United States

US Tax Court rules for taxpayer on 'G&G expenditures' deduction

TAX ALERT  | 

The United States Tax Court ruled in CGG Americas, Inc. v Commissioner of Internal Revenue that a taxpayer (CGGA), which incurred costs to conduct certain marine surveys, but did not own any oil or gas interests, was entitled to deduct those costs under section 167(h).

CGGA conducts marine surveys, which use geophysical techniques to detect or suggest the presence of oil or gas in the survey areas. Using the gathered data, CGGA creates maps, or other visual representations of formations where there could be oil or gas deposits and then licenses the data to customers in the oil and gas development industry.

Section 167(h) allows a deduction for, “Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.” The IRS took the view that the term ‘geological and geophysical expenses’ in the statute only refers to taxpayers that own oil or gas interests.

CGGA does not own any oil or gas interests. The Tax Court looked to various judicial, administrative and legislative authorities to determine whether the IRS’ restrictive view of section 167(h) was supportable. In its opinion, the Tax Court concluded that intent of Congress was to provide the 24-month amortization period to owners of mineral interests as an incentive to incur geological and geophysical costs, but the statute does not limit the deduction only to those taxpayers which own oil or gas interests. Accordingly, the Tax Court held the expenses incurred by CGGA for its surveys were deductible under section 167(h) as geological and geophysical expenses.

This ruling could be significant for taxpayers that incur geological and geophysical expenses, but do not own oil or gas interests. Taxpayers wishing to use this case as authority should consult with their tax advisors as it appears the IRS does not share this expanded view of who is entitled to deduct these expenses under section 167(h).

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