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Sub-Section 218, IRC 631(b)

Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 218, IRC 631(b)
Last amended: 6-26-1978

IRC 631(b)

(1) IRC 631(b) provides that if a taxpayer disposes of timber under any form or type of contract under which the taxpayer retains an economic interest in the timber, the amount received will be considered to be from a sale of the timber.

(2) The key words here are retained economic interest. For the purpose of IRC 631(b), and in simple language, this means the taxpayer will not be paid unless the timber is cut and that payment will only be made for such timber that is cut.

(3) Do not try to assign any other meaning to this term. The retention of a security interest like a mortgage, or the retention of certain partial rights to the trees, such as the retention of turpentine rights, are NOT retentions of an "economic interest" for purposes of IRC 631.

(4) The seller (lessor) must convey equitable ownership of the timber to the purchaser (lessee) in order for the transaction to qualify under IRC 631(b). In other words, the purchaser must have, during the term of the contract, the right to cut and use the timber to the exclusion of all others.

(5) IRC 631(b) applies whether or not the timber is held by the lessor primarily for sale to customers.

(6) IRC 631(a) is elective. IRC 631(b) is NOT elective. If a taxpayer's timber lease satisfies the requirements of IRC 631(b), gain or loss therefrom must be treated as though it were gain or loss from the sale of property used in trade or business under IRC 1231(a) of the Code.

(7) Expenditures directly attributable to a disposal of timber under IRC 631(b) are reductions of the amount received for purposes of computing gain or loss. Rev. Rul. 71-334, 1971-2 C.B. 248. Taxpayers may erroneously expense certain amounts directly attributable to the disposal such as:

(a) advertising the timber;

(b) cruising the timber to be disposed of;

(c) marking or designating the timber to be cut;

(d) scaling or measuring products from the timber;

(e) fees paid to consulting foresters or selling agents;

(f) supervising performance under the contract; and

(g) all other expenses directly related to the disposal.