§ 1254 Gain from disposition of interest in oil, gas, geothermal, or other mineral properties
(a) General rule
(1) Ordinary income
If any section property is disposed of, the lesser of—
(A) the aggregate amount of—
(i) expenditures which have been deducted by the taxpayer or any person under section , , or with respect to such property and which, but for such deduction, would have been included in the adjusted basis of such property, and
(ii) the deductions for depletion under section which reduced the adjusted basis of such property, or
(B) the excess of—
(i) in the case of—
(I) a sale, exchange, or involuntary conversion, the amount realized, or
(II) in the case of any other disposition, the fair market value of such property, over
(ii) the adjusted basis of such property,
shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Disposition of portion of property
For purposes of paragraph (1)—
(A) In the case of the disposition of a portion of section property (other than an undivided interest), the entire amount of the aggregate expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies.
(B) In the case of the disposition of an undivided interest in a section property (or a portion thereof), a proportionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies.
This paragraph shall not apply to any expenditures to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditures do not relate to the portion (or interest therein) disposed of.
(3) Section 1254 property
The term “section property” means any property (within the meaning of section ) if—
(A) any expenditures described in paragraph (1)(A) are properly chargeable to such property, or
(B) the adjusted basis of such property includes adjustments for deductions for depletion under section .
(4) Adjustment for amounts included in gross income under section 617(b)(1)(A)
The amount of the expenditures referred to in paragraph (1)(A)(i) shall be properly adjusted for amounts included in gross income under section .
(b) Special rules under regulations
Under regulations prescribed by the Secretary—
(1) rules similar to the rule of subsection (g) of section and to the rules of subsections (b) and (c) of section shall be applied for purposes of this section; and
(2) in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expenditures referred to in subsection (a)(1)(A) of this section.
(Added Pub. L. 94–455, title II, § 205(a), Oct. 4, 1976, 90 Stat. 1533; amended Pub. L. 95–618, title IV, § 402(c)(1)–(3), Nov. 9, 1978, 92 Stat. 3202; Pub. L. 97–354, § 5(a)(37), Oct. 19, 1982, 96 Stat. 1696; Pub. L. 99–514, title IV, § 413(a), Oct. 22, 1986, 100 Stat. 2227; Pub. L. 100–647, title I, § 1004(c), Nov. 10, 1988, 102 Stat. 3387.)
Operative text only. Editorial notes, amendment history, and effective dates: official OLRC text of § 1254