#### § 1.1502-16 Mine exploration expenditures.

(a) *Section 617* —

(1) *In general.* If the aggregate amount of the expenditures to which section 617(a) applies, paid or incurred with respect to mines or deposits located outside the United States (as defined in section 638 and the regulations thereunder), does not exceed:

(i) $400,000 minus

(ii) All amounts deducted or deferred during the taxable year and all preceding taxable years under section 617 or section 615 of the Internal Revenue Code of 1954 and section 23(ff) of the Internal Revenue Code of 1939 by corporations which are members of the group during the taxable year (and individuals or corporations which have transferred any mineral property to any such member within the meaning of section 617(g)(2)(B)) for taxable years ending after December 31, 1950 and prior to the taxable year, then the deduction under section 617 with respect to such foreign expenditures and paragraph (c) of § 1.1502-12 for each member shall be no greater than an allocable portion of such amount hereinafter referred to as the “consolidated foreign exploration limitation.” Such allocable portion shall be determined under subparagraph (2) of this paragraph. If the amount of such expenditures exceeds the consolidated foreign exploration limitation, no deduction shall be allowed with respect to such excess.

(2) *Allocable portion of limitation.* A member's allocable portion of the consolidated foreign exploration limitation for a consolidated return year shall be:

(i) The amount allocated by the common parent pursuant to an allocation plan adopted by the consolidated group, but in no event shall a member be allocated more than the amount it could have deducted had it filed a separate return. Such allocation plan must include a statement which also contains the total foreign exploration expenditures of each member which could have been deducted under section 617 if the member had filed a separate return. Such plan must be attached to a consolidated return filed on or before the due date of such return (including extensions of time), and may not be changed after such date, or

(ii) If no plan is filed in accordance with subdivision (i) of this subparagraph, then the portion of the consolidated foreign exploration limitation allocable to each member incurring such expenditures is an amount equal to such limitation multiplied by a fraction, the numerator of which is the amount of foreign exploration expenditures which could have been deducted under section 617 by such member had it filed a separate return and the denominator of which is the aggregate of such amounts for all members of the group.

(b) *Section 615* —

(1) *In general.* If the aggregate amount of the expenditures, to which section 615(a) applies, which are paid or incurred by the members of the group during any consolidated return year exceeds the lesser of:

(i) $100,000, or

(ii) $400,000 minus all such expenditures deducted (or deferred) by corporations which are members of the group during the taxable year (and individuals or corporations which have transferred any mineral property to any such member within the meaning of section 615(c)(2)(B)) for taxable years ending after December 31, 1950, and prior to the taxable year, then the deduction (or amount deferrable) under section 615 and paragraph (c) of § 1.1502-12 for each member shall be no greater than an allocable portion of such lesser amount, hereinafter referred to as the “consolidated exploration limitation”. Such allocable portion shall be determined under subparagraph (2) of this paragraph.

(2) *Allocable portion of limitation.* A member's allocable portion of the consolidated exploration limitation for a consolidated return year shall be:

(i) The amount allocated by the common parent pursuant to an allocation plan adopted by the consolidated group, but in no event shall a member be allocated more than the amount it could have deducted (or deferred) had it filed a separate return. Such allocation plan must include a statement which also contains the total exploration expenditures of each member for the taxable year, and the expenditures of each member which could have been deducted (or deferred) under section 615 if the member had filed a separate return. Such plan must be attached to a consolidated return filed on or before the due date of such return (including extensions of time), and may not be changed after such date, or

(ii) If no plan is filed in accordance with subdivision (i) of this subparagraph, then the portion of the consolidated exploration limitation allocable to each member incurring such expenditures is an amount equal to such limitation multiplied by a fraction, the numerator of which is the amount which could have been deducted (or deferred) under section 615 by such member had it filed a separate return and the denominator of which is the aggregate of such amounts for all members of the group.

(c) *Examples.* The provisions of this section may be illustrated by the following examples:

# Example 1.

Corporation X and its wholly owned subsidiaries, corporations Y and Z, file a consolidated return for the calendar year 1971. None of the corporations have incurred exploration expenditures described in section 617 in previous years. During 1971, X incurred foreign exploration expenditures of $30,000, Y of $20,000, and Z of $40,000. The amount of foreign exploration expenditures deductible under section 617 for purposes of computing separate taxable income under § 1.1502-12 will be the amount actually expended by each corporation.

# Example 2.

Assume the same facts as in example (1) except that prior to 1971, X, Y, and Z had deducted (or deferred) under section 615 and 617 a total of $300,000 of exploration expenditures. During 1971, with respect to deposits located outside the United States X incurred exploration expenditures of $25,000, Y of $75,000, and Z of $125,000. The consolidated exploration limitation under paragraph (a) of this section with respect to the foreign deposits (there is no limitation with respect to the domestic expenditures) is $100,000. X may allocate the $100,000 in any manner among the three members, except that X may not be allocated more than $25,000 nor Y more than $75,000, the amount actually expended by X and Y and which they could have deducted had they each filed a separate return. If the allocation is not made in accordance with paragraph (a)(2)(i) of this section, the $100,000 limitation will be allocated under paragraph (a)(2)(ii) of this section as follows:

| Corporation | Expenditure | Fraction | | Limitation | | Allocable portion |
| --- | --- | --- | --- | --- | --- | --- |
| | | 25,000 | | | | |
| X | $25,000 | ————— | × | $100,000 | = | $12,500 |
| | | 200,000 | | | | |
| | | 75,000 | | | | |
| Y | $75,000 | ————— | × | $100,000 | = | $37,500 |
| | | 200,000 | | | | |
| | | 100,000 | | | | |
| Z | $125,000 | ————— | × | $100,000 | = | $50,000 |
| | | 200,000 | | | | |

The denominator of $200,000 was calculated as follows:

X = $25,000

Y = $75,000

Z = $100,000 (maximum amount allowed if filed separately)

Total $200,000.

# Example 3.

Assume the same facts as in example (2) and that on January 1, 1971, X acquired all of the stock of corporation T which prior to its taxable year beginning January 1, 1971, had previously deducted (or deferred) $310,000 of exploration expenditures. Assume further that in 1971 X incurred $25,000 of foreign exploration expenditures, Y $50,000, T $50,000, and Z none. A consolidated return is filed for 1971. None of the expenditures may be deducted under section 617 since the consolidated exploration limitation is zero. The limitation is zero since the aggregate amount of previously deducted (or deferred) exploration expenditures by the members of the group exceeds $400,000. (The total of such expenditures is $410,000, of which $310,000 is attributable to T and, assuming the allocation of the limitation in example (2) is made under paragraph (a)(2)(ii) of this section, $12,500 is attributable to X, $37,500 to Y, and $50,000 to Z.

# Example 4.

Assume the same facts as in example (3) except that on December 31, 1971, X sold all of the stock in Z to an unrelated party. The consolidated exploration limitation for 1972 will be $40,000, computed by subtracting from $400,000, the aggregate amount of previously deducted (or deferred) exploration expenditures incurred by the members of the group prior to 1972. (The total of such expenditures is $360,000, of which $12,500 is attributable to X, $37,500 to Y and $310,000 to T.) Amounts previously deducted (or deferred) by Z are not taken into account since it was not a member of the group at any time during 1972. Amounts previously deducted (or deferred) by Z shall be taken into account by it for subsequent separate return years.

[T.D. 7192, 37 FR 12949, June 30, 1972]