Capital Gains
Useful definitions related to Revenue Rulings.
Pulpwood from tops and linbs of sawtimber trees
Treating the cutting of timber as the disposal of standing trees for capital gain purposes applies only to the disposal
of standing trees and not to the sale of tree tops and limbs lying on the ground. Income form the sale of the tree tops
and limbs is ordinary gain or loss; however, the Section 631(a) benefits apply to the entire standing tree. The method of
computing the fair market value of such trees is specified. (Sec. 631).
Full Text: 56-434,
1956-2 C.B. 334
Tree Stumps, Investment property
Income from the sale of tree stumps by a timberland owner who is not in the business of buying or selling timber is taxable as a
capital gain where the land was acquired in a cutover state as a real estate investment and the stumps were sold in one lot.
(Sec 1221).
Full Text: 57-9,
1957-1 C.B. 265
Disposal, economic interest retained
In the case of the disposal of timber, held primarily for the requisite period of time prior to disposal, by the owner thereof
under any type of contract by virtue of which the owner retains an economic interest in such timber, the amount received qualifies
for capital gain treatment regardless of the nature of the taxpayer's business or the purpose for which the timber is held.
(Secs. 631, 1231).
Full Text: 57-90,
1957-1 C.B. 199
When "cut"
For purposes of determining capital gain or loss, timber is considered "cut" at the time when in the ordinary course of business
the quantity of timber felled is first definitely determined, rather than at the time of the felling. Treas. Reg. ¤1.631-1.
(Sec. 631).
Full Text: 58-135,
1958-1 C.B. 519
Disposal, expenses for
Direct expenses incurred in connection with the disposal of coal or timber subject to the provisions of section 117(k)(2) of
the Internal Revenue Code of 1939 reduce the amount received for the purpose of computing gain or loss from such disposal of
coal or timber. Whether any expense is a "direct expense" is a matter to be determined largely on the strength or persuasiveness
of the facts of each particular case and how closely related are the activities in connection with which the expense is incurred
to the disposal of the coal or timber.
Full Text: 58-266,
1958-1 C.B. 520
Cutting contract, "contract right to cut" defined
To be entitled to the benefits of Section 631(a) of the code as
the holder of a "contract right to cut" timber, a taxpayer must have acquired under such contract a proprietary interest in the
timber which he cut. Treas. Reg. ¤1.631-1(Sec 631).
Full Text: 58-295,
1958-1 C.B. 249
Right to cut and remove for landowner
A taxpayer who acquires by contract the right to cut, remove and sell timber from the land of another for the account of the
landowner, but not the right to cut the timber for sale on his own account or for use in his trade or business, is not the holder
of "a contract right to cut" for purposes of the election under Section 631(a). Also, the taxpayer is not entitled to the
treatment provided by Section 631(b), relating to a disposal by the owner. Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 58-579,
1958-2 C.B. 361
Disposal, last-in, first-out inventories
A taxpayer, who elects to treat the cutting of timber as a sale or exchange under section 631(a) of the Internal Revenue Code of
1954 and who adopts the last-in, first-out, inventory method under section 472 of the Code, may use, in financial statements to
shareholders and for credit purposes, an inventory reserve reflecting the difference between the fair market value of the timber
cut and the adjusted cost basis of such timber, determined without reference to such fair market value.
Full Text: 60-244,
1960-2 C.B. 167
Default of performance bond
An amount received by the fee-owner of certain timber lands from the default of a cash performance bond posted by a grantee under
a contract involving the cutting and disposal of timber is not an amount realized from the disposal of timber and is taxable as
ordinary income. Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 61-56,
1961-1 C.B. 243
Holding period
For purposes of section 631(a) of the Internal Revenue Code of 1954, the holding period for timber held by a taxpayer under a
cutting contract carries over when the timber so held is acquired by outright purchase by the same taxpayer.
Full Text: 61-57,
1961-1 C.B. 243
Long-term contract, capital gain vs. ordinary income
Under a contract for a term of 60 years granting the right to grow timber and to cut timber growing and to be grown, a paper
company was obligated to make yearly payments not contingent on the quantities of timber cut. Held, the transaction is not a
"disposal" of timber under Section 631(b). Payments equal to the fair market value of the timber existing at the execution of
the contract are proceeds of a sale of timber and any gain included in this amount is capital gains, provided the conditions of
Sections 1221 or 1231 are met. Any excess of such payments over the fair market value of the timber existing at the execution of
the contract is ordinary income. Amplified by Rev. Rul. 78-267. Treas. Reg. ¤¤1.631-1, 1.1221-1, 1.1231-1. (Secs. 631, 1221, 1231).
Full Text: 62-81,
1962-1 C.B. 153
Long-term lease, lump sum payment
A lump sum payment received under a contract for the lease of land and the grant of the right to cut timber therefrom constitutes
proceeds of the sale of timber to the extent of fair market value of the timber then existing. The resulting gain or loss is
subject to the treatment described in Sections 1221 and 1231 provided the conditions thereof are met. Any excess of such payments
over the fair market value of the existing timber is ordinary income. Amplified by Rev. Rul. 78-267. Treas. Reg. ¤¤1.631-1,
1.1221-1, 1.1231-1. (Secs. 631, 1221, 1231).
Full Text: 62-82,
1962-1 C.B. 155
Holding period
A taxpayer who acquired timber on December 31, 1962, and still owned it at the beginning of his tax year which began July 1, 1963,
has owned such timber for a period of more than 6 months before the beginning of such tax year for purposes of Section 631(a).
Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 66-6,
1966-1 C.B. 160
Holding period
A capital asset acquired on the last day of any calendar month regardless of whether the month has 31 days, must not be disposed of
until on or after the first day of the seventh succeeding month of the calendar in order to have been "held for more than 6 months"
within the meaning of Sections 1222(3) and (4), and 1231.
Full Text: 66-7,
1966-1 C.B. 188
Disposal, expenses for
Expenditures directly attributable to a disposal of timber a reductions of the amount received for purposes of computing gain or
loss from such disposal. Whether expenditures are directly attributable to a disposal is determined on the strength or
persuasiveness of each case and how closely related to the disposal activities are in connection with the expenditures. Treas.
Reg. ¤1.631-2. (Sec. 631).
Full Text: 71-334,
1971-2 C.B. 248
Timberland tracts, deeds in escrow, holding period
The holding period of each of several tracts in a timber acreage purchased under a single indivisible contract with annual payments
and release of deeds from escrow based on tracts selected for cutting begins on the day after the execution of the contract.
Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 72-252,
1972-1 C.B. 193
Exchange of Property Heldd for Productive Use or Investment
26 CFR 1.1031(a)-1: Property held for productive use in trade or business or for investment. The exchange of unencumbered fee title
to timberlands that differ in timber quality and quantity qualifies for nonrecognition of gain or loss under section 1031(a) of
the Code if both original and replacement lands are held for investment purposes.
Full Text: 72-515,
1972-2 C.B. 466
Timberland, sale of, used in trade or business
Gain realized by an electing small business corporation from the sale of timberland held primarily for the production of timber
products and not for sale to customers is gain from the sale of real property used in a trade or business under Section 1231(b)
of the Code, subject to the provisions of Section 1.1375-1(d) of the regulations. Treas. Reg. ¤¤1.1231-1, 1.1375-1. (Secs. 1231,
1375).
Full Text: 73-222,
1973-1 C.B. 373
Cutting contract, quantity first determined, holding period
A taxpayer who acquired timber cutting rights under a USDA Forest Service cutting contract is considered to have first definitely
determined the quantity of timber cut, for the purposes of the election to treat cutting of timber as a sale or exchange, when
truck scale was made using a bureau scaler at the time the logs arrived at the taxpayer's sawmill even though a mill deck scale
was made later by a Forest Service scaler. Distinguished by Rev. Rul. 73-489. Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 73-267,
1973-1 C.B. 306
Cutting contract, quantity first determined, holding period
A fiscal year accrual method taxpayer who acquired timber cutting rights under USDA Forest Service cutting contracts requiring
that, for payment purposes, logs be scaled by a Forest Service scaler and who elects to treat the cutting of timber as a sale or
exchange is considered to have cut the timber for purposes of Section 631(a) when the logs are scaled on the mill deck by the
Forest Service scaler in the ordinary course of business. Distinguishing Rev. Rul. 73-267. Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 73-489,
1973-2 C.B. 208
Cutting contract, fair market value of timber cut
The terms of a contract under which a taxpayer acquired the unrestricted right to cut and use timber in its lumber manufacturing
business are not relevant in determining the fair market value of timber cut. Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 74-271,
1974-1 C.B. 151
Cutting contract, contract right to cut, future right
An option on a right to cut timber that is transferred as part of of an exchange of property is not an enforceable contract right
to cut for Section 631(a) purposes, in cases where the claimed right to cut is exercisable only after a future date or occurrence
or is contingent upon an election or a transfer of additional consideration by a taxpayer. The holding period in such cases
commences only when the right to cut becomes exercisable. Treas. Reg. ¤1.631-1. (Sec. 631).
Full Text: 74-529,
1974-2 C.B. 185
Contract cutting, road credit
The amount subject to treatment under Section 631(b) by a corporate timberland owner that disposes of timber under a cutting
contract that specifies the unit price for an established number of units and the amount of a "road credit" allowed the purchaser
for building access roads is the actual amount realized, which is the total contract price reduced by the road credit. Treas.
Reg. ¤1.631-2. (Sec. 631).
Full Text: 75-306,
1975-2 C.B. 243
Charitable contribution; bargain sale
A corporation's exchange of timberland, with the corporation reserving the timber-cutting rights, for state-owned timberland of
lesser fair market value is not a bargain sale within the meaning of section 170 of the Code, and the corporation is not entitled
to a charitable contribution deduction; however, the exchange qualifies for nonrecognition of gain or loss under section 1031(a).
Full Text: 76-253,
1976-2 C.B. 51
Charitable contributions, retained timber or mineral rights
A gift of timber land to a charitable organization for transfer to the U.S. for use as a wildlife preserve is not disallowed under
section 170(f)(3)(A) of the Code by the grantor's retention of mineral or timber rights that can be exercised only upon the remote
possibility of approval of the Government.
Full Text: 77-148,
1977-1 C.B. 63
Christmas trees sold on "choose and cut" basis
Income realized from the sale of Christmas trees that are selected and cut on the taxpayer's land by individual purchasers is
ordinary income. However, the taxpayer may elect to treat the cutting of trees as sales or exchanges of timber as prescribed by
reg. 1.631-1. Treas. Reg. ¤¤1.631-1, 1.1231-1. (Secs. 631, 1231).
Full Text: 77-229,
1977-2 C.B. 210
Cutting contract, payment for failure to cut
Amounts received under a timber cutting contract for timber cut, the quantity of which is based upon a "cruise" rather than scaling
qualifies for treatment under Section 631(b). A penalty payment received for failure to cut any portion of the "cruised" or
marked trees during the term of the contract is ordinary income. Treas. Reg. ¤1.631-2. (Sec. 631).
Full Text: 78-104,
1978-1 C.B. 194
Like kind exchange; bargain sale to a state
An exchange of timberland owned by a producer of forest-related products for bare land of lesser value owned by a state, which is
a bargain sale as defined in section 1.170A-4(c)(2)(iii) of the regulations, constitutes an exchange of like kind property under
section 1031(a) of the Code. The basis of the property received from the state is determined under section 1031(d) as adjusted by
applying section 1011(b).
Full Text: 78-163,
1978-1 C.B. 257
Timber rights; retained interest
The entire value of forest land given to an individual by a decedent who reserved for ten years all timber rights, which constitute
personal property under the law of the state in which the timber is located, and died during the ten-year period without having
removed any timber is includible in the decedent's gross estate.
Full Text: 78-26,
1978-1 C.B. 286
Long-term contract unstated interest
The application of the unstated interest provisions to long-term timber contracts is described in situations in which the taxpayer
is (1) a landowner who receives the entire consideration under the contract in a lump sum on the date the contract is signed, (2)
a landowner who is to receive payments over a period of 60 years under a contract for the sale of timber and lease of the land on
which the timber is growing, and (3) a paper company that makes payments under a contract similar to that in situation 2. Rev.
Ruls. 62-81, 62-82 and 75-59 amplified. Treas. Reg. ¤¤1.483-1, 1.1221-1, 1.1231-1. (Secs. 483, 1221, 1231).
Full Text: 78-267,
1978-2 C.B. 171
Interest, installment sale of timber cutting rights
A timber company assigned its right to cut timber on U.F. Forest Service land to a promoter who sold the rights to a limited
partnership. Under the terms of the installment contract the total "interest" and principal payments the partnership will pay
the promoter equal the promoter's obligation to the timber company plus an override. The amounts designated as "interest" are
part of the sales price.
Full Text: 82-78,
1982-1 C.B. 30
Tax on built-in gains: S corporations: Timber, coal, iron ore property:
Conversion to C corporation.
Tax on built-in gains: S corporations: Timber, coal, iron ore property: Conversion
to C corporation.--The IRS has released a revenue ruling holding that an S
corporation's gain recognized in certain described transactions is not
recognized built-in gain for purposes of Code Sec. 1374 . The situations described
involve an S corporation holding timber, coal or domestic iron ore property
with built-in gain on the date its election to convert from a C corporation
to an S corporation is effective.
Full text: 01-50, I.R.B. 2001-43