Sub-Section 121, General
Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 121, General
Last amended: 6-26-1978
General
(1) Persons who examine or audit income tax returns that show gains or losses from the disposition of standing timber or the conversion of standing timber to marketable goods are confronted with problems that are only unique to the timber industry. This is true, not only because timber is a unique kind of property, but also because the Internal Revenue Code provides, under certain circumstances, for special treatment of such gains or losses. The circumstances are described in IRC 631, 1221, and 1231 which provide for long term capital gain, and IRC 611 and 612 concerning deductions for cost depletion.
(2) Timber is one of the several natural resources subject to an allowance for depletion. The others are mines, oil and gas wells, and other natural deposits. The classification of timber as a natural resource is somewhat inconsistent because, under modern forest management, millions of acres of land have been artificially reforested by the application of sophisticated seeding or planting procedures. It remains a fact, however, that by far most of the wood that goes into lumber, plywood, paper pulp, poles and piling, and the like comes from forests that were generated naturally, with little or no help from man.
(3) For purposes of the Internal Revenue Code, the word timber means the wood in standing trees that is available and suitable for exploitation and use by the forest industries. Timber is the only natural resource that is renewable and that naturally increases or decreases in quantity from year to year. The word timber, as used in the Internal Revenue Code, has the same meaning as stumpage (a word that is commonly used among professional foresters and forest industry people). To the forest industry or forest owner, stumpage is the wood expected to be recovered from the forest upon severing the trees from the land. In other words, stumpage is the recoverable wood in the trees while they remain "standing on the stump." After the trees are cut (felled), the wood is no longer stumpage and it also ceases to be timber for income tax purposes. Significantly, when the tree is felled it is also changed from real property to personal property.
(4) After the trees are felled, they are converted into basic raw wood products for transportation to, and eventual use by, some kinds of wood-using plants, such as sawmills, plywood mills, pulpmills, or pole treating plants.
(5) The table in Exhibit 100-1 shows how the basic wood products are used by the more prominent kinds of wood using industries.