[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.612-1]

[Page 404-405]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.612-1  Basis for allowance of cost depletion.

    (a) In general. The basis upon which the deduction for cost 
depletion under section 611 is to be allowed in respect of any mineral 
or timber property is the adjusted basis provided in section 1011 for 
the purpose of determining gain upon the sale or other disposition of 
such property except as provided in paragraph (b) of this section. The 
adjusted basis of such property is the cost or other basis determined 
under section 1012, relating to the basis of property, adjusted as 
provided in section 1016, relating to adjustments to basis, and the 
regulations under such sections. In the case of the sale of a part of 
such property, the unrecovered basis thereof shall be allocated to the 
part sold and the part retained.
    (b) Special rules. (1) The basis for cost depletion of mineral or 
timber property does not include:
    (i) Amounts recoverable through depreciation deductions, through 
deferred expenses, and through deductions other than depletion, and
    (ii) The residual value of land and improvements at the end of 
operations.

In the case of any mineral property the basis for cost depletion does 
not include amounts representing the cost or value of land for purposes 
other than mineral production. Furthermore, in the case of certain 
mineral properties, such basis does not include exploration or 
development expenditures which are treated under section 615(b) or 
616(b) as deferred expenses to be taken into account as deductions on a 
ratable basis as the units of minerals benefited thereby are produced 
and sold. However, there shall be included in the basis for cost 
depletion of oil and gas property the amounts of capitalized drilling 
and development costs which, as provided in Sec. 1.612-4, are 
recoverable through depletion deductions. In the case of timber 
property, the basis for cost depletion does not include amounts 
representing the cost or value of land.
    (2) Where a taxpayer elects to treat the cutting of timber as a sale 
or exchange of such timber, the basis for cost depletion shall be the 
fair market value of such timber as of the first day of the taxable year 
in which such timber is cut and such value shall be considered for such 
taxable year and all subsequent taxable years as the cost of such timber 
for all purposes for which such cost is a necessary factor. See section 
631(a).
    (c) Cross references. In cases where the valuation, revaluation, or 
mineral content of deposits is a factor, see paragraphs (c), (d), (e), 
and (f) of Sec. 1.611-2. In cases where the valuation, revaluation, or 
quantity of timber is a factor, see paragraphs (e), (f), and (g) of 
Sec. 1.611-3. For definitions of the terms property, fair market value, 
mineral enterprise, mineral deposit, and minerals, see paragraph (d) of 
Sec. 1.611-1. For rules with respect to treatment of depletion accounts 
on taxpayers' books, see paragraph (b) of

[[Page 405]]

Sec. 1.611-2 in the case of mineral property, and paragraph (c) of 
Sec. 1.611-3 in the case of timber property.