Journey to the Center of the Earth

[Black Bart]

Taxpayer bought 20 acres of farmland in '95 for $30K--this year, unbelievably, a railroad came through nearby (I just despise clients who have better luck than me). They paid him upwards of $150K for the dirt off the place plus the inconvenience--he gets to keep the land and the big hole. Question: Does he have any basis in the dirt that was sold? If not, then why not (all it's good for now is a catfish pond or a swimmin' hole)?

Does he have a 100% $150K gain? Exxon gets a depletion allowance--why not him? And what about that inconvenience that they bought from him--no doubt but what he's gonna be greatly inconvenienced and will pay dearly (although intangibly) as soon as his wife finds out he's blown quite a bit of the dough at Tunica's casinos.

I got a CPE course from PES (don't get excited; it's not an STD, it's just short for Professional Education Services) entitled "Real Estate Fundamentals." It says, and I quote: "Real property is defined as the earth's surface extending downward to the center of the earth (not to China) and upward into space (wonder if satellites and the Space Shuttle are gonna need easements?), including all things permanently attached to it by nature or by people." Well, nature stuck the dirt in the hole and he sold it back out.

Any basis hints?

[Mark Goldberg]

Mark Goldberg

I am totally making this up but it seems correct to me.
I vote that the dirt has basis. You would need to contact someone like a landscapper who can remember how much fill cost per truckload in 1995. Then find out how many truckloads were bought by the RR. Do the math and as long as this amount is less than the cost of the RE I think you are all set.
Mark Goldberg

[Bees Knees]

Cost Depletion

IRS Pub 225 says: “If you remove and sell topsoil,
loam, fill dirt, sand, gravel, or other natural deposits from your
property, the proceeds are ordinary income. A reasonable allowance for
depletion of the natural deposit sold may be claimed as a deduction.”

The Pub later goes on to say you cannot use the percentage method to figure depletion for standing timber, soil, sod, dirt, or turf. That leaves you with cost depletion.

Basically, cost depletion is figured by taking the cost of the property when purchased, and then figuring the fair market value of the property when it was purchased if it did not have any of the natural resource on it. So what would that property be worth when it was purchased if it had been a big hole in the ground?

The difference between what it would have cost and what it actually cost is your cost basis for depletion. You then divide that basis into depletion units and take a depletion deduction based on units sold. If there is still some dirt in that big hole, you might still have some depletion units left to go before you can right off all of the basis in that dirt.

[Black Bart]

Bees--Regarding dirt poor client

Well, I liked Mark's answer at first, then I liked yours even better, but, thinkin' about it, now I'm not so sure.

Mark's method is appealing because it's good and solid--there's a finite base to work with--the cost of fill dirt in '95. Just do the numbers, multiply some things out, and so forth and so on. Then, it's done and I'm home free.

On the other hand (local attorney's always sayin' that--told him I was gettin' a one-armed lawyer) your method sounded better at first because I thought it would "yield more dirt" and thus, more cost. But now I'm not so sure (good grief, what a hair-splitting profession this is!). How deep would you go with that hole before it becomes worthless in order to extract the max cost? There's dirt (I guess it's dirt--is it relevant if it turns to rock after a ways?) all the way to the center of the earth. How deep do we have to go to get "all" of the dirt. Or, put another way; how deep do we have to go before any remaining dirt (or whatever) is no longer considered a "depletion unit?" To get a little Clintonesque about it; define "is" (strike that), I mean "depletion unit."

As far as the "worth" of a big hole, it might be a lot to a catfish farmer in need of a ready-made pond. But if it's really deep--can't be filled-in a bit/can't work with it--it's worth nothing unless maybe somebody wants a scuba-diving or bungee-jumping site.

[Jesse]

Use of land

You said he bought 20 acres of farmland, did he operate the farm or just hold the property? If this is a one time occurence and he is not in the business of selling the dirt or any of the like, could it be subject to capital gain treatment?

[Snaggletooth]

Cost Basis

Bart - here are the prices for soil types in 1995:

Humous - $30.00/Ton
Arkansas Subsoil - $0.40/Ton
Tennessee Subsoil - $0.36/Ton (I keep telling you there's not a nickel's worth of difference)
LimeRock - $0.22/Ton
Volcanic Magma - $.0003/Ton (actually .00005/Ton. The rest of the money is to replace all the wheelbarrows that melt before the stuff cools off.
Earth Core Iron - $5000.00/Ton not counting the cost of extraction.
The Hole That's Left - i.e. just empty air is, of course, free. Possible value if you can chop the hole up into smaller blocks of empty air, so they can be loaded onto a truck bed and taken to the back forty and dropped into the earth for use as post holes...

I'm sure your client will be thankful for this information. Tell him to thank THE TAX BOOK.

[Joe Btfsplk]

Dirt sale

I believe the sale of dirt could be subject to sales tax if it is sold to a consumer vs being sold for resale.
I don't think it qualifies as 'real estate' which would not be subject to sales tax, but would be considered 'tangible personal property'.

[Bees Knees]

How much dirt would you need before it stops being personal property and starts being real property? What is the break even point?

[Bees Knees]

How deep would you go with that hole before it becomes worthless in order to extract the max cost? There's dirt (I guess it's dirt--is it relevant if it turns to rock after a ways?) all the way to the center of the earth. How deep do we have to go to get "all" of the dirt.

Actually the crust of the earth is only about 20 miles thick on land, and only a few miles thick under the oceans. Below the crust is the strong upper part of the mantle, which goes down to about 60 miles. This and the crust make up the Earth’s lithosphere. Below the lithosphere is a region of solid, but softer and weaker rock called the asthenosphere. Below the oceanic plates, it extends to depths of at least 217 miles and up to as much as 434 miles. Continental crusts may or may not ride over a layer of asthenosphere. Some scientists believe that the continents are anchored into the mantle by deep keels of rock that extend hundreds of miles below the surface. Below the asthenosphere is of course the mantle, a region of hot rock that churns like a fluid. It is some 1,800 miles thick. Beneath it lies the 1,300 mile thick outer core, a sea of liquid iron. At the center of the Earth, is the solid iron core, a sphere some 1,500 miles across. The inner core is separated from the rest of the planet by the liquid outer core.

I think once the hole hits the mantle, you would cause a volcano and kill everyone for hundreds of miles. I’m not sure local ordinances allow you to dig that deep. So I think around the 20 mile depth mark, you could stop depleting your dirt.

[ChEAr$]

depletion etc

(snipped)

I think once the hole hits the mantle, you would cause a volcano and kill everyone for hundreds of miles. I’m not sure local ordinances allow you to dig that deep. So I think around the 20 mile depth mark, you could stop depleting your dirt.

Plus you would have "depleted" your entire cost basis. then what? (grin)

Merry Christmas,
Harlan Lunsford, EA n LA

[Black Bart]

Okay, you clowns!

Don't you just hate it when you have a serious problem and some joker starts cracking wise? I, for one, would never stoop to such.

Mark: I think your method's gonna win out, as it's the only one that doesn't involve liquid rock and volcanic eruptions.

Bees: As I understand it, I need to figure out what the hole in the dirt is worth without the dirt in the hole. Correct?

Jesse: He did not operate the farm. He rented it out to a farmer. It's a one-time deal. He's not in the dirt-selling business. As to capital gains, Bees says Pub. 225 calls it ordinary.

Snag: I'm occasionally humorous, but I'm not even gettin' $30 a ton for the mounds of malarkey that I post here.

Joe: Gimme a break. Although not a biblical scholar, I think there's something in there about the problems of the day being sufficient unto themselves (or--the income tax is enough of a problem without sales tax thrown in for gouger). The nice thing about the Arkansas sales tax department is that they don't know you exist unless you tell them you exist (field personnel are scarce), so I'll let sleeping dogs lie.

Harlan: Merry Christmas to you too.

[Guest]

Publication 225

Pub 225 is a Farmers Guide. You are not dealing with a farmer. I don't know where to look, but I think the capital gains should be investigated.

[Unregistered]

Pub 225 is a Farmers Guide. You are not dealing with a farmer. I don't know where to look, but I think the capital gains should be investigated.

It's all based on the Internal Revenue Code. The IRS publications are geared toward specific taxpayers, such as farmers, but just because a tax principle is in a particular publication doesn't make it wrong or right for a taxpayer who doesn't fit the definition of the title.

As with so many of these tax situations that don't fall neatly into a category for easy interpretation, you have to do your best to apply the fact pattern to the closest authoritative presentation you can find. I'm having a problem finding the IRS Publication entitled "Dirt Sellers." Until I can find that one, I'm not ready to discount statements from the Farmer's Tax Guide.

Gosh knows I have my hands full correcting Bees and steering him to the right authoritative source, and I enjoy doing that. But until I find that Dirt Seller's publication, or a Code or Reg source to dispute it, I'll have to let him off the hook.

[Guest]

Excuse me

As with so many of these tax situations that don't fall neatly into a category for easy interpretation, you have to do your best to apply the fact pattern to the closest authoritative presentation you can find. I'm having a problem finding the IRS Publication entitled "Dirt Sellers." Until I can find that one, I'm not ready to discount statements from the Farmer's Tax Guide.

Gosh knows I have my hands full correcting Bees and steering him to the right authoritative source, and I enjoy doing that. But until I find that Dirt Seller's publication, or a Code or Reg source to dispute it, I'll have to let him off the hook.

You are absolutely correct, you are not going to find an IRS Publication entitled "Dirt Seller", and I never said to disregard the statements from the Farmer's Tax Guide. It is geared toward farmers, maybe there are other exceptions out there. Why can't dirt be a capital asset? He is not in the business of selling dirt. I did not try to correct Bees Knees and do not disrepect his opinions, what is wrong with trying to look at a situation from a different point of view?

Take your blinders off and Happy Holidays to you!

[Jesse]

Similar situation

I had a client come in this AM, this summer he had someone build next to his property and rather than haul fill in the contractor contacted my client to see if he could take fill off of his land rather than haul in from his sand pit. From what I can find and from the info received in this thread I have come to the conclusion to consider this as an extraction of minerals and taxed as royalty income, thus, ordinary income.

Not terrible news for my client because it is only $1,200, not $150,000.