Rev. Rul. 55-121, 1955-1 CB 382
REV-RUL, Limitation on deductions allowable to individuals in certain cases., Rev. Rul. 55-121, 1955-1 CB 382, (Jan. 01, 1955)
REGULATIONS 118, SECTION 39.130-1: Limitation on deductions allowable to
individuals in certain cases.
Where several business activities emanate from a single commodity, such as
oil and gas or a tract of land, it does not necessarily follow that such
activities are one business for the purposes of section 130 of the Internal
Revenue Code of 1939 relating to the limitation on deductions allowable to
individuals in certain cases. Where it is shown that such business
activities are separately conducted and are not closely interrelated with
each other they are considered as separate business activities for the
purposes of section 130 of the Code.
Advice has been requested whether a taxpayer's gross income from the oil and gas business and his income from drilling oil and gas wells for others (contract drilling), whether from his individual, joint venture or partnership operation may, under the following circumstances, be considered as separate businesses for the purposes of section 130 of the Internal Revenue Code of 1939. Advice has been requested whether business activities emanating from a single parcel of land, such as the sale of standing timber, granting of leases for oil and gas minerals, operation of producing oil and gas wells and livestock and farming operations may be considered as separate business activities for the purpose of section 130 of the Code.
Taxpayer, an oil and gas producer, is a partner in a business engaged in contract drilling for others. He is also engaged, in his own individual capacity, in selling oil and gas. Each organization's operations is separately conducted. About 75 percent of the taxpayer's gross income is from the partnership's contract drilling operations for others, approximately 2 percent of which was done for the taxpayer individually, and the remainder of his gross income is primarily from oil and gas sales made on his own account.
The provisions of section 130 of the Code apply to a trade or business carried on by an individual. The activity of developing oil and gas properties and contract drilling activity are related in the sense that they deal with the same commodities--oil and gas. Standing alone, this fact does not make dissimilar business activities one "business" for the purpose of section 130 of the Code. Inherently, the activity of contract drilling is different from the activity of developing oil and gas properties. The first is a service activity in which the income from the business usually bears no relation to the mineral production from properties drilled. The second is a mining activity in which the income is directly proportional to mineral production.
The same would be true with respect to other business activities emanating from a single source. For example, a taxpayer owns a parcel of land and derives income therefrom under a contract for the sale of standing timber whereby the purchaser cuts and hauls the timber. The taxpayer also derives income from granting of leases to oil and gas minerals on such property as well as from producing oil and gas wells which he operates on a portion of the property. In addition he receives income from livestock and farming operations which he conducts on the property. Each of the operations is separately conducted and is related only in the sense that all of them emanate from the exploitation of a single piece of property belonging to the taxpayer.
However, the activities of contract drilling and of developing oil and gas properties are not so unrelated that they may never be carried on so as to constitute one business for the purpose of section 130 of the Code. Nor are the sales of standing timber, granting of leases to oil and gas minerals, operation of producing oil and gas wells, or livestock and farming operations so unrelated that two or more of such activities may never constitute one business for the purpose of section 130 of the Code. However, whether such activities constitute one or more than one business depends upon whether they are in fact operated primarily as a single unit taking into consideration all pertinent factors. The same principles can be applied here as have been applied in determining whether losses in certain commodity transactions were to be considered losses incurred in taxpayer's regular trade or business or capital items. See G. C. M. 17322, C. B. XV-2, 151 (1936); Kenneth S. Battelle et al. v. Commissioner, 47 B. T. A. 117, acquiescence, C. B. 1942-2, 2; Stewart Silk Corp. v. Commissioner, 9 T. C. 174, acquiescence, C. B. 1948-1, 2.
In the instant case, the partnership activities of drilling oil and gas wells for others have no practical relationship to the oil and gas production of the taxpayer individually. The same is true with respect to the activities of selling standing timber, granting mineral leases, operation of producing oil and gas wells, and livestock and farming all conducted on a single parcel of land by the same individual, since each activity is separately conducted and not so interrelated to any other activity or activities so that it may be determined that one or more of such activities constitute one business.
Accordingly, where business activities emanate from a single commodity, such as oil and gas or a tract of land, it does not necessarily follow that such activities are one business for the purposes of section 130 of the Internal Revenue Code relating to the limitation on deductions allowable to individuals in certain cases. Where it is shown that such business activities are separately conducted and are not closely interrelated with each other, they are considered as separate business activities for the purpose of section 130 of the Code.