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Letter Ruling 9104012, October 26, 1990

Uniform Issue List Information:
UIL No. 6041.00-00
Information at source (information on certain payments and collections)
UIL No. 6050.75-00
Returns requiring payment of interest
- (Section 6050N ) Returns regarding payments of royalties

Code Secs. 6041 and 6050

This letter is in response to your letter on behalf of X that was originally submitted to the District Director in your district as a request for a determination letter. That letter was forwarded to the National Office to be handled as a request for a ruling as to whether certain payments must be reported on Forms 1099.

X is a company that purchases standing timber, logs, and pulpwood from landowners and/or independent producers, both incorporated and unincorporated. X keeps the cut wood products in its inventories until selling them to a paper manufacturing company, sawmill, or other wood products dealer or user.

X has previously purchased standing timber and cut wood products from several landowners and producers. Some of the standing timber was purchased at a specified rate per unit of timber actually cut (under a "pay-as-cut" contract), and some was purchased for a set total amount or lump sum. All purchases of logs and cut products were for a set total amount or lump sum. X has requested a ruling on whether or not it is required to file Forms 1099 with respect to these payments.

Section 6041(a) of the Internal Revenue Code (Code) requires 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 . . of $600 or more in any taxable year, ... shall render a true and accurate return to the Secretary ... setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.

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) of the Income Tax Regulations excludes the payments of bills for merchandise from the general information reporting requirements.

Section 6050N(a) of the Code 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.

Code section 6050N was enacted as part of the Tax Reform Act of 1986. The Senate Finance Committee Report, in its explanation of the provision, stated 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).

Code 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 the customer(s) involved in such a transaction, showing the gross proceeds of the transaction. Under temporary regulations, the "real estate broker," or person required to report, will be the transferee as defined in Regulations section 1.6045-3T(e)(6)(iv) if there is not a true "broker" or other person responsible for closing the transaction.

Proposed regulations under Code section 6045 for real estate transactions on or after January 1, 1991, exclude certain property from the definition of reportable real estate. Under proposed section 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 ...)".

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

However, when X purchased standing timber, which it was responsible for cutting and removing, from a landowner outright for a set lump sum, that transaction was considered a real estate transaction under uniform commercial law. Income tax regulations proposed to take effect for real estate transactions on January 1, 1991, similarly consider the sale of an interest in natural resources to be a real estate transaction, but specifically exclude such transactions from the proposed real estate reporting requirements.

The purchases of logs or other cut products for lump sums did not constitute royalty arrangements with the sellers, whether they were landowners or independent producers. X's purchases in those instances are governed by the reporting requirements of Code section 6041 . In those cases, because X was acquiring logs or other cut products for subsequent resale to others, its payments to the sellers were payments for merchandise under section 1.6041-3(d) of the regulations. Therefore, such payments are not required to be reported.

Accordingly, we rule that X is not required to provide Forms 1099 with respect to payments for the purchase of logs or other cut products. If the proposed regulations under section 6045(e) are finalized, X will not be required to provide Forms 1099 with respect to lump sum purchases of standing timber beginning in 1991. However, in those cases where X has entered into a "pay-as-cut" contract for the purchase of timber from an individual owner (who is not an entity specified in section 6050N(c) ) of the land containing the standing timber, then X 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 sections 631 (b) and 1231 of the Code 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.

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.