IRS Says Unamortized G&G Costs are Nondeductible
In FAA 20163501F (August 26, 2016), the IRS issued a field attorney advice memorandum in which it indicated that an integrated oil company could not deduct the unamortized portion of geological and geophysical (“G&G”) costs upon the disposition of the property with respect to which the costs were incurred. Moreover, such costs cannot be included in the basis of the disposed property. Rather, the unamortized portion of the costs must continue to be amortized over the remaining statutory amortization period.
Deductibility of G&G Costs not Dependent on Property Ownership
In CGG Americas, Inc. v. Commissioner, 147 T.C. No. 2 (July 21, 2016), the taxpayer was engaged in the business of conducting marine surveys in the Gulf of Mexico. The surveys employed geophysical techniques, such as seismic reflection, for detecting the presence of oil and gas. The taxpayer licensed the data from the surveys to its customers on a nonexclusive basis. The taxpayer’s customers used the data to drill for oil and gas in the Gulf of Mexico. The taxpayer did not own any of the oil & gas properties, but nonetheless treated its expenses in conducting the surveys as amortizable “geological and geophysical (G&G) expenses.” The IRS took the position on exam that the expenses were not G&G, since the taxpayer did not own the properties. The parties could not agree, and the matter proceeded to Tax Court, where the Court ruled that G&G expenses are not limited to expenses incurred by taxpayers that own oil and gas interests.