sale of gas, oil and mineral interests

[oceanlovin'ea]

Client has letter entitled "Report on special commissioners sale of mineral interests".

This land is in West Virginia and has been passed down from generation to generation and giving fractional interests in the coal, gas and oil in this land to children and children's children, etc.....

Husband was part of this huge family and had a share in this. He died in 2006. The land itself was sold several years ago (?) but the mineral rights stayed with people.

In 2010 these interests were sold and client received her share of proceeds. Does she have a cost basis? Don't know how you would know what the cost basis would be. The letter states they believe this sum is a fair and just price. She would at least get FMV at the time of husband's death.....but who knows what that would be.

Any ideas of what I should use as a basis or is there a basis at all?

Linda, EA

[Burke]

If the transaction is a sale and not a lease, the income is a capital gain. Depending on how long the client owned the land, it will be reported as either long-term or short-term. The basis of the mineral rights will be zero, unless a basis was determined when the land was purchased. In the case of an inherited right, I would think the same would apply. A basis would have to have been determined at the date of death -- possibly reported on an Estate tax return or inventory? Probably wasn't.

[oceanlovin'ea]

Since it was inherited, it will be long term.

Since the land was sold long ago, it was only the oil and gas rights which have not be developed. she owns 1/4 of 1/6 of 1/9 of coal interest. I think it is going to be impossible to come up with a basis for this. She got almost $6300. I hate to include all of that in income. She has some other capital gains too.
It is based on what coal and gas and oil they think are under those mountains. Nothing has ever been mined or used.
I am thinking when the land sold that the basis would have been used then. Except that it has been in the family since the 1800's at least and divided among family over and over.

Linda, EA

[oceanlovin'ea]

Another thought

Is there a chance that FMV when husband died would be same or close to the same as it is now?
I guess now is what she got for the mineral interests.

Linda, EA

[taxxcpa]

Fmv

Is there a chance that FMV when husband died would be same or close to the same as it is now?
I guess now is what she got for the mineral interests.

Linda, EA

It may have been worth more since recoverable reserves would have been diminished by production. However, it could have been worth less if he died when oil was $ 3.00 per-barrel.

[oceanlovin'ea]

He died in 2006. I don't believe there has ever been any production on any of the property. These families have owned these mountains almost as long as there as been a United States. they just kept passing on to descendants. The descendants finally decided to get rid of all of it.

Linda, EA

[Burke]

When the land was sold, basis would have been taken on that sale. The mineral rights is another issue and that basis would have had to have been determined separately. Since it has never been mined or anything produced, it would be anybody's WAG, and due to the land sale, it was probably all taken then anyway. So zero.

[snowshine]

Assuming the land was sold before the husband's death, then the mineral rights do have a stepped-up basis. I'd try a call to the county office of the WV dept of natural resources for historical values of those rights. Good luck and let us know how it comes out.

[Burke]

I don't know how historical real estate values would help in this case, since each plot of land would conceivably be unique in its assessments. It's sort of like timber depletion. It has to be determined when the land is purchased, or you cannot take it. The purchaser of the mineral rights would have a better handle on what the value might have been in 2006 since they are in the business of assessing a fair market price, IMO.

[oceanlovin'ea]

wondering

I am wondering if we just guess at a FMV for 2006.....maybe half of what she received, what would happen?

I just feel that if the coal, oil and gas have been there for hundreds of years, there was always a value to those rights or interests. I feel a little like I am cheating the client if I make her take a zero basis. So maybe split the difference. What do you think?

Linda, EA

[Burke]

Not on a prayer would I take it upon myself to guess at a basis without some corroborating documentation from somebody that looked legitimate. And unless it could be proved, the IRS would disallow it. Especially on this issue, since I would be inclined to say it is zero. Let the TP try to obtain. How much money are we talking about?

[JG EA]

What about checking with a preparer in that state. I know that there are preparers in timber states that do "office cruising" to get the value of timber going back to the time the property was purchased. Maybe there is such a thing for mineral rights. And as has been said FMV needs to be established at the DOD as it wasn't included in the FMV of the land.