[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: 26CFR1.616-1]

[Page 519-520]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.616-1  Development expenditures.

    (a) General rule. Section 616 prescribes rules for treating 
expenditures paid or incurred during the taxable year by the taxpayer 
for the development of a mine or other natural deposit (other than an 
oil or gas well). Development expenditures under section 616 are those 
which are made after such time when, in consideration of all the facts 
and circumstances (including actions of the taxpayer), deposits of ore 
or other mineral are shown to exist in sufficient quantity and quality 
to reasonably justify commercial exploitation by the taxpayer. Under 
section 616(a), a taxpayer is allowed a deduction for development 
expenditures whether or not such expenditures are made in the 
development or production state of the mine or other natural deposit. 
Under section 616(b), the taxpayer may elect to defer development 
expenditures made in the development or producing stage and to deduct 
such expenditures ratably as the minerals or ores benefited are sold. 
While the mine or other natural deposit is in the development stage, the 
election applies only to that portion of the development expenditures 
which is in excess of net receipts from the mine or other natural 
deposit. See Sec. 1.616-2 for rules with respect to the election to 
defer. It is not necessary that the taxpayer incur the development costs 
directly. He may engage a contractor to make the expenditures on his 
behalf.
    (b) Expenditures to which section 616 is not applicable. (1) Section 
616 is not applicable to development expenditures which are deductible 
for the taxable year under any other provision of the internal revenue 
laws.
    (2) Section 616 is not applicable to expenditures which are 
reflected in improvements subject to allowances for depreciation under 
sections 167 and 611. However, allowance for depreciation of such 
improvements which are used in the development of ores or minerals are 
considered development expenditures under section 616. If such 
improvements are used only in part for development during a taxable 
year, an allocable portion of the allowance for depreciation shall be 
treated as a development expenditure.
    (3) Section 616 is applicable to development expenditures paid or 
incurred by a taxpayer in connection with the acquisition of a 
fractional share of the working or operating interest to the extent of 
the fractional interest so acquired. The expenditure attributable to the 
remaining fractional share shall be considered as part of the cost of 
his acquired interest and shall be capitalized and recovered through 
depletion allowances. For example, taxpayer A owns mineral leases on 
undeveloped mineral lands. A agrees to convey an undivided three-fourths 
(\3/4\) interest in such leases to B, provided B will pay all of the 
expenditures incurred during the development stage of the deposits on 
these leases. B may deduct three-fourths (\3/4\) of such amount under 
section 616, but shall treat one-fourth of such amount as part of the 
cost of his interest, recoverable through depletion.
    (4) The provisions of section 616 do not apply to costs of 
development paid or incurred by a prior owner which are reflected in the 
amount which the taxpayer paid or incurred to acquire the property. Such 
provisions apply only to costs paid or incurred by the taxpayer for 
development undertaken directly or through contract by the taxpayer. 
See, however, section 381(a) and 381(c)(10) for special rules with 
respect to deferred development expenditures in certain corporate 
acquisitions.
    (c) Mine or other natural deposit. Section 616 has reference to 
expenditures made for the development of a mine or other natural 
deposit. Within an aggregated property, as that term is defined in 
section 614 (b) and (c), or within a single tract or parcel of land, 
there may be more than one mine or other natural deposit. Where a 
property, as determined under section 614, contains more than one mine 
or other natural deposit, the taxpayer may deduct under section 616(a) 
the development expenditures made with respect to one of such mines or 
deposits, and may defer under section 616(b) the development 
expenditures made with respect

[[Page 520]]

to another of such mines or deposits. Where there is more than one mine 
with respect to a single underlying deposit, the taxpayer may deduct 
under section 616(a) the development expenditures made with respect to 
one of such mines, and may defer under section 616(b) the development 
expenditures made with respect to another of such mines. The taxpayer 
must treat consistently all development expenditures with respect to 
each such mine or other natural deposit in a taxable year. The taxpayer 
must make a separate determination of the units of minerals or ores 
benefited in a mine or other natural deposit (regardless of the 
computation of the depletion allowance) in order that deferred 
expenditures with respect to such mine or deposit may be deducted on a 
ratable basis. See paragraph (f) of Sec. 1.616-2.