Rev. Rul. 77-1

Reconsideration has been given to Rev. Rul. 56-542, 1956-2 C.B. 327, as amplified by Rev. Rul. 68-28, 1968-1 C.B. 5, and Rev. Rul. 71-140, 1971-1 C.B. 161, concerning, in part, the right to the deduction for depletion in the case of a so-called "cost company."

Rev. Rul. 56-542 provides that, if certain criteria are met, stockholder-participants in a cost company that operates a mine are entitled to certain deductions, including depletion and depreciation, by virtue of rights acquired under a contract entitling them to the ore produced and obligating them as joint venturers to furnish the funds needed by the mining company to develop and operate the mine. Rev. Rul. 68-28 applies the principles of Rev. Rul. 56-542 to the investment credit allowable on assets purchased by the cost company. Rev. Rul. 71-140 amplifies certain aspects of Rev. Rul. 56-542 and Rev. Rul. 68-28.

Rev. Rul. 56-542, Rev. Rul. 68-28 and Rev. Rul. 71-140 are revoked. Pursuant to the authority granted by section 7805(b) of the Internal Revenue Code of 1954, the revocation of these rulings is effective July 1, 1977. Subsequent to the effective date of the revocation of these three rulings, all corporations operating as cost companies within the meaning of those rulings will be treated as separate taxpayers and will be required to compute their own income, deductions, credits and tax liabilities.

A cost company and its shareholder-participants may request a ruling confirming the tax consequences of the restructuring of the cost company resulting from this revocation. In appropriate cases, the Service will consider the use of closing agreements in order to facilitate such restructuring.

A corporation presently operating as a cost company within the meaning of Rev. Rul. 56-542 will be given a reasonable period of time beyond June 30, 1977 in which to restructure its present operations and relationships with shareholder-participants and others, if it establishes that such an extension is necessary in order to complete the orderly and expeditious restructuring of such operations and relationships. To request such an additional period, a taxpayer must submit, within 90 days from January 3, 1977, the date of publication of this Revenue Ruling in Internal Revenue Bulletin 1977-1, a request for a ruling requesting specific relief under section 7805(b) of the Code. Such ruling request must comply with the Statement of Procedural Rules, 26 CFR Part 601, and Rev. Proc. 72-3, 1972-1 C.B. 698. This ruling request must describe the intended restructuring of the cost company and include detailed descriptions of specific circumstances that justify an extension for the period requested. Circumstances that will justify the granting of an extension, for example, may relate to restrictions in existing debt obligations and leasehold interests, and difficulties in transferring title to property. If a ruling granting such an extension is issued, Rev. Rul. 56-542, Rev. Rul. 68-28 and Rev. Rul. 71-140 will continue to apply to such taxpayer through the period of the extension to the extent permitted in such ruling.

All such requests should be addressed to the Commissioner of Internal Revenue, Attention T:C:C, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

¹ Also released as News Release IR-1709, dated December 8, 1976.