Mineral royalties qualify as trade-or-business income for passive-loss and net-investment-income rules

Plain-English summary

A partnership that owns, operates, and manages oil, gas, and other mineral interests asked how its royalties and disposition gains should be treated under the passive-activity and net-investment-income rules. The IRS ruled that the mineral royalties and gains or losses from disposing of the interests are derived in the ordinary course of a trade or business for purposes of IRC § 469, so they are not portfolio income under the cited temporary regulation. The partnership may group the related royalty and mineral-interest activities for the taxable year that includes the ruling date, provided the grouping otherwise satisfies the passive-activity rules and is disclosed with its Form 1065. The IRS also ruled that the royalties and disposition gains are trade-or-business items for IRC § 1411 and are not treated as investment of working capital under Treas. Reg. § 1.1411-6. The ruling does not decide whether the activities are passive for any partner, whether a particular grouping is appropriate, or whether a partner must include an item in net investment income.

Ruling snapshot

• Question: Are the partnership's mineral royalties and disposition gains ordinary-course trade-or-business income, may the related activities be grouped, and are the items outside the working-capital rules for net investment income?
• Outcome: Approved, subject to the partnership's representations and compliance with the grouping and disclosure requirements
• Key authorities: IRC §§ 162, 469, 1411; Treas. Reg. §§ 1.469-2T(c)(3), 1.469-4, 1.1411-4, 1.1411-5, 1.1411-6

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202535011 Third Party Communication: None
Release Date: 8/29/2025 Date of Communication: Not Applicable
Index Number: 469.00-00, 469.10-00,
1411.00-00, 1411.02-00, Person To Contact:
469.05-00 ----------------------------, ID No. --------------
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------------------ Telephone Number:
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-------------------------------------- Refer Reply To:
------------------------- CC:PT&E:B01
---------------------------- PLR-122658-24
Date:
May 28, 2025

Legend

X = -----------------
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Y = ---------------------------
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a = --------

b = -----------

c = --

Dear --------------:

   This letter responds to a letter dated December 13, 2024, and subsequent

correspondence, submitted on behalf of X by X’s authorized representatives, requesting
rulings under sections 469 and 1411 of the Internal Revenue Code.

                                      FACTS

  According to the information submitted, X is classified as a partnership for federal

income tax purposes. X conducts some of its business through Y, an entity that is
PLR-122658-24 2

disregarded as an entity separate from X for federal tax purposes. X has one or more
direct or indirect partners that are subject to sections 469 and 1411.

    X is engaged in the ownership, operation, and management of oil, gas, and

mineral interests. X owns mineral interests including rights to oil and gas royalties, oil
and gas overriding royalties, and working interests (collectively, “Mineral Interests”). X
currently has more than a mineral interests covering approximately b acres and
employs c full-time employees to oversee the Mineral Interests. The Mineral Interests
produce gross income for X in the form of royalties (the “Mineral Royalties”). X
represents that the Mineral Royalties are royalites within the meaning of sections 469
and 1411. X also represents that it holds the Mineral Interests in the ordinary course of
a trade or business (within the meaning of section 162) and that the Mineral Royalties
are derived in the ordinary course of a trade or business (within the meaning of section
162). X also represents that it does not hold the Mineral Interests in a trade or business
of trading or dealing in such property.

                             RULINGS REQUESTED

X requests the following rulings:

    1. X’s Mineral Royalties are income derived in the ordinary course of a trade or

business under § 1.469–2T(c)(3)(ii)(G) of the Income Tax Regulations and,
consequently, are not described in section 469(e)(1)(A)(i)(I) and are not portfolio income
within the meaning of § 1.469–2T(c)(3). Furthermore, X’s gain or loss from the
disposition of any Mineral Interests is derived in the ordinary course of a trade or
business for purposes of section 469, and, consequently, is not described in section
469(e)(1)(A)(ii) and is not portfolio income within the meaning of § 1.469–2T(c)(3).

    2. Receipt of a favorable ruling on Issue #1 is an event allowing X to group its

activities related to the Mineral Royalties and Mineral Interests under § 1.469–4 for the
taxable year in which the ruling is received.

   3. X’s Mineral Royalties are income derived in the ordinary course of a trade or

business for purposes of section 1411(c)(1)(A)(i) and are not described in § 1.1411–6.
Furthermore, X’s gain or loss from the disposition of any Mineral Interests is attributable
to the disposition of property held in a trade or business for purposes of section
1411(c)(1)(A)(iii) and is not described in § 1.1411–6.

                                LAW AND ANALYSIS

   Issue #1

   Section 469(a)(1) disallows passive activity losses and passive activity credits of

individuals, trusts, estates, closely held C corporations, and personal service
corporations.
PLR-122658-24 3

    Section 469(c)(1) and § 1.469–1T(e)(1) define a passive activity to include a

trade or business activity in which the taxpayer does not materially participate. Sections
1.469–1(e)(2) and 1.469–4(b)(1)(i) provide that a trade or business activity includes an
activity that involves the conduct of a trade or business (within the meaning of section
162). Section 1.469-4(a) provides, in pertinent part, that a taxpayer’s activities include
those conducted through partnerships.

   Section 1.469-2T(c)(1) provides that, except as otherwise provided in the

regulations under section 469, passive activity gross income for a taxable year includes
an item of gross income if and only if such income is from a passive activity.

   Section 1.469-2T(c)(2)(i)(A) provides that, except as otherwise provided in the

regulations under section 469, any gain recognized upon the sale, exchange or other
disposition of an interest in property used in an activity at the time of the disposition or
of an interest in an activity held through a partnership or S corporation is treated in the
following manner:
(1) The gain is treated as gross income from such activity for the taxable year or
years in which it is recognized;
(2) If the activity is a passive activity of the taxpayer for the taxable year of the
disposition, the gain is treated as passive activity gross income for the taxable year or
years in which it is recognized; and
(3) If the activity is not a passive activity of the taxpayer for the taxable year of
the disposition, the gain is treated as not from a passive activity.

   Section 469(e)(1)(A)(i)(I) provides that, for purposes of section 469, in

determining the income or loss from any activity, there shall not be taken into account
any gross income from interest, dividends, annuities, or royalties not derived in the
ordinary course of a trade or business.

   Section 469(e)(1)(B) provides that, for purposes of section 469(e)(1)(A), any

income, gain, or loss which is attributable to an investment of working capital shall be
treated as not derived in the ordinary course of a trade or business

    Section 1.469–2T(c)(3)(i) provides that passive activity gross income does not

include portfolio income. Section 1.469–2T(c)(3)(i) also provides in part that portfolio
income includes all gross income, other than income derived in the ordinary course of a
trade or business (within the meaning of § 1.469–2T(c)(3)(ii)), that is attributable to
royalties and the disposition of property that produces royalties.

   Section 1.469–2T(c)(3)(ii) provides an exclusive list of seven scenarios where

gross income described in § 1.469–2T(c)(3)(i) will be treated as derived in the ordinary
course of a trade or business. Only under two of these scenarios would gross income
from mineral royalties be treated as derived in the ordinary course of a trade or
business. First, § 1.469–2T(c)(3)(ii)(D) provides that income derived in the ordinary
course of a trade or business includes income or gain derived in the ordinary course of
PLR-122658-24 4

an activity of trading or dealing in any property if such activity constitutes a trade or
business, subject to an exception in § 1.469–2T(c)(3)(iii)(A). This scenario does not
apply here because X does not carry on a trade or business of trading or dealing in
Mineral Interests. Second, § 1.469–2T(c)(3)(ii)(G) provides that gross income derived
in the ordinary course of a trade or business includes income identified by the
Commissioner as income derived by the taxpayer in the ordinary course of a trade or
business. For this scenario to apply, X needs to obtain this ruling.

   Issue #2

   Section 1.469-4(a) provides, in pertinent part, that § 1.469-4 sets forth the rules

for grouping a taxpayer’s trade or business activities for purposes of applying the
passive activity loss rules of section 469.

   Section 1.469–4(c)(1) provides that one or more trade or business activities or

rental activities may be treated as a single activity if the activities constitute an
appropriate economic unit for the measurement of gain or loss for purposes of section

469. Section 1.469–4(c)(2) provides guidance on the meaning of appropriate economic
     unit. Section 1.469–4(d)(1) through (4) and (6) provides limitations on groupings.

     Section 1.469–4(d)(5)(i) provides in part, generally, that a partnership must group
     

     its activities under the rules of § 1.469–4. Once a partnership groups its activities, a
     partner may group those activities with each other, with activities conducted directly by
     the partner, and with activities conducted through other section 469 entities, in
     accordance with the rules of § 1.469–4. A partner may not treat activities grouped
     together by a partnership as separate activities.

     Section 1.469–4(e)(1) provides that, except as provided in §§ 1.469–4(e)(2) and
     1.469–11, once a taxpayer has grouped activities under § 1.469–4, the taxpayer may
     not regroup those activities in subsequent taxable years. Taxpayers must comply with
     disclosure requirements that the Commissioner may prescribe with respect to both their
     original groupings and the addition and disposition of specific activities within those
     chosen groupings in subsequent taxable years.

     Prior to receipt of this ruling, under § 1.469–2T(c)(3)(ii), X’s Mineral Royalties and
     X’s gain or loss from disposition of the Mineral Interests were not eligible to be treated
     as derived in the ordinary course of a trade or business. Upon receipt of this ruling,
     such items will be treated for the first time as attributable to a trade or business for
     purposes of section 469. Accordingly, it is appropriate to allow X to group its activities
     associated with the Mineral Royalties and Mineral Interests.

     Issue #3

     Section 1411(a) imposes a 3.8 percent tax on the net investment income of
     individuals, estates, and trusts, subject to certain thresholds.
     PLR-122658-24 5

     Section 1411(c)(1)(A)(i) provides in part that gross income from royalties (other
     than royalties derived in the ordinary course of a trade or business not described in
     section 1411(c)(2)) is included in the computation of “net investment income.”

     Section 1411(c)(1)(A)(iii) provides in part that net gain (to the extent taken into
     

     account in computing taxable income) attributable to the disposition of property other
     than property held in a trade or business not described in section 1411(c)(2) is included
     in the computation of “net investment income.”

     Section 1411(c)(2) describes the following two trades or businesses: (A) a
     

     passive activity (within the meaning of section 469) with respect to the taxpayer; and
     (B) a trade or business of trading in financial instruments or commodities (as defined in
     section 475(e)(2)).

     Section 1411(c)(3) states that a rule similar to the rule of section 469(e)(1)(B)
     applies for purposes of section 1411(c).

     Section 1.1411–4(b) provides in part that royalties are excluded from net
     investment income if they are derived in the ordinary course of a trade or business not
     described in § 1.1411–5.

     Section 1.1411–4(d)(4)(i)(A) provides that net gain does not include gain or loss
     

     attributable to property (other than property from the investment of working capital (as
     described in § 1.1411–6)) held in a trade or business not described in § 1.1411–5.

     Section 1.1411–5(a) provides that a trade or business is described in § 1.1411–5
     if such trade or business involves the conduct of a trade or business, and such trade or
     business is either—
     (1) A passive activity with respect to the taxpayer; or
     (2) The trade or business of a trader trading in financial instruments or
     commodities.

     Section 1.1411–6(a) provides, in relevant part, that for purposes of section 1411,
     

     any item of gross income from the investment of working capital will be treated as not
     derived in the ordinary course of a trade or business, and any net gain that is
     attributable to the investment of working capital will be treated as not derived in the
     ordinary course of a trade or business. In determining whether any item is gross
     income from or net gain attributable to an investment of working capital, principles
     similar to those described in § 1.469–2T(c)(3)(ii) apply.

     As described above, § 1.469–2T(c)(3)(ii)(G) provides the Commissioner authority
     

     to issue a ruling treating X’s Mineral Royalties, and X’s gain or loss from the disposition
     of Mineral Interests as derived in the ordinary course of a trade or business. Applying
     similar principles under § 1.1411–6, the Commissioner also has authority to issue a
     ruling treating X’s Mineral Royalties, and X’s gain or loss from the disposition of Mineral
     PLR-122658-24 6

Interests, as not being attributable to the investment of working capital. The application
of similar principles will generally result in similar determinations for both these issues.

                                  CONCLUSION

    Based solely on the facts submitted and representations made, we conclude that

X’s Mineral Royalties are income derived in the ordinary course of a trade or business
under § 1.469–2T(c)(3)(ii)(G) and, consequently, are not described in section
469(e)(1)(A)(i)(I) and are not portfolio income within the meaning of § 1.469–2T(c)(3).
Furthermore, X’s gain or loss from the disposition of any Mineral Interests is derived in
the ordinary course of a trade or business for purposes of section 469, and,
consequently, is not described in section 469(e)(1)(A)(ii) and is not portfolio income
within the meaning of § 1.469–2T(c)(3).

  We further conclude that X may group activities related to the Mineral Royalties

and Mineral Interests under § 1.469–4 for X’s taxable year that includes today’s date,
provided that the grouping satisfies the requirements of section 469 and the regulations
thereunder. X should disclose the grouping in a statement attached to its Form 1065,
U.S. Return of Partnership Income, for X’s taxable year that includes today’s date. A
copy of this ruling should be attached to the Form 1065.

   Additionally, we conclude that X’s Mineral Royalties are derived in the ordinary

course of a trade or business for purposes of section 1411(c)(1)(A)(i) and are not
described in § 1.1411–6. Furthermore, X’s gain or loss from the disposition of any
Mineral Interests is attributable to the disposition of property held in a trade or business
for purposes of section 1411(c)(1)(A)(iii) and is not described in § 1.1411–6.

   Except as expressly provided herein, we express or imply no opinion concerning

the federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In particular, we express or imply no opinion concerning
whether any activity of X is a passive activity under section 469 with respect to any
taxpayer, whether any grouping of any activity of X under section 469 by any taxpayer is
appropriate, whether any trade or business of X is described in section 1411(c)(2) or
§ 1.1411–5 with respect to any taxpayer, or whether any income, gain, loss, or
deduction of X is taken into account in computing net investment income tax under
section 1411 for any taxpayer.

    The rulings contained in this letter are based on information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. In particular, these rulings are contingent upon the Mineral
Royalties being derived in the ordinary course of a trade or business (within the
meaning of section 162), and the Mineral Interests being held in the ordinary course of a
trade or business (within the meaning of section 162). While this office has not verified
any of the material submitted in support of the requested rulings, it is subject to
verification on examination.
PLR-122658-24 7

  These rulings are directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that they may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

                                            Sincerely,



                                            ________/S/____________________
                                            Christiaan T. Cleary
                                            Senior Technician Reviewer, Branch 1
                                            Office of the Associate Chief Counsel
                                            (Passthroughs, Trusts, and Estates)

Enclosure:
Copy of this Letter for 6110 purposes

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