LB&I Tier III Issue: Delay Rentals
Industry: Natural Resources & Construction
At issue is whether these delay rental payments are subject to capitalization under IRC §263A as costs of producing property. Petroleum companies acquire leasehold mineral interests in the ordinary course of their businesses. At the time of the acquisition, the lessee/sub lessee pays and capitalizes the leasehold bonus paid to the property or mineral owner. For any period that the lessee fails to drill on the leasehold, the lessee must pay a delay rental to the property or mineral owner.
It is not reasonable for taxpayers to take the position that all delay rentals are currently deductible in tax years which were before the effective date of the pre-production rule in the final regulations. Rather, delay rentals should have been treated as any other type of carrying cost subject to capitalization under section 263A, and some portion of the delay rentals actually incurred must have been capitalized.
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