Wind Turbine lease

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.

The facts of your post are not clear. Who owns the property? Are you saying company B owns the real estate and Company A has the mineral rights from land owned by B? And now A is leasing out the to the wind company on land owned by B?

And what are the terms of the lease? How long? What options?

That is correct company B owns the property and company A is leasing the property to the turbine company. It is on a twenty year lease with no options to buy.

Beats me. Are the partners' interests in both partnerships identical? And is the easement really that, or is it a lease? And how and from whom did A get the mineral rights? And does "no option to buy" include no option to renew?

I doubt any of the answers to my questions will tell you how A can give any rights to a property owned by B, but it might help to know the accurate and complete facts.

I have clients with wind leases. Per the contract, they are leases and treated likewise.

Unless Company A obtained the mineral rights and wind lease rights through an arm lengths transaction you might be looking at assignment of income.

I am curious as to what business or tax purpose was served by transferring the rights from B to A where the net is reported as income to the same partners.

How do they qualify for cap gain treatment?

How do they qualify for cap gain treatment?

Sounds like previous accountant screwed up based on some incorrect 1099's that were issued during the early years of the lease.

Are you saying that the 1099B led the prior preparer to report the income as proceeds on schedule D?

Are you saying that the 1099B led the prior preparer to report the income as proceeds on schedule D?

Per the OP "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."

Well at least they weren't receiving a 1099-NEC

But, if our given facts are, say, a bit off, maybe there was a 1099_S, which is issued for a sale or exchange of an ownership interest in real estate. Here's what the instructions include as an ownership interest:

Ownership interest. An ownership interest includes fee simple interests, life estates, reversions, remainders, and perpetual easements. It also includes any previously created rights to possession or use for all or part of any particular year (for example, a leasehold, easement, or timeshare), if such rights have a remaining term of at least 30 years, including any period for which the holder may renew such rights, determined on the date of closing. For example, a preexisting leasehold on a building with an original term of 99 years and a remaining term of 35 years on the closing date is an ownership interest; however, if the remaining term is 10 years, it is not an ownership interest.

That is correct company B owns the property and company A is leasing the property to the turbine company. It is on a twenty year lease with no options to buy.

Like mineral rights and water rights, wind rights can be separated from the ownership of the surface. Maybe that is what happened. Have you asked the client? Keep in mind that some states do not allow the wind rights to be separated.