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Lump-sum Sale without Installment Payments

A lump sum sale is the outright sale of standing timber for a fixed dollar amount agreed upon in advance. The dollar amount agreed upon is not a function of the volume of timber actually cut. Whether the proceeds from a lump sum sale are ordinary income or capital gain (loss) depends upon whether the timber was a capital asset and if the holding period requirements were met.

Note: The following discussion applies if you sold standing timber and received full payment for the timber in the same year in which it was disposed of.

In order to receive the preferential tax treatment provided by long-term capital gains it is necessary to determine the exact amount of time the timber was held (holding period). If the holding period does not meet the requirements then the gain will be taxed at your marginal rate. If, however, the holding period has been satisfied then the gain may be taxed at a rate lower than your marginal tax rate.

Note: Sales contracts specifying a fixed purchase price for designated timber to be cut and removed by the buyer within a reasonable period of time are usually referred to as "timber deeds". This term accurately portrays the intent of the buyer and seller, but no deed as such is created. The legal principals governing contracts for the sale of timber are drawn both from commercial and real estate law. In general, however, the Uniform Commercial Code applies to sales of standing timber to be cut by the buyer. Even though these contracts are not subject to the requirements generally applicable to real estate transactions, it is advisable to register the contracts, especially from the standpoint of buyers who maintain a stumpage inventory instead of cutting immediately after making a purchase.

Standing timber would be considered a capital asset if it is not held primarily for the sale to customers in the ordinary course of a trade or business or if it is not being held for use in a trade or business, Section 1231 property. This means that timber would be considered a capital asset if you are holding it for personal use, or as an investment. Some of the more common factors that the IRS uses to determine if the timber is primarily "being held for sale" are listed below. It is important to keep in mind that no one factor is determining and that all the facts and circumstances should be reviewed.

• Purpose for which the timber was acquired, whether for sale or as an investment.
• The number, continuity, and frequency of sale.
• Activities of the seller with reference to the sales or of those acting under his instructions or in his behalf.
• Extent of substantiality of the transactions.
• Any facts tending to indicate that sales or transactions were in furtherance of an occupation of the taxpayer.

Reporting a Lump-sum Sale without Installment Payments

The gain or loss from a Lump-Sum Sale can be calculated using Form T, Part III. On what form the gain is reported depends on how the timber was held.

Personal Use or as an Investment:

Capital Gain -

Income received from the lump-sum sale of standing timber, held for personal use or as an investment, that qualifies as as capital gain is reported on Schedule D of Form 1040. A long-term capital gain is reported in Part II, line 9. If the long-term holding period has not been met the transaction should be reported in Part I, line 1.

Ordinary Income-

If the timber did not qualify as a capital asset the income from the sale of standing timber is reported as ordinary income. This is done by completing Line 21 of Form 1040 (Other Income), and writing in a description of the income.

Use in a Trade or Business

Capital Gain -

Partnership: Capital gains from a lump-sum sale are reported on Form 1065 Schedule D. Short-term capital gains are reported in Part I. A long-term capital gain is reported in Part II. The net short- and long-term capital gains or losses are carried forward to Form 1065 Schedule K.

S-Corporation: Capital gains from a lump-sum sale are reported of Form 1120S, Schedule D. Short-term capital gains and losses are reported in Part I. Long-term capital gains and losses are reported in Part II. The net short- and long-term capital gains or losses are carried forward to Form 1120S, Schdeule K

C-Corporations: Capital gains from a lump-sum sale are reported on Form 1120, Schedule D. Short-term capital gains and losses are reported in Part I. Long-term capital gains and losses are reported in Part II. The net short- and long-term capital gains and losses are carried forward to Form 1120.

Ordinary Income -

Partnership, S-Corporation, and C-Corporation: Ordinary gain from the sale of standing timber without an installment agreement is reported by completing Part II of Form 4797 (Sale of Business Property). The amount from Form 4797 Line 18 is then carried forward to the appropriate business form; 1065, 1120S or 1120.