In a legal memorandum released on December 24, 2015 the IRS held that a taxpayer that acquires seismic data as part of an asset acquisition involving properties that were either developed, proved or probable has not paid or incurred “G&G” (geological and geophysical) expenditures within the meaning of Section 167(h) of the Internal Revenue Code, and as a result, cannot deduct such expenditures over the 24-month period permitted by Section 167(h).  Section 167(h)(1) provides for any G&G expenses paid or incurred in connection with the exploration for, or development of, oil and gas within the United States to be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.  

In this case, the taxpayer acquired seismic data as part of an asset acquisition.  The purchase and sale agreement entered into in connection with the acquisition allocated a specific amount of the overall purchase price to the seismic data.  The taxpayer then amortized the allocated value of the seismic data over 24 months as G&G expenditures under Section 167(h).  

The IRS held that since the taxpayer acquired properties that were either developed, proved or probable, the taxpayer did not incur costs to locate and identify properties with the potential to produce commercial quantities of oil and natural gas.  As a result, the IRS ruled that the taxpayer did not pay or incur G&G expenditures within the meaning of Section 167(h) and could not amortize such expenditures pursuant to that subsection.   

Note that had the acquisition involved undeveloped properties the IRS may have reached a different result.