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Rev. Rul. 57-9, 1957-1 CB 265

SECTION 1221.--CAPITAL ASSETS DEFINED

Income from the sale of tree stumps from land held by an investment company which is not in the timber or stump business, either as a buyer, seller or processor, 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.

Advice has been requested whether the sale of stumps by an investment company is taxable as a capital gain or as ordinary income.

The sale involves all of the stumps on a large tract of land for an agreed total consideration, payable in one lump sum. The seller is not in the timber or tree stump business, either as a buyer, seller or processor, but acquired the property years before in a cutover condition, with some young timber growth present. The property was acquired and held for its enhancement in value either as a new crop of timber developed or for sale as land values increased.

In the usual case the sale of tree stumps has been considered to be ordinary income. Such sales ordinarily occur either in the case of taxpayers engaged in buying and selling timber or from timber properties used in the trade or business.

Section 1221 of the Internal Revenue Code of 1954 provides, in part, that the term "capital assets" means property held by the taxpayer, whether or not connected with his trade or business, but does not include property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

Whether property is held for sale to customers in the ordinary course of a taxpayer's trade or business is a question of fact to be determined in the light of all the circumstances of each particular case. However, the difference is recognized between a sale of tree stumps in one lot by a taxpayer who is not in the timber or stump business, either as a buyer, seller, or processor, such as the one in this case, and a sale of tree stumps as a byproduct, either by lot or on a tonnage basis by timber operators after the merchantable standing timber has been cut and removed, in which case the stumps are considered to be property held by the taxpayer for sale to customers in the ordinary course of his trade or business and income from their sale is considered to be ordinary income.

Accordingly, it is held that gain realized from the sale of stumps from land held by a taxpayer who is not in the timber or tree stump business, but who acquired the cutover property some years before as an investment, constitutes gain from the sale of "capital assets." Since no cost basis was allocated to the stumps, the entire amount received, less expenses of sale, constitutes capital gain.