I own land within an HA unit, leased, drilled and operated by CHK. A well was drilled in 2010, and I received royalties ever since. In 2021, new wells were drilled in this section. It was determined that there were several road R/O/W parcels that were not covered by the leases signed by me. The 2010 well has paid out, so in 2022, I started receiving payments for my “working interest” in that 2010 well. I actually disagree with the conclusion by CHK that the contiguous R/O/W parcels are not leased, but that’s not the point. The WI payments turned out to be much more than I expected.
What shocked me is that a few weeks ago, I received two separate 1099’s from CHK - one for royalties, and the other was a 1099-NEC, and the NEC stands for “non-employee compensation”. Generally, a 1099-NEC is issued when one does consulting for an employer, not as an employee but as a consultant. Funds “earned” as a consultant are treated by the IRS as “wages” subject to employment taxes (FICA, Social Security, Medicare, etc). It’s about 15%. I googled 1099-NEC and none of the examples of what is included seem to apply to this situation. So, I haven’t heard from my CPA yet, but I’m wondering if any of you have experienced this with your WI payments.
It’s hard for me to wrap my mind around paying “employment taxes” on proceeds from a well that I did not drill, play no role in the operation of the well, and just get funds periodically. Makes no sense to me.
Anyone out there had this experience, or have an opinion?
I have a similar issue. Several years ago CHK claimed that a few acres were not leased and paid as such. Could not get then to correct it until they needed something from me. They then realized it was leased to BPX, as part of the agreement they did not request a refund of the payments and I had no more dealing with them.
Fast forward a few years and they acquired Vine. They took back part of the refund the was less than three years old. Contacted Royalty Relations -- nothing. Contacted the person I originally dealt with and received the money back through a "land" account.
Last month I got a bunch of 1099-MISC
One from Vine
One from CHK Royalty
One from CHk Land.
The issue was that the Land amount was in the royalty 1099 also.
They resolved the problem by issuing a 1099 -NEC for a NEGATIVE amount.
Waiting on comments about that from my CPA.
Also got a 1099-NEC from NCX (carbon credits) but they reversed it and issued a 1099-MISC.
your list is certainly longer than mine. I"ve sent an email to CHK. Let's see how they respond.
If you are a lessee, you are a Working Interest under LA law. If you are an unleased mineral interest, you are a UMI and treated differently under LA law. Here in LA you will pay unemployment taxes come hell or high water. I am a one man LLC and I pay it. I asked my CPA once that if I fired myself and chose to apply for unemployment compensation whether the state required me to dispute my application.
This is going to tax (pun intended) my old brain, but we signed a standard LA O&G lease, and they all include the standard "Mother Hubbard" clause which extends coverage of the lease to any lands unintentionally omitted from the lease description. The "unleased" acreage are parcels of right-of-way along a state hwy. I think those small parcels could have been swept into the lease using the Mother Hubbard Clause.
I do a little consulting here in my retired years, and I get a 1099-NEC from the companies for which I consult. That's what the 1099-NEC was designed to cover.
You are correct as to the Mother Hubbard clause, Steve. I am unaware of any instance where a lessor has attempted to enforce it on the lessee or operator. It would make for a very interesting case. The clause is standard in all form leases that I have familiarity with and if the lessee/operator can enforce it, I don't see why a court would not rule that the lessor could sue to enforce it also. IMO it's a lease term and not an option that an operator may exercise or not at their discretion.
well, right now I'm getting 8/8ths less operating costs, so I will pay the "employment taxes" if I have to. I do wonder what law firm spent the time to identify these small parcels that are contiguous to the leased premises and call them out as unleased instead of having CHK invoke the Mother Hubbard clause.
It appears that as the play matured and cross unit laterals became the norm, many companies scrutinized the original division order title reviews. In a number of cases this included new surveys more accurate than the original. We discussed this years ago when a number of members go multi page royalty statements with negative income figures because a new survey showed that they had been overpaid, for years. Then there are situations like J B Nabors in his current main page discussion where his no cost royalty clause was honored by EXCO but not by TGNR after the company acquired the wells from EXCO. O&G companies make considerable income off the work of their bean counters and lawyers.
I've done some research on this topic. There is a Tax Court decision, confirmed by the federal courts, that holds that income by a working interest owner is treated as "compensation" and subject to employment taxes. The facts in that case are different - the working interest owner was an actual investor, not an unleased mineral owner, but I'm not sure it is a distinction that the IRS would be interested in hearing about. The gist of that Tax Court decision is that the working interest owner was a "partner" with the operator and the income would be equivalent to income from a partnership.
I've never been in a legal partnership, so I have no frame of reference for any of this. My gut instinct still holds - I have no contract or agreement with the well operator at all for the unleased minerals. I'm getting paid due to the rules of the La. Department of Conservation that created a production unit. This seems to be a long stretch to conclude that these payments are "earnings" that should be subject to Social Security and Medicare taxes.
Not enough money for me to fight over it. I would think that there are those out there whose income from unleased mineral interests are significant enough that they would fight to avoid paying an extra ~15% of taxes to the feds on that income, on top of income taxes.
The vast majority of UMI tracts are small. Operators declined to force pool mineral owners in a compulsory drilling and production unit where too much of the acreage was unleased.