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OIL AND GAS LEASE

Mansfield, PA |

I SIGNED A GAS AND OIL LEASE. AND MY QUESTION CONCERNS THE ROYALTY PARAGRAPH WHICH STATES . LESSORS ROYALTY SHALL BE LESS THE LESSORS PRORATED SHARE OF ANY TAXES LEVIED ON THE OIL AND/ OR GAS. I DO NOT UNDERSTAND THE TERM [ LESSORS PRORATED SHARE OF ANY TAXES LEVIED.] I DO NOT UNDERSTAND TAX LAWS , AND I AM CONCERNED THAT I MAY OWE TAXES RATHER THEN GETTING A ROYALTY.

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Attorney answers 2

Posted

I do not practice in your state so you will need to confirm this with an oil / gas attorney in PA. Generally this clause deals with severance and other state taxes. As an accountant friend of mine once stated, "I'll be glad to take your income and pay the taxes on it as I will still be ahead." I can't imagine a situation where the taxes would exceed the income. All that being said, you would be wise to either retain an attorney to review your lease and educate you on its terms or you may want to join a group, such as the National Association of Royalty Owners (http://www.naro-us.org), to take advantage of some of the educational opprotunities they offer. As a royalty owner, your interest will be long-term and the more you know and understand the better.

Posted

"Prorated share" means your proportional or percentage share of the taxes. This does not mean that you have to write a separate check to someone for the taxes, but it will reduce the amount that you receive as royalty. In this instance, lets say your royalty is 15%. There are severance and other types of taxes charged on all oil and gas that is produced and sold. So when the oil or gas is pumped and sold, the purchaser will write a check to your lessee (the oil company) for 100% of the value. The lessee then has to pay the taxes on 100% before sending you a check for your 15%. So if your lessee sells oil for $100 bucks and pays $10 bucks in taxes, you will be getting a check for 15% of $90 bucks rather than 15% of $100. That is all that this means.

You will, of course, still have to pay income taxes on the money you receive as royalty, but that is not what they are talking about. The "taxes levied on the oil and/or gas" will never be higher than the value of the oil or gas, so there should never be a case where you will owe taxes rather than receive a royalty.

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