TREATMENT OF PROPERTY IN CASE OF OIL AND GAS WELLS.

SEC. 226. TREATMENT OF PROPERTY IN CASE OF OIL AND GAS WELLS. (a) In General.—Section 614(b) (relating to special rule as to operating mineral interests) is amended to read as follows: “(b) Special Rules as to Operating Mineral Interests in Oil and Gas Wells.—In the case of oil and gas wells— 78 Stat. 95 “(1) In general.—Except as otherwise provided in this subsection— “(A) all of the taxpayers operating mineral interests in a separate tract or parcel of land shall be combined and treated as one property, and “(B) the taxpayer may not combine an operating mineral interest in one tract or parcel of land with an operating mineral interest in another tract or parcel of land. “(2) Election to treat operating mineral interests as separate properties.—If the taxpayer has more than one operating mineral interest in a single tract or parcel of land, he may elect to treat one or more of such operating mineral interests as separate properties. The taxpayer may not have more than one combination of operating mineral interests in a single tract or parcel of land. If the taxpayer makes the election provided in this paragraph with respect to any interest in a tract or parcel of land, each operating mineral interest which is discovered or acquired by the taxpayer in such tract or parcel of land after the taxable year for which the election is made shall be treated— “(A) if there is no combination of interests in such tract or parcel, as a separate property unless the taxpayer elects to combine it with another interest, or “(B) if there is a combination of interests in such tract or parcel, as part of such combination unless the taxpayer elects to treat it as a separate property. “(3) Certain unitization or pooling arrangements.— “(A) In general.—Under regulations prescribed by the Secretary or his delegate, if one or more of the taxpayer’s operating mineral interests participate, under a voluntary or compulsory unitization or pooling agreement, in a single cooperative or unit plan of operation, then for the period of such participation— “(i) they shall be treated for all purposes of this subtitle as one property, and “(ii) the application of paragraphs (1), (2), and (4) in respect of such interests shall be suspended. “(B) Limitation.—Subparagraph (A) shall apply to a voluntary agreement only if all the operating mineral interests covered by such agreement— “(i) are in the same deposit, or are in 2 or more deposits the joint development or production of which is logical from the standpoint of geology, convenience, economy, or conservation, and “(ii) are in tracts or parcels of land which are contiguous or in close proximity. “(C) Special rule in the case of arrangement entered into in taxable years beginning before january 1, 1964.—If— “(i) two or more of the taxpayers operating mineral interests participate under a voluntary or compulsory unitization or pooling agreement entered into in any taxable year beginning before January 1, 1964, in a single cooperative or unit plan of operation, “(ii) the taxpayer, for the last taxable year beginning before January 1, 1964, treated such interests as two or more separate properties, and “(iii) it is determined that such treatment was proper under the law applicable to such taxable year, such taxpayer may continue to treat such interests in a consistent manner for the period of such participation. 78 Stat. 96 “(4) Manner, time, and scope of election.— “(A) Manner and time.—Any election provided in paragraph (2) shall be made for each operating mineral interest, in the manner prescribed by the Secretary or his delegate by regulations, not later than the time prescribed by law for filing the return (including extensions thereof) for whichever of the following taxable years is the later: The first taxable year beginning after December 31, 1963, or the first taxable year in which any expenditure for development or operation in respect of such operating mineral interest is made by the taxpayer after the acquisition of such interest. “(B) Scope.—Any election under paragraph (2) shall be for all purposes of this subtitle and shall be binding on the taxpayer for all subsequent taxable years. “(5) Treatment of certain properties.—If, on the day preceding the first day of the first taxable year beginning after December 31, 1963, the taxpayer has any operating mineral interests which he treats under subsection (d) of this section (as in effect before the amendments made by the Revenue Act of 1964), such treatment shall be continued and shall be deemed to have been adopted pursuant to paragraphs (1) and (2) of this subsection (as amended by such Act).” (b) Technical Amendments.— (1) The heading of section 614(c) is amended to read as follows: “(c) Special Rules as to Operating Mineral Interests in Mines.—” (2) Paragraph (5) of section 614(c) is hereby repealed. (3) Section 614(d) is amended to read as follows: “(d) Operating Mineral Interests Defined.—For purposes of this section, the term ‘operating mineral interest’ includes only an interest in respect of which the costs of production of the mineral are required to be taken into account by the taxpayer for purposes of computing the 50 percent limitation provided for in section 613, or would be so required if the mine, well, or other natural deposit were in the production stage.” (4) Section 614(e)(2) is amended by striking out “within the meaning of subsection (b)(3)”. (c) Allocation of Basis in Certain Cases.—For purposes of the Internal Revenue Code of 1954— (1) Fair market value rule.—Except, as provided in paragraph (2), if a taxpayer has a section 614(b) aggregation, then the adjusted basis (as of the first day of the first taxable year beginning after December 31, 1963) of each property included in such aggregation shall be determined by multiplying the adjusted basis of the aggregation by a fraction— (A) the numerator of which is the fair market value of such property, and (B) the denominator of which is the fair market, value of such aggregation. For purposes of this paragraph, the adjusted basis and the fair market value of the aggregation, and the fair market value of each property included therein, shall he determined as of the day preceding the first day of the first taxable year which begins after December 31, 1963. (2) Allocation of adjustments, etc.—If the taxpayer makes an election under this paragraph with respect to any section 614 (b) aggregation, then the adjusted basis (as of the first day of the 78 Stat. 97first taxable year beginning after December 31, 1963) of each property included in such aggregation shall be the adjusted basis of such property at the time it was first included in the aggregation by the taxpayer, adjusted for that portion of those adjustments to the basis of the aggregation which are reasonably attributable to such property. If, under the preceding sentence, the total of the adjusted bases of the interests included in the aggregation exceeds the adjusted basis of the aggregation (as of the day preceding the first day of the first taxable year which begins after December 31, 1963), the adjusted bases of the properties which include such interests shall be adjusted, under regulations prescribed by the Secretary of the Treasury or his delegate, so that the total of the adjusted bases of such interests equals the adjusted basis of the aggregation. An election under this paragraph shall be made at such time and in such manner as the Secretary of the Treasury or his delegate shall by regulations prescribe. (3) Definitions.—For purposes of this subsection— (A) Section 614(b) aggregation.—The term “section 614(b) aggregation” means any aggregation to which section 614(b) (1) (A) of the Internal Revenue Code of 1954 (as in effect before the amendments made by subsection (a) of this section) applied for the day preceding the first day of the first taxable year beginning after December 31, 1963. (B) Property.—The term “property” has the same meaning as is applicable, under section 614 of the Internal Revenue Code of 1954, to the taxpayer for the first taxable year beginning after December 31, 1963. (d) Effective Date.—The amendments made by subsections (a) and (b) shall apply to taxable years beginning after December 31, 1963.