Marginal production is defined as domestic crude oil or domestic natural gas that is produced from a property that is a "stripper" well or is substantially all the production of which is "heavy" oil. Code Section 613A(c)(6)(D). In general, stripper well property is property from which the average daily production is 15 barrel equivalents or less, determined by dividing the average daily production of domestic crude oil and domestic natural gas from producing wells on the property for the calendar year by the number of wells. Code Section 613A(c)(6)(E). Heavy oil is defined as domestic crude oil that has a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit). Code Section 613A(c)(6)(F).

Marginal production may qualify for a higher percentage rate (not to exceed 25 percent) if the price of domestic crude oil is reduced. Under Code Section 613A(c)(6)(A), an electing independent producer or royalty holder may take depletion on his marginal property at the "applicable percentage" -- a figure equal to 15 percent plus one percentage point (but in no event to exceed 25 percent) for each whole dollar by which $20 exceeds the "reference price" for crude oil for the preceding year. Code Section 613A(c)(6)(C), The reference price is determined under Code Section 29(d)(2)(C). The election is found under Code Section 613A(c)(6)(B).

The following percentages are for taxable years beginning in:

1991 15 percent

1992 18 percent

1993 19 percent

1994 20 percent

1995 21 percent

1996 20 percent

1997 16 percent

1998 17 percent

1999 24 percent

Code Section 613A(c)(6)(B).

(6) OIL AND NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES

(A) IN GENERAL

Except as provided in subsection (d) and subparagraph (B), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to--

(i) so much of the taxpayer's average daily marginal production of domestic crude oil as does not exceed the taxpayer's depletable oil quantity (determined without regard to paragraph (3)(A)(ii)), and

(ii) so much of the taxpayer's average daily marginal production of domestic natural gas as does not exceed the taxpayer's depletable natural gas quantity (determined without regard to paragraph (3)(A)(ii)), and the applicable percentage shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section.

(B) ELECTION TO HAVE PARAGRAPH APPLY TO PRO RATA PORTION OF MARGINAL PRODUCTION

If the taxpayer elects to have this subparagraph apply for any taxable year, the rules of subparagraph (A) shall apply to the average daily marginal production of domestic crude oil or domestic natural gas of the taxpayer to which paragraph (1) would have applied without regard to this paragraph.

(C) APPLICABLE PERCENTAGE

For purposes of subparagraph (A), the term "applicable percentage" means the percentage (not greater than 25 percent) equal to the sum of--

(i) 15 percent, plus

(ii) 1 percentage point for each whole dollar by which $20 exceeds the reference price for crude oil for the calendar year preceding the calendar year in which the taxable year begins.

For purposes of this paragraph, the term "reference price" means, with respect to any calendar year, the reference price determined for such calendar year under section 29(d)(2)(C).

(D) MARGINAL PRODUCTION

The term "marginal production" means domestic crude oil or domestic natural gas which is produced during any taxable year from a property which--

(i) is a stripper well property for the calendar year in which the taxable year begins, or

(ii) is a property substantially all of the production of which during such calendar year is heavy oil.

(E) STRIPPER WELL PROPERTY

For purposes of this paragraph, the term "stripper well property" means, with respect to any calendar year, any property with respect to which the amount determined by dividing--

(i) the average daily production of domestic crude oil and domestic natural gas from producing wells on such property for such calendar year, by

(ii) the number of such wells, is 15 barrel equivalents or less.

(F) HEAVY OIL

For purposes of this paragraph, the term "heavy oil" means domestic crude oil produced from any property if such crude oil had a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit).

(G) AVERAGE DAILY MARGINAL PRODUCTION

For purposes of this subsection--

(i) the taxpayer's average daily marginal production of domestic crude oil or natural gas for any taxable year shall be determined by dividing the taxpayer's aggregate marginal production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and

(ii) in the case of a taxpayer holding a partial interest in the production from any property (including any interest held in any partnership), such taxpayer's production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer's percentage participation in the revenues from such property.

Bob Parrish CPA PC

For the firm,

 

Bob Parrish CPA