Oil and gas has become a hot topic in Ohio over the last few years for a variety of reasons. Such increased focus has naturally led to more tax-related questions in this area. One of the most frequently asked questions is whether a lease bonus can be treated as a capital gain instead of ordinary income. Generally the answer is no because, in the typical agreement, the landowner retains a continuing interest in the property (i.e. the mineral rights). However, if the taxpayer wants capital gain treatment, there are ways that these transactions can be structured to achieve that result. Taxpayers should discuss the various options with their tax professional before entering into any agreements so they fully understand the tax and economic consequences.
Another area of the tax law that has received increased attention is the Ohio real property tax. The main question is: at what point can real property taxes be levied on the mineral rights? Until recently, taxes were not levied on mineral rights until an active and producing well was on the property. Once a well was active and producing, the Ohio Revised Code provided the method for determining the mineral value for purposes of assessing property taxes. The discovery of Utica Shale has lead some county auditors to take the position that an active and producing well does not need to be on the property in order for taxes to be assessed. In these cases, the auditors are using a fair market value approach to valuing the mineral rights. Some auditors have been challenged and the outcome will likely have significant implications in this area for the foreseeable future.
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This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.
Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.
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