7874 / Who is eligible to use the percentage depletion method?

Percentage depletion is generally available to individuals (including limited partners) who qualify as “independent producers or royalty owners” (i.e., certain “small producers”) and to individuals who own a depletable interest in (1) certain domestic regulated natural gas, (2) domestic natural gas sold under certain fixed contracts, and (3) certain domestic natural gas produced from geopressured brine.¹ (See Q 7872 regarding calculation of depletion in the case of an electing large partnership.) The IRC formerly prohibited certain transferees of an interest in a “proven” oil or gas property from using the small producer’s percentage depletion method; however, for transfers occurring after October11, 1990, this limitation generally does not apply.² (See Treasury Regulation Section1.613A-3(i)(2) regarding “transfers” and “transferees” in the context of “proven” properties and, also, for examples illustrating the effects of the old and new rules on the transfer of such properties.)

Percentage depletion is available under IRC Section613(b) with respect to certain minerals (other than oil and gas) recovered from an oil or gas well, without regard to the restrictions on oil and gas contained in IRC Sections 613(b)(7) and 613A.³

1. IRC §§ 613A(b), 613A(c); Treas. Reg. § 1.613A-3.