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“G&G expenses” not limited to taxpayers owning oil and gas interests

G&G expenses not limited to owning oil, gas interests

The U.S. Tax Court today issued an opinion, granting summary judgment for the taxpayer—a service company that conducted marine surveys—based on a finding that the taxpayer’s marine surveys and the survey data licensed by the taxpayer to its customers were “geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil and gas” as required under section 167(h).


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The Tax Court held that the term “geological and geophysical expenses”—G&G expenses—under section 167(h) is not limited to expenses incurred by taxpayers that own oil and gas interests.

The case is: CGG Americas, Inc. v. Commissioner, 147 T.C. No. 2 (July 21, 2016). Read the Tax Court’s 47-page opinion [PDF 200 KB]


The taxpayer conducted marine surveys of the outer continental shelf in the Gulf of Mexico, by using geophysical techniques (including seismic reflection) that detected or suggested the presence of oil and gas in the surveyed area. The taxpayer then licensed the survey data to its customers—companies engaged in oil and gas exploration and development—for a fee.

The IRS’s position was that the taxpayer’s survey expenses were not “geological and geophysical expenses” as defined within section 167(h) because such expenses could only be incurred by taxpayers that owned mineral interests (and the taxpayer in this case did not own any mineral interests). Also, the IRS asserted that such expenses under section 167(h) must have been paid or incurred by the taxpayer in connection with its exploration for or development of oil and gas—and not when paid or incurred by a taxpayer in connection with the exploration for or development of oil and gas by other taxpayers. 

The Tax Court acknowledged that the legislative history suggested that there was a link between the meaning of “geological and geophysical expenses" in section 167(h) as well as similar phrases in several revenue rulings, but nevertheless found that it did not appear that the rulings defined the terms as including only the costs of taxpayers owning mineral interests. Thus, the court concluded that “geological and geophysical expenses” are not confined to owners of mineral interests. 

Having found the “geological and geophysical expenses” were were not limited to taxpayers that own mineral interests, the court then held that the taxpayer’s survey expenses in this case were incurred in connection with the exploration for or development of oil or gas. The court found the relationship between the surveys and oil and gas exploration was sufficient to conclude that the taxpayer had satisfied this requirement of section 167(h). 

KPMG observation

This issue is discussed in KPMG’s Income Taxation of Natural Resources 2014 at paragraph 11.16, “Unanswered Questions in the Geological and Geophysical Costs” chapter.

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