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Letter Ruling 9643004, July 12, 1996

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

Code Secs. 6041 and 6050N

This Technical Advice Memorandum is in response to a request made by the District Director for technical advice regarding the information reporting requirements of the taxpayer.

ISSUES

1. Whether taxpayer's payments to independent contractors for logging and hauling services are subject the information reporting requirements under section 6041 of the Internal Revenue Code.

2. Whether the taxpayer's payments to landowners are subject to the information reporting requirements under section 6050N of the Code.

FACTS

The taxpayer is in the business of buying wood. The taxpayer contracts with Company X to haul pulpwood to Company X's yards. In addition, the taxpayer contracts with independent contractors to haul the wood to Company X's yards. The independent contractor deals directly with the landowner and agrees to purchase standing timber at a specified rate per unit actually cut under a "pay-as-cut" contract. For purposes of this memorandum, we assume that the independent contractor, and not the taxpayer, enters into the contract with the landowner for the right to remove the timber.

Company X pays the taxpayer for all loads delivered during the week based on the tons delivered. Company X gives the independent contractor a scale ticket for each load delivered. In turn, the independent contractor gives this ticket to the taxpayer in order to receive payment for the services. When the contractors submit the ticket for payment, some will request that the taxpayer calculate for them the conversion from tons to cords in order to determine the amount owed to the landowner from the contractor. Generally, the taxpayer writes two checks for each load--one to the independent contractor for the hauling and cutting services and another, as a mere accommodation to the independent contractor, to the landowner.

LAW AND ANALYSIS

Section 6041(a) of the Code provides that a person 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, or income of $600 or more in any taxable year is required to file an information return setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.

Section 6041A of the Code 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 such 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 is required to file an information return setting forth the aggregate amount of the payments and the name and address of the recipient of such payments. The term "service-recipient" means the person for whom the services are performed.

Section 1.6041-3(c) of the Income Tax Regulations excludes payments to corporations from the general information reporting requirements. Additionally, section 1.6041-3(d) excludes the payments of bills for merchandise from the general information reporting requirements.

Section 6050N(a) of the Code provides that every person who makes payments of royalties (or other similar amounts) aggregating $10 or more to any other person during any calendar year is required to file an information return setting forth the aggregate amount of such payments and the name and address of the person to whom paid.

Section 6050N was enacted as part of the Tax Reform Act of 1986. The legislative history of this section explains, "[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 ..." See S. Rep. No. 313, 99th Cong., 2d Sess. 190 (1986).

In the present situation, the taxpayer's payments to the independent contractor for cutting timber are "compensation for services rendered" or "remuneration for services performed." Accordingly, under section 6041 of the Code, the taxpayer must furnish information returns with respect to any payments of $600 or more, unless the independent contractor is a corporation.

In the present situation, the independent contractor enters into the agreement with the owner of the standing timber for the right to remove the timber at a specified rate per unit actually cut under a "pay-as-cut" contract. The taxpayer issues a check to the landowner as a mere accommodation to the independent contractor. The taxpayer performs no acts with respect to the payment other than the ministerial act of converting the tons to cords and, therefore, is a mere paying agent of the independent contractor. In this situation, the independent contractor, and not the taxpayer, has the right to exploit the timber and the obligation to pay the landowner. Accordingly, the taxpayer is not required to file information returns with respect to payments to the landowner on behalf of the independent contractor.

If, on the other hand, the taxpayer were to pay the independent contractor a total amount covering the purchase of the timber and the logging and hauling services, such amount would be considered a payment for merchandise. Accordingly, such payment would not be subject to the information reporting requirements under section 6041 of the Code.

CONCLUSIONS

The taxpayer's payments to independent contractors for logging and hauling services are subject the information reporting requirements under section 6041 of the Code.

The taxpayer's payments to landowners, on behalf of the independent contractors, are not subject to the information reporting requirements under section 6050N of the Code.

A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Code provides that this memorandum may not be used or cited as precedent.