I have several mineral leases in Weld CO. The statements I have received in the last year show very high “expense” deductions. As an example, one month the gross was $3600 with deductions of $1513 as well as $191 in taxes. Of course I have to pay income tax on the gross so my net at the end of the year is very low. Are these deductions appropriate? The leases are very old and have been passed down for several generations. I don’t even have copies of the originals. I would like to understand what the situation is before I go any further. How do I get copies of the original leases? Who can I talk to about them? Any advise from someone that’s been in this situation? Thanks
You pay income tax on the net income, at least for federal income tax purposes. Colorado tax rules may be different. The gross royalties are listed as income on Schedule E and the costs are deducted below. I am assuming that the $191 is Colorado severance or property taxes, rather than withholding for Colorado income tax. Percentage depletion is calculated on the gross royalties.
Charles, I would definately recommend obtaining a copy of your lease. It was likely recorded with the county so you can search the records in the Weld county clerk & recorder online. If only a memorandum of lease was recorded, contact the operator for a copy.
Next, I would contact the operator’s owner relations department to ask for more information on why you are being charged the deductions. A written letter (or email) is a good idea so you have record of the request.
Once you have this information, you can see if your lease would allow the deductions or if the allocation of costs to the royalty owner should have not been allowed. Call and talk with an attorney if you are unsure, many offer free consultation. Based on the amount in question, it might be worth paying an attorney if it comes to that if at first glance they believe you might be getting charged incorrectly.
I did a webinar on this topic with attorney Ben Kinney back in December through NARO. If you are a NARO member, you can go to the member section to find a recording and you can download our presentation as well. If you’re not a member, I would recommend looking into it. One of the benefits of membership is access to all past webinar recordings and all of the new webinars we are doing on a monthly basis.
Thanks, Matt Sands
Thank you for the information. I’ll check into it. Do you have an attorney you would recommend that might start with a free consultation? I have the info for the legal offices that transferred ownership to me but I doubt they have any older info.
I’ve had attorney Spencer Cox with Burns Charest LLP on my podcast several times and he’s a great resource for royalty audits and under-payments. He’s in Texas but I imagine that someone in the firm is licensed in Colorado. Thanks, Matt Sands
I have a royalty interest in Weld County oil and gas wells and post production expenses are something I’ve looked into. Definitely find your lease by searching county records under the name of the relative who would have signed the lease. If it doesn’t specifically allow expense deductions in other words if the lease is silent on the issue then most deductions aren’t allowed. The Colorado Supreme Court in Rogers v. Westerman Farm Co. found that if the lease was silent as to all costs and their allocation then the implied covenant to market obligates the lessee to make the oil or gas marketable with respect to both “condition” and “location.” That would mean things like compression, gathering, transportation. Processing might be allowed if it improves the value of the final product at least as I understand it.
While you might want to speak with a attorney on the issue you don’t want to jump into litigation but begin by contacting the owner relations department and asking for an explanation. If that isn’t effective the next thing to do is send them a Form 37 from the Colorado Oil & Gas Conservation Commission (COGCC) which is a request for payment and proceeds and sales volume reconciliation that they’re obliged to answer.
You can download a copy here: Colorado Oil and Gas Conservation Commission Forms
If that isn’t satisfactory you need to exhaust administrative remedies before taking legal action. The COGCC has jurisdiction over royalty disputes unless they involve contract interpretation.
If you find your lease allows deductions they still must be reasonable. Deductions of $1513 out of a $3,600 gross is 42% and seems extreme. By comparison my lease is silent on expenses but deductions have been taken anyway from oil and gas of about 12% of gross.