Tax News

CCH (cch.taxgroup.com) reports:

In calculating its alternative minimum taxable income, a corporation that owned a number of gold mines was required to make an adjusted current earnings (ACE) adjustment under Code Sec. 56(g)(4)(C)(i) for depletion with respect to mines placed in service on or before December 31, 1989. The ACE adjustment under Code Sec. 56(g)(4)(C)(i) is a general provision that applies to all property, regardless of when placed in service, and offsets the permanent benefit of percentage depletion method and other deductions not allowed when computing earnings and profits. The ACE adjustment under Code Sec. 56(g)(4)(F)(i), which applies only for mines placed in service after December 31, 1989, and requires an adjustment for the difference between the taxpayer's depletion deduction and the amount of the depletion that would be allowed under the cost method, did not preclude the general ACE adjustment. There was no ambiguity or conflict between the provisions because the general ACE adjustment applied only where the depletion deduction exceeded the adjusted basis of the property. Thus, the ACE adjustment under Code Sec. 56(g)(4)(F)(i) could be required when the general ACE adjustment would not apply. There was no evidence that Congress intended to protect mines placed in service on or before December 31, 1989, from the general ACE adjustment by, for example, including a similar limitation in the statute. The Tax Court rejected a number of arguments involving the rules of statutory construction and the legislative history and statutory scheme of Code Sec. 56.
Unamortized Code Sec. 56(a)(2) mining development costs were not included in the adjusted basis of the depletable property when calculating either the general ACE adjustment under Code Sec. 56(g)(4)(C)(i) or Code Sec. 57 tax preference items. In both cases, adjustments are required for the same amount, that being the excess of the depletion deduction allowed under the percentage depletion method over the adjusted basis of the property. Property for purposes of determining the depletion deduction included actual minerals. Unamortized Code Sec. 56(a)(2) costs are added to the mineral enterprise, but excluded from the adjusted basis of the mineral deposits for purposes of determining depletion deductions and the ACE adjustment. Similarly, for purposes of tax preference items, property was defined by reference to the cost depletion rules as interests in mineral deposits, excluding unamortized Code Sec. 56(a)(2) costs. However, based on the IRS's concession that the unamortized Code Sec. 56(a)(2) costs could be included in the adjusted basis of the mine property for purposes of calculating the tax preference items, the taxpayer was not required to make adjustments to its tax preference item. The ACE adjustment was computed to exclude items taken into account as tax preferences.
Santa Fe Pacific Gold Company, 130 TC No. 17, Dec. 57,477
Other References:
Code Sec. 56
CCH Reference - 2008FED ¶5210.22
Code Sec. 57
CCH Reference - 2008FED ¶5307.12
Tax Research Consultant
CCH Reference - TRC STAGES: 9,120.05