The Pennsylvania Department of Revenue has clarified its policy concerning the valuation of natural gas rights for Pennsylvania state inheritance tax purposes. In Inheritance Tax Bulletin 2012-01 (Issued: July 10, 2012) the Department states that taxable value is most clearly established by a bona fide sale. Thus, if natural gas rights are sold for full value shortly after the death of the owner of the interest, the Department should accept that sale as establishing the inheritance tax value. If the interest is not sold, the Department will accept a “credible appraisal.” These are the same methods used in general to value real property or tangible personal property interests of a decedent.
Often however, gas rights will pass by inheritance without sale. And appraisals can be expensive. In the case of real estate, taxpayers can fall back on the property’s tax assessed value to establish the inheritance tax value of a property. But, natural gas rights are not given tax assessed values. So, the Department provides taxpayers with an alternative and relatively simple valuation method for gas rights based upon whether the interest is (1) leased and producing, or (2) leased and non-producing, or (3) non-leased and non-producing.
The Department’s clarification reads as follows:
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 an appraisal or other credible evidence. 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, 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.
Readers should understand that Inheritance Tax Bulletin 2012-01 relates to the Pennsylvania state inheritance tax (usually 4.5% on assets that pass at death from parent to child) and not the federal estate tax.
IRS Publication 1457 Actuarial Values Table B, Section 3 Annuity, Income, and Remainder Interests For a Term Certain