The continuing expansion of Marcellus Shale drilling has brought with it some serious tax issues for private clubs that are normally tax exempt under Internal Revenue Code Section 501(c)(7). Private hunting and fishing clubs that own property in the rural mountains and valleys of Pennsylvania sit above some of the most desired Marcellus Shale drilling locations in the Commonwealth. To that end, the drilling companies are doing their best to acquire access to the underlying natural gas through oil and gas leases.
Entering into a gas lease generally involves, among other provisions, receipt of an upfront lease bonus payment and the potential for future royalties if a well is drilled on or under the club’s property. Receipt of one or more of these payments will result in the need for the club to file a federal income tax return (the club would need a federal identification number) and pay the resultant tax liability. Depending on how the funds are utilized, the payments could jeopardize the on-going tax exempt status of the club. Furthermore, if royalties are received, the annual amount received could cause the club to fail the gross receipts test and further complicate retention of the club’s tax-exempt status.
Be sure you understand your situation and the related ramifications before you sign the lease!
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person any tax-related matter.