Mineral or Natural Resource
A “mineral or natural resource” is any product, as listed in I.R.C. §613, for which a percentage depletion deduction is allowable under I.R.C. §611, except for a) soil, sod, turf, water, and mosses, and b) minerals from sea water, the air, or similar inexhaustible resources. Percentage depletion may be taken for the products of oil and gas wells, mines and other natural deposits (this includes virtually every metal and mineral extracted from the ground). “Mineral or natural resource” also includes fertilizer, timber, and geothermal energy. Qualifying income does not include income from fishing; farming (including the cultivation of fruits or nuts); or hydroelectric, solar, wind, or nuclear power production.
§7704(d)(1); S. Rpt. 100-445 (Report of the Senate Committee on Finance on the Technical Corrections Act of 1988), p. 424; H. Rpt. 100-795 (Report of the House Committee on Ways and Means on the Miscellaneous Revenue Act of 1988, p. 400).
Renewable Fuels Under Section 7704
Section 208 of the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) added the transportation and storage of specified alternative fuels to the list of qualifying natural resource activities under section 7704(d)(1)(E). The alternative fuels that qualify are defined by reference to I.R.C. section 6426(b)(c)(d), and (e) and section 40A(d)(1) and include:
- Alcohol fuel mixtures, i.e., a mixture of alcohol and another fuel;
- Biodiesel mixtures;
- Alternative fuels, including
º Liquefied petroleum gas,
º “P Series” fuels,
º Compressed or liquefied natural gas,
º Liquefied hydrogen,
º Any liquid fuel derived from coal through the Fischer-Tropsch process,
º Liquid hydrocarbons derived from biomass;
- Alternative fuel mixtures;
- Any alcohol fuel (i.e., neat alcohol), which includes methanol, ethanol, an alcohol gallon equivalent of ethyl tertiary butyl ether or other ethers produced from such alcohol but does not include alcohol produced from petroleum, natural gas or coal, or with a proof of less than 190; and
- Neat biodiesel (as defined in section 40A (d)(1).
I.R.C. §§7704(d)(1)(E), 6426(b) – (e), 40A(d)(1)
Transportation
“Transportation” includes any transportation by pipeline of “gas, oil, or products thereof.” Transportation to a “bulk distribution center” such as a terminal or refinery, whether by pipeline, truck, barge, or rail, qualifies. Except for transportation by pipeline, transportation of oil and gas (except liquefied petroleum gas) to a place where it is dispensed or sold to retail customers—e.g., a gas station–does not qualify. Refiners and processors who acquire the oil or gas for further refining or processing, and utilities supplying power to customers, are not retail customers for this purpose. Any transportation of oil and gas or products thereof through pipelines qualifies, whether or not retail customers are involved. Since October 3, 2008, transportation of industrial carbon dioxide and specified alternative fuels also qualifies.
I.R.C. §7704(d)(1); H. Rpt. 100-795 (Report of the House Committee on Ways and Means on the Miscellaneous Revenue Act of 1988), p. 401; H. Rpt. 100-1104, vol. II (Conference Report for the Technical and Miscellaneous Revenue Act of 1988, P.L. 100-64), pp. 17-18; P.L. 110-343 §§116 and 208.
Marketing
Marketing of minerals and natural resources may occur at the level of exploration, development, refining, or processing; however, marketing to end users at the retail level (except liquefied petroleum gas) is not qualifying income. For example, marketing of refined petroleum products (s) to retail customers, as in gas station operations, will not qualify. In the case of income from marketing of fertilizer, bulk or truckload sales to farmers in amounts of one ton or more are not considered retail sale.
S. Rpt. 100-445 (Report of the Senate Committee on Finance on the Technical Corrections Act of 1988), p. 424; H. Rpt. 100-1104, vol. II (Conference Report for the Technical and Miscellaneous Revenue Act of 1988, P.L. 100-64), p. 18.