1099-Misc Box 1 generated from 40 yr lease to drill on property

[AZ-Tax]

If there ever was a case of asking a plumber how to perform open by pass surgery, this is it. The client briefly informed me about this soon to be transaction in 4 qtr of 09. I replied I need to know in what form of income will this money come in and I encourage them to call the Energy Co. in NY (property located in PA). They got back to me and said capital gains but I was a skeptical if its a lease or was it a lease. Well my client recieved a 1099-misc only Box 1 completed with rather large amt. The 1099-misc instructions state Box 1 amt needs to be entered on Sch E. The client has NO exps related to this rent so it looking to be all taxable. Any help would be appreciated.

Here is another case of FAILURE to tax plan.

[BP.]

If there ever was a case of asking a plumber how to perform open by pass surgery, this is it. The client briefly informed me about this soon to be transaction in 4 qtr of 09. I replied I need to know in what form of income will this money come in and I encourage them to call the Energy Co. in NY (property located in PA). They got back to me and said capital gains but I was a skeptical if its a lease or was it a lease. Well my client recieved a 1099-misc only Box 1 completed with rather large amt. The 1099-misc instructions state Box 1 amt needs to be entered on Sch E. The client has NO exps related to this rent so it looking to be all taxable. Any help would be appreciated.

Here is another case of FAILURE to tax plan.

I would expect this as taxable on a Schedule E. I have a few of these- very small. Only expense has been portion of the tax prep fee attributable to the Sched E.

But now one of my clients with land in NE PA expects huge (7 figures monthly!) lease payments for the gas found under the property. Probably in the same group as your client. My client said some of her neighbors are getting 3 million $ per month. She's a little freaked out.

[Bert73]

What about depletion allowance?

What about depletion allowance?

[BP.]

What about depletion allowance?

Excellent.

[Bert73]

Excellent.

I have had many of these with my former employer. Glad to help!

[jimmcg]

If there ever was a case of asking a plumber how to perform open by pass surgery, this is it. The client briefly informed me about this soon to be transaction in 4 qtr of 09. I replied I need to know in what form of income will this money come in and I encourage them to call the Energy Co. in NY (property located in PA). They got back to me and said capital gains but I was a skeptical if its a lease or was it a lease. Well my client recieved a 1099-misc only Box 1 completed with rather large amt. The 1099-misc instructions state Box 1 amt needs to be entered on Sch E. The client has NO exps related to this rent so it looking to be all taxable. Any help would be appreciated.

Here is another case of FAILURE to tax plan.

If this is an advance lease payment to secure the mineral interest in the land (which it sounds like), then depletion alowance would not apply at this point and their should be a written agreement to secure the mineral interest. Depletion allowance begins with (and is associated with) production. Obtain and review the written documents if you wish to understand the true nature and tax effects of this transaction.

[taxxcpa]

I agree

If this is an advance lease payment to secure the mineral interest in the land (which it sounds like), then depletion alowance would not apply at this point and their should be a written agreement to secure the mineral interest. Depletion allowance begins with (and is associated with) production. Obtain and review the written documents if you wish to understand the true nature and tax effects of this transaction.

You have stated it very well. Not all payments from Exploration & Production companies are royalty or working interest payments subject to depletion deductions.

Often the payments are for Rents or easements.

[AZ-Tax]

Update

Client tells me its a 5 yr lease. The name of the energy co. is Fortuna Energy for those of you that had and/or have current clients in this program. Last year I had a client involved in the Atlas Energy program and he gave me only a K-1. I will contact Fortuna Energy but I am guessing per the 1099-misc instructions, it going on Sch E without any related exps to deduct except for tax preparation.

[BP.]

it going on Sch E without any related exps to deduct except for tax preparation.

This yr's prep fee (pd in 2010) on next yr's E. And thx for the energy co info.

[Bert73]

Thanks Jim and Taxxcpa

Thanks for the input. There I go again not rereading original posts. Royalties is what I would see in the office when it came to drilling. Which is not box 1 on the 1099.
Getting back in my corner again.