In CGG Americas, Inc. v. Commissioner, 147 T.C. 2, the U.S. Tax Court concluded that a seismic surveyor is entitled to geological and geophysical (G&G) expenses deductions even though they merely gathered data for license to third parties and did not engage in exploration or development work.
Facts & Procedural History
The taxpayer was in the business of conducting seismic surveys in the Gulf of Mexico.
The taxpayer licensed the data to oil and gas developers. The developers used the data to drill for oil and gas on the outer continental shelf in the Gulf of Mexico.
The taxpayer deducted a portion of the expenses as G&G expenses.
The issue in the CGG Americas case was whether the expenses qualify as G&G expenses.
G&G DEDUCTIONS VS. DEPRECIATION DEDUCTIONS
Taxpayers often prefer G&G expense deductions over depreciation deductions, as G&G expense deductions can be recovered over a shorter time period. G&G expenses must generally be capitalized as part of the cost of the properties and recovered over a twentyfour month period beginning on the date the costs are incurred.
G&G expenses are expenses incurred to acquire and collect information used to decide whether to acquire or retain property to develop or to reject an area as unworthy of development. This typically means paying in-house staff to search the surface of land and evaluate and use geological mapping, topographical mapping, aerial photography, and radiation surveying for indications of hydrocarbons.
In CGG Americas, the court addressed whether G&G expenses include these same expenses incurred by a seismic surveyor who was not in the business of oil or gas exploration or development. The IRS argued that the expenses had to be paid or incurred in connection with the exploration for, or development of, oil or gas to be G&G expenses. According to the IRS, exploration by the taxpayer’s clients was not sufficient. The IRS cited various tax cases and rulings in support of this position.
The court did not agree with the IRS. The court concluded that the authorities cited by the IRS did not limit G&G expense deductions to taxpayers in the business of oil or gas exploration or development. The court concluded that the phrase “in connection with” is satisfied because surveying is integral to the process of finding oil and gas deposits regardless of whether it is performed by a third party or in-house by the exploration and development company. Thus, the court concluded that this requirement was satisfied given the relationship between surveying and exploration and development.