TAM: Contingent Production Royalty Makes Mine Interest Transfer Lease

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Nov. 28 — The IRS national office in a technical advice memorandum said a taxpayer's transfer of its interest in a mine is treated as a lease, rather than a sale, where the taxpayer retained a contingent production royalty interest.


The Internal Revenue Service office in TAM 201448020, released Nov. 28, considered an international mining company subsidiary's transfer for cash of its interest in a mine—which it had operated as a joint venture with other owners—retaining rights to production and bonus royalties.


The production royalty is payable on a sliding scale, depending on commodity prices, beginning after a specified amount of reserves have been produced from the mine. The bonus royalty is a lump sum payable after a set amount of cumulative reserves are added to existing reserves.