TIMBER ROYALTIES SHOULD BE REPORTED ON FORM 1099-S, IRS ANNOUNCES.

Announcement 90-129

Section 6050N of the Internal Revenue Code requires that royalties paid during a calendar year aggregating $10 or more be reported by the payer. The definition of "royalties" includes royalty payments with respect to the right to exploit natural resources, including timber.

When the owner of standing timber disposes of it under a contract calling for payment at a specified rate for each unit of timber cut, this agreement is referred to as a "pay-as-cut" contract, and the payments made to the owner under such a contract are royalty payments.

Although Form 1099-MISC, Miscellaneous Income, is generally used to report royalty payments, that form is most appropriate for reporting the type of royalty that is taxable to the recipient as ordinary income reportable on Schedule E (Form 1040), Supplemental Income and Loss. In the case of timber, royalties usually are reportable 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 more appropriate in this case.

Therefore, for dispositions of timber in 1991 and later, payers are to report payments of timber royalties under a "pay-as-cut" contract on Form 1099-S, Proceeds From Real Estate Transactions.