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Sub-Section 214, Contract Right to Cut

Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 214, Contract Right to Cut
Last amended: 6-26-1978

Contract Right to Cut

(1) To qualify as an owner for purposes of IRC 631(a), the holder of a contract right to cut timber must have both the right to cut the timber, and to use the products from the cutting for his/her own account. A logging contractor may have the right under a contract to cut certain timber, but is required to deliver the logs, that he/she never owned, to the mill or log yard designated by the owner of the timber. The logging contract is merely a service agreement. IRC 631(a) applies only if the cutter has the right to sell the cut timber on his/her own behalf (Rev. Rul. 58-579, 1958-2 C.B. 361). If the cutter is required to deliver the logs to the owner's mill, all of his/her income on the operation is subject to ordinary tax rates. The owner, however, will consider the cutting as a sale or exchange if he/she makes the election in accordance with IRC 631(a).

(2) Although the basic contract may not require the logger to deliver the logs to the owner, another contract entered into simultaneously may require it. If the two contracts are, in substance, part of one transaction, the logger has not acquired a contract right to cut and sell the timber in his/her own behalf. It there is doubt as to the logger's right to claim IRC 631(a), the examiner should determine the source of the logger's contract right to cut and to whom the logs were delivered.