Royalty Income, Passive or Business Income?

Accounting and Taxes
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I just became aware of a recent IRS Letter Ruling 202535011 which conludes “Based solely on the facts submitted and representations made, we conclude X’s Mineral Royalties are Income derived in the ordinary couse of a trade or business” and further states, “and is not portfolio income”.

We have Mineral Leases in 4 states and have treated the income as portfolio income. We are active in negotiating the Royalty Leases and where we have surface interests Pipeline, road and othe surface use. One of our CPA’s thinks we should file the Royalty income as Business income and another thinks it is Passive income.

I would be intereste in how other people are handling this and does this Ruling Letter change your opinion. Thanks

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2

It is not a ruling that simply managing your minerals and surface qualifies as trade or business income. It is not a ruling that managing minerals automatically removes royalties from portfolio income. Taxpayer owned minerals, working interests etc as a partnership and office with employees and wanted to be treated as trade or business and mix with other business income, most likely in order to deduct losses. IRS limited to Taxpayer’s claim to have particular circumstances which are not completely defined or explained. That will open them to self-employment taxes. Why would you want to do this?