Replies to This Discussion

Permalink Reply by olddog573 on October 16, 2013 at 23:17

I am not a UMO, but I never sign them, just supply my SS#.  They don't like it when I do it, but I have not had any issues before.  Someone else will need to comment on the UMO part.

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Permalink Reply by Henry on October 17, 2013 at 3:23

This is just a guess:  CHK needs your SSN, so they can file info with the IRS once payments start.  They need to file a 1099 every year, right?  It may be that if they don't have your SSN, they are obligated, by law, to take deductions. So maybe it's not a "penalty."  It sounds like withholdings. 

I don't know that you need to sign the DO, but you should at least look at it to ensure that you are in agreement with CHK about what your fractional ownership is.  If there is a disagreement, you should resolve that asap.

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Permalink Reply by Skip Peel - Mineral Consultant on October 17, 2013 at 3:48

You need to supply your social security number for your 1099.  There is no other way for CHK to get it.  Don't sign the DO but do check to see if your decimal interest in the unit is correct.

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Permalink Reply by adubu on October 18, 2013 at 0:49

Skip---you say Do Not sign DO -WHY ---Dion says sign if data and decimal % is correct --- what's pro/con of signing or not signing DOs ---I sign the one I received since decimal and other data was correct--what's the negative down side ? My understanding the DO can not trump my lease terms so I don't understand reason not to sign it for if anything it confirm my decimal calculation and confirms Title run opinion ownership of my minerals plus the address where to sent my check or set up EFT to bank account

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Permalink Reply by Skip Peel - Mineral Consultant on October 18, 2013 at 6:46

adubu, Dion and I are posting in regard to Louisiana DOs.  Whether a decimal interest is correct or not is a question different from the question of signing the DO.  My attorneys have as a matter of course told clients they do not need to sign under LA law. 

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Permalink Reply by adubu on October 18, 2013 at 8:47

Skip--- U correct I am in Texas and as you explained  Louisiana DOs are different in some way from Texas. I am just Curious in regard to Pros/Cons of signing or not signing the DOs since you and Dion both sound strongly on your opinion re: Sign vs. No sign  -- who know i may move to Louisiana one day ( But doubt) I have developed  respect over time on this site for both you and Dion post honest answers with knowledge and business like fashion to help educate all and I thank you both.  

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Permalink Reply by LN on October 17, 2013 at 8:21

Many thanks to all of you,  I will have an O&G attorney review this information/request.

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Permalink Reply by Dion Warr, CPL on October 17, 2013 at 10:21

LN:

I generally counsel folks to execute the division order letter, once you are reasonably certain that the calculation of your interest is correct.  Without an up-to-date name, address, and SSN (or TIN), the lessee / operator may suspend payment of royalties due.

 

Some folks still operate under the misconception that signing the division order or division order letter can result in modifications in their lease.  In LA, this is no longer true and has not been true for some time.  Please review Article 138.1 of the Mineral Code (emphasis to selected text added by me):

 

LA R. S. 31:138.1. Division order; precedence of lease; penalties for failure to pay royalties due

A. For the purposes of this Article, a "division order" is an instrument setting forth the proportional ownership in oil or gas, or the value thereof, which division order is prepared after examination of title and which is executed by the owners of the production or other persons having authority to act on behalf of the owners thereof.

B. A division order may not alter or amend the terms of the oil and gas lease. A division order that varies the terms of the oil and gas lease is invalid to the extent of the variance, and the terms of the oil and gas lease take precedence.

C. The execution of a division order is not a condition precedent to receiving payment from a lessee. The lessee shall not withhold royalty payments because his lessor has not executed a division order.

D. If the lessee fails to pay royalties solely because his lessor has not executed a division order as defined in this Article, the court shall award as damages double the amount of royalties due, legal interest on that sum from the date due, and reasonable attorney's fees. However, if the lessor fails to supply the name, address, and tax identification number upon written request of the lessee, the lessee's failure to pay royalties shall be deemed reasonable.

The only valid reason IMO not to execute a division order letter would be improper calculation of your interest.  One can certainly complicate a situation in which there is a discrepancy in the interest which would result in added monies accruing in your favor (the dreaded 'But you executed a division order..." phrase can get thrown in your face.), but rest assured, if the calculation is improper and you are overpaid, a company will ALWAYS send you a revised DO letter to correct the mistake.  If the calculation appears proper and reasonably correct (small discrepancies in the eighth decimal place don't generally amount to a large difference), I would say sign it.  If you are not reasonably certain, or cannot reasonably determine your interest, you always have the option to call the lessee / operator and inquire.

There are alternate means of notification which would comply with the requirement:

a)  Certified or registered letter sent to the requester with your current name, address and SSN/TIN.  If you choose this route, any other issues that you may have (e.g., "How did you calculate my interest?") should be included so that the company can officially and timely respond.

b)  Short cover letter with an executed W-9 form, completing the obligatory sections with your information and the name of the company which would be requesting the information.  Many companies will include the W-9 in with their DO package - use that one.

 

The IRS does not "penalize you" - under the Internal Revenue Code, payors are obligated to obtain information from their payees for records purposes as well as report income to you and the IRS via copies of Forms 1099 and 1096.  If the payor cannot obtain this information from a payee, they are directed to withhold a percentage of the net payments for purposes of "backup withholding" which is accumulated and sent to the IRS to offset the estimated tax liabilities.  I'm not sure whether this is 28% or 31%; whatever it is, if you do not supply the information, and your marginal tax bracket is lower than the percentage for backup withholding, you're giving money away to the IRS that you would have to file proper paperwork to reclaim.

 

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Permalink Reply by 1kw6x71km1v37 on October 17, 2013 at 13:07

LA R. S. 31:138.1 is not applicable to the OP, being unleased. Do not sign that division order  under any circumstances You are under no obligation to do so. Provide your name and social security info via certified  or registered mail. If your decimal interest is incorrect, an operator may voluntarily correct it on request, or you may have a dispute in quasi-contract. An operator has 180 days from the date of sale of product to pay you for your pro-rata acreage share of production proceeds. An operator is out of line to threaten you with IRS penalties. Given a lack of information, an operator may withhold some percentage of your gross or net and forward the funds to the IRS. That  is a withholding, not a penalty. Threatening you with a penalty borders on assuming the posture of a federal revenue agent.

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Permalink Reply by adubu on October 17, 2013 at 14:38

LN--- I thing at least a email or phone call by you to CHK royalty relationship department to inquire about why they sent you a DO if you are a ULMO is a simple thing to do first. Even CHK may answer the question for you.

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Permalink Reply by Dion Warr, CPL on October 17, 2013 at 20:33

Adubu:

I would assume that DOs were likely sent to all owners in the unit at one time more or less, regardless of the owner status.

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Permalink Reply by Dion Warr, CPL on October 17, 2013 at 20:31

LN:

Given Cheap Shot's response, never mind anything I said. He has this all figured out for you. While you're at it, accuse the agent of assuming the posture of a revenue agent. I'm certain they will cave immediately and send you a check on the entire gross revenue share from first production even if you haven't reached payout yet. Vinegar also works much better to catch flies as well.

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