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Housing Your Mineral Activities in the Right Structure

James L. Houghton, John R. Braden, Tracey L. Harris, Proceedings of 31st Annual Rocky Mountain Mineral Law Institute (1985)

The choice of an appropriate entity through which to conduct economic activities is an important consideration in all forms of business enterprise. The decision process involves not merely federal tax differences among entities but many other factors such as the ability to obtain financing, exposure of the participants to various business risks, the ability to make subsequent transfers of interests or being in new participants, and the limitation imposed by the nature of the business being undertaken. Proper planning of the business structure always requires realistic and objective appraisals of the full spectrum of business possibilities and thus includes which entity is most suitable in unwinding the business affairs of an unsuccessful enterprise, as well as consideration of the entity most desirable to hold a profitable venture. The tax provisions have made these initial choices particularly important in extractive industries due to the adverse consequences of subsequent transfers. Oil and gas properties are difficult to transfer without the loss of percentage depletion. The transfer of almost any oil, gas, or [6-4] mineral property exposes the transferor to potential recapture of previously deducted mine exploration or intangible drilling costs along with recapture of the investment tax credit.

This need to anticipate future requirements is complicated by the fact