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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 12469
Experience:  Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
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I am part of an investment LLC which has a line of credit established

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I am part of an investment LLC which has a line of credit established with an individual for the purpose of acquiring mineral interests. As a term of the agreement, the lender receives a percentage of the assets we purchase in addition to interest payments on the outstanding loan amount. The assets are conveyed in title directly to the lender's entity. What would be the lender's tax liability on the assigned interests?
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

How are you today

Customer:

Great thanks - and you?

MyVirtualCPA :

So tell me more about this arrangement

MyVirtualCPA :

The individual would lend, say $10,000 and then get $1,000 in mineral rights and 10% interest on top of that?

MyVirtualCPA :

I'm just using those numbers as an example

Customer:

Yes. The "carried interest" is 5%, but your example is accurate

MyVirtualCPA :

And you would pay them back in full on the amount that was lent

Customer:

Correct

MyVirtualCPA :

Okay. Then I would consider the mineral rights as ordinary income to the lender

MyVirtualCPA :

Just as is interest

Customer:

At the acquired basis?

MyVirtualCPA :

Yes

Customer:

It was suggested to me that since the minerals will distribute royalty payments which will not be received until this calendar year, that they may not have a taxable basis and the lender would simply pay on the royalty income

MyVirtualCPA :

My opinion would be they received these rights, so it would be income to them.

MyVirtualCPA :

Just like if you were to borrow money to purchase inventory, and then gave the lender so much of that inventory as a payment. The lender would have income in the amount of the consideration, and then profit upon the sale

MyVirtualCPA :

It's a grey area.

Customer:

Ok. These interests have an effective date, compelling the oil companies make payments on production as of that date; however, the conveyance of the interests may not be recorded until a later date due to processing in the county clerk offices. Since some of these interests were acquired and have effective dates in 2012, but title will be officially recorded in 2013 - what year would you consider income received?

MyVirtualCPA :

Constructive receipt - the effective date

Customer:

And finally, I believe we need to provide a 1099i for the interests payments, but is there any form we must provide for the assigned interests?

MyVirtualCPA :

I would do 1099-MISC

Customer:

Would an 83 b election be applicable for the lender here?

MyVirtualCPA :

An 83b election is for stock.

MyVirtualCPA :

So, this would not be appropriate

Customer:

Thank you for your advice. Have a nice day!

MyVirtualCPA :

You too

MyVirtualCPA :

please don't forget to rate my response

MyVirtualCPA :

so that I may receive credit for assisting.

MyVirtualCPA :

Thanks again for using JustAnswer.com and have a great day

Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 12469
Experience: Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
Megan C and 7 other Tax Specialists are ready to help you
Expert:  Megan C replied 1 year ago.
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Expert:  Megan C replied 1 year ago.
Thank you for the opportunity to assist. Please take a moment to rate my response so that I may receive credit for assisting you today. Thanks again for using JustAnswer.com and have a great day.
Expert:  Megan C replied 1 year ago.
Thank you for the positive rating. I really enjoyed working with you – please feel free to request me again when you come back to ask another question. Simply enter "MyVirtualCPA" in the subject of your question, and it will be routed directly to me. Thank you again for using JustAnswer. For the quickest service, please post a new question.

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