Tax Law and Business Organization Strategy

Wind Energy Part 4 -- Option Payments as Deferred Income

Many energy deals start with an option to “explore,” or study, the wind energy capabilities of land that may be leased. Would these option payments be taxed just as any other option payments?

When, for example, a cash method taxpayer receives money for an option to purchase property, the taxpayer doesn’t take that income into account until the option is either exercised or expires. At that time, the character of the consideration, money or other property, is determined and either included as purchase price (if the option is exercised) or as income (if the option expires).

There is no reason not to suppose that option payments in a wind deal would be treated in the same fashion. But, again, there is no specific authority for such a conclusion.

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