Intangible Drilling Costs

[Burke]

Client bought interest in oil well partnerhip Dec 2005 investing $16,000. K-1 for 2005 showed $12,000 IDC. No problem. Elected to write off in one year. After 3 months, well turned into pumping mud, and interest terminated about March 2006, client got distribution of $1,620. K-1 for 2006 shows IDC of $16,000. Seller of investment is telling client he can write off entire $16,000 investment this year. Is there a special treatment of a "dry hole?" Where is this written? I have an old RIA Master Fed Tax Manual which says "deducted IDCs are recaptured as ordinary income on disposition of the oil or gas well," and refers to IRC 1254, which is titled "Gain from Disposition of Interest in Oil, Gas....etc." This will obviously be a loss. Does that make any difference? My view is that he has a basis of $16,000 - $12,000 - $1,620 = $2,380.

[taxxcpa]

I think your interpretation is correct. If he has already written off $ 12,000 of his investment, he cant deduct it again.

quote name='G Sawyer' date='Apr 24 2007, 09:12 PM' post='690']

Client bought interest in oil well partnerhip Dec 2005 investing $16,000. K-1 for 2005 showed $12,000 IDC. No problem. Elected to write off in one year. After 3 months, well turned into pumping mud, and interest terminated about March 2006, client got distribution of $1,620. K-1 for 2006 shows IDC of $16,000. Seller of investment is telling client he can write off entire $16,000 investment this year. Is there a special treatment of a "dry hole?" Where is this written? I have an old RIA Master Fed Tax Manual which says "deducted IDCs are recaptured as ordinary income on disposition of the oil or gas well," and refers to IRC 1254, which is titled "Gain from Disposition of Interest in Oil, Gas....etc." This will obviously be a loss. Does that make any difference? My view is that he has a basis of $16,000 - $12,000 - $1,620 = $2,380.

[kcjenkins]

Client bought interest in oil well partnerhip Dec 2005 investing $16,000. K-1 for 2005 showed $12,000 IDC. No problem. Elected to write off in one year. After 3 months, well turned into pumping mud, and interest terminated about March 2006, client got distribution of $1,620. K-1 for 2006 shows IDC of $16,000. Seller of investment is telling client he can write off entire $16,000 investment this year.

My view is that he has a basis of $16,000 - $12,000 - $1,620 = $2,380.

I think what you are confusing is that there are two different 16Ks here, his initial investment, and this year's IDC. I believe the seller is talking about this year's IDC not the 'investment'. As I see , he has a basis of 16000 - 12000 - 1620 plus a deduction of this years IDC.

KC

[taxxcpa]

If the well was producing in 2005, why would there be IDCs in 2006? If there WERE IDCs in 2006 it would be deductible in 2006.

I think what you are confusing is that there are two different 16Ks here, his initial investment, and this year's IDC. I believe the seller is talking about this year's IDC not the 'investment'. As I see , he has a basis of 16000 - 12000 - 1620 plus a deduction of this years IDC.

KC

[Burke]

I think what you are confusing is that there are two different 16Ks here, his initial investment, and this year's IDC. I believe the seller is talking about this year's IDC not the 'investment'. As I see , he has a basis of 16000 - 12000 - 1620 plus a deduction of this years IDC.

KC

I tend to agree with you that this is exactly what the seller is talking about from what I can discern. So, what you are saying is, the IDC expense is completely separate from his basis, and deductible regardless of his basis? This was never a producing oil well. The walls caved in, and it was shut down. Therefore, the K-1 is a final and should be treated as a disposition. What is confusing me is that Sect 1254 states that deducted IDCs are recaptured as oridinary income on disposition of the oil or gas well.