Capital Gains Determination
Based on your responses you sold standing timber (stumpage), that was "held primarily for sale to customers in the ordinary course of a trade or business", under a pay-as-cut contract, you retained an economic interest in the timber that was sold, the timber was held for more than one year. but payment was not based on the actual volume cut.
In order to qualify under Section 631(b), disposal with an economic interest retained, there are certain qualifications that must be met. One of those is that payment for the timber was based on the actual volume cut. Since payment was not based on the actual volume cut, the transaction does not qualify for capital gains treatment, and the income from the transaction must be reported as ordinary income on the appropriate business form.