Q-1 OilCo is a corporation that files its federal income tax return on a calendar year basis using the accrual method of accounting.
During the year, OilCo entered leases with the federal government to use offshore wells for oil production. The leases provide that OilCo must remove any physical assets that it constructs to run its business should it abandon the wells or upon lease termination. Although the lease itself does not state when it will terminate, the lease may be terminated upon one year’s notice by either party. Typically, parties maintain these types of lease arrangements for twenty years.
OilCo installed platforms and fixtures this year and in its federal income tax return for the year deducted the estimated cost of removing them. OilCo will perform all services incidental to removing the assets.
Assume that the installation costs at issue are fully deductible (the question is not whether they are deductible, but when). Also, assume that the estimated removal cost is a good approximation of the actual costs.
a) List the primary authorities (Code, Regulations, cases, rulings, and procedures only) relied upon in answering parts b & c below:
b) When may OilCo deduct the costs related to the fixtures? Explain using the authorities you have cited.
c) Assume that OilCo will pay another person to remove the physical assets when the time comes. How does this change your answer to a (if at all)? Explain using the authorities you have cited.
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