For purposes of Section 631(c), coal generally is deemed to be disposed of on the day
on which the coal is mined. Further, Treasury Regulations promulgated under Section 631 provide that advance royalty payments may also be treated as proceeds from sales of coal to which Section 631 applies and, therefore, such payment may
be treated as capital gain under Section 1231. However, if the right to mine the related coal expires or terminates under the contract that provides for the payment of advance royalty payments or such right is abandoned before the coal has been
mined, we may, pursuant to the Treasury Regulations, file an amended return that reflects the payments attributable to unmined coal as ordinary income and not as received from the sale of coal under Section 631.
Our royalties from coal leases generally will be treated as proceeds from sales of coal to which Section 631 applies. Accordingly, the
difference between the royalties paid to us by the lessees and the adjusted depletion basis in the extracted coal generally will be treated as gain from the sale of property used in a trade or business, which may be treated as capital gain under
Section 1231. Please read Sales of Coal Reserves or Timberland. Our royalties that do not qualify under Section 631(c) generally will be taxable as ordinary income in the year of sale.
general, we are entitled to depletion deductions with respect to coal mined from the underlying mineral property. Subject to the limitations on the deductibility of losses discussed above, we generally are entitled to the greater of cost depletion
limited to the basis of the property or percentage depletion. The percentage depletion rate for coal is 10%. If Section 631(c) applies to the disposition of the coal, however, we are not eligible for percentage depletion. Please read
Depletion deductions we claim generally will reduce the tax basis of the underlying mineral property.
Depletion deductions can, however, exceed the total tax basis of the mineral property. The excess of our percentage depletion deductions over the adjusted tax basis of the property at the end of the taxable year is subject to tax preference
treatment in computing the alternative minimum tax, the consequences of which are not addressed herein. In addition, a corporate unitholders allocable share of the amount allowable as a percentage depletion deduction for any property will be
reduced by 20% of the excess, if any, of that partners allocable share of the amount of the percentage depletion deductions for the taxable year over the adjusted tax basis of the mineral property as of the close of the taxable year.
Oil and Natural Gas Depletion
Subject to the limitations on deductibility of losses discussed above (please read Tax Consequences of Unit
OwnershipLimitations on Deductibility of Losses), unitholders may be entitled to depletion deductions with respect to our oil and natural gas royalty interests. The deduction is equal to the greater of cost depletion limited to the basis
of the property or (if otherwise allowable) percentage depletion.
Percentage depletion is generally available with respect to unitholders
who qualify under the independent producer exemption contained in Section 613A(c) of the Code. For this purpose, an independent producer is a person not directly or indirectly involved in the retail sale of oil, natural gas or derivative
products or the operation of a major refinery. Percentage depletion is calculated as an amount generally equal to 15% of the unitholders gross income from the oil and gas property for the taxable year. A unitholder generally may deduct
percentage depletion only to the extent the unitholders average daily production of domestic crude oil, or the natural gas equivalent, does not exceed 1,000 barrels. A limitation equal to the lower of 65% of taxable income or 100% of taxable
income from the property further limits the deduction for the taxable year.
All or a portion of any gain recognized by a unitholder as a
result of either the disposition by us of some or all of our oil and natural gas interests or the disposition by the unitholder of some or all of his units may be taxed as ordinary income to the extent of recapture of oil and gas depletion.