Oil Well Investor

[peggysioux]

I have been handling a particular taxpayers return for a few years now and he invests in oil wells and has received 1099's each year with income in box 7 from the oil well, due to his having a direct working interest. However, this year, his 1099's are marked as royalties. When I questioned the company that issued the 1099's, I was told that their CPA had a conversation with another accountant who represents another investor and they changed to take advantage of the depletion allowance. I am going to call the CPA tomorrow, but thought I would get some feedback from other preparers. I know that one should not change the way 1099's are issued based on the advantages it would provide a taxpayer, and even if taxpayer has a direct working interest where the income goes in box 7, they are still able to take a depletion deduction. If CPA tells me he is not going to correct 1099's, how should I handle??? These are new wells that he has invested in this year; I did not receive any 1099's from wells from previous years. Any input would be greatly appreciated.

[taxxcpa]

Joint interest statements?

Does he really have a working interest? If so, he should receive Joint interest billings from the lease operator. He should have expenses other than taxes, gathering, compression, or trucking--such as supplies and a billing for overhead expense--since a working interest owner incurrs a share of all operating expenses as well as drilling costs, etc. unless it is a non-consent well in which case these costs would defer his revenue until payout occursed.

[peggysioux]

Oil Well Investor

He has always received a letter for each invested well giving a breakdown of deductible expenses (taxes, dehy/comp, operating, workover and any other costs) based on taxpayer's percentage of ownership. When I first started handling taxpayers return, I spoke with CPA at that time because I was not that familiar with well investments and he advised me that taxpayer had a working interest.

[Roland Slugg]

If the payments are, in fact, paid to the owner of a working interest, they should be reported on form 1099-MISC, in Box 7, not in Box 2. If you talk with the producer's CPA, you may wish to refer him to the instructions for form 1099-MISC. The specific instructions for Box 2 are very clear about this.

If this were my client, and he didn't receive a corrected 1099-MISC, I would simply report the amounts on his own return correctly anyway ... taking depletion as allowed.