Discussion:Royalty / depletion
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| + | {{ForumReplyPost|UserID=LSC CPA|Date=6 November 2009|Text=The properties are in Oklahoma where the 22% is correct for the state. The taxpayers are in IL. The properties were inherited by the deceased taxpayer, who died in 2006. She inherited them from her parents years and years ago, and some of them are still titled in her maiden name (she was in her 80's when she died), so it's possible that most, if not all, of those contracts were in existence prior to 1975. The heirs are in the process now of changing title to the rights to a holding company in OK. It's taken so long because the first executor was not handling the estate appropriately and a second executor had to come in last year and start from scratch. What should be my next step, then? Does the depletion rate revert to 15% upon the death of the taxpayer, even if the nature of the fixed contract still applies? }} | ||
Revision as of 19:18, 6 November 2009
Discussion Forum Index --> Tax Questions --> Royalty / depletion
| 11 April 2007 | |
| Just want a second (or more) opinion - if clients are receiving royalty income for natural gas leases on their home property - can they still take 15% depletion? How about if it is a lot separate from main home? | |
| 12 April 2007 | |
| 15% would probably be the depletion that you would use. That is what is available for royalty owners. The 22% rate is allowed for oil & gas production in the case of regulated natural gas and natural gas sold under a fixed contract. If the taxpayer is the royalty owner then it wouldn't matter if it's from their home property or a separate lot to which they own the mineral rights. | |
| 12 April 2007 | |
| As always, need more informaton. Most working interest operations issue fixed priced contracts. | |
| 30 July 2008 | |
| The 22% depletion rate is only available to a very specific type of production:
For purposes of this subsection - (A) Natural gas sold under a fixed contract
The term natural gas sold under a fixed contract means
domestic natural gas sold by the producer under a contract, in
effect on February 1, 1975, and at all times thereafter before
such sale, under which the price for such gas cannot be
adjusted to reflect to any extent the increase in liabilities
of the seller for tax under this chapter by reason of the
repeal of percentage depletion for gas. Price increases after
February 1, 1975, shall be presumed to take increases in tax
liabilities into account unless the taxpayer demonstrates to
the contrary by clear and convincing evidence.
(B) Regulated natural gas
The term regulated natural gas means domestic natural gas
produced and sold by the producer, before July 1, 1976, subject
to the jurisdiction of the Federal Power Commission, the price
for which has not been adjusted to reflect to any extent the
increase in liability of the seller for tax under this chapter
by reason of the repeal of percentage depletion for gas.
Most production would only qualify for the 15% depletion. | |
| 6 November 2009 | |
| I am working on a new client's deceased parents' 2005 tax return and 2006 final tax return and estate tax returns for 2006 - 2008 (both parents died in April 2006). They have oil and gas royalty income from about 20 - 25 different sources reported on Schedule E on their previous years' 1040s for 2003 and 2004. It appears that their previous accountant was using the 22% fixed contract depletion rate. That accountant has no recollection of how he determined that the depletion rate was the correct one, and if it applied to all investments (he has been retired for years - was doing the return as a favor to this client's parents - so not quite up to speed on this stuff anymore). Going forward, I am unclear about whether I should be using the same 22% rate, or if this is something that changes from year to year. I can't imagine having to contact each and every oil and gas company, especially going backwards to 2005, to see what the terms of the investments/contracts were. I hate to assume anything here, but want to maximize the depletion deduction for the client. Would I be safe in using the 22% rate, being consistent with the prior year tax returns, since I have no information available to me? Any help from someone with more experience in this area would be greatly appreciated. Thank you. | |
| 6 November 2009 | |
| The rate that should have been/should be used would be 15% Federal rate.
State may make a difference as some states have depletion rate. For example Oklahoma has 22% rate, so you take 15% on federal and the 7% add'l on the state return. The prior accountant using the 22% rate was incorrect..the 22% for fixed contract would have to be for a fixed contract in place in 1975. "By 1974, the FPC had determined that area wide pricing was unfeasible. In an effort to find a system of wellhead price regulation that worked, the FPC adopted national price ceilings for the sale of natural gas into interstate pipelines. Realizing that the prior price ceilings, based on the cost-of-service approach, were much lower than the market value of interstate natural gas, the FPC set a national price ceiling of $0.42 per million cubic feet (mcf) of natural gas. Although this price ceiling doubled the prices that had been set during the 60s, it was still significantly less than the market value of the natural gas being sold. This system of price controls was in place until the passage of the Natural Gas Policy Act (NGPA) in 1978." Even with contractual price increases the price per McF would be very low.. Have client check his royalty stubs. I would bet he is being paid much more..and oil production would never get this fixed depletion rate... What state are you in? You should be using 15% federal........The deaths change the scenario very significantly, and there are some deductions that you could help clients with, but to use 22%, without justification makes you as guilty as prior accountant. | |
| 6 November 2009 | |
| The properties are in Oklahoma where the 22% is correct for the state. The taxpayers are in IL. The properties were inherited by the deceased taxpayer, who died in 2006. She inherited them from her parents years and years ago, and some of them are still titled in her maiden name (she was in her 80's when she died), so it's possible that most, if not all, of those contracts were in existence prior to 1975. The heirs are in the process now of changing title to the rights to a holding company in OK. It's taken so long because the first executor was not handling the estate appropriately and a second executor had to come in last year and start from scratch. What should be my next step, then? Does the depletion rate revert to 15% upon the death of the taxpayer, even if the nature of the fixed contract still applies? | |
