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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Can beneficiaries of a trust take percentage depletion on ...

Customer Question

Can beneficiaries of a trust take percentage depletion on the oil & gas royalty income of the trust when income is distributed to them.
Submitted: 7 years ago.
Category: Tax
Expert:  Christopher Phelps replied 7 years ago.

A distribution of cash or property from a trust may or may not be a taxable event. Rather, you should look to the Form K-1 the trust distributes to its beneficiaries to determine your reportable items. If a trust is invested in an oil & gas partnership and is entitled to deduct depletion, it may elect to pass through such deductions to the beneficiaries. You should see the reportable deductions on your K-1.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

 

Customer: replied 7 years ago.
Reply to Christopher Phelps's Post: I'm the one that is making up the K-1s for the
trust beneficiaries. On the K-1 allocable share items number 9.b reference is made to depletion.
It does not relate to cost or percentage depletion. I know cost depletion is allowed, but is percentage depletion allowed? There is oil and gas royalties coming from the trust own farm land as well as royalties from production off of owned farmland in partnerships. Why I question whether percentage depletion is allowed is because royalty loose it identity on the K-1. It is buried in "Other portfolio and nonbusiness income"-block 5. I'm looking for an answer of yes or not and possibility a reference.
Expert:  Christopher Phelps replied 7 years ago.

Cost depletion percentage depletion are two methods of calculating the depletion deduction available under IRC Sec. 611. Pursuant to IRC Sec. 611(b)(3) (http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000611----000-.html) depletion deductions for property held by a trust are apportioned between the income beneficiaries and the trust depending on the provisions of the trust. Report your allocable depletion deductions to the income beneficiaries in box 9 using code B. See page 16 of the 1041 instructions (http://www.irs.gov/pub/irs-pdf/i1041.pdf) for the manner in which you allocate the depletion deduction between income beneficiaries and the trust.

Finally, if you have not already, I recommend reviewin chapter 9 in IRS Pub 535 for details on calculating depletion (http://www.irs.gov/pub/irs-pdf/p535.pdf).

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

 

 

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