Problems on the Mechanics of Making an IDC Election 1. Wildcat… Problems on the Mechanics of Making an IDC Election1. Wildcat Bill, Inc., an accrual method taxpayer, incurred drilling costs of $25,000 during Year 1, the first year in which it had incurred IDC. Wildcat Bill, Inc. capitalized the drilling costs on the financial books but deducted the drilling costs on the tax return. Is Wildcat Bill’s reporting of the IDC as expense on the tax return a valid election to expense IDC?2. The well in Problem 1 turned out to be a dry hole. Wildcat Bill, Inc. deducted the IDC on its Year 1 return, under the heading “Dry Holes and Worthless Leases,” but made no other mention of the IDC election on the return. Is Wildcat Bill, Inc.’s expense of the dry hole cost in Year 1 an election as to IDC? See Hawkeye Petroleum Corp. v. Commissioner, 18 T.C. 1223 (1952), nonacq., 1953-1 C.B. 7.3. Wildcat Bill and Driller Dan form a joint venture to explore and develop an oil and gas property. (Bill and Dan do not file a section 761(a) election to be excluded from the Subchapter K provisions.) Bill and Dan each own one-half of the working interest in the oil and gas property. In Year 1, Bill and Dan, both cash method taxpayers, each pay $15,000 of IDC with respect to the property and elect to expense them by deducting them on their individual returns. In Year 3, the IRS establishes that Bill and Dan’s joint venture constitutes a partnership for federal income tax purposes. Are Bill and Dan’s elections to expense IDC in Year 1 effective? See Boone v. United States, 374 F. Supp. 115 (D.N.D. 1973); Marburger v. United States, 303 F. Supp. 42 (W.D. Ky. 1969).4. Wildcat Bill, Inc., has previously elected to capitalize IDC as the IDC on the financial books of account that had been capitalized flowed through to the tax return as capital items. Wildcat Bill is primarily an unconventional oil and gas producer with significant tax losses so had not been diligent about considering tax elections. Wildcat Bill, Inc. now proposes to acquire a new oil and gas property and wants to make an election to expense IDC. Is there any way that Wildcat Bill, Inc. can expense IDC with respect to the new property? What would you recommend that Wildcat Bill, Inc. do to change the result and secure expense treatment for the IDCs associated with this new property?LawSocial ScienceTax law ACCT 7337
