The popularity of development and leasing to Marcellus shale
has raised many questions pertaining to the valuation of both
mineral right and natural gas benefits for Pennsylvania’s
inheritance tax. On July 10, 2012 the Department of Revenue
distributed an Inheritance Tax Bulletin 2012-01 (known as the “Bulletin”)
which related directly to these issues.
This Bulletin clarifies the Department of Revenue’s policy regarding
the taxation of mineral rights and natural gas interests. Mineral
rights and natural gas benefits like all other types of assets must
be reported on the Inheritance Tax returns and specifically on
Schedule E (which also includes cash, bank deposits, and
miscellaneous personal property). Furthermore, the taxable value
is determined by using the same methodology used to value any
real property or tangible personal property interest.
Taxable value of mineral rights is established by a bona fide sale:
That is, a sale to an unrelated third party, or by appraisal.
A bona fide sale means that the sale happened in good faith
between unrelated parties and where there is no intent of fraud.
Other ways of valuation: if there is no bona fide sale, a computed
value can be calculated using the common-level ratio applied to the
assessed value of the mineral right. Furthermore, if there is no
bona fide sale and no computed value, then the taxable value is
determined by the interest’s actual monetary worth.
The taxable value of natural gas interests is calculated by the
actual monetary worth of interest determined by a bona fide sale.
If there is no bona fide sale, the natural gas rights can be determined
by a credible appraisal. Unlike mineral rights, natural gas interests
do not have assessed values. As a result, if there is no bona fide
sale an assessed value cannot be computed. The Bulletin states,
absent a bona fide sale, an appraisal or other credible evidence to the
contrary, value should be calculated as follows:
1. Leased and producing properties: The reported value should be the sum
of any amount received for production of natural gas interests during the twelve
months prior to the decedent’s date of death, multiplied by two.
2. Leased but non-producing properties: The reported value should be zero,
unless, at the time of death, the properties were part of a contractual agreement
whereby the properties generated fixed future payments.
3. Non-leased and non-producing properties: The interests should be reported
as a value of zero.
For more information regarding the taxation of mineral and natural gas
interests for the Pennsylvania Inheritance Tax,
please contact David M. Frees, III at
[email protected] or 888-573-7407.