Oil & Gas Royalty Trust

[Koss]

Anyone ever had a client that owned units of BPT?

BP Prudhoe Bay Royalty Trust.

They don't issue a Schedule K-1.

The unit owner gets a 40-page book that explains two different methods of computing the income and deductions, based on quarterly record dates or average daily allocation.

According to the introduction, the Trust's intention is to allocate income and deductions based on record ownership at quarterly record dates. But it goes on to say that "it is unknown whether the Internal Revenue Service will accept such allocation."

I've been doing taxes for over 20 years, and I've seen some d**n strange stuff. But this is pretty far out...

It doesn't really look that complicated for most unit owners. It has a few worksheets where you plug in the number of units you owned, and then you get figures which presumably would appear on Schedule K-1.

I still think it's pretty funny that investors in this thing basically have to construct their own Schedule K-1.

BMK

[Burke]

Well, yes, I have a client who had that one. I had to go through some pretty complicated stuff like you mention but only when they sold it. It was inside a brokerage account and they reported the income on their documents.

[FEDUKE404]

Bpt

I've been putting up with that booklet for years.

Actually, it's not that bad unless you are actively buying/selling units of BPT.

When all is said and done, only three numbers hit the Sch E as royalty income.

The depletion calculation can be a little tedious (unless you have the complete history) but things improve once basis gets lowered to zero and you only deal with the 15% calculation.

The client may have a stroke upon eventual sale, since his "cost" has now evaporated.

FE

[FEDUKE404]

Cannot go by "income"

Well, yes, I have a client who had that one. I had to go through some pretty complicated stuff like you mention but only when they sold it. It was inside a brokerage account and they reported the income on their documents.

I just reread your statement.

If the broker reported only "the income" (as what?????) then there is a problem to report to Houston. Perhaps I am wrong, but I cannot imagine anyone in the back room (computer) of the brokerage firm running the actual numbers that must eventually show up on Schedule E.

The amount of the "income" (quarterly payments) is basically irrelevant to the tax numbers.

Good luck on that one!!

FE

[Koss]

Broker Reporting

I may be able to help make sense out of this...

My client also has the units in an ordinary retail brokerage account.

The broker reported the gross amount of the royalty income on Form 1099-MISC, Box 2, which is for royalties. It was buried deep in a consolidated 1099, with interest, dividends, and sales of stock.

The amount reported by the broker:

reflects the actual amount of cash distributions paid by the trust into the client's account
(almost as if it were a dividend), and

also matches exactly the amount calculated in the income worksheet in the booklet.

The part that the broker would have no way of knowing about is the unit holder's allocated share of administrative expenses and depletion. For that, you need the worksheets in the book.

The gross royalty income gets reported on line 3b of Schedule E, and then you report the expenses and the depletion. That sounds like the same three numbers referred to by FEDUKE.

BMK

[taxxcpa]

Bpt

I used to own BPT, but I had it in my IRA so I didn't have to deal with it on my tax return.
It pays a good yield, but as production declines, the yield will be less and less.

[FEDUKE404]

More on BPT income issues

...The amount reported by the broker:

reflects the actual amount of cash distributions paid by the trust into the client's account
(almost as if it were a dividend), and

also matches exactly the amount calculated in the income worksheet in the booklet.

....

BMK

While, depending upon circumstances, the Form 1099-MISC amount may "match exactly" the true calculated number, I think that random coincidence could be more a matter of purchase date, market conditions, etc. My client bought units (broker thought it was a good deal) years ago more or less when they were first issued.

And the 40-lb gorilla () in the room is that by NOT going through the booklet worksheet each year and adjusting the basis downward (cost depletion where allowed) there is another long-term problem lurking. I recall that sometime in the early years (mid/late 90's ??) there was some weird financial accounting change in one year where a huge adjustment became necessary....virtually everyone showed a net Sch E loss....but they still received their "normal" quarterly checks. (There might even be some tracking of such historical stuff in the BPT booklet??)

My client now legitimately has a zero cost basis (per the workbooks) in the royalty units, and now is into percentage depletion. My annual work is much simpler. I hope he does not come after me asking why I did not just use the "Form 1099-MISC" amounts instead so he could use "what he paid for it" whenever a final disposition occurs. [FWIW: He holds the ownership certificates, and has never received a Form 1099-MISC or anything close thereto....just the annual tax booklet.)

For those of you with further interest: http://mms.businesswire.com/bwapps/m...d=313017&vid=1
( Page 10 shows the gory details related to depletion issues, and pages 3 and 33 reference the "adjusted basis" upon sale. )

FE

[Burke]

Appreciate the above information. Koss is right that the brokerage reported the royalty income and it was on the tax return. If the TP had such a booklet from BP in that year, he never gave it to me -- and he kept it less than a year. It happened to straddle two tax years, and it was only in the year he sold it that he brought me the booklet to calculate the gain. It's the only one I have come across in my clients' portfolios, but I'll know to ask for it next time. (Hopefully, there won't be one.) I like this stuff, but just don't have the time for it during tax season. On a prior thread about these PTP's I mentioned I am seeing a whole lot of these bought and sold within 3 months.

[Uncle Sam]

Tax Reporting for this

Yes - I have one client involved in this.

No - I don't have the time the last two weeks of March to go through all that stuff
to comprehend and reconstruct what's SUPPOSED TO be reported.
The royalty income showed up on a brokerage account and I reported it
(rightly or wrongly) as reported on the brokerage statement.

For this one client who I have such an investment - going through reconciling
25 PTP K-1s, about 15 royalty 1099-s, 10 different brokerage accounts where NO
TWO OF THEM report the investment information the same way - I'm not going to
exhaust time for just one 1 investment sacrifcing valuable time.