7735 / What special rules apply to electing large partnerships with oil and gas properties?

Electing large partnerships with oil and gas properties are subject to special rules. The allowance for depletion (see Q 7870) is computed at the partnership level, except in the case of a disqualified person. Such depletion is determined without regard to the limits of production for which percentage depletion is allowable (see Q 7874), and without regard to the limit of percentage depletion to 65 percent of taxable income (see Q 7878). Also, a partner’s basis in the partnership interest is not reduced by any depletion allowance computed at the partnership level (see Q 7883). Such depletion would generally be treated as from a passive loss limitation activity (see Q 7734).

If any partner is a disqualified person, that partner’s distributive share of income, gain, loss, deduction, or credit attributable to a partnership oil or gas property is determined without regard to the electing large partnership rules. In addition, that partner’s distributive share attributable to oil or gas property is excluded for purposes of the simplified flow-through and partnership level computations. A disqualified person is a retailer or refiner of crude oil or natural gas (see Q 7874) or any other person whose average daily production of domestic crude oil and natural gas exceeds 500 barrels. In determining a person’s average daily production, all production of domestic crude oil and natural gas is taken into account, including the person’s share of any production by the partnership.¹