Tax treatment-Edgemarc gas & oil leases

Edgemarc Paid up 5 year lease  on  200+ acres 

 

The bonus payment is paid in one lump sum.

My tax preparer insisted it must be reported as that entire lump sum in the year received.

I decided to check with Dad's tax firm. They said report equal 20% each of the five year lease term and pay estimated payments..

It's rent. It's rent for five years. Each 20% is in return for one year's right to explore for and produce gas & oil.

Yes, there is a risk of IRS audit and eventual rejection of that position, they advised. But not a lot of risk in their estimation.

Since the difference between the two approaches is nearly six figures, and I have zero doubt that I can much more responsibly spend that money than the varied governments taxing me...I'll choose to go with the 5 year treatment.

Anyone care to share their experiences with their chosen tax treatment of Edgemarc leases covering significant acreage?

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Replies to This Discussion

Permalink Reply by Jon on October 8, 2016 at 10:41am

What township are you located in? Shell paid in full 4 months after the signing. No clue about Edgemark.

Permalink Reply by smitty on October 8, 2016 at 11:26pm

The bonus is paid in full as stated.

The issue is how that bonus is to be treated tax-wise.

The acreage is located in Allegheny & Venango townships.

Permalink Reply by rmc on October 9, 2016 at 2:45am
Pretty simple although not what one wants to hear the money is to be taxed in the year received.
If you want to pay over a five year period you would have to receive the money over the five year period.
At least that's what I have been told by different tax attornys
Permalink Reply by rmc on October 9, 2016 at 2:52am
One more suggestion if I were you I would want to know how much it could cost me to be wrong. Other words how much could it cost me in five years when the IRS decides to audit and access penalties and interest ?
Permalink Reply by Jon on October 9, 2016 at 7:05am

My understanding is that if you don't report your income correctly, the penalty is double what you owe.

Permalink Reply by rmc on October 9, 2016 at 1:34pm
One could end up losing the farm.

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