Rp 2004-19

.07 In order to assist those individuals
who are filing prior year or amended tax
returns, the Internal Revenue Service is re-

publishing the countries listed for tax years
2000, 2001, and 2002 for which the eli-

gibility requirements of § 911(d)(1) of the
Code are waived under § 911(d)(4):

Tax Year 2000—
Date of Departure
Country

On or after

Eritrea

May 19, 2000

Tax Year 2001—
Date of Departure
Country

On or after

Macedonia

July 27, 2001

Tax Year 2002—
Date of Departure
Country

On or after

Central African Republic
Côte d’Ivoire
Indonesia
Madagascar
Pakistan
Venezuela

October 31, 2002
October 18, 2002
October 13, 2002
April 13, 2002
March 22, 2002
December 20, 2002

SECTION 3. INQUIRIES

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, §§ 611; 1.611–2.)

A taxpayer who needs assistance on
how to claim this exclusion, or on how to
file an amended return, should contact a local IRS Office or, for a taxpayer residing
or traveling outside the United States, the
nearest overseas IRS office.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2003–26, 2003–1 C.B. 666,
is supplemented.
DRAFTING INFORMATION

Rev. Proc. 2004–19
SECTION 1. PURPOSE
This revenue procedure provides an
elective safe harbor that the owner of an
oil and gas property may use in determining the property’s recoverable reserves
for purposes of computing cost depletion
under § 611 of the Internal Revenue Code.
SECTION 2. BACKGROUND

The principal author of this revenue
procedure is Kate Y. Hwa of the Office of
Associate Chief Counsel (International).
For further information regarding this revenue procedure, contact Ms. Hwa at (202)
622–3840 (not a toll-free call).

March 8, 2004

.01 In General. Section 611(a) and the
regulations thereunder allow as a deduction in computing taxable income a reasonable allowance for depletion in the case of
oil and gas wells according to the peculiar
conditions in each case.

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.02 Computation of Cost Depletion.
Under § 1.611–2(a) of the Income Tax
Regulations, a taxpayer claiming the deduction for cost depletion computes the
amount allowed with respect to each oil
and gas property by reference to both the
total number of recoverable units that the
property is estimated to contain and the
number of units sold from the property
during the taxable year.
.03 Depletion Accounts. A taxpayer is
required under § 1.611–2(b) to keep accounts for the depletion of each property
and to adjust those accounts annually for
units sold and for depletion claimed.
.04 Reserve Estimates.
Section
1.611–2(c)(1) contains the rules for estimating the total recoverable units of
mineral products reasonably known, or
on good evidence believed, to exist with
respect to each property. The estimate or
determination must be made according
to the method current in the industry and

2004-10 I.R.B.

in light of the most accurate and reliable
information obtainable. Under the regulations, the estimate of total recoverable
units includes all reserves that are proved
and, under appropriate circumstances,
probable or prospective reserves in addition to the reserves that are proved.
.05 Revisions of Reserve Estimates.
(1) Under § 1.611–2(c)(2), if the number of recoverable units of mineral in the
deposit has been previously estimated, and
if there has been no known change in the
facts upon which the prior estimate was
based, the number of recoverable units of
mineral in the deposit as of the taxable
year will be the number remaining from
the prior estimate. However, § 611 provides that, in any case in which it is ascertained as a result of operations and development work that the recoverable units
are greater or less than the prior estimate,
then the estimate will be revised and the revised estimate will be used for subsequent
periods. Under § 1.611–2(c)(2), a revision
is made only when operations or development work indicates that the remaining recoverable units as of the taxable year are
materially greater or less than the number
remaining from the prior estimate. The
revised estimate is used until a change in
facts requires another revision.
(2) In Martin Marietta Corporation v.
United States, 7 Cl. Ct. 586 (1985),
the United States Claims Court interpreted
§ 611(a) and § 1.611–2(c)(2) as intended
to remedy mistakes of geological fact: situations where the actual size of the mineral deposit in place, as originally estimated, is later determined on the basis
of more exploratory studies, for example,
to be greater or less than earlier information indicated. The court distinguished
situations where revisions are made under the statute and regulations from those
in which the mineral property has experienced a mere diminution in value or even
a retreat into worthlessness.
.06 Differences between Tax and Financial Accounting for Reserves. Generally,
accounting for reserves for purposes of the
depletion allowance differs from accounting for reserves for financial purposes in
two important respects. First, while the
regulations require the inclusion of probable or prospective reserves in addition
to proved reserves for purposes of the
depletion allowance, the United States Securities and Exchange Commission (SEC)

2004-10 I.R.B.

generally requires the reporting of only
proved reserves for financial purposes.
Second, the revision of a reserve estimate
for purposes of the depletion allowance is
permitted under fewer circumstances than
is the revision of a reserve estimate for
financial reporting purposes. While the
SEC may require or permit the revision of
a reserve estimate in the case of changes
in the price of the mineral or the cost of
its extraction, such circumstances are not
sufficient basis for revision of a reserve
estimate for purposes of the depletion allowance.
.07 Probable or Prospective Reserves.
The appropriate quantity of probable or
prospective reserves to be included in
an oil and gas property’s total recoverable units for purposes of computing cost
depletion has been a source of controversy between taxpayers and the Service.
When present, the issue has been resolved
through the examinations which are costly
for both parties in the dispute. This revenue procedure provides a safe harbor
which is intended to remove this source
of controversy from the examinations of
taxpayers who elect it.
SECTION 3. SCOPE
.01 In General. A taxpayer’s estimate
of an oil and gas property’s probable or
prospective reserves determined under the
safe harbor provided in this revenue procedure may be used only for purposes of the
depletion allowance. This revenue procedure has no application to the determination of the fair market value of any oil and
gas property or for any other purpose not
specifically authorized herein.
.02 Effect of Other Statutory and Regulatory Rules. Except with respect to
estimated total recoverable units (within
the meaning of § 1.611–2(c)(1)) and revised estimates (within the meaning of
§ 1.611–2(c)(2)), this revenue procedure
has no effect on the rules provided in § 611
and the regulations thereunder.
SECTION 4. TOTAL RECOVERABLE
UNITS SAFE HARBOR
.01 If a taxpayer makes an election in
accordance with section 5 of this revenue
procedure, then, for purposes of computing cost depletion:

564

(1) The total recoverable units under
§ 1.611–2(c)(1) that each of the taxpayer’s
domestic oil and gas producing properties
is estimated to contain as of a specific date
will be treated as being equal to 105 percent of the property’s “proved reserves”
(both developed and undeveloped) as defined in 17 C.F.R. § 210.4–10(a) of Regulation S-X, as of that date;
(2) The total recoverable units under
§ 1.611–2(c)(2) that each of the taxpayer’s
domestic oil and gas producing properties
is estimated, on a revised basis, to contain as of a taxable year will be deemed to
be equal to 105 percent of the property’s
“proved reserves” (both developed and undeveloped) as defined in Regulation S-X,
as of that taxable year.
.02 Nothing in this revenue procedure
precludes the examination and adjustment,
if appropriate, of the estimate of proved reserves, as defined in Regulation S-X, in order to ensure that this revenue procedure is
properly administered. Except as provided
in section 5.02 of this revenue procedure, a
taxpayer’s estimate of a property’s remaining recoverable units may be revised only
under the circumstances permitted under
§ 1.611–2(c)(2).
SECTION 5. METHOD OF ELECTION
AND REVOCATION
.01 In General.
(1) Election. To elect the safe harbor
provided in this revenue procedure for taxable years ending on or after March 8,
2004, a taxpayer must attach a statement
to its timely filed (including extensions)
original federal income tax return for the
first taxable year for which the safe harbor is elected. The statement must indicate
that the taxpayer is electing the safe harbor provided by Rev. Proc. 2004–19, and
include the taxpayer’s name, address, taxpayer identification number, and contact
name and telephone number. A copy of the
statement must be sent to the Industry Director, Large and Mid-Size Business, Natural Resources, 1919 Smith Street, HOU
1000, Houston, Texas 77002. Once a taxpayer files a first return electing the safe
harbor for a taxable year, the taxpayer may
not revoke the election for the taxable year.
The election is effective for the taxable
year of election and all subsequent taxable
years until revoked and applies to all of the

March 8, 2004

taxpayer’s domestic oil and gas producing
properties.
(2) Revocation. To revoke a safe harbor election, a taxpayer must attach a statement to its timely filed (including extensions) original federal income tax return
for the first taxable year for which the
safe harbor is revoked. The statement
must indicate that the taxpayer is revoking the safe harbor provided by Rev. Proc.
2004–19, and include the taxpayer’s name,
address, taxpayer identification number,
and contact name and telephone number.
A copy of the statement must be sent to
the Industry Director, Large and Mid-Size
Business, Natural Resources, 1919 Smith
Street, HOU 1000, Houston, Texas 77002.
If a taxpayer revokes its election, the taxpayer may not re-elect the safe harbor for
the next five taxable years following the
taxable year of revocation.
.02 Election of Safe Harbor for Taxable
Year Beginning Before January 1, 2005.
If the first taxable year for which a taxpayer elects the safe harbor provided in
this revenue procedure begins before January 1, 2005, the taxpayer may, for the taxable year of election, revise the estimate
of remaining recoverable units for any of
the taxpayer’s domestic oil and gas producing properties whether or not there has
been a change in geological fact indicating that the remaining recoverable units as
of the taxable year for any given property
is materially greater or less than the number remaining from the prior estimate. The
taxpayer must use the economic and operating conditions (such as prices and costs)
applicable to the taxable year of election
in determining the estimate of total recoverable units.
.03 Election of Safe Harbor for Taxable Year Beginning After December 31,
2004. If the first taxable year for which
a taxpayer elects the safe harbor provided in this revenue procedure begins
after December 31, 2004, the taxpayer
must determine, for each domestic oil and

March 8, 2004

gas producing property, the last taxable
year preceding the taxable year of election as of which the taxpayer revised an
oil and gas property’s total recoverable
units (the year of last revision) pursuant to
§ 1.611–2(c)(2). The taxpayer determines
the property’s remaining recoverable units
for the year of last revision using the safe
harbor rules set forth in section 4 of this
revenue procedure. The taxpayer then applies the rules set forth in § 1.611–2(b) for
all subsequent taxable years to determine
the property’s remaining recoverable units
for the taxable year of election. Similar
procedures apply if the taxpayer’s estimate
of the property’s remaining recoverable
units is based on the taxpayer’s original
estimate of its total recoverable units under
§ 1.611–2(c)(1). The taxpayer may not,
for the taxable year of election, revise the
estimate of remaining recoverable units
for any of the taxpayer’s domestic oil and
gas producing properties unless there has
been a change in geological fact indicating
that the remaining recoverable units as of
the taxable year for any given property is
materially greater or less than the number
remaining from the prior estimate.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after March 8,
2004.
SECTION 7. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. § 3507) under control number
1545–1861.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the

565

collection of information displays a valid
OMB control number.
The collection of information in this
revenue procedure is in section 5. The
information in section 5 is required to be
submitted to the applicable service center
in order to elect (or revoke) the safe harbor. This information will be used to determine whether a taxpayer estimated the total recoverable units for each of its domestic oil and gas producing properties under
the safe harbor. The likely respondents are
businesses or other for-profit institutions.
The estimated total annual reporting
burden is 50 hours.
The estimated annual burden per respondent varies from .25 hours to .75
hours, depending on individual circumstances, with an estimated average burden
of .5 hours to complete the statement. The
estimated number of respondents is 100.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection
of information must be retained as long as
their contents may become material in the
administration of any internal revenue law.
Generally, tax returns and tax return information are confidential under 26 U.S.C.
§ 6103.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Jolene J. Shiraishi of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this revenue
procedure, contact Ms. Shiraishi at (202)
622–3120 (not a toll-free call).

2004-10 I.R.B.