You negotiate your contract for a ROW and pipeline to cross your land. The land agent tells you that the money you receive can be considered payment for damages. The document from the midstream company lists the payment as damages. Tax time arrives....how do you proceed? The midstream company sent you a 1099-misc showing the amount they reported to the IRS. The confusion soon follows. Is this money taxable or not? Ask 5 "tax professionals" and you'll get 5 different answers.
Is there such a thing as damages. Tell your accountant or local H&R Block tax person that these damages aren't taxable and they'll look at you like you're crazy.
Let's settle this once and for all. Let's hear your comments. Are damages taxable???
Let me put this out there too. Is it possible to pay zero tax on your pipeline agreement? If you negotiated it as such and it's says it will all be paid as damages. Does that mean zero tax? Is that possible?
I think that if you could prove to the IRS that the value of the damages was the value that you were paid then yes, it could happen. I think that in most situations you would end up getting far less for the ROW than your neighbor would, though, because the value of the property damage is going to be less than what a pipeline company is willing to pay for the ROW. In other words, in order to pay zero taxes you would have to take far less in payment than you could get if you took both damages and taxable payment. I could be wrong, though. I'd love to be proven wrong.
Please don't take the tone of this response as too abrupt, however:
Hire professionals who know what they are doing and have demonstrable experience in doing it. You get what you pay for.
My advice on the above is solid and tested, and settled.
It cost me much time and treasure to get it. My ROW was settled with the same seriousness and fortitude as the O/G lease - in fact, they compliment each other, and are as tight as any that exist in the UTICA. And I do get the ROW back if the intended use terminates. Why? Because that's the way it I negotiated it!
This site has discussions regarding ROW's that go back years. You will also find certain posters who give a lot of good advice regarding this matter, and yet most people seem to be still starting from scratch (or are behind the curve) !!
Go ahead and spend some serious time using that search function for ROW's and get the benefit of the experience.
Free to me. Free to you. Testing and implementing did cost some attorney/accountant fees plus time in educating myself.
It's me, with a ROW contract tip.
I recently saw what happened to a Farmer who signed the ROW Agreement that Cardinal Pipeline carried around the counties in OH, PA & WV asking for signatures while telling everyone they don't negotiate.
From reading the ROW, myself and others knew that anyone who signed this ROW Agreement would no longer own their right of way.
It has been confirmed by this Farmer that when the Fiber Optic cable was laid across his land, no one called on him for permission, or paid him. Cardinal Pipeline did the negotiating and legally took the money for the Fiber Optic ROW since they now ETERNALLY own the ROW for this Farmers land.
Sign nothing for anyone in the O&G and related industries who has a contract for you. Only sign after you have it rewritten by a lawyer in your favor, otherwise you will lose every time.
Sorry for the negative news, but someone has to educate landowners.
A pipeline right of way easement agreement does not allow for a commercial fiber optic line unless it specifically states that it is. If it does give the right for a commercial forber optic line, then the landowner should be so compensated. Normal fiber optic language only allows for the company to lay a fiber optic line to serve the pipeline company's communications for operations and maintenance and only for the pipeline. A good attorney would see this in an instant.
A few years ago we had 2 IRS Supervisors come to a Right of Way training session to answer that question and a couple more. The answer to your question is NO, you have no tax relief for damages UNLESS you can prove that you spent the money for fixing damages. Some will claim that the damage money is compensation for a devaluation of the remainder, but this can not be proven, even by an appraisal. If you agreed to a pipeline or any other facility where the company did not have eminent domain, then all of the money is taxable. If the company does have eminent domain, then even if you agree to all of their offers, the fact is that there is no "willing seller-willing buyer" situation and therefore all of the easement money and temporary work space is not taxable.If you look hard enough, there is an IRS bulletin on this but they have a poor example for this.
See, another different view. Some say damages are taxable....others do not. If they are taxable, why did the O&G people ever start using the term? To make the landowner think they are getting more money then they are?
As I mentioned earlier, AEP and NiSource both paid me for damages and they weren't taxed. These companies follow the "letter of the law". If there is no such thing as damages, then why did they pay me as such?
Zack, damages are not income. Income is taxable. Damages are not because they are not income. Read the Law. Start with the IRS publications regarding damages and property basis. Not an easy read but good tax people know where to find this. This should not even raise an eyebrow if the tax person can read and do research.
I forgot to mention to the group, the balance of payment that one may have receive MAY NOT be ordinary income, rather the non-damage loot you receive will be taxed as a capital gain (Less taxes). That portion can be considered a "sale" of real estate. ROW Lessee will send you a 1099S for that.
The box that is checked on the 1099 form, (1099s, 1099Misc). etc, there are others) determines what the IRS is looking for when you file your taxes.
Prudent ROW negotiations will already have this in mind when negotiating the ROW, and will insist on all of that in writing upfront.
Always consider tax consequences ahead of time when doing business like this.
If the IRS comes knocking for the audit, your homework is done if you have stuff in writing.
Finally, damages must be justifiable. One must be able to justify what is being taken in a dollar amount. That amount is the damage. Anything beyond damage may be a sale taxed as a capital gain or as ordinary income (you nay have actually made a profit!!) , depending on your holding period of the property.
Again, what constitutes a "damage"? How is the landowner damaged? If the pipeline ditch is filled in and re-seeded and the grass grows back, fences are fixed, gates are repaired; how are you damaged? It is really classified or looked upon as rent or income. As I stated before, if you are under the threat of eminent domain, generally no taxes on the easement and temporary work space. Taxed on all crops, timber and damage payments unless you can prove you paid to fix a damage, then you can take that off with proven receipts, labor, etc.
Fair enough. Read my last paragraph. We had substantial crop tree damage as well as permanent loss of use for the affected area. And attorney/tax accountant fees (as a reimbursement) and ANY other expense directly associated with that agreement. Document everything.
By the way, The PAD fees that O/G will pay for damages SETS THE STANDARD by which a commercial valuation may be established in the middle of nowhere, NOT the value of the land as farmland.
Finally, your county has probably reassessed the O/G pads as no longer being part CAUV, rather these new small tracts are now taxed commercially. Perhaps one can use that as a basis of valuation for what is now essentially and industrial parcel in the middle of farmland.
I should caveat that taking the whole payment as damages might not be prudent, part of it should claimed as income and taxed as a capital gain. I alluded that in that last paragraph, albeit not so clearly. If you see your are clearly profiting by the situation, do not get greedy, take some profits and pay some capitals gains.
If your ROW payments are into six figures this would be a good idea.
But get that in writing in the ROW agreement.
It actually has nothing to do with the legal document, it all has to do with how the check or payment is split. If no eminent domain, it is all taxable unless you get creative about your "costs". If the company does have eminent domain, have the company put all payments on the easement except for crops and timber, then you are safe. Actually, you might even be able to write off the timber since it was a requirement of the easement, so it was a situation that you did not want to cut the timber, but the company made you per eminent domain.
An advising accountant with our Columbus-based law firm that is handling ET Rover for us informed clients of the law firm that any monies placed in the "damages" column is not taxable at this time but would be taxable when/if we sell our property. He also encouraged clients who haven't yet done so to hire personal accountants who are knowledgeable in these areas.