Rev. Proc. 77-11

Section 1. Purpose.

The purpose of this Revenue Procedure is to prescribe conditions for the issuance of rulings that involve the Federal income tax treatment of bonuses and advanced royalties by lessors under section 631(c) of the Internal Revenue Code of 1954.

Sec. 2. General Rule.

.01 Section 1.631-3 of the Income Tax Regulations provides, in part, that in certain cases lessors of coal or iron ore are required to recompute their tax liabilities for the years of receipt of bonuses and advanced royalties.

.02 The tax liability of a lessor who received a bonus is required to be recomputed for the taxable year or years in which such payment or payments were received if the right to mine coal or iron ore under the lease expires, terminates, or is abandoned before any coal or iron ore has been mined. In this recomputation the lessor is required to treat the payment or payments as ordinary income and not as received from the sale of coal or iron ore under section 631(c) of the Code.

.03 The tax liability of a lessor who received an advanced royalty is required to be recomputed for the taxable year or years in which such payment or payments were received if the right to mine coal or iron ore under the lease expires, terminates, or is abandoned before the coal or iron ore that has been paid for in advance is mined. In such recomputation the lessor is required to treat any portion of the payment or payments attributable to unmined coal or iron ore as ordinary income and not as received from the sale of coal or iron ore under section 631(c) of the Code.

Sec. 3. Application.

Prior to issuing a ruling to lessors who request a ruling that they may treat bonuses or advanced royalties received under a lease of coal or iron ore as received from a sale of coal or iron ore under section 631(c) of the Code, the Internal Revenue Service will require that the lessor enter a closing agreement in which the lessor agrees that:

(1) if the lease under which the lessor received a bonus expires, terminates, or is abandoned before any coal or iron ore has been mined, the tax liability of the lessor will be recomputed for the taxable year or years of receipt of the bonus by treating the bonus payment or payments as ordinary income;

(2) if the lease under which the lessor received an advanced royalty expires, terminates, or is abandoned before the coal or iron ore that has been paid for in advance is mined, the tax liability of the lessor will be recomputed for the taxable year or years of receipt of the advanced royalty by treating any portion of the advanced royalty payment or payments attributable to unmined coal or iron ore as ordinary income;

(3) if the recomputation described in this section is required, the lessor will pay the additional amount, if any, of all Federal income tax finally determined as due and payable by the lessor for the taxable year or years of the receipt of the bonus or advanced royalty; and

(4) if any of the events described in this section have occurred, the lessor will notify the appropriate District Director of such events in writing within 90 days of the close of the taxable year in which the lease expires, terminates, or is abandoned.

Sec. 4. Inquiries.

Inquiries in regard to this Revenue Procedure should refer to its number and should be addressed to the Commissioner of Internal Revenue, Attention T:C:E, 1111 Constitution Avenue, Washington, D.C. 20224.