Rev. Rul. 71-191

Advice has been requested whether fees paid for services rendered in connection with the attempted acquisition of noncompetitive government oil and gas leases where no leases were acquired, are deductible under section 165(a) of the Internal Revenue Code of 1954 under the circumstances described below. The taxpayer, an individual, who from time to time acquired oil and gas leases, in a transaction entered into for profit paid fees to a person who solicited applicants to participate in the bidding on noncompetitive government oil and gas leases on Federal lands. The following services were provided for the fees paid: expert geological advice on United States Government lands available for noncompetitive leasing, timely and accurate filing of offers to lease approved lands on behalf of the applicant, and the payment of the standard filing fee to the Bureau of Land Management on behalf of the applicant. There was a public drawing to award available leases among the applicants, but no leases were acquired by the taxpayer.

These facts are similar to those presented in Revenue Ruling 67-141, C.B. 1967-1, 153, except that in the instant case no leases were actually acquired by the applicant. That Revenue Ruling provides that fees paid for services rendered in connection with the acquisition of noncompetitive government oil and gas leases are capital expenditures recoverable through depletion. In the instant case, the fees would not be capitalized since no leases were acquired and no other benefits accrued to the taxpayer.

Section 165(a) of the Code provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(c) of the Code provides that in the case of an individual, the deduction under subsection (a) shall be limited to losses incurred in a trade or business, incurred in any transaction entered into for profit, though not connected with a trade or business, or arising from a casualty or theft.

Section 1.165-2 of the Income Tax Regulations provides that a loss incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of any nondepreciable property, in a case where such business or transaction is discontinued or where such property is permanently discarded from use therein, shall be allowed as a deduction under section 165(a) for the taxable year in which the loss is actually sustained.

Accordingly, it is held in the instant case the amounts the taxpayer paid in connection with the attempted acquisition of the noncompetitive government oil and gas leases are deductible as a loss under section 165(a) of the Code.

Revenue Ruling 67-141 is distinguished.