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TITLE 26-INTERNAL REVENUE CODE or incurred on the respective dates on which the mines reach the producing stage, and ii) are properly chargeable to capital account. (B) If subparagraph (A) does not apply with respect to any such mine, then the de- duction for depletion under section 611 with respect to the property shall be disallowed until the amount of depletion which would be allowable but for this subparagraph equals the amount of the adjusted explora- tion expenditures with respect to such mine. (2) Elections (A) Method Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe. (B) Time and scope The election provided by paragraph (1) for any taxable year may be made or changed not later than the time prescribed by law for filing the return (including ex- tensions thereof) for such taxable year. (c) Recapture in case of bonus or royalty If an election has been made under subsec- tion (a) with respect to expenditures relating to a mining property and the taxpayer receives or accrues a bonus or a royalty with respect to such property, then the deduction for depletion under section 611 with respect to the bonus or royalty shall be disallowed until the amount of depletion which would be allowable but for this subsection equals the amount of the adjusted exploration expenditures with respect to the property to which the bonus or royalty relates. (d) Gain from dispositions of certain mining property (1) General rule Except as otherwise provided in this subsec- tion, if mining property is disposed of the lower of- (A) the adjusted exploration expenditures with respect to such property, or (B) the excess of- (I) the amount realized (in the case of a sale, exchange, or involuntary conver- sion), or the fair market value (in the case of any other disposition), over (ii) the adjusted basis of such property, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. (2) Disposition of portion of property For purposes of paragraph (1)- (A) In the case of the disposition of a por- tion of a mining property (other than an undivided interest), the entire amount of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such portion to the extent of the amount of the gain to which paragraph (1) applies. (B) In the case of the disposition of an un- divided interest in a mining property (or a portion thereof), a proportionate part of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies. This paragraph shall not apply to any expen- diture to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditure relates neither to the portion (or Interest therein) disposed of nor to any mine, in the property held by the taxpayer before the disposition, which has reached the pro- ducing stage. (3) Exceptions and limitations Paragraphs (1), (2), and (3) of section 1245(b) (relating to exceptions and limita- tions with respect to gain from disposition of certain depreciable property) shall apply in respect of this subsection in the same manner and with the same effect as if references in section 1245(b) to section 1245 or any provi- sion thereof were references to this subsec- tion or the corresponding provisions of this subsection and as if references to section 1245 property were references to mining property. (4) Application of subsection This subsection shall apply notwithstanding any other provision of this subtitle. (e) Basis of property (1) Basis The basis of any property shall not be re- duced by the amount of any depletion which would be allowable but for the application of this section. (2) Adjustments The Secretary shall prescribe such regula- tions as he may deem necessary to provide for adjustments to the basis of property to re- flect gain recognized under subsection (d)(1). (f) Definitions For purposes of this section (1) Adjusted exploration expenditures The term "adjusted exploration expendi- tures" means, with respect to any property or mine- (A) the amount of the expenditures al- lowed for the taxable year and all preceding taxable years as deductions under subsec- tion (a) to the taxpayer or any other person which are properly chargeable to such prop- erty or mine and which (but for the election under subsection (a)) would be reflected in the adjusted basis of such property or mine, reduced by (B) for the taxable year and for each pre- ceding taxable year, the amount (if any) by which (i) the amount which would have been allowable for percentage depletion under section 613 but for the deduction of such expenditures, exceeds (ii) the amount allowable for depletion under section 611, properly adjusted for any amounts included in gross income under subsection (b) or (c) and for any amounts of gain to which subsec- tion (d) applied. (2) Mining property The term "mining property" means any property (within the meaning of section 614 after the application of subsections (c) and (e) thereof) with respect to which any expendi- 71-999 0 - 78 - 31 (Vol. 7) Page 453 § 617