New Developments

This section is designed to help you stay up to date on issues that could impact your timberland and the tax treatment of timber. Please check back often for the lastest information!

Food, Conservation, and Energy Act of 2008
(H.R. 2419)

The House on May 21 and Senate on May 22 overrode President Bush’s veto of the "Farm Act." The Food, Conservation, and Energy Act of 2008, H.R. 2419, (Act) puts into effect many tax provisions of interest to timberland owners. Some provisions may directly impact their tax liability, while others may impact timber markets. Several provisions applicable to "farmers" only are included for farmers who also grow timber...|continue|

The IRS Form 1099 Conundrum (Updated on 11/29/07 to reflect REG-155669-04 , Information Reporting for Lump-Sum Timber Sales, 11/28/2007)

There has been rampant confusion for many years about the filing by timber buyers and lessees of IRS Form 1099. Current Regulations under Internal Revenue Code (IRC) Sec. 6045 provide that filing is not required for the purchase of standing timber for a lump sum amount since such transactions come under the Uniform Commercial Code of most states and are not real estate transactions, IRC Reg. 1.6045-4(c)(2)(i). (See also Letter Rulings 9104012 and 9544005) Note, however, that this provision is based on the assumption that the timber is a capital asset under IRC Sec. 1221, not a business asset under IRC Sec. 1231. When timber is acquired under any form of so-called pay-as-cut contract the payments are considered to be royalty payments since they are tied to the severance of the timber. Royalties are generally reported on IRS Form 1099 Misc and are taxed as ordinary income. However, timber royalties are subject to capital gains treatment under IRC Sec. 631(b) and as such Form 1099S is to be used, not 1099 Misc., IRS Announcement 90-129 [90-129 I.R.B. 1990-48, 10, (Nov. 26, 1990)]. Timber royalties under IRC Sec. 631(b) are generally reported on Form 4797. Note that these provisions reflect current law. The issue is the reporting of lump sum sales under IRC Sec. 631(b). This became an issue when IRC Sec. 631(b) was amended by the American Jobs Creation Act of 2004 (P.L. 108-357, Sec. 315(a)). Capital gains treatment applies under IRC Sec. 631(b) to sales after 12-31-04 whether sold lump sum or with an economic interest retained. The IRS announced that they would address this issue under the Department of the Treasury, 2007-2008 Priority Guidance Plan. And, on November 28, 2007 they issued proposed changes to Reg. §1.6045-4 that would classify all lump-sum sales as real estate transactions under 1.6045-(4)(2). This would make these transactions subject to the same reporting requirements as other real estate transaction. The effective date would be when the amendments to the regulations are adopted. Reg. §1.6045-4 is posted here . The IRS will not announce how this change is to be implemented until the revised regulations are adopted.

Analysis : Even with the proposed requirement to require 1099's for all timber sales, the problem of a firm acquiring standing timber under a lump-sum contract not knowing if the timber in the hands of the owner, lessor, or sublessor is a capital asset or a business asset will remain. The IRS could rule that the acquiring firm is required to make this determination by communicating with the seller, requiring no doubt a form to be sent by the buyer to the seller and returned to the buyer. It would be simplier to designate a new Form 1099 to be used by buyers for all lump sum acquisitions. This form would include instructions to the seller to report the transaction on Schedule D, or Form 4797, depending on the determination by the seller as to the classification of the timber as a capital asset under IRC Sec. 1221, or a business asset under IRC Sec. 1231. But, in the case of timber that is a capital asset in the hands of the seller this would be inconsistent with the provisions of IRC Sec. 6045-4 and would require a legislative change.

Some firms acquiring standing timber cover their bets by filing a Form 1099 for all acquisitions. Form 1099S would be used without question for acquisitions under pay-as-cut contracts. Given the current litney of Form 1099's, Form 1099S is also the most appropriate to use for lump-sum acquisitions. If Form 1099Misc is used the IRS computers will look for a matching entry under ordinary income on the seller's tax return and generate an adjustment notice if not found. Firms filing Form 1099's for lump sum sales might win repeat business by including an insert with the 1099S's suggesting that the taxpayer consult their tax preparer concerning the proper way to report the revenue received. Suggested language for inserts is provided here for 1099-S and 1099-MISC

Exchange of Timberland by a REIT

The number of property sales that a real estate investment trust (REIT) can make is restricted to prevent them from engaging in ordinary retailing activities such as sales of lots in a development. In Private Letter Ruling 200728037 [not to be cited as precedent, Code Sec. 6110(k)(3)] the IRS concluded that an exchange of timberland for timberland by a REIT did not constitute a sale for purposes of Code Sec. 857(b)(6)(D)(iv). This conclusion is based on taxpayer's representations that (1) the exchange will be treated as a Code Sec. 1031(a), (2) no gain or loss will be recognized as a result of Code Sec. 1031(a), and (3) the exchange will satisfy the requirements for deferred exchanges under Sec. 1.1031(k)-1 of the Income Tax Regulations. The conclusion also referred to the intent of Congress to allow REIT's a safe harbor within which to adjust their real estate holdings.

Editorial Comment: Should this ruling hold up generally it will provide timberland REIT's with the ability to adjust their holdings for reasons of economic efficiency and economies of scale, however, the Sec. 1031 requirement to carryover the basis of the relinquished property to the replacement property will not increase depletion allowance.

IRS Requests Applications for Authority to Issue Forestry Bonds (posted 9/5/08)

H.R. 2419 amended IRC Sec. 54B to include qualified forestry conservation bonds (QFCB). A taxpayer intending to issue such bonds must be granted authority by the IRS. In Notice 2008-70 the IRS requests such applications.

IRS Reemphasizes Hobby Loss Rule (posted 9/5/08)

For the second year in a row the IRS has reminded taxpayers, FS-2008-23, to carefully distinguish activities conducted for profit from those conducted as a hobby. The hobby loss rule limits the deduction of expenses of hobby activities to the amount of income from the hobby. Activities that include only timber production frequently can't meet the presumptive test of this rule. In this case the taxpayer must be able to prove by a showing of the facts in their case that they intend to eventually make aprofit, and have a reasonable expectation of being able to do so.

Housing Assistance Act of 2008 (posted 8/29/08)

The President signed P.L. 110-289, Housing Assistance Tax Act of 2008, on July 30, 2008. A few of the provisions may impasct timberland owners.

Standard deduction increased by property taxes. Up to a $500 ($1,000 for married filing jointly) increase in the standard deduction for taxpayers paying taxes on real property applies for tax years starting in 2008. If taxes paid are less than this cap, the amount paid applies. The language doesn't restrict this treatment to property taxes paid on a primary residence. Thus, a timberland owner paying property tax on their residence less than this cap, or one living in rental proeprty could apply the tax paid on the timberland to the $500 ($1,000) cap. If the tax is reflected in adjusted gross income, for example it was included on Schedule C or other business form, it can't be claimed as an addition to the standard deduction.

Real Estate Investment Trust (REIT) Quailfications. Amendments to the rules used for a business to qualify as a REIT were made to account for fluxuations in values due to fluxuations in the value of foreign currency. The limit on the total value of assets account for by securities of subsidiaries was incresed from 20 to 25 percent.

Grouping of Activities for Determination of Material Partiicpation Under Passive Loss Rules (posted 8/29/08)

Lossses from trades or businesses in which a taxpayer does not materially participate are classified as passive activities and can not be deducted currently except against taxable income from other passive activites of the taxpayer. This restriction does not apply to activities reported as an investment, i.e. expenses taken as itemized deductions, or as adjustments to gorss income in the case of qualified reforestation expenses. The regulations allow a taxpayer to group multiple trades or business in which they are engaged as a single activity for purposes of determining their material participation. Activities grouped must be (1) of similar as to the type of trades or businesses, (2) be under common control and ownership, (3) located proximately, and (4) be interdependent to a degree. The IRS does not currrently require taxpayers to report their groupings.

In Notice 2008-64 the IRS requests comments on a change in the regulations under IRC 469 that would require taxpayers to report on the tax return for the year it is made, any change in the grouping of trades or businesses for the purpose of determing material particiaption.