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A Tax Trap For the Unwary: The Acquisition/disposition of Mineral Properties

Robert F. Wilson, Mineral Taxation (1977)

Occasionally, hopefully not often, one hears the old adage that brings tears to the tax practitioner's eyes—“It's a good deal; don't let the tax tail wag the dog!” The aim of this paper is to demonstrate the fallacy of the premise behind that adage. That is, a good deal, if it is structured right, remains a good deal, but, one must not forget that a particular structure or conceptual arrangement may have attendant adverse tax consequences that can ruin the economics of even the “best” of deals. Furthermore, tax benefits may save what otherwise appears to be a disastrous or diseconomic deal.

This paper deals with four topics: (1) Sale versus lease; (2) the special treatment afforded coal and iron ore, (3) the acquisition or disposition of surface rights and (4) variable rate royalties. However, before discussion of each primary topic a background discussion relating to the consequences of certain transactional structures or concepts that have an effect on the tax result is provided. The background is hopefully sufficient and most important to an understanding of the subject matter. It should not be lightly regarded. Do so and you may find yourself or your client in a tax trap set for the unwary.



Significance of the Distinction. For tax purposes it is important to consider whether a particular arrangement regarding