Rev. Rul. 67-141

Advice has been requested whether fees paid for services rendered in connection with the acquisition of noncompetitive government oil and gas leases are deductible or to be capitalized by the applicant.

A person solicits applicants to participate in the bidding on noncompetitive government oil and gas leases on Federal lands. The person also selects the tracts to be bid on and is responsible for filing a proper and timely bid with the Bureau of Land Management for which each applicant pays a fixed fee. In addition, the standard filing fee is paid to the Bureau of Land Management by each applicant.

The Tax Court of the United States in L. S. Munger et al. v. Commissioner , 14 T.C. 1236 (1950), upheld the Commissioner's determination that commissions paid for services in the acquisition of oil and gas leases were part of the cost of acquisition of the leases and should be capitalized.

The court in Dorothy Cockburn v. Commissioner , 16 T.C. 775 (1951), sustained the Commissioner's determination that the commission paid in the assignment of an oil and gas lease was a capital expenditure recoverable through depletion and not deductible as ordinary and necessary business expense.

Although the commissions paid in the Munger and Cockburn cases were paid by the grantor rather than the grantee, there is no difference in principle between fees paid by the applicant in the instant case and the commissions paid in those cases. Compare Bonwit Teller and Co. v. Commissioner , 17 B.T.A. 1019 (1929), acquiescence, C.B. IX-1, 6 (1930), reversed on other grounds, 53 F.2d 381 (1931), certiorari denied, 284 U.S. 690 (1931).

Accordingly, the fees paid by the applicants for services rendered in connection with the acquisition of oil and gas leases are not deductible expenses but must be capitalized as part of the cost of the oil and gas leases acquired by the applicants and may be recoverable through depletion.