Reg. § 1.615-1 Pre-1970 exploration expenditures.
(a) General rule Section prescribes rules for the treatment of expenditures (paid or incurred before January 1, 1970) for ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (other than oil or gas) paid or incurred by the taxpayer before the beginning of the development stage of the mine or other natural deposit. Such expenditures hereinafter in the regulations under section will be referred to as exploration expenditures. The development stage of the mine or other natural deposit will be deemed to begin at the time when, in consideration of all the facts and circumstances (including the actions of the taxpayer), deposits of ore or other mineral are shown to exist in sufficient quantity and quality to reasonably justify commercial exploitation by the taxpayer. A taxpayer who elects under section (e) may treat exploration expenditures under either section or section . See for the method of making the election to treat exploration expenditures under section . Under section , a taxpayer may, at his option, deduct exploration expenditures paid or incurred in an amount not to exceed $100,000 for any taxable year. Under section and , he may elect to defer any part of such amount and deduct such part on a ratable basis as the units of produced minerals benefited by such expenditures are sold. If the taxpayer does not treat exploration expenditures under either section (a) or (b) in any year for which his election under section is effective, the expenditures for such year will be charged to depletable capital account. The option to deduct under section and the election to defer under section , however, are subject to the limitation provided in section and . In the case of certain corporations which are members of an affiliated group which has elected the 100 percent dividends received deduction under section , see section (3) and for limitations on the option to deduct under section and the election to defer under section .
(b) Expenditures to which section 615 is not applicable
(1) Section is not applicable to expenditures which would be allowed as a deduction for the taxable year without regard to such section.
(2) Section is not applicable to expenditures which are reflected in improvements subject to allowances for depreciation under sections and . However, allowances for depreciation of such improvements which are used in the exploration of ores or minerals are considered exploration expenditures under section . If such improvements are used only in part for exploration during a taxable year, an allocable portion of the allowance for depreciation shall be treated as an exploration expenditure.
(3) Section is applicable to exploration expenditures paid or incurred by a taxpayer in connection with the acquisition of a fractional share of the working or operating interest to the extent of the fractional interest so acquired by the taxpayer. The expenditures attributable to the remaining fractional share shall be considered as the cost of his acquired interest and shall be recovered through depletion allowances. For example, taxpayer A owns mineral leases on unexplored mineral lands and agrees to convey an undivided three-fourths (3⁄4) interest in such leases to taxpayer B provided B will pay all of the exploration expenditures for ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral which will be incurred before the beginning of the development stage. B shall treat three-fourths of such amount under section , and shall treat one-fourth of such amount as part of the cost of his interest, recoverable through depletion.
(4) The provisions of section do not apply to costs of exploration which are reflected in the amount which the taxpayer paid or incurred to acquire the property. Such provisions apply only to costs paid or incurred by the taxpayer for exploration undertaken directly or through a contract by the taxpayer. See, however, sections and (10) for special rules with respect to deferred exploration expenditures in certain corporate acquisitions.
[T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 7192, 37 FR 12938, June 30, 1972]