State: Tax breaks could flow in drilling deal

South Florida's Collier family could end up with millions of dollars in federal tax breaks in addition to the $120-million President Bush's administration proposes to pay to acquire the family's mineral rights in the Everglades.

The deal announced this week is designed to protect 765,000 acres of land in the Big Cypress National Preserve, Florida Panther National Wildlife Refuge and Ten Thousand Islands National Wildlife Refuge. The Collier family retained the oil and gas drilling rights when it sold or gave Everglades land to the government over the years.

The $120-million payment, which Congress still has to approve, may be in cash or in credits that could be used to purchase future offshore leases.

On top of that, however, the Colliers are going after some hefty tax breaks. To accommodate the family, the deal is structured partly as a purchase and partly as a donation, according to the agreement signed by Collier representatives and the Department of the Interior.

In the agreement, the government officially acknowledges the Collier family's opinion that the fair market value of the mineral rights is "significantly greater" than $120-million. Now it will be up to the Colliers to obtain an appraisal that can be used as the basis for claiming a charitable deduction and to defend the amount before the IRS or in court if it should be challenged.

Under the tax law, the difference between the $120-million and the fair market value of the mineral rights may be deductible. It is considered a noncash contribution, like giving your old clothes to the Salvation Army.

A spokeswoman for the Collier interests declined to discuss the issue. But helping the influential Colliers claim such a big break is likely to provide more fodder for critics of the deal.

"It probably makes sense to preserve these areas, but these guys are getting a great return on their investment," said Keith Ashdown, spokesman for the Taxpayers for Common Sense in Washington. "The federal government is going to do what it can to sweeten the pot for the Collier family."

Claiming a large charitable deduction could allow the family to significantly reduce, if not eliminate, the income tax that otherwise would be due on the $120-million federal payment.

Not even a tax expert on mineral rights could hazard a guess on how much in taxes the Colliers would owe.

The tax treatment of the profit from the sale of mineral rights varies depending on whether the rights have been used to produce income in the past and whether certain deductions previously have been claimed on the property, said Farzan Jahanian, a certified public accountant in San Antonio, Texas.

Most of a sale probably would qualify for the lower tax rates that apply to capital gains, he said. However, higher ordinary income rates could apply to part of the proceeds if a company has taken certain deductions for depreciation, drilling costs and depletion of mineral reserves. Also, Jahanian said, some costs incurred in the past would reduce the taxable profit if they were added to the cost basis of the property instead of being deducted.

In the past five years, the Collier interests have filed 27 proposals -- still pending -- for development of the mineral rights that are part of this deal. The Department of the Interior estimates the property contains the equivalent of 40-million barrels of oil.

Environmentalists have opposed drilling in the environmentally sensitive area, which is part of an $8-billion Everglades restoration effort. The Collier deal was announced in conjunction with a $115-million payment to three oil companies to buy up natural gas leases in the Gulf of Mexico off Pensacola. Critics said the president was favoring Florida over other states, giving a boost to re-election efforts for his brother, Gov. Jeb Bush.

Some have objected to other aspects of the Collier deal, particularly to the fact that Congress could pay part or all of the $120-million price tag in the form of credits, which would encourage additional offshore drilling.

"Our concern is that they'll be used to acquire leases off the Florida coast or sensitive areas of Alaska," said Lisa Speer of the Natural Resources Defense Council in New York. "It doesn't solve the problem. It just shifts it to somewhere else that may be equally damaging."

-- Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.

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