Rev. Rul. 67-135

Advice has been requested whether a taxpayer, under the circumstances described below, is in receipt of gross income, either within the meaning of section 74(a) of the Internal Revenue Code of 1954, or under section 61 of the Code.

Periodically the public is offered the opportunity to lease oil and gas rights to certain federally owned lands. The lands are administered by the Department of the Interior of the United States through its Bureau of Land Management and the leases are issued pursuant to the authority of the Mineral Leasing Act of 1920, Public Law 146, 66th Congress, 30 U.S.C. 181, as amended.

The Bureau of Land Management posts a list of the tracts of land when they become available for leasing. The lands posted are not within any known geological structure of a producing oil and gas field and are leased without competitive bidding. Any citizen of the United States who has reached the age of 21 years may file, on a drawing entry card, one offer to lease for each tract of land in which he is interested. Each offer to lease must be accompanied by the payment of the standard filing fee and the payment of the first year's rental. The Bureau of Land Management retains all filing fees but returns the rental payments to the applicants who are not selected. Each applicant, when he submits an offer, agrees that he will be bound to a lease if his offer is chosen for acceptance.

If a qualified applicant's offer to lease a tract of land is the only offer filed on that tract, his offer is accepted. However, when the lands available for leasing are posted it is not unusual that more than one applicant will file an offer to lease the same tract of land. When this occurs, the lessee is determined by a drawing.

Section 74(a) of the Code provides, in part, that gross income includes amounts received as prizes.

Section 61(a) of the Code provides, in part, that except as otherwise provided by law, gross income means all income from whatever source derived.

The facts and circumstances surrounding the issuance of these oil and gas leases indicate that the drawing is used merely as an impartial method of selecting a lessee from the qualified applicants.

Accordingly, the difference, if any, between the fair market value and the cost of a lease obtained by a taxpayer under these circumstances is not a prize under the provisions of section 74(a) of the Code, and such difference is not includible in the taxpayer's gross income under section 61(a) of the Code when he obtains the lease.