15 year clay extraction agreement

[DexEA]

Land owner has entered into a Clay purchase agreement:

Seller granted purchaser the right, but not the obligation to extract 200,000 cubic yards of quality clay in total from date of contract to 12/31/27. Purchaser agrees to pay Seller $3.25 per cubic yard of clay extracted. Purchaser will make a Prepayment of $30,000 to Seller on the date of the agreement and shall pay seller w/in 30 days after the end of each quarter for the volume of clay extracted during such quarter.

There is also a Reclamation plan to restore the site to be completed by the purchaser.

I conclude this to be a sale subject to ordinary income. As he is not in the business of selling clay would it be proper to report this on line 21 as other income? Or possibly schedule E? It will be continuous for the next 15 years.

Suggestions?

[mastertaxguy]

Clay extraction

Why is this not a royalty with income from a mineral property? See IRC Sec. 613(b), and TTB 9-22 (bottom left column, top right column). Depending on the use of the clay (or intended use), this might be a 15% or a 5% depletion situation.

You do not state that this is TP's business or that he is invovled with the extaction company.

[ChEAr$]

Why is this not a royalty with income from a mineral property? See IRC Sec. 613(b), and TTB 9-22 (bottom left column, top right column). Depending on the use of the clay (or intended use), this might be a 15% or a 5% depletion situation.

You do not state that this is TP's business or that he is invovled with the extaction company.

I had a client once who sold dirt and that went to line 20, other income. She was not in the business of course, just owned land from which the state had a contract to haul dirt away for road fill projects.

Back to clay. In Georgia there are extensive kaolin mines (a form of clay) in middle of the state. This clay, white in color, is used in the paper making process and is a mineral, so a depletion allowance might be provided for in the IRC.

Incidentally, among certain citizens of the southeast, such white clay has nutritional qualities and a few grocery stores still sell it in bags, one of my accounting clients among them. Maybe some here have read Erskine Caldwell novels mentioning this practice.

[mastertaxguy]

Clay mining

I had a client once who sold dirt and that went to line 20, other income. She was not in the business of course, just owned land from which the state had a contract to haul dirt away for road fill projects.

Back to clay. In Georgia there are extensive kaolin mines (a form of clay) in middle of the state. This clay, white in color, is used in the paper making process and is a mineral, so a depletion allowance might be provided for in the IRC.

Incidentally, among certain citizens of the southeast, such white clay has nutritional qualities and a few grocery stores still sell it in bags, one of my accounting clients among them. Maybe some here have read Erskine Caldwell novels mentioning this practice.

Unlike dirt, clay is specifically mentioned in IRC Sec. 613. Whether the initial payment is a royalty or a 'license' fee may be another question. It certainly looks like an advance royalty to me.