Just looking for some advice on how these scenarios play out. I have been paid for a property by an operator for around 3 years. I probably have made 30K from this. It appears that there was a clerical error by the operator on who the correct owner of this was (two people with identical names), and they have suspended payments on this property. I have other properties with this operator, making around $40 a month.
While I am upset, I am also concerned. They do mention in the notice that they may request the funds back. I stupidly do not have anywhere near 30K just sitting around with everyday life. Obviously, I do not care if they start deducting my production from the other properties to recoup this, but that would take quite a long time. I’m not sure they will even consider this. I just don’t want to be put in a legal bind and end up in a bankruptcy scenario. Has anyone ever faced a similar case?
I’ve seen in it in several times over the year’s. The same family, with different generations, with the same name on several tracts the original family owned! The lease broker/landmen made mistakes, which was not the fault of the rightful owner in the long run. The wrong person was paid instead of the real owner which was not his fault. The rightful owner only got paid the second time and not the first time. You should not have to pay for the companies brokers landmen mistakes. I would not agree to pay for their mistakes! They have absolutely no legal right to deduct the funds from other properties! It’s a big bluff!
You should be very careful here. First, make sure that the operator proves to you that you are not the correct mineral owner by sending the revised title opinion and the underlying deeds. Then you can review to see if you agree with this revised opinion. Second, do not concede that you own some or any of the royalties to the operator. There may be applicable defenses. See the attached 2011 law review article which discusses the “Voluntary-Payment Rule”. You have presumably paid federal income taxes on the royalties as well as property taxes and state income taxes. It would seem unfair for you to refund the total royalties and then be in a negative cash position due to those tax outlays which you may not be able to recoup. This is a different position than having any overpayment deducted from current revenues as you will not be taxed on the money which is not paid to you. There may be more recent case law on this issue and laws depend on the state where your minerals are located. If the oil company demands payment, you should consult an attorney who knows about royalties and debt defense. https://scholarship.law.tamu.edu/cgi/viewcontent.cgi?article=1380&context=txwes-lr
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Tennis, when a person is in this type of position they need to consult with an accountant on the resulting tax issue. They may have to file amended returns or make deductions in current years. The property tax issue is interesting. Any thoughts from the forum on a resolution.
I agree that RO should consult a CPA about taxes and his alternatives (which is also an additional cost to him.) I do think that this is not at all a simple matter. The first question is whether or not the oil company has a legal right to recoupment of the royalties, as discussed in the law review article. Second, RO’s ability to file amended returns is not clear. The operator would have to file amended 1099-Misc for multiple years reducing the royalties to -0- and there is no evidence that the operator either can do so at this late point in time or would be willing to do so. I would not trust the IRS to simply agree to a major reduction in income for past years on the say-so of RO. Also, amended returns cost money and RO should not be out that cost. Third, RO cannot necessarily claim a giant loss in royalty income in 2024 as there are limits on losses of passive income. RO said he only gets $40 per month ($480 per year) from this operator. So unless he has a lot of other royalty income, it might take him years to be able to write off $30,000+ on his returns. And he would need to have a settlement agreement with the operator where all parties agree as to the character.of the check written to the operator and that will need an attorney to draft and negotiate, in consultation with a CPA to be sure it passes muster with IRS. I am interested to hear other ideas.
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Tennis, this is never a good situation. The reality is make the best of a bad situation. The operator/purchaser does have the right to recover the funds that were improperly paid. The best situation for RO is to be allowed to re-pay from royalty proceeds, but the operator has the right to request immediate repayment. You can make a best effort to recover costs and damages, but at this amount legal action may be cost prohibitive and speculative at best. I am sure a CPA will suggest filing amended returns which will allow for a correction in the 1099 amounts without the issuance of replacement 1099’s. The other method could be there is royalty income for the current year which be subject to a 1099 and there will be a deduction to recover previous years overpayment. 1099’s are issued on a gross and not net basis. This does not help reduce current year income taxes. These complications require someone that has successfully dealt with this issue in the past. I have advised many clients in the past to spend time reviewing payments associated with their properties. This applies to underpayments, overpayments, proper deductions as well as product pricing. Unfortunately, many people do not have the resources or industry knowledge for this type of review. Situations such as this highlight the risks, even as a royalty owner, of investments in this industry.
I would suggest you read the division order you signed with the operator who made the supposed overpayment. The DO may have some wording that is applicable to this situation.
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My point is that there may be legal defenses that the payee can assert. In this case the payee was told by the operator that he was the rightful owner of the minerals and entitled to the royalties. He accepted in good faith and paid income and property taxes and spent the rest. Based on the post, his was a error made by both the oil company and its lawyers, not a fraud or error by the payee who trusted the oil company and its lawyers. It would seem reasonable and equitable that the oil company should have to pay for all his out-of-pocket expenses to keep him whole, including the cost of amended returns. Particularly as he says he does not have $30,000. The law review article notes that recoupment rights are limited if there is a mistake of law, as opposed to a mistake of facts, at least in Texas. This is a fine line legal distinction and can turn on the position that a mistake of law occurs where there are legal documents, such as title opinions, involved. The payee may be entitled to this defense. This is why I suggested he talk to an attorney who can perhaps work an equitable settlement agreement that would be fair to all parties.