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Letter Ruling 9544005, July 14, 1995

Uniform Issue List Information:
UIL No. 6041.00-00
Information at source (information on certain payments and collections)

Code Sec. 6041

This is in response to your submission on behalf of Taxpayer in which you request rulings under §6041 , §6041A , §6045 , and §6050N of the Internal Revenue Code.

Taxpayer is in the business of selling wood products to paper manufacturing companies, sawmills, and wood products users. Taxpayer will inventory wood products delivered to its yards awaiting their sale.

In its business Taxpayer buys standing timber, logs, pulpwood, and other wood products from landowners and independent producers in various types of transactions. In one transaction type, Taxpayer purchases standing timber from a landowner for a fixed price and assumes the responsibility for cutting and removing the timber. Taxpayer pays an independent contractor to cut the timber and deliver the logs or other cut products to a designated site.

Taxpayer also may execute contracts with owners of standing timber referred to as "pay-as-cut" contracts. Under the contracts Taxpayer pays the owner at a specified rate for each unit of timber cut. Again, Taxpayer will contract with independent contractors to harvest the timber on a per unit or per ton rate.

In addition, Taxpayer acquires logs and other cut products in a variety of transactions. Taxpayer may pay an independent contractor a total amount that covers the purchase of timber (never owned by Taxpayer) and the service of cutting. In such cases, Taxpayer may or may not know what portions of the total payment is for the timber and what portion is for the cutting service.

Taxpayer also purchases logs and other cut products from landowners who have cut the timber or from independent contractors who may also deliver the logs and other cut products to Taxpayer's or third party facilities. On occasion, Taxpayer, as an accommodation to an independent contractor, may pay for the purchase of logs and other cut products with multiple checks made payable to different parties designated by the independent contractor.

Section 6041(a) provides that all persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments to which certain Code sections not here relevant apply), of $600 or more in a any taxable year shall render a true and accurate return setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.

Section 6041A provides that if any service-recipient engaged in a trade or business pays in the course of such trade or business during any calendar year remuneration to any person for services performed by such person, and the aggregate of such remuneration paid to such person during such calendar year is $600 or more, then the service-recipient shall make a return setting forth the aggregate amount of such payments and the name and address of the recipient of such payments. The term "service-recipient" means the person for whom the service is performed.

Section 1.6041-3(c) of the Income Tax Regulations excludes from the general information reporting requirements payments to corporations, except for certain types of corporations not applicable here. Section 1.6041-3(d) excludes the payments of bills for merchandise from the general information reporting requirements.

Section 6045(e)(1) requires in the case of a real estate transaction, that the real estate reporting person file a return with the Secretary and furnish a statement to each customer involved in such a transaction, showing the gross proceeds of the transaction. Under §1.6045-4(c)(2)(i) , "no return of information is required with respect to a sale or exchange of an interest in ... surface or subsurface natural resources (i.e., timber...)".

Section 6050N(a) requires that every person who makes payments of royalties (or similar amounts) aggregating $10 or more to any other person during any calendar year shall make a return according to the forms or regulations prescribed by the Secretary, setting forth the aggregate amount of such payments and the name and address of the person to whom paid.

Section 6050N(c) excepts the payment of royalties to corporations from these royalty reporting requirements. Also excluded from the requirements are royalty payments to tax-exempt organizations, federal and state entities and agencies, foreign governments, and international organizations.

Section 6050N was enacted as part of the Tax Reform Act of 1986. The Senate Finance Committee Report, in its explanation of the provision, states that "[e]xamples of royalty payments required to be reported under this provision include royalty payments with respect to the right to exploit natural resources such as ... timber ..." The provision was made effective for royalty payments made after December 31, 1986. S. Rep. No. 313, 99th Cong., 2d Sess. 190 (1986).

In the present case, when Taxpayer pays the owner of standing timber a specified rate for each unit of timber actually cut under a "pay-as-cut" contract, the payment for that timber is a royalty. In those instances, the payments to the landowner are subject to the reporting rules of §6050N , and are, in fact, reportable unless made to a corporation (or one of the other entities specified in §6050N(c) ).

In contrast, when Taxpayer purchases standing timber, which it will be responsible for cutting and removing, from a landowner outright for a fixed lump sum, the transaction is a real estate sale and is not subject to information reporting under §1.6045-4(c)(2)(i) .

However, when Taxpayer pays independent contractors for cutting timber, these payments are "compensation for services rendered" or "remuneration for services performed", and Taxpayer must furnish information returns with respect to any payments of $600 or more in this category unless the independent contractors are corporations.

The purchases of logs or other cut products for lump sums do not constitute royalty arrangements with the sellers, whether they are landowners or independent contractors. Taxpayer's purchases in those instances are governed by the reporting requirements of §6041 . In those cases, because Taxpayer is acquiring logs or other cut products for subsequent resale to others, its payments to the seller are payments for merchandise under §1.6041-3(d) . Therefore, such payments are not required to be reported. Similarly, when Taxpayer pays contractors a total amount that covers the purchase of timber and the service of cutting, the total amount is considered payment of the delivered logs, and is excluded from reporting requirements as the payment of a bill for merchandise.

Accordingly, we rule that Taxpayer is not required to provide Forms 1099 with respect to payments for the purchase of logs or other cut products, whether delivered or not. Taxpayer will not be required to provide Forms 1099 with respect to lump sum purchases of standing timber. However, in those cases where Taxpayer has entered into a "pay-as-cut" contract for the purchase of timber from an individual owner (who is not an entity specified in §6050N(c) ) of the land containing the standing timber, then Taxpayer must report all amounts paid aggregating $10 or more to the landowner-seller.

Form 1099-MISC, Miscellaneous Income, is generally used to report royalty payments and, in fact, contains a box specifying "Royalties". However, this box on the Form 1099-MISC is most appropriate for the type of royalty that is ordinary income to the recipient and that the recipient in turn reports on Schedule E (Supplemental Income and Loss) of Form 1040. Generally, §631(b) and §1231 apply with respect to royalties received on timber, and the royalties are reported as sales proceeds on Form 4797 (Sales of Business Property) and may receive capital gain treatment. Therefore, reporting to payment recipients on Form 1099-S, Proceeds From Real Estate Transactions, is most appropriate in this case, and Form 1099-S is to be used for reportable royalty payments with regard to timber.

Taxpayer must also report all payments of $600 or more to the independent contractors representing compensation or remuneration for the service of cutting timber. This information should be furnished on Form 1099-MISC in the "Nonemployee compensation" box.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the code provides that it may not be used or cited as precedent.

Sincerely yours, John M. Coulter, Senior Technical Reviewer CC:DOM:IT&A:01