The IRS and Mineral Property Appraisal - Mining Business Valuation

The United States Internal Revenue Service (IRS) has some specific requirements for appraising mineral properties and valuing mining businesses. It also has some generic rules that affect all real property appraisal and business valuations. This portion of the Mineral Business Appraisal web site is designed to provide some fundamental information about these generic and special IRS rules. These IRS requirements are necessary when valuing mineral properties and/or mining businesses for estate and gift taxes.

Appraisals performed for clients that intend to use them for substantiating tax filings are performed under a definition of value referred to as Fair Market Value (FMV). The IRS is of the opinion that the fair market value of an asset should be the same whether it is being appraised for estate taxes or for gift tax purposes. In Anselmo v. Commissioner, the Court, in applying the definition of fair market value in a charitable contributions case, held that there should be no distinction between the measure of fair market value for estate and gift tax purposes and charitable contributions under the income tax law.

Fair Market Value is defined as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts". The definition of fair market value for estate tax purposes is at Treasury Regulations § 20.2031-1(b) and, for gift tax purposes is at Treasury Regulations § 25.2512-1. Both definitions are the same.

IRS Rules For Mines The United States Treasury Department has established rules applicable to mines, oil and gas wells, and other natural deposits under CFR Title 26, Section 1.611-2(c) and (d), concerning the determination of fair market value of mineral properties, and improvements, if any. If the fair market value of the mineral property and improvements at a specified date is to be determined for the purpose of ascertaining the basis, such value must be determined, subject to approval or revision by the district director, by the owner of such property and improvements in the light of the conditions and circumstances known at that date, regardless of later discoveries or developments or subsequent improvements in methods of extraction and treatment of the mineral product.

Copies of relevant IRS Regulations and Revenue Rulings are available for review.

IRS Regulations Section 1.611-2(c), (d) IRS Regulations Section 1.611-2(c) deals with the determination of the mineral contents of deposits: If it is necessary to estimate or determine with respect to any mineral deposit as of any specific date the total recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products reasonably known, or on good evidence believed, to have existed in place as of that date, the estimate or determination must be made according to the method current in the industry and in the light of the most accurate and reliable information obtainable.

IRS Regulations Section 1.611-2(d) deals with the determination of fair market value of mineral properties, and improvements, if any: The district director will give due weight and consideration to any and all factors and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties and improvements, bona fide offers, market value of stock or shares, royalties and rentals, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property and improvements was in question, the amount at which the property and improvements may have been inventoried or appraised in probate or similar proceedings, and disinterested appraisals by approved methods.

Mining & IRS Revenue Ruling 59-60 The purpose of this Revenue Ruling is to outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes. The methods discussed herein will apply likewise to the valuation of corporate stocks on which market quotations are either unavailable or are of such scarcity that they do not reflect the fair market value.

Mining & IRS Revenue Ruling 68-609 The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the currently outstanding portions of A.R.M. 34, C.B. 2, 31 (1920), A.R.M. 68, C.B. 3, 43 (1920), and O.D. 937, C.B. 4, 43 (1921). The "formula" approach may be used in determining the fair market value of intangible assets of a business only if there is no better basis available for making the determination.

Mining & IRS Revenue Ruling 77-287 The purpose of this Revenue Ruling is to amplify Rev. Rul. 59-60, 1959-1 C.B. 237, as modified by Rev. Rul. 65-193, 1965-2 C.B. 370, and to provide information and guidance to taxpayers, Internal Revenue Service personnel, and others concerned with the valuation, for Federal tax purposes, of securities that cannot be immediately resold because they are restricted from resale pursuant to Federal securities laws.

Mining & IRS Revenue Ruling 83-120 The purpose of this Revenue Ruling is to amplify Rev. Rul. 59-60, 1959-1 C.B. 237, by specifying additional factors to be considered in valuing common and preferred stock of a closely held corporation for gift tax and other purposes in a recapitalization of closely held businesses. This type of valuation problem frequently arises with respect to estate planning transactions wherein an individual receives preferred stock with a stated par value equal to all or a large portion of the fair market value of the individual's former stock interest in a corporation. The individual also receives common stock which is then transferred, usually as a gift, to a relative.

Mining & IRS Revenue Ruling 93-12 If a donor transfers shares in a corporation to each of the donor's children, the factor of corporate control in the family is not considered in valuing each transferred interest for purposes of section 2512 of the Code. For estate and gift tax valuation purposes, the Service will follow Bright, Propstra, Andrews, and Lee in not assuming that all voting power held by family members may be aggregated for purposes of determining whether the transferred shares should be valued as part of a controlling interest. Consequently, a minority discount will not be disallowed solely because a transferred interest, when aggregated with interest held by family members, would be a part of a controlling interest. This would be the case whether the donor held 100 percent or some lesser percentage of the stock immediately before the gift.

Discuss your mineral property appraisal, mining business valuation, or other mineral industry related concerns with Mineral Business Appraisal:
Michael R. Cartwright  michael@minval.com
Five Claret Court, Reno, NV  89512-4744
Tel/Fax: 775-322-9028

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IRS Regulations Section 1.611-2(c), (d)
Mining & IRS Revenue Ruling 59-60
Mining & IRS Revenue Ruling 68-609
Mining & IRS Revenue Ruling 77-287
Mining & IRS Revenue Ruling 83-120
Mining & IRS Revenue Ruling 93-12

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