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Oil & Gas Tax Alert

Recent tax court case highlights tax considerations for landowners receiving bonus payments


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A recently issued Tax Court memorandum opinion, Dudek v. Commissioner, T.C. Memo. 2013-272 (December 2013), addresses the tax treatment of a bonus payment received by landowners in connection with the signing of an oil and gas lease agreement. The court concluded that the lease bonus payment received by the taxpayers in this case is taxable as ordinary income and not capital gain and that the taxpayers were not entitled to a depletion deduction. While the analysis of the court was not novel or surprising, the case does serve as a reminder of the basic tax rules surrounding the receipt of these payments by landowners. In light of the proliferation of domestic oil and gas leasing activity in recent years, this topic is of increasing relevance to many taxpayers that may not historically have received these types of payments.

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