[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: 26CFR1.617-4]

[Page 531-534]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.617-4  Treatment of gain from disposition of certain mining property.

    (a) In general. (1) In general, section 617(d)(1) provides, that, 
upon a disposition of mining property, the lower of (i) the adjusted 
exploration expenditures (as defined in section 617(f)(1) and paragraph 
(d) of Sec. 1.617-3) with respect to the property, or (ii) the amount, 
if any, by which the amount realized on the sale, exchange, or 
involuntary conversion (or the fair market value of the property on any 
other disposition, exceeds the adjusted basis of the property, shall be 
treated as gain from the sale of exchange of property which is neither a 
capital asset nor property described in section 1231 (that is, shall be

[[Page 532]]

recognized as ordinary income). However, any amount recognized under the 
preceding sentence shall not be included by the taxpayer in his gross 
income from the property for purposes of section 613. Generally, the 
ordinary income treatment applies even though in the absence of section 
617(d) no gain would be recognized under any other provision of the 
Code. For example, if a corporation distributes mining property as a 
dividend, gain may be recognized as ordinary income to the corporation 
even though, in the absence of section 617, section 311(a) would 
preclude any recognition of gain to the corporation. For an exception to 
the recognition of gain with respect to dispositions which involve 
mineral production payments, see section 636 and the regulations 
thereunder. For the definition of the term mining property, see section 
617(f)(2) and paragraph (c)(3), of Sec. 1.617-3. For exceptions and 
limitations to the application of section 617(d)(1), see section 
617(d)(3) and paragraph (c) of this section.
    (2) In the case of a sale, exchange, or involuntary conversion of 
mining property, the gain to which 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 section 617(d)(1) applies is the 
lower of the adjusted exploration expenditures with respect to such 
property or the excess of the fair market value of the property on the 
date of disposition over the adjusted basis of the property. In the case 
of a disposal of coal or domestic iron ore subject to a retained 
economic interest to which section 631(c) applies, the excess of the 
amount realized over the adjusted basis of the mining property shall be 
treated as equal to the gain, if any, referred to in section 631(c). For 
determination of the amount realized upon a disposition of mining 
property and nonmining property, see paragraph (c)(3)(i) of this 
section.
    (3) The provisions of this paragraph may be illustrated by the 
following examples:

    Example 1. On July 14, 1970, A purchased undeveloped mining property 
for $100,000. During 1970, A incurred with respect to the property, 
$50,000 of exploration expenditures which he deducts under section 
617(a). In 1971, A incurred $150,000 of exploration expenditures with 
respect to the property which he deducts on his income tax return. On 
January 2, 1972, A sells the mining property to B for $250,000. A's gain 
on the sale is $150,000 ($250,000 amount realized minus $100,000 basis). 
Since the excess of the amount realized over the adjusted basis of the 
mining property is less than the adjusted exploration expenditures with 
respect to the property ($200,000), the entire gain is treated as 
ordinary income under section 617(d)(1).
    Example 2. Assume the same facts as in example 1 except that A sells 
the mining property to B for $400,000, thereby realizing gain of 
$300,000 ($400,000 minus $100,000 basis). Since the amount of adjusted 
exploration expenditures with respect to the mining property ($200,000) 
is less than the amount realized upon its disposition ($300,000), an 
amount equal to the amount of adjusted exploration expenditures is 
treated as ordinary income under section 617(d)(1). The remaining 
$100,000 is treated by A without regard to section 617(d)(1).

    (4) Section 617(d) does not apply to losses. Thus, section 617(d) 
does not apply if a loss is realized upon a sale, exchange, or 
involuntary conversion of mining property, nor does section 617(d) apply 
to a disposition of mining property other than by way of sale, exchange, 
or involuntary conversion if at the time of the disposition the fair 
market value of such property is not greater than its adjusted basis.
    (b) Disposition of portion of mining property. (1) For purposes of 
section 617(d)(1) and paragraph (a) of this section, except as provided 
in subparagraph (3) of this paragraph, in the case of the disposition of 
a portion of a mining property (other than an undivided interest), the 
entire amount of the adjusted exploration expenditures with respect to 
such property shall be treated as attributable to such portion to the 
extent of the amount of the gain to which section 617(d)(1) applies. If 
the amount of the gain to which section 617(d)(1) applies is less than 
the amount of the adjusted exploration expenditures with respect to the 
property, the

[[Page 533]]

balance of the adjusted exploration expenditures shall remain subject to 
recapture in the hands of the taxpayer under the provisions of section 
617 (b), (c), and (d). The disposition of a portion of a mining property 
(other than an undivided interest) includes the disposition of a 
geographical portion of a mining property. For example, assume that A 
owns an 80-acre tract of land with respect to which he has deducted 
exploration expenditures under section 617(a). If A were to sell the 
north 40 acres, the entire amount of the adjusted exploration 
expenditures with respect to the 80-acre tract would be treated as 
attributable to the 40-acre portion sold (to the extent of the amount of 
the gain to which section 617(d)(1) applies).
    (2) For purposes of section 617(d)(1), except as provided in 
subparagraph (3) of this paragraph, in the case of the disposition of an 
undivided interest in a mining property (or portion thereof) a 
proportionate part of the adjusted exploration expenditures with respect 
to such property shall be treated as attributable to such undivided 
interest to the extent of the amount of the gain to which section 
617(d)(1) applies. For example, assume that A owns an 80-acre tract of 
land with respect to which he has deducted exploration expenditures 
under section 617(a). If A were to sell an undivided 40 percent interest 
in such tract, 40 percent of the adjusted exploration expenditures with 
respect to the 80-acre tract would be treated as attributable to the 40 
percent of the 80-acre tract disposed of (to the extent of the amount of 
the gain to which section 617(d)(1) applies).
    (3) Section 617(d)(2) and subparagraphs (1) and (2) of this 
paragraph shall not apply to any expenditure to the extent that such 
expenditure relates neither to the portion (or interest therein) 
disposed of nor to any mine, in the property held by the taxpayer before 
the disposition, which has reached the producing stage. In any case 
where a taxpayer disposes of a mining property (or interest therein) and 
treats adjusted exploration expenditures with respect to the mining 
property as if they relate neither to the portion (or interest therein) 
disposed of nor to any mine, in the property held by the taxpayer before 
the disposition, which has reached the producing stage, the taxpayer 
shall attach to its return for the taxable year in which the disposition 
occurred, a statement which includes:
    (i) A description of the portion (or interest therein) disposed of;
    (ii) A description of the mineral property which included the 
portion (or interest therein) disposed of;
    (iii) An itemization of all expenditures deducted under sections 617 
and 615 with respect to such mineral property; and
    (iv) A description of the location of all producing mines on such 
mineral property.
    (c) Exceptions. (1)(i) Section 617(d)(3) provides, through 
incorporation by reference of the provisions of section 1245(b)(1), that 
no gain shall be recognized under section 617(d) upon a disposition by 
gift of mining property. For purposes of this subparagraph, the term 
gift means, except to the extent that subdivision (ii) of this 
subparagraph applies, a transfer of mining property which, in the hands 
of the transferee, has a basis determined under the provisions of 
section 1015 (a) or (d) (relating to basis of property acquired by 
gift). For reduction in amount of the charitable contribution in case of 
a gift of section 617 property, see section 170(e) and paragraph (c)(3) 
of Sec. 1.170-1.
    (ii) Where a disposition of mining property is in part a sale or 
exchange and in part a gift, the gain to which section 617(d) 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 such property.
    (2) Section 617(d)(3) provides, through incorporation by reference 
of the provisions of section 1245(b)(2), that, except as provided in 
section 691 (relating to income in respect to a decedent), no gain shall 
be recognized under section 617(d) upon a transfer at death. For 
purposes of this paragraph, the term transfer at death means a transfer 
of mining property which property, in the

[[Page 534]]

hands of the transferee, has a basis determined under the provisions of 
section 1014(a) (relating to basis of property acquired from a decedent) 
because of the death of the transferor.
    (3)(i) Section 617(d) provides, through incorporation by reference 
of the provisions of section 1245(b)(3), that upon a transfer of 
property described in subdivision (ii) of this subparagraph, the amount 
of gain taken into account by the transferor under section 617(d) shall 
not exceed the amount of gain recognized to the transferor on the 
transfer (determined without regard to section 617). For purposes of 
this subdivision, in case of a transfer of mining property and nonmining 
property in one transaction, the amount realized from the disposition of 
the mining property shall be deemed to be equal to the amount which 
bears the same ratio to the total amount realized as the fair market 
value of the mining property bears to the aggregate fair market value of 
all of the property transferred. The preceding sentence shall be applied 
solely for purposes of computing the portion of the total gain 
(determined without regard to section 617) which shall be recognized as 
ordinary income under section 617(d). Section 617(d)(3) does not apply 
to a disposition of mining property to an organization (other than a 
cooperative described in section 521) which is exempt from the tax 
imposed by chapter 1 of the Code.
    (ii) The transfers referred to in subdivision (i) of this 
subparagraph are transfers of mining property in which the basis of the 
mining property in the hands of the transferee is determined by 
reference to its basis in the hands of the transferor by reason of the 
application of any of the following provisions:
    (a) Section 332 (relating to distributions in complete liquidation 
of an 80-percent-or-more controlled subsidiary corporation). See 
subdivision (iii) of this subparagraph.
    (b) Section 351 (relating to transfer to a corporation controlled by 
transferor).
    (c) Section 361 (relating to exchanges pursuant to certain corporate 
reorganizations).
    (d) Section 371(a) (relating to exchanges pursuant to certain 
receivership and bankruptcy proceedings).
    (e) Section 374(a) (relating to exchanges pursuant to certain 
railroad reorganizations).
    (f) Section 721 (relating to transfers to a partnership in exchange 
for a partnership interest).
    (g) Section 731 (relating to distributions by a partnership to a 
partner).
    (iii) In the case of a distribution in complete liquidation of an 
80-percent-or-more controlled subsidiary to which section 332 applies, 
the limitation provided in section 617(d)(3), through incorporation by 
reference of the provisions of section 1245(b)(3), is confined to 
instances in which the basis of the mining property in the hands of the 
transferee is determined under section 334(b)(1), by reference to its 
basis in the hands of the transferor. Thus, for example, the limitation 
may apply in respect of a liquidating distribution of mining property by 
an 80-percent-or-more controlled corporation to the parent corporation, 
but does not apply in respect of a liquidating distribution of mining 
property to a minority shareholder. Section 617(d)(3) does not apply to 
a liquidating distribution of property by an 80-percent-or-more 
controlled subsidiary to its parent if the parent's basis for the 
property is determined, under section 334(b)(2), by reference to its 
basis in the stock of the subsidiary.

[T.D. 7192, 37 FR 12947, June 30, 1972]

                      Exclusions From Gross Income