Page 74

74

a. If a beneficiary receives winnings or prizes use documentation that the individual has in his possession to verify the income. If there is not sufficient documentation to verify the income, obtain a signed statement from the individual regarding:

(1) The date the item was received,

(2) Type of item received,

(3) Individual’s estimate of the value of the item if not cash; and

(4) Source of the item

b. Accept an individual’s signed estimate of the value of the item or actual value if cash, unless you have reason to doubt the estimate. If you doubt the estimate, determine the item’s current market value with an independent source. Determine the nature of the item and apply the appropriate instructions pertaining to income.

FF. Royalties (Also see VII. J. above)

1. Definition

Royalties include compensation paid to the owner for the use of property, usually copyrighted material (e.g., books, music, and art) or natural resources (e.g., minerals, oil, gravel or timber). Royalty compensation may be expressed as a percentage of receipts from using the property or as an amount per unit produced.

2. An outright sale of natural resources by the owner of the land or by the owner of the rights to use of the land constitutes a conversion of a resource. Proceeds from a conversion of a resource are not income.

To be considered royalties, payments for the use of natural resources must be received:

a. Under a formal or informal agreement whereby the owner authorizes another individual to manage and extract a product (timber or oil) and

b. In an amount that is dependent on the amount of the product actually extracted.

3. Royalties are unearned income unless they are received as part of a trade or business or received by an individual in connection with any publication of his/her work.