Taxing the New Frontier: Outer Space Ventures

March 4, 2014 — Leave a comment

“They [asteroids] are the low-hanging fruit of the solar system,” said Eric Anderson, an American aerospace engineer and co-founder of Planetary Resources, which lists Google’s Larry Page and Virgin billionaire Richard Branson among its backers.

Without any major technological advances, scientists claim that many minerals like zinc and gold could run out in a 100 years, so companies, such as Planetary Resources and Deep Space Industries, are working toward an alternative solution to this pending problem: asteroid mining.

Screen Shot 2014-03-03 at 12.30.17 PMAsteroids yield significant amounts of precious metals like platinum, rhodium, iridium, rhenium, osmium, ruthenium, palladium, germanium, and gold. According to Wall Street research firm, Bernstein, there is an asteroid, 16 Psyche, in between Jupiter and Mars. It stretches almost 130 miles across and could contain “17 million billion tones of nickel-iron – enough to satisfy mankind’s current demand for millions of years.”

These companies are lining up for the opportunity to mine raw minerals from asteroids/spent comets and to bring them back to earth. We will be able to use these minerals on earth for our own everyday purposes, but the asteroid miners also want to use the newfound minerals to perfect the process of fueling rockets into deeper space. Scientists want to create futuristic space “gas stations” with this new process since asteroids may contain hydrogen and oxygen: the necessary components to create new fuel for rockets while they are in space.

Likewise, citizens, like David Brenner, are also taking advantage of the economic possibilities in outer space. His website, moonforsale.com, sells tracts of land on the moon to anyone who wants some. New property and mineral reserves are running low on our planet, and the answer to these shortages look like its out in space.

While scientists make the impossible soon possible, tax lawyers in the U.S. should prepare for the newest source of income in the U.S. economy. How will it tax this new phenomenon?

Is income from space activity income earned abroad or income earned domestically?

In general, the government taxes U.S. citizens on income earned abroad; however, these citizens do receive tax credits for the taxes they paid in other countries. More specifically, Internal Revenue Code (IRC) section 863(d)(1) states that space income for U.S. citizens is U.S. source income; on the other hand, space income for foreigners is not U.S. source income.

Except as provided in regulations, any income derived from a space or ocean activity–

(A) if derived by a United States person, shall be sourced in the United States, and

(B) if derived by a person other than a United States person, shall be sourced outside the United States.

Space activity is “any activity conducted in space.”  (IRC 863(d)(2)(A)(i)). One possible problem with the regulation is that this definition of space activity excludes asteroid mining income.

Any activity with respect to mines, oil and gas wells, or other natural deposits to the extent within the United States or any foreign country or possession of the United states (section 638).

untreatiesWould the United States have jurisdiction over asteroids that pass over its orbit and then have the ability to tax anyone that mines from these asteroids? No to both questions.

Article II of the Outer Space Treaty of 1967, which the U.S. has signed and ratified, states that no nation in the world has jurisdiction over any celestial body like an asteroid, so it does not matter that the IRC does not define asteroid mining.

Outer space, including the moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means.

This treaty is the reason David Brenner’s lunar real estate venture exists legally. It states that foreign sovereignties are the only ones that cannot own outer space property; however, it does not prohibit individuals like Brenner from doing what he is doing.

Even though the Treasury’s definition of space activity might exclude asteroid mining and outer space property sales, the U.S. can still tax citizens on space activity income in general.

Problems do emerge when Controlled Foreign Companies (CFCs) take part in the space mining process. IRC 957 states that a CFC is a foreign corporation where U.S. persons own more than 50 percent of the corporation. There are no clear regulations on the space activity of these CFCs and on foreign persons engaged in a trade or business within the U.S.

Under Treas. Reg. 1.863-8(b)(2)(ii) & (iii), the income is apportioned between foreign source income and US source income “to the extent the income, based on all the facts and circumstances, is attributable to functions performed, resources employed, or risks assumes” within the US or in foreign countries.

It looks like accountants should also be ready to get involved in the space tax race; they will have to diligently determine what is U.S. source income and what is foreign source income for these CFCs that may joint launch ventures into space.

There are potential tax credits available too.

Mining-the-SkyMineral, petroleum, and timber companies use a percentage depletion deduction as a tax credit. (IRC 611 and 613). This deduction allows mining companies to recover the capital costs of a mineral investment through a special type of depreciation.

“Rather than being limited by the original capital investment as with normal depreciation, the percentage depletion deduction allows a deduction that is fixed as a rate of the gross income derived from the mineral investment and it is not limited by the original capital costs.”

The percentage depletion deduction is equal to the lesser of: (1) the depletion rate of a mineral multiplied by the gross income from mining; or (2) 50% of the net income from the mineral property.

In this equation, a statute determines the depletion rate of a mineral. For minerals typically found on asteroids (gold, titanium, platinum), the depletion rate would be 14 percent. Therefore, under the gross income calculation, the depletion deduction would be 14 percent of the gross income of the mineral property.

After all that, it appears as though the IRS will not be taxing asteroid mining much differently from current terrestrial mining. It will be interesting, however, to see if either the IRS or Congress takes steps to add laws for space activity income or if it give more tax credits for those companies involved in this emerging field.

The Future of Asteroid Mining: Video

JDKatz: Attorney's At Law

JDKatz, P.C. is a full-service law firm focused on tax lawbusiness and transactional lawestate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.jdkatz.com.

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