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Industry Director Directive on IRC Section 172(f) Specified Liability Losses - Attachment 4

Issue Name
Dismantlement of Drilling Platforms

Introduction
IRC §172(f)(1) provides ” The term ’specified liability loss‘ means the sum of the following amounts to the extent taken into account in computing the net operating loss for the taxable year.”

IRC §172(f)(1)(B)(i) states, “Any amount allowable as a deduction under this chapter (other than section 468(a)(1) or 468A(a)) which is in satisfaction of a liability under a Federal or State law requiring --- (I) the reclamation of land; (II) the decommissioning of a nuclear power plant, (III) the dismantlement of a drilling platform, (IV) the remediation of environmental contamination, or (V) a payment under any workers compensation act within the meaning of section 461(h)(2)(C)(i).” 

IRC §172(f)(1)(B)(ii) provides additional conditions on allowable deductions. “A liability shall be taken into account under this subparagraph only if —  (I) the act (or failure to act) giving rise to such liability occurs at least 3 years before the beginning of the taxable year, and (II) the taxpayer used an accrual method of accounting throughout the period or periods during which such act (or failure to act) occurred.”

IRC §172(f)(2) provides a “Limitation – The amount of the specified liability loss for any taxable year shall not exceed the amount of the net operating loss for such taxable year.”

Preceding those sections, IRC §172(b)(1)(C), concerning specified liability losses, states, “In the case of a taxpayer which has a specified liability loss (as defined in subsection (f)) for a taxable year, such specified liability loss shall be a net operating loss carry back to each of the 10 taxable years preceding the taxable year of such loss.”

The Petroleum Industry Technical Advisor team describes dismantlement of offshore platform in their coordinated issue on estimated dismantling costs. See IRS.gov for Coordinated Issue Paper – Dismantlement of Platforms.

  • Accrual basis taxpayers acquire long term mineral leases for the production of oil and gas. Offshore oil and gas leases typically have durations of 20 years or more. Easements are generally negotiated for oil and gas pipeline right-of-ways. The terms of the leases or land easements contain a contractual obligation to remove the platforms and well fixtures upon abandonment of the wells or termination of the leases. The pipeline must be removed when it is no longer used (i.e., after the last barrel of oil has moved through the pipeline) or upon termination of the easement.

The Petroleum Industry Technical Advisor Team provides general guidance on issues involving drilling platforms because of their involvement with the oil and gas industry.

Audit Steps

  • Examine the expenditures included within the specified liability loss related to the dismantlement of the drilling platforms to insure current period costs are excluded.
  • Determine if taxpayer accrued and deducted estimated dismantling and removal costs, either as an improper method of accounting or pursuant to a pre 1984 Appeals coordinated settlement position.
  • Determine if the dismantlement was triggered by storm damage and whether there is any potential insurance reimbursement.
  • Determine if the claimed dismantlement of the platform is in satisfaction of a liability under a Federal or State law.
  • Determine the 3 year and accrual rules apply to the dismantling expenditures.  “A liability shall be taken into account under this subparagraph only if —  (I) the act (or failure to act) giving rise to such liability occurs at least 3 years before the beginning of the taxable year, and (II) the taxpayer used an accrual method of accounting throughout the period or periods during which such act (or failure to act) occurred.”
Page Last Reviewed or Updated: 27-Nov-2013