coal mining damage lease or sale?

[cpn]

My client wants to let a coal company mine on his property, they want to call it damages, How do I report the income? Will he have to report it all? 

[qbteachmt]

That's a loaded question and a bit too vague for a software users' forum to be able to answer. What you have is the potential for a legal nightmare. In general, payments for damages are meant to offset the damage remediation cost to restore the property, or to compensate for the lost Basis in the property. That would be one reason to want to label it Damages, even if it isn't really. It might really be operating costs, but the tax treatments are difference, of course. This doesn't really explain what is happening: "wants to let a coal company mine on his property" as in, strip mine, underground mine, easement, will there need to be reclamation? Will there be subsidence insurance issues? Does he own the property and the mineral rights or were these severed previously and he only owns one of them? Will there also be royalties or lease income?

I would refer this to a tax attorney that works with this all the time, unless you know all the pitfalls.

[cpn]

Yes, Very good response. Thanks.