- 34 -
expected unless corrective action is taken. [S. Rept. 91-
552, supra at 184, 1969-3 C.B. at 540.]
See also H. Rept. 91-413, supra at 140-141, 1969-3 C.B. at
288. In order to remedy the above abuse, section 636(a)
treats a carved-out production payment as a mortgage loan.
The committee reports issued in connection with the Tax
Reform Act of 1969 describe the operation of section 636(a)
as follows:
In the case of a carved-out production
payment, the bill provides the payment is to
be treated as a mortgage loan on the mineral
property (rather than as an economic interest in
the property). Thus, the proceeds received by
the seller upon a sale of a production payment
would not be taxable to him. However, as income
is derived from the property subject to the carve
out, that income would be taxable to the owner of
the property, subject to the depletion allowance.
The cost of producing minerals used to satisfy
carved-out production payments would be deduct-
ible when incurred. Thus, the use of a carved-
out production payment would not cause income
to be accelerated, and there would be, thus, no
avoidance of the limitation on the percentage
depletion deduction. [S. Rept. 91-552, supra
at 185, 1969-3 C.B. at 540; H. Rept. 91-413,
supra at 141, 1969-3 C.B. at 288.]
It is readily apparent from the above discussion that
the abuse Congress sought to prevent by the passage of
section 636, namely the artificial acceleration of income
from the mineral property, could come about only through
the use of a right to payments which constituted an
economic interest in the mineral in place. As described
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