BIR Ruling

May 10, 1967 2nd Indorsement Returned to the Revenue Operations Head (Assessment), the inquiry of Group Supervisor Pablito J. Enano as to the correct computation, for income tax purposes, of a depletion allowance by taxpayers making use of the itemized deduction. Section 30(g) of the Tax Code as amended by Republic Act No. 269B provides that the depletion allowance at the percentages mentioned in subsections (A), (B) and (C) thereof, should be based on the gross income. On oil or gas wells the percentage depletion allowance is fixed at 27 1/2% of gross income while on mines, the percentage depletion allowance varies in accordance with the class of minerals. In both cases, the total percentage depletion allowance shall in no case exceed 50% of the net income or net profit, whichever is lower. (Gen. Cir. No. V-332 dated Jan. 6, 1961) Under Section 30(g) of the Tax Code, as amended, "gross income" means the gross income from the property or the amount remaining after deducting therefrom rents or royalties paid or incurred by the taxpayer in respect to the property. And "gross income from the property" means, in the case of mines, the gross income from mining. (IBID) For example, in the case of oil and gas wells, the percentage depletion is 27 1/2% of the gross income, i.e., after an amount equal to the rents or royalties and paid or incurred by the taxpayer has been deducted from such gross income. However, such depletion allowance of 27 1/2% of gross income is more than 50% of the net income, or of the net profit, such depletion allowance should be reduced correspondingly to only 50% of the net income or of the net profit, whichever is lower. For the purpose of the computation of a depletion allowance, "net income" or "net profit" contemplated under said Section 30(g) of the Tax Code means the taxpayer's taxable income from the property. Net income or net profit (computed without allowance for depletion) means the "gross income from the property" less the allowable deductions attributable to the mineral property upon which the depletion is claimed and the allowable deductions attributable to the treatment processes insofar as they relate to the product of such property, including overhead and operating expenses, development costs properly charged to expense, depreciation, taxes, losses sustained, etc. Deductions not directly attributable to particular properties or processes shall be fairly allocated. (Gen., Cir, No. V-332 supra ) cdtech In fine, before a taxpayer who is making use of the itemized deduction can deduct a depletion allowance, i.e., as one of the deductible items, from his total gross income or income from all sources including those from mining or oil and gas wells, the same should first be computed based on gross income as contemplated in Section 30(g) of the Tax Code, as amended by Republic Act No. 2698. The depletion allowance thus computed should not, however, exceed 50% of the net income or of the net profit, whichever is lower. The "gross income" as well as the "net income" or "net profit" adverted to in Section 30(g) shall be determined solely on the basis of the income and all allowable deductions attributable to the mineral property upon which the depletion is claimed exclusive of income and deductions from other sources. Be guided accordingly. (SGD.) MISAEL P. VERA Commissioner of Internal Revenue