Introduction Taxes are important in the evaluation of any investment. For example, the market price of a tax exempt municipal bond will usually be higher than the market price of a fully taxable industrial bond of equivalent interest rate and security. Similarly, the buyer of a business will consider the impact of taxes in determining its potential yield and payout. The timing and extent of capital improvement programs are also influenced by taxes. For example, the time of repayment and ability to repay purchase obligations will be materially influenced by the ability to deduct the cost of improvements through depreciation or depletion charges. The oil and gas industry is affected by certain special rules of taxation which tend to make tax considerations of paramount importance to the industry. Some of these specialized concepts will be discussed and their effect upon specific transactions will be examined. Property Unit If the land department of an oil company secures four 160-acre leases from four different landowners, thereby securing a 640-acre tract, the operating departments of the company would likely regard such a tract as a single property for most purposes. However, under income tax rules, the company is regarded as having four properties, even though 640-acre spacing might be required, absent an election to aggregate, which will be discussed presently. Property is defined by the Internal Revenue Code as "each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land". This definition places emphasis on the concept of separateness whether it arises by reason of the nature of the interest owned by the taxpayer, the various deposits under the tract of land, or the number of tracts or parcels into which it may be carved. The types of interest which may be regarded as separate would refer to the kind of interest owned by the taxpayers such as a fee simple, working interest, royalty, or over-riding royalty, etc. Regardless of how or when acquired, each such interest would be regarded as a separate property for depletion purposes, except in certain very special circumstances. If several mineral deposits are under a single tract or parcel of land, each deposit is regarded as a separate property.