Section 310, General
Internal Revenue Manual
Specialized Industry Guidelines - Timber
Section 310, General
Last amended: 6-26-1978
General
(1) A sale of timber, by one who holds it as an investment is said to be a "casual sale" and results in long-term gain or loss to the seller, provided the holding period required by IRC 1222 is satisfied.
(2) On the other hand, if the seller holds the timber primarily for sale to customers in the ordinary course of its business, the seller is said to be a timber dealer and the result is ordinary gain or loss to the seller.
(3) If, however, the transaction is a disposal with a retained economic interest (timber lease) the provisions of IRC 631(b) apply and it would not matter if the timber was held primarily for sale.
(4) The questions of consideration (selling price) and basis are important items for investigation by the examining agent. It may be necessary to read the contract of sale or timber deed for verification of the terms and form of payment. The contract may require the purchaser to reforest the logged-over area after cutting or the unstated interest provisions of IRC 483 may be applicable if there are deferred payments. Sometimes the seller will borrow money from a purchaser of timber and repay the loan by allowing the timber to be cut.
(5) Probably the most difficult problem the examiner will find in connection with casual sales is verifying the basis. Taxpayers often fail to make an allocation between land and timber at the time of acquisition and the basis claimed years later on the return is often only a bad guess. In these situations, the examiner will have to use whatever information is available. Procedures normally used in determining basis may be applied, but the examiner must realize that timber is a growing resource and it may have come into existence since acquisition of the land and could, therefore, have a zero basis.