Tax News

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations under Code Sec. 6045(e), pertaining to information reporting requirements applicable to sales or exchanges of standing timber in return for lump-sum or "outright" payments. The proposed regulations require information reporting of lump-sum payments received by landowners in sales of standing timber. This would bring the reporting requirements for lump-sum sales of standing timber in line with the reporting requirements applicable to pay-as-cut timber sales.
Background
Payments related to the harvesting of timber may be on either a lump sum or a "pay-as-cut" basis. In lump-sum timber contracts, payments do not depend on the amount of timber harvested; rather, a pre-set, fixed and noncontingent payment is made to the landowner in exchange for the right to cut and remove designated trees. Under lump-sum contracts, the sellers do not retain an economic interest in the timber and do not bear any risk of loss in the timber-harvesting operations. Pay-as-cut, or contingent, timber contracts allow purchasers to cut designated trees in exchange for a payment which varies with the amount of timber harvested by the payor. Sellers who receive contingent payments retain an economic interest in the timber and bear an economic risk of loss until the trees are actually cut and harvested.
The difference in the economic nature of lump-sum and pay-as-cut timber sales has resulted in differing characterization for tax purposes. Proceeds from pay-as-cut timber sales are considered royalties (because the sellers retain an economic interest in the timber) and are reported under the rules of Code Sec. 6050N. Sales of timber in exchange for lump-sum payments, on the other hand, are considered sales of real estate and are reported in accordance with the rules of Code Sec. 6045(e). Currently, no information reporting requirement applies to sales of timber in exchange for a lump-sum payment. The new proposed regulations are intended to provide that such sales are subject to the same reporting requirements as sales of timber under pay-as-cut contracts.
Proposed Regulations, NPRM REG-155669-04, 2007FED ¶49,777
Other References:
Code Sec. 6045
CCH Reference - 2007FED ¶35,929A
Tax Research Consultant
CCH Reference - TRC FILEBUS: 9,156.10