Also known as: farm · farmee · farmer · farminee · farminor · farmor · farmoutee · farmoutor · farm-out · farm-out agreement · farm out
Written by attorneys · grounded in primary & secondary sources — see below
A sharing arrangement in oil and gas operations by which one party transfers an interest in acreage to another in return for the transferee's participation in drilling and testing operations on the acreage.
Select any source to read its text and confirm it supports the definition.
Freya Freeman holds mineral rights on a 640-acre tract. She transfers a 50 percent working interest in 160 acres to Flagship Logistics under a farmout. Flagship drills and tests the acreage. The transfer qualifies as a pool of capital arrangement with no immediate tax consequences to Freya.
Fairview Manufacturing grants a security interest in farm products to Fairfield Bank. Fairview then farmouts acreage containing those products to Frostline Textiles. Frostline buys in ordinary course without taking farm products directly from farming operations and therefore takes the interest free of the bank's perfected security interest.
Frederick Ferguson and his insurer retain a law firm to handle an uninsured motorist claim arising from an accident on acreage subject to a farmout. After the firm obtains confidential information, Ferguson becomes a defendant in related litigation. The firm is disqualified because the prior representation creates a non-consentable conflict.
The parties are treated as having pooled their capital and created an informal partnership. No tax consequences arise from the transfer itself until the property is abandoned or transferred, at which point the transaction is generally taxed as a sale.
No. The IRS has taken the position that a transfer of acreage beyond the drilling unit constitutes a transfer of separate property that is not protected from taxation by the pool of capital doctrine.
…phrases must be construed together and in context, not in isolation. See Plainsman Trading Co. , 898 S.W.2d at 789; cf. State Farm Life Ins. Co. v. Beaston , 907 S.W.2d 430, 433 (Tex.1995) (“Indeed, courts must be particularly wary of isolating from its surroundings or considering apart from other provisions a single…