Pennsylvania Inheritance Tax Implications Concerning Mineral and Natural Gas Interests

Many Pennsylvania landowners are receiving royalties relating to natural gas leases.  That revenue stream may be subject to tax implications.  Likewise, an estate that owns natural gas rights must determine the Pennsylvania inheritance tax implications of the rights and any related natural gas lease.  The Marcellus shale exploration boom brought with it many questions pertaining to valuation of natural gas interests for estate purposes.  Recognizing these questions, the Pennsylvania Department of Revenue issued Inheritance Tax Bulletin 2012-01on July 10, 2012.  That Bulletin was entitled, “Taxation and Valuation of Mineral Rights and Natural Gas Interests for Pennsylvania Inheritance Tax.” The Bulletin addresses taxable value of mineral and natural gas rights and states: 

Under provisions of the Inheritance and Estate Tax Act of 1991, (72 P.S. §§ 9102, 9121), the Secretary of the Department of Revenue (“Department”) announces that the Department has clarified existing Department policy concerning the taxation of mineral rights and natural gas interests for Pennsylvania inheritance tax purposes. All mineral and natural gas rights shall be reported on Inheritance Tax Schedule E (REV-1508) as Cash, Bank Deposits & Misc. Personal Property. The Department clarifies its policy as follows:

(1) The taxable value of mineral rights shall be determined using the same methodology used to value any real property or tangible personal property interest. Taxable value is most clearly established by determining the actual monetary worth of the interest determined by either a bona fide sale or, if the transfer is for no or nominal consideration, computed value (based on the common-level ratio applied to the assessed value of the mineral right). In the event that there is no sale and no computed value, then the taxable value is the interest’s actual monetary worth.

(2) The taxable value of natural gas rights shall be determined using the same methodology used to value any real property or tangible personal property interest. Taxable value is most clearly established by determining the actual monetary worth of the interest determined by a bona fide sale. If there is no bona fide sale, natural gas rights can be determined from a credible appraisal. A computed value using assessed value cannot be accomplished because natural gas rights do not have assessed values.

Therefore, absent a bona fide sale, an appraisal or other credible evidence to the contrary, value shall be determined as follows:

(i) For leased and producing properties, an estate shall value natural gas rights at an amount equal to any amounts received that were attributable to actual production of the natural gas interests at issue during the twelve months prior to the decedent’s date of death, multiplied by two.

(ii) For leased, non-producing properties (including unconventional natural gas wells as that term is defined by 58 Pa.C.S. § 2301), interests shall be reported at a value of zero unless, at the time of death, the properties were part of a contractual arrangement whereby the properties generated fixed future payments, in which case the natural gas rights shall be calculated by reducing the fixed future payments to present value as of the decedent’s date of death using established Internal Revenue Service actuarial tables as found in IRS Publication 1457 Actuarial Values Table B, Section 3 Annuity, Income, and Remainder Interests For a Term Certain.

(iii) For non-leased, non-producing properties, interests shall be reported at a value of zero.

Therefore, the Department of Revenue has allowed that an estate can calculate taxable value of gas rights by obtaining an appraisal.  Undertaking this appraisal can be costly and time consuming to the estate.  Apparently recognizing this, the Department has also provided for a capitalization model allowing for a multiplier where the estate holds leased, producing acreage.  Absent leased/producing acreage, and/or a fixed future payment arrangement an estate can likely report a value of “zero” on the Pennsylvania inheritance tax return relating to natural gas rights.

If you are an executor or administrator of a Pennsylvania estate that owns gas and/or mineral rights, or if you are an heir or beneficiary of such an estate, you may wish to seek legal representation to ensure proper calculation of Pennsylvania inheritance tax liability.  If you would like to discuss the Tax Bulletin in detail, or if you have questions as to how the Bulletin may impact an estate in which you have an interest, please feel free to contact this law firm for a consultation.