7864 / How do the “at risk” rules impact the percentage depletion deduction with respect to an oil and gas program?

It is not completely clear whether the “at risk” rules will ever operate to disallow the percentage depletion deduction. Some authorities suggest that percentage depletion is deductible regardless of an individual’s amount at risk. These authorities point out that the conference committee report and effective date provisions of the Tax Reform Act of 1976 specifically mentioned depreciation and amortization, but omitted any reference to depletion. Furthermore, Proposed Treasury Regulation Section1.465-1 provides that a taxpayer’s amount at risk in an oil and gas limited partnership is to be increased by the excess of the deductions for depletion over the basis of the property subject to depletion. As this appears to allow percentage depletion even if the taxpayer has no other amount at risk, the authorities question whether a deduction for percentage depletion should also be allowed in early years when percentage depletion does not exceed the basis of the property and the taxpayer has no other amount at risk in the partnership.¹

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1. See, e.g., Haft, 1984 Tax Sheltered Investment Handbook (Clark Boardman Company, Ltd.), at5-6.

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