Rev. Proc. 74-43

Section 1. Purpose.

The purpose of this Revenue Procedure is to provide procedures for obtaining the approval of the Office of Assistant Commissioner (Technical) to compute gross income from mining by use of an alternative method pursuant to the provisions of section 1.613-4(d)(1)(ii) of the Income Tax Regulations.

Sec. 2. Background.

.01 Section 613 of the Internal Revenue Code of 1954 provides an allowance for percentage depletion measured by a stated percentage of the gross income from the property. Section 613(c) defines gross income from the property as gross income from mining.

.02 Section 1.613-4 of the regulations provides the rules for determining gross income from the property in the case of minerals other than oil and gas. Section 1.613-4(b) discusses the sale of minerals prior to the application of nonmining processes including nonmining transportation. Section 1.613-4(c) discusses cases where a representative market or field price for the taxpayer's ore or mineral can be ascertained. The general rule in section 1.613-4(c)(1) provides that gross income from mining shall be determined by use of the representative market or field price of an ore or mineral of like kind and grade after the application of mining processes actually applied and before application of nonmining transportation or other nonmining processes if it is possible to determine a representative market or field price. In cases where a representative market or field price cannot be ascertained, gross income from mining shall be determined in accordance with the provisions of section 1.613-4(d).

.03 Section 1.613-4(d)(1)(i) of the regulations, adopted by T.D. 7170, March 10, 1972, provides generally that in those cases where it is impossible to determine a representative market or field price under the provisions of section 1.613-4(c), gross income from mining shall be computed by use of the proportionate profits method set forth in section 1.613-4(d)(4). An exception is provided in section 1.613-4(d)(1)(ii) where upon application, the Office of the Assistant Commissioner (Technical) approves the use of an alternative method that is more appropriate than the proportionate profits method or the alternative method being used by the taxpayer.

.04 Section 1.613-4(d)(1)(ii)(d) provides for the submission of an application for approval to compute gross income from mining by use of an alternative method.

.05 For purposes of this Revenue Procedure, the term--

1 "Alternative Method" means a method that must be approved by the Office of the Assistant Commissioner (Technical) under section 1.613-4(d)(1)(ii) of the Income Tax Regulations.

2 "Approved Alternative Method" means an alternative method that has been approved by the Office of the Assistant Commissioner (Technical).

Sec. 3. Scope.

.01 In all cases where a representative market or field price cannot be determined, the specific approval by the Office of the Assistant Commissioner (Technical) is required to use an alternative method, other than the proportionate profits method, to compute gross income from mining in determining the percentage depletion allowance for taxable years to which section 1.613-4(d) of the regulations applies. Generally, approval of the use of an alternative method will be made by letter or memorandum signed by the Chief, Engineering and Valuation Branch of the Income Tax Division, Office of the Assistant Commissioner (Technical), in response to a request from a taxpayer or from the appropriate District Director.

.02 Consistent with established publication standards approved alternative methods to the extent practicable will be published in the Cumulative Bulletin as Revenue Rulings. Such Revenue Rulings will illustrate situations in which taxpayers may use such alternative methods subject to prior approval of the Office of the Assistant Commissioner (Technical).

Sec. 4. Application.

.01 A taxpayer who desires to obtain approval to use an alternative method, for taxable years for which a return has been filed and is under the jurisdiction of a District Director or Director of a Service Center, shall request permission to use such alternative method by letter (together with the information set forth in section 7 of this Revenue Procedure) addressed to the Assistant Commissioner (Technical), Attention: Chief, Engineering and Valuation Branch, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 through the appropriate District Director's office or Service Center. The District Director's office or Service Center will forward such request together with comments or recommendations, if any. Requests for approval for taxable years for which a return has not been filed are not required to be sent through the District Director, but shall be sent directly to the Assistant Commissioner (Technical).

.02 In the case of a taxpayer using an alternative method that has not been approved by the Office of the Assistant Commissioner (Technical), for any taxable year subject to the regulations, and the District Director determines that a different alternative method should be used in determining a taxpayer's income tax liability, the District Director shall request the approval of the Office of the Assistant Commissioner (Technical) before using that alternative method. In such a case the taxpayer will be appraised of the facts and reasons for using a different alternative method, and provided an opportunity to agree to such facts or to present his statement of facts if he does not agree. Every effort should be made to reach agreement on the facts before the District Director submits his request. Such a request shall be treated as a request for technical advice.

Sec. 5. Conditions for Approval and use of an Alternative Method.

.01 An alternative method will be approved only if the provisions of section 1.613-4(d)(1)(ii) of the regulations and this Revenue Procedure are satisfied, subject to the terms and conditions set forth in the letter or memorandum of approval.

.02 The use of an alternative method will not be approved if, for the taxpayer's ore or mineral, a representative market or field price is determined to exist under the regulations applicable to the use of such price.

.03 An alternative method will not be approved if it materially distorts the depletion allowance or if the primary purpose is to avoid specific rules for determining the depletion allowance or gross income from mining such as, but not limited to, the limitation of 50 percent of taxpayer's taxable income from the property.

.04 The effective date for the use of an approved alternative method shall be the first taxable year for which a request for approval of such method was made.

.05 Since the use of an alternative method depends upon the facts of each case, it is the responsibility of the taxpayer to furnish all of the facts relevant to the method for which he requests approval. In the absence of facts justifying its use, an alternative method will not be approved. However, nothing in this Revenue Procedure shall be construed to prevent approval and use of an appropriate alternative method by the Office of the Assistant Commissioner (Technical) even though that may not be the specific method for which the taxpayer, or District Director, requested approval.

.06 If an alternative method has been approved by the Office of the Assistant Commissioner (Technical) such method shall continue to be used unless a different alternative method is approved by the Office of the Assistant Commissioner (Technical) upon request of the taxpayer or the District Director. However, an approved alternative method may not be used for any taxable year after which it is established that a representative market or field price is determined to exist under the regulations applicable for determining such price.

.07 An approved alternative method is subject to review and change in the light of changes in operations of the taxpayers who, at the time of such change, should request approval for continued use of the approved method or approval to use a different method in accordance with section 4 of this Revenue Procedure.

.08 The provisions or conditions of this section are not intended to be all inclusive. The facts and circumstances in a particular case may require other terms or conditions such as, but not limited to, approval of an alternative method for a period of taxable years upon termination of which the method will be reconsidered only upon request of the taxpayer. In the absence of such a request, the proportionate profits method may be applied under the regulations. Furthermore, approval and continued use of an alternative method applies only to the taxpayer for whom such approval was granted. For example, an approved alternative method for a taxpayer who is merged into another may not be used by the successor in the absence of approval by the Office of the Assistant Commissioner (Technical) for the successor.

Sec. 6. Changes in an Approved Method.

.01 A taxpayer or District Director may request that an alternative method of computation or the proportionate profits method be approved as more appropriate than the method previously approved by the Assistant Commissioner (Technical). This request must be made to the Office of the Assistant Commissioner (Technical) as provided in Section 4 of this Revenue Procedure, with the information prescribed in Section 7.03 of this Revenue Procedure, except as provided in paragraph .02 below.

.02 Requests submitted concerning proposed changes in methods of computing gross income for which approval has been previously granted must include all the relevant facts and information required in this Revenue Procedure except where previously submitted information has remained the same. A statement must identify generally the particular facts and information which remain the same, to whom they were submitted, and the date of such submission.

.03 If the method referred to in .01 above is approved, such method shall be applied for the taxable year of change and subsequent taxable years unless another method is subsequently approved by the Office of the Assistant Commissioner (Technical).

Sec. 7. Instructions to Taxpayers.

.01 Requests for approval of an alternative method are to be submitted in duplicate and may not contain alternative methods or variations of the same method.

.02 The information required by .03 of this section shall be submitted with requests made pursuant to Section 4 and Section 6 of this Revenue Procedure.

.03 Each request must contain a complete statement of facts relating to the taxpayer's mining and nonmining operations to which the request applies. This includes the name, address, and taxpayer's identifying number; the Internal Revenue Service Center where the taxpayer has filed or will file its return; a precise statement of the reasons for the request; a description of the mining and nonmining activities and their costs, and the original cost of assets involved; a true copy of all contracts involving the performance of mineral processing by others, or for others; any outstanding sale or purchase contracts involving the products produced by the taxpayer or others producing the same products in the vicinity of the taxpayer's operation; true copies of all contracts, deeds, other agreements, reports of studies, analyses and surveys, or other documents pertinent to the taxpayer's mining and nonmining operations, and all other facts pertinent to the request. For this purpose, studies and analyses are considered to be pertinent to the request if made or utilized in connection therewith even if disregarded in whole or part in arriving at the alternative method submitted for approval. The request must contain a statement whether, to the best of the knowledge of the taxpayer and its representatives, any element of the alternative method is involved in an issue pending before any office of the Service and that all information is true and complete. The original documents should not be submitted because such documents and exhibits become a part of the Service file and cannot be returned. When documents and exhibits are submitted they must be accompanied by an analysis of their bearing on the method requested, specifying the pertinent provisions.

.04 A request by or for a taxpayer must be signed by the taxpayer or his authorized representative. If the request is signed by a representative of the taxpayer, or if the representative is to appear before the Internal Revenue Service in connection with the request, he must be eligible to practice before the Internal Revenue Service.

.05 A taxpayer or his representative who desires a conference should so indicate in his request.

.06 Requests will be processed in regular order and as expeditiously as possible. As indicated in section 5.05 of this Revenue Procedure the taxpayer should submit accurate and complete facts and representations because in the absence thereof, the use of an alternative method requested may not be approved.

.07 If subsequent verification or investigation is found necessary, the taxpayer shall make available for inspection such records, documents, etc., relevant to the alternative method proposed as the Service may request (including those pertaining to prior years whether or not such years have been examined). Where the Service has requested certain facts or additional information, every effort should be made to reach agreement as to the correctness of those facts. If agreement of the facts cannot be reached, the statements of both the taxpayer and the Service official making a verification will be forwarded to the Office of the Assistant Commissioner (Technical). Investigations or verifications shall be for the sole purpose of determining the acceptability of the method submitted and shall not be examinations or investigations within the meaning of section 7605(b) of the Code. The taxpayer's request for approval of an alternative method under this Revenue Procedure must include a statement to the effect that he understands the purpose of such an investigation or verification, if any, consents thereto, and agrees that it does not constitute an examination or investigation within the meaning of section 7605(b) of the Code.

.08 If, after submission of a request for approval of an alternative method with respect to a taxable year, but before a reply is received, the income tax return of the taxpayer is required to be filed, the taxpayer must attach to his return a statement that such a request has been filed and the method of determining gross income from mining used in computing the depletion deduction on his return is in accordance with the method requested. If gross income from mining has been computed under the proportionate profits method and the taxpayer has requested approval of an alternative method, it is the responsibility of the taxpayer to protect his interests by filing a claim for refund based upon the use of the alternative method.

.09 A copy of the approval to use an alternative method shall be attached to the income tax return of the taxpayer for the first taxable year to which it applies. Income tax returns for subsequent taxable years for which an approved alternative method remains in effect, shall be accompanied by a brief statement attached to the return describing the method approved, the date thereof, and the first taxable year for which the method was approved.

Sec. 8. Procedures in the National Office.

.01 If, after a study of the case file, it is concluded that a conference with the taxpayer would be appropriate and a conference has been requested, the taxpayer will be notified of the time and place of the conference.

.02 A conference will be arranged by telephone, if possible, and must be held within 21 calendar days after contact has been made. Extensions of time will be granted only if justified in writing by the taxpayer and approved by Chief of the Engineering and Valuation Branch.

.03 It is the responsibility of the taxpayer to furnish to the Office of the Assistant Commissioner (Technical) within 21 calendar days after the conference a written record of any additional data, reasoning, precedents, etc., that were not previously or adequately presented in writing. Extensions will be granted only if justified in writing and approved by the Chief of the Engineering and Valuation Branch.

.04 A taxpayer is entitled, as a matter of right, to only one conference in the National Office on each request for approval to use some other method. This conference will usually be held at the branch level in the Income Tax Division of the Office of the Assistant Commissioner (Technical), and will usually be attached by a person who has authority to act for the Branch Chief. If more than one subject relevant to the proposed method is discussed at the conference, the discussion constitutes a conference with respect to each subject. Where circumstances warrant, at the request of the taxpayer or his representative, the conference may be held at an earlier stage in the consideration of the case than the Service would ordinarily designate. A taxpayer has no "right" of appeal from an action of a branch to the Director, Income Tax Division or to any other National Office official.

Sec. 9. Withdrawal of Requests.

The taxpayer's request may be withdrawn at any time prior to the signing of an approval to use an alternative method. In such a case, a method of computing gross income from the property under section 1.613-4(b), section 1.613-4(c), or section 1.613-4(d) of the regulations must be used for the taxable years to which the request applies and subsequent taxable years. However, a taxpayer may submit a new request for approval of an alternative method under the Revenue Procedure in advance of the filing of his income tax return for any subsequent taxable year.

Sec. 10. Effects of Approved Methods.

.01 An approved alternative method must be used for the first taxable year for which its use is approved and all subsequent taxable years subject to the provisions of section 5 and 6 of this Revenue Procedure.

.02 Generally, any change in an alternative method previously approved by the Office of the Assistant Commissioner (Technical) will be applied from the taxable year for which the facts and conditions giving rise to the change are determined to first exist. However, if, for example, the facts on the basis of which an alternative method was previously approved have been materially misstated or there has been a material omission of facts, that method or any change in the method previously approved will not be effective.

.03 As part of the determination of a taxpayer's liability, it is the responsibility of the District Director to ascertain whether any approved alternative method under section 1.613-4(d)(1)(ii) of the regulations and this Revenue Procedure has been properly applied. The District Director should determine whether the facts and representations, if any, upon which the approved method was based are substantially accurate and complete as to material facts and whether operations were carried out substantially as described. If, in the course of the determination of tax liability, it is the view of the District Director that an approved alternative method previously granted to the taxpayer should be modified or revoked, or the District Director proposes to reach a conclusion contrary to that method, the findings and recommendations of that office will be forwarded to the Office of the Assistant Commissioner (Technical) for consideration prior to further action. Such reference to the Office of the Assistant Commissioner (Technical) will be treated as a request for technical advice and the procedures of Rev. Proc. 73-8, 1973-1 C.B. 754 will be followed. Otherwise an approved alternative method is to be applied by the District Director in determining the taxpayer's income tax liability.

Sec. 11. Effective Date.

This Revenue Procedure is applicable for all taxable years to which section 1.613-4(d)(1)(ii) of the regulations applies.