I don't want to rain on anyone's parade, but I don't think this is been fully thought out. Let's just break down the biggest steps that will need to be taken in order for this to succeed.
1) Toady will need to give his blessing. As the owner of Dwarf Fortress he has full say what is, and isn't acceptable use of his product. I don't claim to know him or be able to read his mind, but the fact that he's always pushed aside any attempts to "help" him code and has only made the smallest of mentions that he even reads the stories leads me to believe that publishing a work based on his game wouldn't fly. At the minimum, all references to the game would need to be removed; specifically the languages and possibly the randomly generated names and some game specifics - like nobles, hammerers, and how certain creatures behave.
2) Every single person who has ever worked on a community / succession fortress would need to give their real name and written consent. Let's use Boatmurdered as an example since it, and Nist Akath, seem to have brought in the most people. Let's pretend 12 separate people worked on Boatmurdered. Every single one of them would have to give their consent, otherwise the story as a whole couldn't be used, giant chunks would be missing. You couldn't "rewrite" the sections for those that refused because then you can be sued by the property holder. Unlike a criminal case, with intellectual properties it's the burden of the person BEING sued to show they didn't actually steal/reproduce things illegally. I haven't read the somethingawful ToS, but there's a chance that everything written on that forum is owned by the website, not the actual people that write it, and there's an even bigger problem you've just opened.
3) Assuming that the top two actually go without a hitch, you now have money to be concerned with. Using Boatmurered again. If one person out of <however> said, "I want $300 or you can't use my section." you're now in a tough spot. Either you leave the entire story out, or you pony up the money. The second everyone else finds out, there will be hard feelings. They'll want their $300, or they'll want more because they actually wrote the funny parts. The second this begins to make ANY money - regardless of how noble "all proceeds go to Toady" is - people are going to start wanting their cut for the weeks or months they spent writing a story.
4) Lastly, no brick-and-mortar publishing house will touch this with a ten foot pole. This is NOT marketable and with the number of collaborators that might need a payout they'd wash their hands of the whole thing entirely. You're asking to sell a bunch of stories to a single, small audience that most likely have already read these stories a couple times beforehand for free. The best that could be done would be a self-publisher, the majority of which are incredibly shady and take a huge, huge, huge cut of any money you could possibly make. This now leaves you with a growing list of artists who could possibly want compensation from an incredibly shrinking pool of profits.
I'm going to leave out all the other, "smaller" issues, like clean up work, the fact that as entertaining as a lot of stories are they aren't actually that well written, that to anyone who hasn't played the game they'll seem like indecipherable gibberish...
Instead of "putting the stories [already written] to use", why not create something entirely separate? Break it away from Toady's work so it can't be nixed from up high. Only have a few collaborators so everyone is rewarded deservedly. Make it generic enough fantasy that a much larger audience could enjoy it while still slipping in little inside jokes for the Dwarf Fortress fans.
The Dragon Lance novels have made LOTS of money by being generic enough fantasy that is loosely based on the Dungeons and Dragons world. Ignore that the books are poorly written and incredibly cliched; they're still considered a fun and light read in a genre that does well. Having a book "based on the hit game Dwarf Fortress" does many things - it allows you to break away from the game and do more things, it allows more creative freedom, it allows authors to get compensated, it gives publicity to Toady and his game, and by actually being "really" published, not online published, it allows you to give "some of the proceeds" to Toady as a thanks for all the work he's done.
tl;dr: I don't like this idea at all, and there's a lot that can go disastrously wrong. Write something new and separate, get paid for it, and give Toady a small cut.
[ May 15, 2008: Message edited by: Heavy Flak ]