26 U.S.C. § 617 — Deduction and recapture of certain mining exploration expenditures

(a) Deduction. (1) A taxpayer^* may elect to deduct taxable-year expenses incurred before a mine's development stage to determine whether an ore or other mineral deposit exists and to determine its location, size, or quality. The election covers only expenses otherwise not deductible that year. Acquisition or improvement of depreciable property is excluded, but depreciation allowances count as expenses. The subsection never covers oil or gas exploration or minerals for which percentage depletion is not allowed under section 613. (2) Elections. (A) The election must be made as the Secretary's regulations require. (B) It may be made before the deadline for claiming a credit or refund for the year's tax. It applies to all qualifying expenses in that year and later years and cannot be revoked without the Secretary's consent. (C) For a deficiency^* attributable to an election or revocation, the assessment period remains open through the end of the two-year period beginning the day after the election or revocation, and assessment may occur during that period despite another law. (b) Recapture on production. (1) If a mine for which (a) expenses were deducted reaches the producing stage, then (A) if the taxpayer elects for all such mines^* reaching production that year, the taxpayer must include the adjusted exploration expenses in gross income. That amount is treated as capital expenses paid or incurred on the dates the mines reached production; or (B) if (A) does not apply to a mine, depletion deductions for the property are disallowed until the otherwise allowable depletion equals that mine's adjusted exploration expenses. (2) The election must follow the Secretary's regulations and may be made or changed by the tax-return deadline, including extensions. (c) Bonus or royalty. If a taxpayer made an (a) election and receives or accrues a bonus or royalty from the property, depletion on that bonus or royalty is disallowed until it equals the property's adjusted exploration expenses. (d) Dispositions. (1) Unless this subsection says otherwise, on disposal of mining property, the lower of (A) adjusted exploration expenses or (B) the excess of (i) the amount realized for a sale, exchange, or involuntary conversion, or fair market value for another disposition, over (ii) adjusted basis, is ordinary income. It is recognized despite other subtitle provisions. (2) For a portion other than an undivided interest, all adjusted exploration expenses are attributed to that portion up to the gain covered by (1). For an undivided interest, a proportional part is attributed to it up to that gain. This does not apply to an expense the taxpayer proves to the Secretary^* relates neither to the disposed portion or interest nor to a mine retained before disposal that has reached production. (3) Section 1245(b)(1), (2), and (3) exceptions and limits apply as if references to section 1245 and section 1245 property referred to this subsection and mining property. (4) This subsection applies despite other subtitle provisions. (5) It does not apply to a disposition covered by section 1254. (e) Basis. (1) Property basis is not reduced by depletion that would be allowed without this section. (2) The Secretary must issue rules adjusting basis for gain recognized under (d)(1). (f) Definitions. (1) “Adjusted exploration expenditures” means qualifying expenses deducted under (a) by the taxpayer or another person and properly charged to the property or mine, reduced for each relevant year by the excess of hypothetical percentage depletion under section 613 over section 611 depletion, with proper adjustments for income under (b) or (c) and gain under (d). (2) “Mining property” means property as defined in section 614 after subsections (c) and (e) are applied, to which (a)(1) expenses are properly charged. (3) A section 631(c) disposal of coal or domestic iron ore is a disposition. The excess in (d)(1)(B) equals the section 631(c) gain, if any. (g) Partnerships. (1) For property or a mine distributed to a partner^*, adjusted exploration expenses include qualifying expenses immediately before distribution that are not otherwise included. They are reduced by partnership^* gain under section 751(b) on the distribution. (2) For property or a mine retained by the partnership after a section 751(b) distribution, the Secretary's rules must reduce adjusted exploration expenses by the partner's section 751(b) gain relating to it. (h) Foreign exploration. For predevelopment exploration expenses for a deposit outside the United States, other than an oil, gas, or geothermal well, (1) (a) does not apply; and (2) the taxpayer may elect to include expenses in adjusted basis for section 611 depletion without section 613, or, if not, deduct them ratably over ten taxable years beginning when paid or incurred. (i) For a 10-year amortization election, see section 59(e).