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Tax Partnerships For Nontax Professionals

Bruce N. Lemons, Thomas P. Briggs, Oil and Gas Joint Operating Agreement (1990)

The purpose of this paper is to discuss the important federal income tax issues arising from the treatment of oil and gas operating agreements or farmout agreements as partnerships for federal income tax purposes. As originally conceived by the authors, this paper was not intended to set forth a discussion suitable for an oil or gas tax professional. However, because of the complexity of the issues presented, many (but certainly not all) portions of [11-2] this paper as drafted may be suitable for that purpose. The authors' inability to draft a paper that explains tax partnerships in simple terms may be a testament to the fact that the title of this paper (“Tax Partnerships for Nontax Professionals”) is a misnomer—perhaps a tax professional should always be involved when a tax partnership is used.

This paper first examines the single most important tax issue relating to the utilization of a joint operating agreement: the determination of whether the arrangement constitutes an association taxable as a corporation. Second, the paper examines the treatment of an operating agreement or farmout agreement as a partnership for federal income tax purposes. Third, the paper examines the election out of Subchapter K. Fourth, the paper examines the tax consequences where the parties do not elect to exclude the arrangement from Subchapter K. Fifth, the paper examines the conseque