Marie L. Murrell, wrote:

- quote -

LOE and IDC don't generally give rise to any assets, though,
and you don't really get any equipment, even if the JIBs say
"equipment." I assume that what's really happening is that
F is getting a half interest in current year gross income,
in exchange for paying half the current year expenses, but
isn't getting any ownership in the underlying working
interest.

- quote -

If the JIBs are never expected to exceed the gross income,
so that F will likely never have any out of pocket expenses,
I'm inclined to say S is making a gift of cash. You could
take the position that F is buying an ORRI (see below), but
there's likely to be a bargain element to that sale - no one
sells a one-year cash stream at much of a discount.

If F is anticipated to and does have cash out of pocket, I'd
be inclined to say that what F is getting is an overriding
royalty interest, reportable in Box 2 of a 1099-Misc. He
has basis in the ORRI to the extent of his share of JIBs
paid. S deducts the royalties (F's share of the gross
income) paid on his Schedule C, and reports a partial sale
of his working interest (which presumably has some basis) on
Schedule D. You might need an O&G specialist (does he have
any geologist buddies?) to determine how much of the value
of his working interest would be allocable to a one-year
ORRI.

- quote -

I think you need more facts about the nature (and intended
consequences) of the transaction.

Phoebe

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I have a client (we will call him Son) that became a working
interest (small percent) owner in several oil and gas
properties and started his own business with such.

On one particular well, Son struck an "agreement" with his
Father-In-Law (Father) whereby Father would provide 50% of
the Son's expenses for drilling, completing and operating.
In return, Father would receive a 50% interest in the
referenced assets received by the Son. The Father never
received any type of ownership, and the son looks at him as
an investor.

How does Son report (to the IRS) the checks he has written
Father for the 1/2 net revenues? Son takes the revenues he
receives, subtracts the expenses he was billed for to arrive
at a net revenue. He then forwards Father a check for 1/2
this net revenue.

At first I thought a 1099 MISC for non employee
compensation, but later thought not because Father has no
ownership interest.

Would this be considered a partnership requiring a 1065?
This seems incorrect also, as the Son's interest would be a
working interest requiring Self employment taxes be paid.
However, I am unsure if Father would be subject to Self
Employment taxes.

Any help will be appreciated.

Marie L. Murrell

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