Tuesday, March 29, 2011

IRS Groundwater Depletion Allowance

Back in the 1960's a savvy Texas irrigator sued the IRS in order to claim a depletion allowance on his federal taxes for groundwater declines under his property.  He eventually won his suit and the IRS revised Section 611 of the Internal Revenue Code - dealing specifically with the Southern High Plains area of the Ogallala Aquifer (Texas and New Mexico) where natural recharge is scant at best.  This was Revised Ruling 65-296.

In 1973 three Kansas irrigators began claiming the same allowance, and ended up suing the IRS in 1978 after having been denied the claims.  They eventually won also, and the IRS revised the ruling again (82-214) for the rest of the Ogallala.

Basically to claim the deduction, you must show the IRS you own or have an economic interest in the land, the water table is declining due to its use, that recharge is negligbile or non-existent and that you have a cost in water that is devaluing as the groundwater depletes.  Practically, you need credible water level information for each year once you establish your cost in water for the land. 

I often wonder if the rulings have had any impact on groundwater use or conservation in the Ogallala.  The attorneys that litigated the Kansas case reported in 1980 that it could mean as much as $1 billion less tax burden to irrigators in Kansas alone - over the life of the aquifer.  Personally I don't think it is used all that much in NW Kansas - where the cost in water has always been harder to establish, and the declines less significant.  But where this is not true, I can see tax benefits to depleting the groundwater on schedule.

This'd be a good investigative report for some aspiring hydro-journalist some day.  I wonder how easy it would be to get a freedom of information request approved by the IRS for all such claimants by state?  Could be a very interesting study.


  1. Wayne,
    Any chance you have more information about the $1 billion figure, a citation, publication, etc.? Looking for a reference for that figure for my dissertation.
    Rima Petrossian

    1. Rima: The attorney that litigated the Kansas Case in 1978 was Patrick J. Regan. Staff writer for the Wichita Eagle-Beacon newspaper (Wichita, KS) Martha Mangelsdorf reported on this case on October 1, 1980 in an article titled "Irrigators Win Tax Break". Her report was basically on the settlement of the 1978 case. In this article she quotes Patrick Regan as follows: "We could easily be talking about more than $1 billion in potential depletion reductions over the life of the aquifer, just in Kansas".

      I hope this helps.