The Application of Depletion to Geothermal Resources

The energy crisis and the increasing costs of conventional sources of energy have created increased interest in geothermal resources as an alternative energy source. One impediment to the development of geothermal resources is the uncertainty of their status under federal tax law. This note analyzes the application of the depletion provisions of the Internal Revenue Code of 1954 to geothermal resources. Consideration is given to whether geothermal resources are exhaustible, whether they can or should be viewed as heat, and whether heat is a natural deposit or a mineral. Since geothermal resources exist in several forms, and since the depletion provisions may not apply uniformly to all of the forms, the provisions are analyzed to discover which ones might apply to each form of geothermal resources. A background summary of the nature of geothermal resources is provided in part I. Federal tax law is then reviewed in part II to determine which depletion provisions may apply to geothermal resources. Finally, in part III the distinctions among the forms of geothermal resources and the economics of developing these forms are considered in formulating the tax treatment that should be applied to each form.