Marine surveyor may deduct geological and geophysical expenses

The Tax Court is unwilling to restrict the 2-year amortization under Sec. 167(h) to owners of mineral interests.
By David R. Silversmith, CPA

The Tax Court held that deductibility of "geological and geophysical expenses" under Sec. 167(h) is not limited to taxpayers that own oil and gas interests. For the same reason, the expenses could be considered incurred "in connection with the exploration for, or development of, oil or gas" by a company providing marine geological surveying services to oil and gas companies despite its not owning oil and gas interests itself, the court held.

Facts: CGG Americas (CGGA) used various geophysical techniques to conduct marine surveys on the outer continental shelf of the Gulf of Mexico to find new areas favorable for oil and gas development and production. CGGA would then license this data to oil- and gas-producing customers on a nonexclusive fee basis. CGGA deducted expenses of collecting and processing the survey data on its 2006 and 2007 tax returns under Sec. 167(h), which allows taxpayers to deduct geological and geophysical expenses ratably over a 24-month period. Otherwise, such expenses would be capitalized and depreciated over a much longer time.

Issues: The IRS contended that the survey expenses did not qualify for Sec. 167(h) treatment, based on two arguments. First, the IRS argued that the term "geological and geophysical expenses" is a "term of art" that refers only to expenses of taxpayers who, unlike CGGA, own mineral interests. Second, the IRS contended that the survey expenses were not incurred "in connection with the exploration for, or development of, oil or gas" as specified by Sec. 167(h)(1) because CGGA was not doing the actual exploring or developing; its clients were. Although Sec. 167(h) does not specifically state that the deduction can be taken only by mineral interest owners, the IRS relied on judicial precedent, administrative rulings, and materials that it contended expressed legislative intent of the provision, which was instituted by the Energy Policy Act of 2005, P.L. 109-58.

Holding: Although the court opinions that the IRS cited related to mineral interest owners, the Tax Court found that none of them specifically stated that geological and geophysical expenses could be deducted only by a mineral interest owner. The Tax Court admitted that materials cited by the IRS did suggest that Congress may have been principally concerned about mineral interest owners. But Congress did not insert an explicit ownership requirement in the law, which it could have done if it had so intended.

The Tax Court also found that the marine surveys were "integral to the process of finding oil and gas deposits," and thus were incurred in connection with the exploration for, or development of, oil and gas. Since all of the IRS's arguments were rejected, the Tax Court granted summary judgment for CGGA.

  • CGG Americas, Inc., 147 T.C No. 2 (2016)

—By David R. Silversmith, CPA, a practitioner in Woodbury, N.Y.

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