Timber Sale

[JohnH]

Mom owns 20 acres of land and son owns adjoining 5 acres. Ownership period for both is more than a year and there is no farming or other activity on the land. A timber cutter harvested about $25K of timber and obtained a W-9 from the son, but not mom. This means the 1099-S is showing only the son's SocSec#. All payments went to the son and he is then turning over $20K to mom.

Son's income is higher, whereas mom has very little income. It would have been better to have the income reported separately, but since son was handling all the negotiations and logistics with the deal, it didn't cross anyone's mind. Can the son nominee the $20K out to the mom and take the appropriate adjustments on his form 8949?

[mastertaxguy]

Timber sale: Nominee to mom

1. Before you go further, determine if Mother may have other consequences of reporting the income on her return.
2. Depending on her age, she may be getting "chore" or similar services which are provided based on low income. Timber sale income may push her beyond the income limits which may lead to other non-tax problems.
3. As for nominee, some might suggest son issue a 1099-MISC for the amount due Mom, even though doing so now may be late.

[Burke]

If the timber was harvested from all 25 acres, then it makes sense to 1099 80% to Mom, and the son retains 20%.

[JohnH]

I agree, that's how it should have been done. But in this case, the W-9 was submitted by the son only, and the entire payment went to him. They didn't think about the tax implications and just did everything in his name since he was handling the details with the guy who cut the timber. Mom didn't do anything other than give him permission to do the deal. Everything is OK within the family and no funny business taking place. He is giving the 80% to mom, but we have a substance vs form issue, as I see it. Just trying to come up with the best way to correct it.

[CVTax]

Mom owns 20 acres of land and son owns adjoining 5 acres. Ownership period for both is more than a year and there is no farming or other activity on the land. A timber cutter harvested about $25K of timber and obtained a W-9 from the son, but not mom. This means the 1099-S is showing only the son's SocSec#. All payments went to the son and he is then turning over $20K to mom.

Son's income is higher, whereas mom has very little income. It would have been better to have the income reported separately, but since son was handling all the negotiations and logistics with the deal, it didn't cross anyone's mind. Can the son nominee the $20K out to the mom and take the appropriate adjustments on his form 8949?

That's exactly how I have done it in the past and never had any comebacks on it so far.

[JohnH]

Thank you for the confirmation. Might be worth about $4,000 savngs to the client and his mom.

[Roland Slugg]

Can the son nominee the $20K out to the mom and take the appropriate adjustments on his form 8949?

He can, and he should. See "nominee/middleman returns" at the bottom of page 2 of this link:

http://www.irs.gov/pub/irs-pdf/i1099gi_14.pdf

But don't report that sale on F-8949. Mom and son should report their respective shares of the sale on F-4797, and make the election to treat it as a sale or exchange under Code §631(a). That will result in LTCG treatment. This election can be made on Form T (Timber), but the use of Form T isn't required for an occasional sale. If Form T isn't used, the election can just be made on a separate sheet attached to the returns. If this was the first of what will become a series of timber sales, it would be best to file Form T with each of their 2014 returns. Form T is a rather intimidating form, so if you use it, good luck!

Finally, timber qualifies for cost depletion, and you must attach Form T if it's taken. I am not sure where to report a timber depletion deduction on a tax return ... F-1040, line 21, perhaps?

[Burke]

Finally, timber qualifies for cost depletion, and you must attach Form T if it's taken. I am not sure where to report a timber depletion deduction on a tax return ... F-1040, line 21, perhaps?

It goes on Page 2, Line 22 of 4797 as part of the gain calculation.

[JohnH]

Many thanks for all the detailed replies. Looks like this fellow is going to save some money for his mom.

[Roland Slugg]

It goes on Page 2, Line 22 of 4797 as part of the gain calculation.

How can it go there? The sale is reported in Part I.

[Burke]

You are right. It is considered 1231 property if it is treated as business property. The land is 1250. So it does go on Part I. The depletion would be taken on Line 18 of Sche E, whether you use Sche D or 4797, as long as the total board feet available before the cutting takes place has been established to calculate it. But why use 4797 when it would still be LTCG on Sche D. An occasional sale is not considered as a trade or business.