Tree Farmer - May/June 2008 - (Page 20)

New Casualty Losses, Rules: Form 1099, and Errata This column deals with new IRS rules that will be finalized by this summer concerning Form 1099, the information return businesses use to report certain transactions with their customers. An update on casualty losses to timber is also provided, in light of the “unsettled” weather that has hit many parts of the country. I also need to let you know of a mathematical error in my last column. IRS Form 1099 Required For All Timber Sales There has been rampant confusion for many years about whether timber buyers are required to file information returns with the IRS, that is, IRS Form 1099. The issue came to a head when IRC Sec. 631(b) was amended by the American Jobs Creation Act of 2004 (P.L. 108-357, Sec. 315(a)), which now allows owners of timber held primarily for sale to customers in the ordinary course of a trade or business to get long-term capital gains treatment for lump-sum stumpage sales. Previously only pay-as-cut sales qualified for capital gains treatment. And, if this were not enough to justify a change in the rules, the IRS has known for years that a significant proportion, perhaps as much as 50 percent, of timber owners who sell timber don’t report it on their tax return. Some owners assume that if they did not get a Form 1099 on their timber sale then the transaction was not taxable. Aside from violating the law, this underreporting reduces the significance of the timber economy in the official statistics compiled by the IRS. Regulations under Internal Revenue Code (IRC) Sec. 6045 previously provided that filing of the 1099 by buyers was not required for the purchase of standing timber for a lump-sum amount since such transactions came under the Uniform Commercial Code of most states and, as such, were not real estate transactions. When timber was acquired under any form of socalled pay-as-cut contract, the payments were considered royalties since they were 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. Timber royalties under IRC Sec. 631(b) are generally reported on Form 4797. Note that these provisions reflect current law. On November 28, 2007, the IRS 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 transactions. The effective date would be when the amendments to the regulations are adopted. Reg. §1.6045-4, with the proposed changes included, is posted on the National Timber Tax Website, . Final regulations will be posted when issued by the IRS. taxing issues 20 By Hoover BILL Casualty Losses to Timber The worst news Tree Farmers can get is that their timber has been decimated by a tornado, hurricane, fire, or other sudden, unexpected, and unusual event. The second worst news is how little financial help you get on your federal income tax return. Changes in the law during the last several years have helped somewhat, but only if a small portion of your timber is destroyed. Here’s an overview of steps you should take if you are subject to a casualty. William L.“Bill” Hoover is forestry professor, Extension coordinator, and assistant head for the Department of Forestry and Natural Resources, Purdue University 1159, W. Lafayette, IN 479071159; . Tree Farmer MAY/JUNE 2008 http://www.timbertax.org

Table of Contents for the Digital Edition of Tree Farmer - May/June 2008

Tree Farmer - May/June 2008
Contents
Sharing Your Experiences
Cover Story
Botanicals: Marketing Non-Timber Forest Products
An American Land Ethic: Protecting the Family Farm
Taxing Issues
Timber Talk
Tools & Techniques
Wildlife Matters
Gadgets & Gear

Tree Farmer - May/June 2008