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Market Segment Specialization Program (MSSP)

Placer Mining Industry

Table of Contents


Chapter 9 - Sale of Claims

Information on sales and other transfers of mining claims can be obtained from the files maintained at the Department of Natural Resources. All transfers must be recorded and a copy of the recorded document supplied to the state. These documents include quitclaim deeds, warranty deeds, and contracts of sale. They provide the names of the seller, buyer, which property is transferred, and the terms of the transfer.

The documents may not contain the true sales price. Usually the documents indicate that the property was transferred for $10.00 and/or other good and valuable consideration. After the information derived from these documents is obtained, an RTVUE of the sellers return can be requested and examined to verify if the sale has been reported. If there is no sale apparent on the return, further research is warranted. This can be achieved by a third-party contact with the buyer. However, it may be advisable to probe further to guarantee that there is no collusion between the buyer and seller or to verify that the transaction was at arms length.

Since the purchase price or fair market value establishes the basis for the buyer in the majority of transactions, there is some incentive for the buyer to give correct information. Research of sales of property may also reveal a non-filer, so it is advisable to review both the seller's and the buyer's returns.

IRC section 617(d)(1) states:

Except as otherwise provided in this subsection, if mining property is disposed of, the lower of-

  1. the adjusted exploration expenditures with respect to such property, or
  2. the excess of
    1. the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value (in the case of any other disposition), over
    2. the adjusted basis of such property, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

Treas. Reg. section 1.617-4(a)(2) states:

In the case of a sale, exchange, or involuntary conversion of mining property, the gain to which [IRC] section 617(d)(1) applies is the lower of the adjusted exploration expenditures with respect to such property or the excess of the amount realized upon the disposition of the property over the adjusted basis of the property. In the case of a disposition of mining property other than by a manner described in the preceding sentence, the gain to which [IRC] section 617(d)(1) applies is the lower of the adjusted exploration expenditures with respect to such property * * * on the date of disposition over the adjusted basis of the property.

IRC section 617(f)(1) states:

* * * The term "adjusted exploration expenditures" means, with respect to any property or mine-

  1. the amount of the expenditures allowed for the taxable year and all preceding taxable years as deductions under subsection (a) to the taxpayer or any other person which are properly chargeable to such property or mine and which (but for the election under subsection (a)) would be reflected in the adjusted basis of such property or mine, reduced by
  2. for the taxable year and for each preceding taxable year, the amount (if any) by which
    1. the amount which would have been allowable for percentage depletion under [IRC] section 613 but for the deduction of such expenditures, exceeds
    2. the amount allowable for depletion under [IRC] section 611, properly adjusted for any amounts included in gross income under subsection (b) or (c) and for any amounts of gain to which subsection (d) applied.

Because a large percentage of Schedule C gold mines never claim to reach the production stage, depletion is rarely claimed. It is unlikely that there will be any recapture of exploration and development expenses. The computation described by IRC section 617(f)(1), regarding adjusted exploration expenditures, will generally not be a consideration when determining the gain on the sale of a particular claim; however, it must be considered.

It is important to determine the amount of exploration and development expenditures previously deducted pertaining to a particular claim or group of claims. The taxpayer is required to supply copies of all returns which include exploration or development expenditures pertaining to the claim or claims sold and be able to segregate the expenses by claim. This information can then be used to determine if a gain exists.

The basis of the claim must also be determined in order to ascertain if there is any excess basis. Once determined, the formula per IRC section 617(d)(1) can be applied. Also see IRC section 1254 for property placed in service after 1986.

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Chapter 10 - Alternative Minimum Tax

For purposes of determining Alternative Minimum Taxable Income (AMTI), mining development and exploration costs paid or incurred after December 31, 1986, which were allowable as a current deduction under IRC section 616(a) or 617(a), must be capitalized and amortized ratably over the 10-year period beginning with the taxable year in which the expenditures were made. This amount is shown as an Alternative Minimum Tax adjustment item and is the difference between the recomputed Alternative Minimum Tax expense and the expense claimed on the return. This adjustment is subject to an election under IRC section 59(e) which could eliminate the adjustment for AMTI purposes.

A taxpayer pays or incurs expenditures of $50,000 in the current taxable year for mining exploration and development costs. This amount was deducted on the Schedule C. Had the taxpayer elected to amortize the expenses over a 10-year period, the deduction in the current year would have been $5,000. The Alternative Minimum Tax adjustment would be calculated as follows:

 

        Current Year Deduction      $50,000
        Amortized Deduction          -5,000
                                    -------
        Total Adjustment to AMT     $45,000
     

In years 2 through 10, the unamortized amount becomes a negative adjustment in computing AMTI. That is, the unamortized amount reduces AMTI in years 2 through 10 as shown below:

 

        Current Year Deduction              $70,000
        Current Year Amortized Deduction     -7,000
        Prior Year Amortized Deduction       -5,000
                                            -------
        Total Adjustment to AMT             $58,000
     

Exploration and development expenditures can effect the Alternative Minimum Tax calculation. Consider also the calculation for Depreciation and Depletion. Most miners tend to have some heavy equipment with sizable basis. The recalculation of the depreciation or depletion and subsequent changes can have an effect on the Alternative Minimum Tax.

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Page Last Reviewed or Updated: 30-Aug-2012