How to make oil and gas royalties show up as passive income?

[SuzB92]

I am working on a trust return (1041), and I entered oil and gas royalties from a 1099 on schedule E.  I chose property type 6 in box 1b and included the royalty income on line 4, yet Proseries Professional is showing it as nonpassive income and including it on line 5 of the K1 when it should be line 6.  Any ideas how to get Proseries to report it as passive income? 

[ljr]

Did you look to make sure you didn't check off a box on schedule E that says active participation?

[SuzB92]

The material participation and active participation checkboxes are all blank.

[Just-Lisa-Now-]

Wouldn't you want it on the K-1 Line 5 as Portfolio and Non Business income rather than Line 6 as Ordinary Business Income?

[sjrcpa]

What makes you think it should be passive?

[SuzB92]

I need it to be classified as passive income.  Proseries is forcing the royalty income to be non-passive on the K-1 worksheet (line 5) and Distributable Income worksheet [Part I, line 5e and Part II, column e (should be column f)] and I cannot figure out why.  I do very few trust returns so I'm probably missing something obvious.  The only income for the trust is oil and gas royalties.

[SuzB92]

There is no participation in the income generation.  The trust receives periodic checks from oil & gas companies for royalties.  

[sjrcpa · Accepted solution]

Look at IRC Section 469(e)(1)(A)(i)

[SuzB92]

Interesting thank you!

[sjrcpa]

You're welcome.