PLEASE READ AND ACKOWLEDGE THE FOLLOWING 1) I am attaching a short powerpoint which will provide basis for most of the answers – Some also have ref to a court case which will need to be looked up 2) The paper does not need to be any length – But answer each question precisely and concisely – I just guessed based off of the questions. In fact – Do not write the answers like a paper – just write them like 1) the tax consequences of xxx are ……. 2) ……. etc Problems on Parties Eligible to make an IDC Election Note (LL=Landowner Larry, WB=Wildcat Bill DD=Driller Dan) 1. LL and WB enter into an oil & gas lease with Larry retaining 1/8th royalty and Bill receiving the entire working interest. Is either LL or WB eligible to make an election to expense IDC? 2. Assume the same facts as problem 1, but Bill, as sub-lessor, assigns the entire working interest in the lease to FF, retaining a 1/16th -overriding royalty interest who is eligible to make an election to expense IDC? 3. Does it make a difference in eligibility to expense IDC if Bill retains a net profit interest (entitling him to ½ of the net profits from the property) instead of the overriding royalty interest? 4. Bill assigns the entire working interest acquired in prob 1 above to FF, subject to a 100k production payment (payable out of 25% of production), instead of an overriding royalty. (Ignore any interest issues that could arise.) Who can make an election to expense IDC on the property? See IRC Sec 636(b). 5. LL enters into an oil & gas lease w WB and DD, each securing a 50% working interest in the lease, with L retaining a 1/8th. Royalty interest. Are Bill & or Dan eligible to make an election to expense IDC? What about LL? Assume for this problem that the parties make an effective election under IRC 761 (a) to be excluded from partnership treatment under subchapter K of the code. 6. Assume the same facts in Prob 5 above, but the parties do not elect to be excluded from tax partnership treatment under sub-chapter K of the code and thus form a tax partnership. Does this make a difference as to eligibility to make an election to expense IDC? 7. Corp XYZ jointly owned 50/50 by FF & WB enters into an oil & gas lease w LL receiving the entire working interest. Which party or parties can make an election to expense IDC? 8. Corp X, an integrated oil co, as defined under IRC sec 291(b)(4), enters into an oil & gas with LL securing 100% of the working interest & LL retaining a 1/8th royalty. Can corp. X make an election to exp IDC? 9. WB secures an oil & gas lease from LL securing 100% of the working interest, with LL retaining a 1/8th royalty. Bill contracts with the DD to drill a well for a cash payment of $10/ft. Can DD make an election to exp IDC? Can WB make an election to exp IDC even though Bill contracts for the drilling? 10. Assume the same facts as prob 9, except that B enters into a turnkey contract w DD to deliver a completed well for $100k/ Can WB make an election to deduct IDC and if so, what amount would qualify? See Rev Rule 73-211, 1973-1 C.B. 303 11. LL enters into an oil & gas lease with WB, retaining 18th royalty & granting 100%.% of the working interest to WB. WB assigns 25% of the working interest to DD in exchange for DD drilling a well. DD holds the entire working interest until drilling expense is offset. Who is eligible to make an election to exp IDC? 12. Does it make a diff in prob 11 if DD only holds ¼ of the working interest but funds 100% of the drilling exp? How is the 75% excess drilling cost treated? 13. LL enters into an oil & gas lease with WB, retaining 18th royalty & granting 100% of the working interest to WB. WB holds other leases & mase an election to exp IDC in the pan B capitalize IDC associated with drilling on the lease with Larry Landowner (LL)? Problems on the mechanics of making an IDC Election P291 1) WB inc.– an accrual taxpayer, incurred drilling costs of 25,000 during year 1, the 1st year. it had incurred IDC. Wildcat inc. capitalized the drilling costs on the financial books but deducted the drilling costs on the tax return. Is Wildcat Bill’s reporting of the IDC as expense on the tax retur. a valid election to exp IDC? 2) The well in Prob 1 turned out to be dry. WB Inc deducted the IDC on it’s year 1 return., under the heading “Dry holes and worthless Leases” but made no other mention of the IDC election on the return. Is Wildcat Bill, Inc’s expense of the dry hole cost in YR 1 an election to IDC – See Hawkeye Petrol Corp. v Commissioner, 18 T.C. 1223 (1952), nonacq., 1953-1 C.B. 7. 3) WB & Driller Dan form a joint venture to explore and develop an oil and gas property. (Bill & Dan do not file a Sec 761 (a) election to be excluded from Subchapter K provisions) Bill & Dan each own one- half of the working interest in the oil and gas property in year 1, Bill & Dan, both cash method taxpayers, each pay $15,000 of IDC with respect to the property & elect to expense & deduct them on their individual tax returns. In Yr. 3, the IRS establishes that Bill & Dan’s Joint venture constitutes a partnership for Fed tax purposes. Are Bill & Dan’s elections to expense IDC in Year 1 effective? See Boone vs. United states, 374 F Supp. 115(D.N.D. 1973); Marburger v United States, 303 F. Supp. 42 (W.D. Ky 1969) 4) WB inc. , has previously elected to capitalize IDC as the IDC on the financial books of account that had been capitalized flow through the tax return as capital items. WB is primarily an unconventional oil & gas producer with significant tax losses so Had not been diligent about considering tax elections. WB Inc, now proposes to acquire new oil & gas property and wants to make an election to expense IDC. Is there any way that WB Inc, can expense with respect to the new property. What would you recommend that WBI do to change the result & secure expense treatment for the IDC’s associated w this new property. Problems on Expenses Qualifying for IDC Deduction In Which of the following expenditures qualify for the election to expense intangible drilling and development costs 1) Drilling costs billed to the operator/lessee by a contract driller. Does it make a difference if the drilling fee is on a per foot billing rate ore a well completion rate to a stated depth? 2) Legal fees paid by the lessee for the negotiating and drafting the drilling contract with an independent contractor 3) Drilling costs associated with a well to determine the best location for a platform location 4) Costs of constructing a dirt road to the drill site to access the property – these include labor and gravel costs 5) Costs of renting trucks and cars to transport materials and individuals to the drill site. Would it make a difference if the cars and trucks are purchased by the operator 6) Costs of constructing pipelines from the wellhead to oil storage tanks that are needed in drilling operations as liquids come up the wellbore during drilling operations. 7) Labor and material costs of offshore drilling platforms 8) Costs of transporting the platforms described in prob 7 above to their offshore location, and costs of installing the platforms at that location 9) Costs of a flare boom installed on an offshore platform that is sized for peak production but needed during drilling operations 10) Costs of separation equipment located onshore due to regulatory requirements but needed for drilling offshore wells from an offshore platform 11) Costs of modules installed on a modular platform that are stacked in place to secure all of the modules but are not sued for drilling other than to support other modules that are used in drilling 12) Costs of drilling delineation wells to determine the reservoir’s locations when the driller/operator is highly unlikely to ever produce from the well until a platform is installed although the well is capable of producing.
