Are Oil Royalties Held in Escrow Taxable In The Year Paid or Years When Revenue Produced?

Hypothetical situation but maybe this has happened to someone in the forum. A mineral owner has royalties held in escrow for years pending the outcome of a lawsuit. Owner wins the case and the escrowed funds are paid. Does the owner pay federal taxes on the lump sum in the year paid or amend previous years tax returns to pay tax on the minerals that were sold during each of those years?



Have you been receiving 1099 misc forms for past years taxes paid?

Usually it is taxable in year paid. During lawsuit it was impossible to determine who was entitled to the revenue. You will get 1099 from oil company.

Dogbert, we had something very similar happen. The operator showed the entire amount held in suspense on the 1099 but in the lower right hand corner of the 1099 was the amount we were actually paid. Our accountant provided the information and we only paid taxes on the income we were paid for that year. The following year the money in suspense was paid to us and we paid the taxes on the suspense amount that year.

In this scenario, I wouldn't think the operator would be able to send a 1099 because the money went to escrow but you would still have to pay taxes on revenue that you did not receive. So, the question would be, does the oil company send you one big 1099 when the funds are released, or do they go back and re-issue 1099's for each year. I don't know the answer but Kathy's reply below is a solution that I didn't think of.

We had royalties held in suspense because BLM was sopposedly backlogged in approving owners’ shares. It pushed 2 years’ royalties into 1 year’s taxable income.

Dogbert, I went back and found our copy of the 1099 I mentioned. Under "Royalties" it listed the entire amount in suspense plus what we were paid during the year. In the lower right hand corner was a block I have not seen on other 1099's and it said "Net Check Amount" which was the amount we had been paid that year. The next years 1099 which included the past monies held in suspense did not include the additional block in the lower right hand corner. Good luck, Kathy

Unless you are an "accrual" based taxpayer, you will report the royalties in the year you receive the cash. In this case, even an accrual based taxpayer might argue that the amounts were indeterminable until the lawsuit was completed, and income would still be reportable in the year in which the proceeds were received.