working interest

[PATMK@DC.RR.COM]

Taxpayer invested in oil and gas program 12-26-13 for $100,000. We opened Schedule C (as directed by the entity) took IDC @ 80,00, other expenses @ 9,000
and 5598 depreciation. Irs denied stating we cannot write it off as a worthless investment which we did not. It was a "working interest" as provided
in regualtions for oil/gas entities operating as self-employed Scheduel C .

[Roland Slugg]

The letter your client received may have been the result of a selection clerk at the IRS simply misreading the return, or perhaps he was inadequately trained. In any case, it should be possible to clear everything up by simply writing the IRS a letter stating that there was no deduction taken for a worthless security. Instead, the deductions reported on Schedule C were all legitimate expenses from a working interest in an oil and gas operation.

This assumes, of course, that the taxpayer's expenses in his working interest are unlimited. If his expenses are limited, then the investment is a passive activity, subject to the PAL rules. Look and see how the question about that was answered on Schedule C of the return filed. It was Question G on the 2014 version of the form.