paragraph (c)(2) is 
removed and two sentences are added in its place to read as follows:


Sec. 1.612-3  Depletion; treatment of bonus and advanced royalty.

* * * * *
    (c) * * *
    (2) * * * To the extent the delay rental is not required to be 
capitalized under section 263A and the regulations thereunder, the 
payor may at his election deduct such amount or under section 266 and 
the regulations thereunder, charge it to depletable capital account. 
The second sentence of this paragraph (c)(2) applies to delay rentals 
paid with respect to leasing transactions entered into on or after the 
date these regulations are published as final regulations in the 
Federal Register.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-2730 Filed 2-7-00; 8:45 am]
BILLING CODE 4830-01-P