| By Bob Weaver
The issue of taxing free gas rights in West Virginia surfaced last fall, challenging and and maybe changing what has been a historical benefit to many West Virginian's who leased their mineral rights over the past 100 years.
Many free gas owners received their free gas rights under the deals connected with the the sacred 1/8 royalty cut given owners, or under other contracts that had low, locked-in payments to owners, often a few hundred dollars a year. Many of those contracts have been in-force for 90 years or more.
EQT, formerly Equitable Gas, starting informing holders who have been getting free gas under drilling leases, that they think
that all or a portion of the value of the free gas owners receive may be "income" for the purposes of federal income tax.
Other gas producers are likely following the EQT lead.
The EQT letter wanted the owners to send EQT an IRS W-9 form disclosing their social security numbers, indicating the action is essential.
The West Virginia Surface Owners Rights Organization wrote in their newsletter, "Whether to send this in is a decision that you have to make based on your reading of IRS forms and regulations, or consultations with a tax adviser."
WVSORO said, "Just because the producer thinks that the receipt of free gas by some surface owners is income for federal income tax purposes, does not mean that it is true."
EQT thinks that free gas, or a portion of the free gas, is reportable income, it plans in the future to send the IRS a report of surface owners' receipt of the free gas.
EQT has indicated it is also going to send the IRS EQT's determination of the "free gas" value.
The WVSORO Newsletter says, "When EQT or other producers make that report to the IRS in the future, they will send you an IRS Form 1099-Misc letting you know that they have reported this to the IRS and the value they reported."
"EQT believes that they do not have to send the IRS any money ("withholding") with that report as long as the report includes your social security number," says WVSORO.
EQT believes that if they report the "free gas" income and the holder's name, but do NOT send a social security number with it, then EQT will have to send the IRS money equaling 28% of their determination of the value of the free gas.
EQT claims if they have to do that, they have to send the free gas holder a bill for that amount.
WVSORO says, "If you send EQT the IRS Form W-9, then the IRS will have an easier time comparing the report EQT sends in with your tax return to see if you owe tax, if you have reported the income and paid tax on it.
EQT will probably make the report to the IRS anyway, and send the "free gas" holder an IRS Form 1099 anyway.
If EQT believes it has to send the IRS 28% of their determination of the value of the free gas, and the holder does not pay it, EQT could take the position that the holder of the free gas owes them money.
They are planning on sending the free gas holder a bill.
"EQT could therefore take the position that there has been a breach of the agreement or covenants granting you free gas, and EQT might try to use that as an excuse to turn off your gas," says WVSORO.
WVSORO members are being advised to send in the W-9's now, and figure out whether they believe it is income as they file their federal income tax returns.
See wvsoro.org
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