Amended

by

ART. 209. Determination of quantity of oil in ground.—In the case either an owner or lessee it will be required that an estimate, subj to the approval of the Commissioner, shall be made of the probab recoverable oil contained in the territory with respect to which th investment is made as of the time of purchase, or as of March 1, 197 if acquired prior to that date, or within 30 days after the da of discovery, as the case may be. The oil reserves must be estimat for all undeveloped proven land as well as producing land. If info mation subsequently obtained clearly shows the estimate to have be materially erroneous, it may be revised with the approval of t Commissioner.

ART. 210. Computation of allowance for depletion of mines and wells. When the cost or value as of March 1, 1913, or within! days after the date of discovery of the property shall have be determined, and the number of mineral units in the property of the date of acquisition or valuation shall have been estimate. the division of the former amount by the latter figure will g the unit value for purposes of depletion, and the depletion allo ance for the taxable year may be computed by multiplying s unit value by the number of units of mineral extracted during year. If, however, proper additions are made to the capital count represented by the original cost or value of the proper or unforeseen circumstances necessitate a revised estimate of t number of mineral units in the ground, a new unit value i purposes of depletion may be found by dividing the capital count at the end of the year, less deductions for depletion to t beginning of the taxable year which have or should have be taken, by the number of units in the ground at the beginni of the taxable year. This number, unless a revision of the origi estimate has been necessary, will equal the number of units in t ground at the date of original acquisition or valuation less the nu ber extracted prior to the taxable year. If, however, a recalculati is needed, the number of units at the beginning of the year will the sum of the gross production of the year and the estimated miner reserves in the property at the end of the year.

ART. 211. Computation of allowance for depletion of gas wells.-0 account of the peculiar conditions surrounding the production natural gas it will be necessary to compute the depletion allowance for gas properties by methods suitable to the particular cases question and acceptable to the Commissioner. Usually, the depl

T.W.404 3064 Lept. 4, 20, tion of natural gas properties should be computed on the basis Pt. p. 4104. producer will be expected to compute the depletion as accurate

decline in closed or rock pressure, taking into account the effects water encroachment and any other modifying factors. The g

as possible and submit with his return a description of the meth

which the computation was made. The following formula, in hich the units of gas are pounds per square inch of closed pressure, ay be used and is recommended: the quotient of the capital account coverable through depletion allowances to the end of the taxable ar, divided by the sum of the pressures at the beginning of the year plus he sum of initial pressures of new wells a ss the sum of the pressures at the time of expected abandonment vhich quotient is the unit cost), multiplied by the sum of the presres at the beginning of the taxable year plus the sum of the presres of new wells less the sum of the pressures at the end of the tax ar, equals the depletion allowance.

ART. 212. Gas well pressure records to be kept.-Beginning with 1919 osed pressure readings of representative wells, if not of all wells, ust be carefully made and kept. In order to standardize pressure adings the well should remain closed until the pressure does not ild up more than 1 per cent of the total pressure in ten minutes. rdinarily 24 hours will suffice for this purpose, but some wells ill need to remain closed for a longer period. If there is any water the well it should be blown or pumped off before the well is closed. closed pressure reading of a gas well which has been producing, is near gas wells that have been producing, is lower than the tual pressure of the gas in the reservoir by an amount depending the well's location with reference to other producing wells and e length of time it has been closed in. It is necessary to record e length of time the well has been closed and to show how the ressure built up during this period. Successive readings will indite the point at which the pressure becomes approximately station`y, that is, the point at which the closed pressure approaches as early as possible the maximum pressure which would be shown if 1 wells in the pool were closed for several months. The length of me required varies with the character of the sand, position of the acker, the location of the well with reference to other wells, the mits of the pool, and other factors. The depth of the well, diameter f tubing, and line pressure when the well was shut off, should be oted. Since readings at the exact end of the taxable year will dinarily not be available, the pressure of that date may be obined by interpolation or extrapolation. In certain cases readings ken regularly in September or some other month may be applicable the end of the taxable year. As a general rule September closed ressure readings furnish the best indication of depletion and it is commended that such readings be made with regularity and care. 'here interpolated or extrapolated readings are used the data from hich they are obtained should be given. Gauges should be of apropriate capacity and should be frequently tested. A record should a kept of the number of gauges, date each was tested, names of en testing, and other significant details.

Amended

ART. 213. Computation of allowance where quantity of oil or gas ur certain. If by reason of the youth of the field, the restricted pro duction, or for any other cause, it is not possible to determine with any degree of certainty the quantity of oil or gas in a property, it will be necessary to make a tentative estimate which will apply until production figures are available from which an accurate determina tion may be made.

ART. 214. Computation of depletion allowance for combined holding

4 T.19.3055 of oil and gas wells. (1) The recoverable oil belonging to the tas

́payer shall be estimated separately on the smallest unit on which 12,920. data are available, such as individual wells or tracts, and the P. H. added together into a grand total to be applied to the total capita 4105 account returnable through depletion. The capital account shal include the cost or value, as the case may be, of all oil or g leases or rights within the United States and its possessions plus all incidental costs of development not charged as expense no: returnable through depreciation. The unit value of the total recover able oil or gas is the quotient obtained by dividing the total capital account recoverable through depletion by the total estimated recover able oil or gas. This unit multiplied by the total number of units of oil or gas produced by the taxpayer during the taxable year from all of the oil and gas properties will determine the amount whic may be allowably deducted from the gross income of that year.

(2) In the case of the gas properties of a taxpayer the depletion allowance for each pool may be computed by using the combined capital account returnable through depletion of all the tracts of g land owned by the taxpayer in the pool and the average decline rock pressures of all the taxpayer's wells in such pool in the formus given in article 211. The total allowance for depletion of the g properties of the taxpayer will be the sum of the amounts com puted for each pool.

per

ART. 215. Depletion of mine based on advance royalties. Where the owner has leased a mining property for a term of years with a r quirement in the lease that the lessee shall mine and pay for annual a specified number of tons or other agreed units of measurement such mineral, or shall pay annually a specified sum of money whic shall be applied in payment of the purchase price or agreed royalty unit of such mineral whenever the same shall thereafter be mine and removed from the leased premises, the value in the ground to th lessor for purposes of depletion of the number of units so paid f in advance of mining will constitute an allowable deduction from the gross income of the year in which such payment or payments shall made; but no deduction for depletion by the lessor shall be claime or allowed in any subsequent year on account of the mining or re moval in such year of any ore or mineral so paid for in advance and

for which deduction has been once made. If for any reason any such mining lease shall be terminated before the ore or mineral therein. which has been paid for in advance has been mined and removed, and the lessor repossesses the leased property, an amount equal to the aggregate deductions for depletion allowed in respect of ore or mineral not mined and removed by the lessee, but still in the ground, will be deemed income to the lessor and will be returned as such for the year in which the property is repossessed.

ART. 216. Depletion and depreciation accounts on books.-Every taxpayer claiming and making a deduction for depletion and depreciation of mineral property shall keep accurate ledger accounts in which shall be charged the fair market value as of March 1, 1913, or within 30 days after the date of discovery, or the cost, as the case may be, (a) of the property, and (b) of the plant and equipment, together with such amounts expended for development of the property or additions to plant and equipment since that date as have not been deducted as expense in his returns. These accounts shall be credited with the amount of the depreciation and depletion deductions claimed and allowed each year, or the amount of the depreciation and depletion shall be credited to depletion and depreciation reserve accounts, to the end that when the sum of the credits for depletion and depreciation equals the value or cost of the property, plus the amount added thereto for development or additional plant and equipment, less salvage value of the physical property, no further deduction for depletion and depreciation with respect to the property will be allowed. If dividends are paid out of a depletion or depreciation reserve, the stockholders must be expressly notified that the dividend is a return of capital and not an ordinary dividend out of profits. See article 1549.

ART. 217.1 Statement to be attached to return where depletion of mine claimed. To the return of the taxpayer claiming a deduction for depletion or depreciation or both there should be attached a statement setting out: (a) whether the owner is a fee owner or lessee or both; (b) a description of the property owned in fee, if any, and a description of the leasehold property, if any, including the date of acquisition and the date of expiration of the lease; (c) the fair market value as of March 1, 1913, or within 30 days of the date of discovery, or the cost, as the case may be, of the property owned in fee and the leasehold property, together with a statement of the precise method by which the value or the cost of freehold and leasehold property was determined; (d) the estimated number of units of mineral or ore at the date of acquisition or of valuation in the property owned in fee and in the leasehold property separately, together with an explanation of the method used in estimating in each case the number of units of mineral or ore for purposes of depletion;

1 See pp. 315-316 for modification.

(e) the amount of capital applicable to each unit; (f) the number of units removed and sold during the year for which the return was made; (g) the total amount deducted on account of depletion and on account of depreciation, stated separately, up to the taxable year during the ownership of the taxpayer; and (h) any other data which would be helpful in determining the reasonableness of the de pletion and depreciation deductions claimed in the return.

ART. 218.1 Statement to be attached to return where depletion of oil or gas claimed. To each return made by a person owning or operat ing oil or gas properties, there should be attached a statement showing for each property the following information, which may be given in the form of a table, if desired, by taxpayers owning more than one property: (a) the fair market value of the property (ex. clusive of machinery, equipment, etc., and the value of the surface rights) as of March 1, 1913, if acquired prior to that date; or the fair market value of the property within 30 days after the date of discovery; or the actual cost of the property, if acquired subsequently to February 28, 1913, and not covered by the foregoing clause; (b) how the fair market value was ascertained, if the prop erty came under the first or second head under (a); (c) the esti mated quantity of oil or gas in the property at the time that the value or cost was determined; (d) the name and address of the person making the estimate and the manner in which this esti mate was made, including a summary of the calculations; (e) the amount of capital applicable to each unit (this being found by dividing the value or cost, as the case may be, by the estimated num ber of units of oil or gas in the property at the time the value or cost was determined); (f) the quantity of oil or gas produced dur ing the year for which the return is made (in the case of new prop erties it is desirable that this information be furnished by months); (g) the number of acres of producing and proven oil or gas land; (h) the number of wells producing at the beginning and end of the taxable year; (2) the date of completion of wells finished during the taxable year; (j) the date of abandonment of all wells abandoned during the taxable year; (k) a property map showing the location of the property and of the producing and abandoned wells, dry holes, and proven oil and gas land; (7) the average gravity of the oil produced on the tract; (m) the number of pay sands and average thickness of each pay sand or zone on the property; (n) the average depth to the top of each of the different pay sands; (o) any data regarding change in operating conditions, such as flooding, use of compressed air, vacuum, shooting, etc., which have a direct effect on the production of the property; (p) the monthly or annual production of individual wells and the initial daily production of new wells (this is highly desirable information and

1 See pp. 315-316 for modification.