Last year I received a payment from a class action lawsuit (Hogg v. Trinity) seeking recovery of underpayments of gas royalties. Had the royalty been paid directly, it would have been eligible for the depletion allowance, but we received a 1099 listing the payment as “Other Income” rather than a royalty payment. A posting from February 2020 started by VivianV, entitled “Class action settlements,” suggested that she should take the depletion allowance on a similar settlement payment and wait for someone to tell her she’s wrong, but she had not received a 1099, so her situation was slightly different. I’m skeptical we can take the allowance, but I hate to overpay on taxes. I’m curious if anyone has any insights.
To make matters worse, you calculate depletion allowance on the GROSS amount. What you have on the class action 1099 is the NET amount after exorbitant legal fees. My point is that if this depletion allowance is allowed, in theory it could even be substantially larger than one might think had the 1099’s reflected all this.
Do any accountants/CPA’s know the answer to LeeSE’s question? If so, please weigh in on this. Quite a few Oklahoma taxpayers participated in the settlement, like me. If the gas was taken out of the ground and we received a portion of what we were due, seems only logical that we would be entitled to a depletion deduction on the settlement.
The lawsuit and settlement agreement clearly center around underpaid royalties and release of claims regarding underpaid royalties. You could send a notice to the issuer at the address on the 1099 requesting that it be corrected to reflect that the payment was royalties. Not sure how likely it is that you will get a revised 1099. Your CPA can best advise you on how you can report as royalty income, perhaps with an attachment of the settlement agreement or a reference to that agreement. How you handle this may depend on the amount of depletion involved. https://www.hoog-trinity.com/admin/api/connectedapps.cms.extensions/asset?id=8051c137-8c0e-464a-ba29-07020f13ea12&languageId=1033&inline=true
Thanks TennisDaze for your insight. I will give the Settlement Fund a call to see if they will reissue the 1099 in box 2 as Royalties. Will comment back with any progress.
Update: Spoke to a settlement administrator who has no information about why the settlement amount is on line 3 on the 1099 form instead of line 2. His only comment was that the administrator does not provide tax advice, and to consult with your tax advisor. Don’t waste your time on hold like I did. Good luck all
If you were my client and you had the paperwork that clearly states the payment is for royalties, I would report the amount on Schedule E as royalties and take the 15% depletion. A 1099 doesn’t always determine the tax treatment, the supporting documentation determines the proper tax treatment, and in this case, it is royalties and use the eligible percentage depletion.