How are you today
Great thanks - and you?
So tell me more about this arrangement
The individual would lend, say $10,000 and then get $1,000 in mineral rights and 10% interest on top of that?
I'm just using those numbers as an example
Yes. The "carried interest" is 5%, but your example is accurate
And you would pay them back in full on the amount that was lent
Okay. Then I would consider the mineral rights as ordinary income to the lender
Just as is interest
At the acquired basis?
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
My opinion would be they received these rights, so it would be income to them.
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
It's a grey area.
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?
Constructive receipt - the effective date
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?
I would do 1099-MISC
Would an 83 b election be applicable for the lender here?
An 83b election is for stock.
So, this would not be appropriate
Thank you for your advice. Have a nice day!
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