gross income from the property
(4) Percentage depletion is not allowable with respect to the income from a disposal of coal (including lignite) or domestic iron ore (as defined in paragraph (e) of 1.631-3) with a retained economic interest to the extent that such income is treated as from a sale of coal or iron ore under section 631(c) and 1.631-3. Rents or royalties paid or incurred by a taxpayer with respect to coal (including lignite) or domestic iron ore shall be excluded by such taxpayer in determining gross income from the property without regard to the treatment under section 631(c) of such rents and royalties in the hands of the recipient. (5) (i) In all cases there shall be excluded in determining the gross income from the property an amount equal to any rents or royalties (which are depletable income to the payee) which are paid or incurred by the taxpayer in respect of the property and are not otherwise excluded from gross income from the property. The following example illustrates this rule: