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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1377
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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I seem to be the "talking piece" for anybody around here with

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I seem to be the "talking piece" for anybody around here with a problem (who doesn't have internet access nor tech-interest), first it was Amish neighbors, then the parent of a felon, an antique vehicle owner, and now this...: Question du jour:
Is a Wyoming C-corp considered "doing business in Ohio" if it is only a beneficiary of limited non-surface mineral rights held in a land trust and that land is in Ohio? Are the bonus and royalty checks, from mineral rights, be written out to the Trustee as a pass-through, using that Wyoming C-corp's TIN as the recipient of the funds then deposited by the C-corp into their corporate bank account? (The Trust has no bank account, wants no bank account, has no TIN) Or should the gas/oil company draft the checks directly to the beneficiary, the Wyoming C-corp? Should the Wyoming C-corp's bank be in Wyoming? Or Ohio? What factors need to be considered there? If the officers of the Wyoming C-Corp come to the land in Ohio and rent it for their annual retreat does that affect anything? They are not beneficiaries of the surface rights nor buildings to that land, only the minerals 5000 feet down. Finally, what kind of entity can receive the income from Gas/oil signing bonus and royalties and hold it tax-free (as a pass-through entity) UNTIL a portion of it is paid to the beneficiary/member/recipient who will then be taxed on only that part which is received FROM the entity which collects and holds, and possibly invests the bonus and royalty monies ON BEHALF of the eventual beneficiary/member/recipients? What is that called and how can they get one set up? And, in the case of more than one beneficiary/recipient, can the amounts vary, and not be allocated equally? Whew...who's on first? Hope you've got the answers and that I can understand and translate them...Good Luck.
Submitted: 2 years ago.
Category: Tax
Expert:  Jax Tax replied 2 years ago.

1. No, simply receiving mineral rights does not mean "doing business in" a particular state, but since they are for the rights of property in Ohio, Ohio tax returns and tax apply to that income. So, technically no but the result is the same as far as being subject to tax in Ohio.

2. How the check is written out and where the funds are deposited does not matter. The result is the same. The Corp has Ohio income. The trustee is not a "pass through" he is an agent of the Corp. So, the checks can be written to him or the corp but will be reported as income to the Corp. regardless.

3. Where the bank is makes no difference.

4. No entity can hold the income tax free. "Pass through" means only the owners pay tax not the business entity, and you have it backwards. In a pass through structure, the owners are taxed on income whether distributed to them or not.

The best thing to do would be to make a Sub S election for the C corp to eliminate Corporate tax if the Corp qualifies to do so. Otherwise, there is not much that can be done to change the tax situation.

I understand what you are asking but no such business or trust structure exists by which royalties or other income can be received but not taxed until distribution to owners. A C corp is the only thing close taxing income at the corporate level (generally the net tax is less) and then not taxed individually until dividends are made.

If the only income is from these rights and the Corp qualifies, a Sub S tax election would be more fitting.

Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1377
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Customer: replied 2 years ago.
Thank you -
1. IF the out of state C-corp owns NOT the actual mineral resources, and those are owned by the trust or another Beneficiary to the Trust, and again, the Wyoming C-corp is in no why a part of the Ohio Trust instrument - and then the Ohio Beneficiary who DOES own the mineral rights to that Ohio Land assigns the bonus and/or royalty income to the out of state C-corp - then does that not clear up any muddiness about the C-corp NOT actually doing business in state - and thus legally avoids taxation as doing business in Ohio?

2. The Trustee would then only sign the lease agreement on behalf of the Beneficiary - but the Beneficiary has gifted the income to the out of state C-corp. The Trustee is not working for nor representing the C-corp, only the Beneficiary to the Trust she is trustee over. Correct?

4.Actually the entity to which I am referring is called a Resource Holding Organization (RHO). It may be an LLC, but I am wondering if an other entity/structure such as an Ohio nonprofit (not to be confused with a 501(c)3) or another vehicle such as an association, can be used instead of an LLC? And it that vehicle, whether or not it is an LLC, is formed out of state - what consequences, if any, are there to it merely "holding" the resources, or even investing them? It, the Resource Holding Organization, is not taxed. It merely receives the income on behalf of those who draw from it eventually. Those who are eligible to receive the benefits as needed will be taxed according to their own tax bracket, etc., AFTER they receive the money they solicit from that RHO. I recall hearing something about a 15% distribution to the "manager." And an eventual Charitable Remainder Trust kicking into gear after the demise of the beneficiaries/recipients to the primary RHO.
Comments? Thanks.
Customer: replied 2 years ago.
Jax - still awaiting your reply....are you there?
Customer: replied 2 years ago.
Hi again. Got more info from my near-by neighbors, elderly couple trying to figure this all out before they sign any lease agreement. This is what a high-falootin' planner told them they do (for a hefty fee):
1. Create an LLC, get a TIN for it.
2. Create an Operating Agreement
3. Create a Charitable Trust
4. Assign Deed of Mineral Rights to the LLC
5. something about a W-9 from the date is formed?

The LLC holds the funds, income, royalties, invests it, and none of the income is taxable until dispersal of that income to the member/owner/partner receiving the funds from the LLC. A Charitable Remainder Trust is a 99% non-voting co-owner of the LLC.

The LLC files an annual return on its revenue/income but pays no taxes. The tax responsibility belongs to that 1% owner of the LLC but only when they receive any funds from it.

The Charitable Trust has nothing in it until they both die. All it owns is a piece of paper - it "owns" a 99% non-voting interest until then. Yet 15% of the LLC money/income goes to a charity annually beginning now.

They said something about an ILIT too, that funds life insurance on them and something about a "second to die" policy - all way over my head...I'm doing good to get this far for them.

So what they want from you via me Jax, is confirmation of what they heard from the planner they can't afford to hire. The planner sees this is as a way to pay no tax on the signing bonus, get a charitable deduction on the couple's assigning 30% to the Charitable Remainder Trust. How it jumps from 30% to 99% I don't follow.

But if you could tell us what part of this makes sense and what part needs more investigation, they'd be thrilled. Thanx Jax!

Customer: replied 2 years ago.
Hi again - some good deeds never go unpunished, or something like that. Just found out that the only two offers the couple had for leasing fell through - Chesapeake pulled the offer, and are even plugging the gas wells they started in the area - gas prices too low and they are out of money. Shell just reneged on more than 40 leases they SIGNED - just walked away from the people they had contracts with...so my friends feel sad but lucky they were spared any of those shenanigans. They figure they've lived this long (nearly 60 years together) and were "born poor" and don't mind dying that way, despite their son's offer to use his Wyoming corp... so Jax, hope you weren't burning the midnight oil on this one, because I think we got all the answers we need - for now. Thanx!
over and out.

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