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Problems on Pool of Capital Doctrine and Farmout Transactions What are the federal income...

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Accounting

Problems on Pool of Capital Doctrine and Farmout Transactions

What are the federal income tax consequences to each party in the following transactions?

1) Wildcat Bill, a.lessee, agrees to assign a 50% share of the working interest in the drill rite to Driller Don and a one-sixteenth over-riding royalty interest in the remaining acreage in exchange for Don drilling, equipping and producing a well free of cost to Bill.

2) Wildcat Bill, a lessee, contracts with George-, a geologist, to conduct geological and geophysical tests on the leased acreage. Bill pays George $S,000 for the work.

3) Would the tax treatment differ from Problem 2 above if George was given a onesixteenth overriding royalty in the lease in exchange for the geological and geophysical study?

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