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Sub-Section 123, Acquisitions

Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 123, Acquisitions
Last amended: 6-26-1978

Acquisitions

(1) For income tax purposes, an owner of timber is the one who owns the right to cut timber, along with the right to use the products of the felled trees for its own account.

(2) Ownership of timber may be acquired in one of four ways:

(a) by acquiring the fee simple title to the land;

(b) by leasing the land for a long period of time under an agreement that gives the lessee the right to cut the timber growing or to be grown on the land during the term of the lease;

(c) by contracting with the timber owner for the right to cut the timber in return for a royalty to be paid only for each unit of timber actually cut under the contract. This is called a timber lease or a "pay-as-cut contract."

(d) By purchasing the timber outright. Timber cutting rights purchased outright are paid for without regard to the number of units of timber actually cut (felled). An agreed upon lump-sum consideration must ultimately be paid whether the timber is cut or not.

(3) Where timber ownership is transferred by timber lease as distinguished from a lease of the land the transferor (lessor) is said to have retained an economic interest in the timber. This is important for depletion and IRC 631(b) purposes as we shall see in a later discussion.