Rev. Rul. 71-317

Advice has been requested as to the effect on the value of the gross estate of mineral production sold within one year after a decedent's death.

Among the estate's assets at the date of the decedent's death, June 17, 1968, were producing royalty interests and producing working interests in minerals, which continued to produce income paid to the decedent's estate. The executor elected, on a timely filed return, to use the alternate valuation method of valuing the estate's assets in accordance with section 2032 of the Internal Revenue Code of 1954 [prior to its amendment by the Excise, Estate and Gift Tax Adjustment Act of 1970, Public Law 91-614 [C.B. 1971-1, 533]].

Section 20.2032-1(d) of Estate Tax Regulations provides, in part, that "* * * property earned or accrued (whether received or not) after the date of the decedent's death and during the alternate valuation period, with respect to any property interest existing at the date of the decedent's death, which does not represent a form of 'included property' itself or the receipt of 'included property,' is excluded in valuing the estate under the alternate valuation method. Such property is referred to in this section as excluded property."

Revenue Ruling 66-348, C.B. 1966-2, 433, considered the problem of the valuation of mineral production sold during the alternate valuation period where an election was made to use the alternate valuation method. It stated that the mineral thus sold was to be valued at its "in place" value.

The starting point for valuation of the estate in the instant case is the alternate valuation date. This is the date for which the asset must be valued on the basis of its stage of development or production at that time and the "in place" fair market value of the reserves (units of mineral remaining) must be determined. The term "in place" used in Revenue Ruling 66-348 means minerals in their natural state, that is, in the earth prior to extraction.

The apportionment of the net proceeds (net income) from mineral production during the period from the date of the decedent's death to the alternate valuation date as between "included" and "excluded" property is computed as set forth below.

The value of the included property is determined by applying an appropriate discount factor to the net proceeds (net income) from mineral production during the interim period. Such determined value is added to the fair market value of the reserves (units of mineral remaining) as of one year after the date of death. The discount factor used will vary from case to case but will be determined by taking into account the particular facts of each case, such as producing rate, type of interest owned and economic factors such as interest rates.

For example, a royalty interest has a fair market value of $100,000 on the date of death and $90,000 one year after the date of death. Net proceeds (net income) from mineral production during the interim period is $20,000. Considering all the facts and circumstances in this hypothetical case a discount factor of 12 percent is determined to be appropriate. The factor for 12 percent is 0.8929, the present value of $1 discounted at 12 percent for one year. Therefore, the fair market value of the property on the applicable alternate dates is $90,000 + ($20,000 X 0.8929) or $107,858. The remainder of the alternate year's production is excluded property.

Accordingly, the value of the royalty interest in the gross estate at the alternate valuation dates is the sum total of the in place fair market value of the reserves (units of mineral remaining) in existence one year after the date of death plus the value of the included property disposed of during the interim period.

Revenue Ruling 66-348, relating to proceeds received by an estate from the extraction and sale of minerals during the alternate valuation period, is clarified.