Gas Royalties

[Terry]

I have a client who received a 1099-Misc for Royalties. He signed a "non-surface lease" in 2009 and received his first royalties in 2011. The well is NOT on his land, the gas company just needed his acres to have enough land area to drill. As far as I know no one has even been on his land concerning the well, nor are they using his land in any way. The lease states he get a percentage of the current market price when gas is taken out as royalties. I've read two different sections of TTB, and can not decide whether he would or would not be allowed a deduction for depletion (15%). Would someone provide their opinion? I've also searched the forum and found discussions, but I'm STILL undecided.
Thanks for your help.

[Jiggers]

I have a client who received a 1099-Misc for Royalties. He signed a "non-surface lease" in 2009 and received his first royalties in 2011. The well is NOT on his land, the gas company just needed his acres to have enough land area to drill. As far as I know no one has even been on his land concerning the well, nor are they using his land in any way. The lease states he get a percentage of the current market price when gas is taken out as royalties. I've read two different sections of TTB, and can not decide whether he would or would not be allowed a deduction for depletion (15%). Would someone provide their opinion? I've also searched the forum and found discussions, but I'm STILL undecided.
Thanks for your help.

He is allowed the 15% depletion. While the well may not be on his property, the gas is probably coming from under his land. Same with oil royalties.

[Terry]

Thanks!

Thanks so much for your reply. I appreciate it!

[AJsTax]

Two types of payments

The oil companies make two types of payments. The lease payment, may be upfront, may be over several years. or in different years. These will be on the rent line. No depletion allowed on this.
If the well is in production and if he is in the unit and is receiving royalties that will be listed on the royalty line on the 1099 and that is subject to the 15% depletion.

[Terry]

Thanks, again.

Yes, the initial lease payment was upfront, reported as rent and no depletion taken.
Thanks for the responses!