RS 01802.040 Oil and Gas Operations


The customary means of developing an oil and gas property is through an oil and gas lease. Usually a landowner grants to the operator, for a term of years, the right to enter the property and drill for oil and gas. The operator's interest is called a “working interest” . He pays for the development and operation. The owner receives a “royalty”, generally one-eighth of the proceeds from the sale of oil produced from the lease.


All income received by the owner of the land is rentals from real estate and excluded in computing SEI.

The owner of a lease may sell it to another. An occasional sale would not constitute a “trade or business”. However, there are lease dealers who buy and sell leases for their livelihood. This is a business.

The ownership and operation of a working interest constitutes a business. Whether the income is NESE depends on the nature of the venture. If a general partnership is involved, the income to the individual partners will be NESE; if a corporation, the income would be paid as dividends.

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RS 01802.040 - Oil and Gas Operations - 10/22/2002
Batch run: 07/03/2014