Discussion:Royalty / depletion

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.

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.

Does the rate revert to 15% upon death? THe 22% fixed contract NEVER SHOULD HAVE BEEN TAKEN by the previous accountant, who by the way CANNOT remeber why he was taking 22%... Why not start using 100% depletion, no justification for it either!!!!!

heirs are changing title to a holding company in OK?

I hope these that these royalties are valueable, otherwise they are making thing awefully complex. If the royaly income is sizable, you need to get better help than what you've gotten.

I posted a question looking for some help and guidance from other tax professionals, because here in northern IL we do not see this type of thing. I did not expect such an unprofessional response from someone who is on here responding to questions.