I have a new client that has mineral rights to the property in one company and real estate on the second company. The real estate company lease the land for hunting and the mineral rights company is leasing easements to a wind turbine company. Both companies file 1065 forms. My question is how can the mineral rights company lease to the turbine company when they are not the legal owners of the property? Previous CPA has been reporting the proceeds from the turbine company as long term gain on schedule D with zero basis for cost for the past ten years. Talked to the previous CPA and was explaining to me that they have been reporting the income in this manner due to 1099b the company was receiving from the turbine company. I called the turbine company and was informed that they had not issued any 1099 in the past five years due to errors in-house.
Am I missing something on how they can report the leased property on the mineral rights company and why is it being reported on schedule D instead of form 8825.