What IRS tax code determines if my participation in a drilling program is tax deductible?
Numerous code sections apply. Most importantly, under Section 469(c)(3) (the “working interest exception”), working interests in oil and gas properties are not treated as “passive activities” if the taxpayer owns the interest directly or through an entity that does not limit his liability with respect to the activity. Two elements must be met before a taxpayer qualifies for the working interest exception to the passive activity loss rules, so that losses will not be treated as losses from passive activity. First, the property generating losses must constitute a “working interest” as defined by the passive loss rules. Second, the interest must not be held through an entity that limits the liability of the taxpayer with regard to the activity.
