Revenue Ruling 71-334, 1971-2 CB 248

Gain or loss upon the disposal of timber under cutting contract

Section 631.--Gain or Loss in the Case of Timber, Coal, or Domestic Iron Ore

26 CFR 1.631-2: Gain or loss upon the disposal of timber under cutting contract. Expenditures directly attributable to a disposal of timber under section 631(b) of the Code are reductions of the "amount received" for purposes of computing gain or loss from such disposal.

Advice has been requested as to the Federal income tax treatment of expenditures directly attributable to the disposal of timber under the provisions of section 631(b) of the Internal Revenue Code of 1954.

In connection with a disposal of timber, so as to produce the maximum income therefrom, the taxpayer expended certain amounts directly attributable to the
disposal for:

  1. advertising the timber for disposal;
  2. cruising to determine the quantity and quality of timber to be disposed of;
  3. marking or otherwise designating the timber for cutting;
  4. making seed trees to be retained;
  5. scaling, measuring, or otherwise determining the quantity of timber cut;
  6. fees paid to consulting foresters, selling agents, and others for services directly related to the timber disposal;
  7. supervising or checking performance under the contract; and
  8. other expenses directly attributable to the disposal.

Section 631(b) of the Internal Revenue Code of 1954 provides, in part:

In the case of the disposal of timber held for more than 6 months before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner retains an economic interest in such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shall be considered as though it were a gain or loss, as the case may be, on the sale of such timber.

The specific question in the instant case is whether the words "amount realized" as used in section 631(b) of the Code mean the gross amount received or whether these words are to be interpreted to mean the gross amount reduced by the direct expenses incident to the transaction.

In considering an amendment to section 117 of the Internal Revenue Code of 1939, now section 631 of the Internal Revenue Code of 1954, Senate Report No. 627, 78th Cong., First Session, C.B. 1944, 973 at 993, on the Revenue Act of 1943, P.L. 235, C.B. 1944, 757, states:

Your committee is of the opinion that various timber owners are seriously handicapped under the Federal income and excess profits tax laws. The law discriminates against taxpayers who dispose of timber by cutting it as compared with those who sell timber outright. The income realized from the cutting of timber is now taxed as ordinary income at full income and excess profit tax rates and not at capital gain rates. In short, if the taxpayer cuts his own timber he loses the benefit of the capital gain rate which applies when he sells the same timber outright to another. Similarly, owners who sell their timber on a so-called cutting contract under which the owner retains an economic interest in the property are held to have leased their property and are therefore not accorded under present law capital-gain treatment of any increase in value realized over the depletion basis.

It is apparent that, in the above statement, a comparison was being made of economic income from sale versus economic income from cutting or lease. The impact of income tax upon a taxpayer deriving income from cutting or lease discriminated against such taxpayer as compared with the impact of the lower capital gain rate applicable to a taxpayer deriving income from a sale.

It has been the consistent position of the Internal Revenue Service, in connection with transactions qualifying for capital gain or loss treatment, that selling expenses are treated as an offset to the selling price. (Mrs.) E. A. Giffin v. Commissioner, 19 B.T.A. 1243, (1930); Therese C. Johnson v. Commissioner, 7 T.C. 465, acquiescence C.B. 1946-2, 3. Since the selling expenses in a sale of a capital asset are considered in arriving at income subject to a capital gain tax, it is reasonable to give like consideration to direct expenses in connection with income from leases. The comparison set forth in the above Committee Report constitutes a comparison of like concepts and affords a basis for a sound determination as to a finding of discrimination between similarly situated taxpayers. The fact that selling expenses may be of a recurring nature has been held not to affect their treatment as an adjustment to the selling price. General Spring Corporation v. Commissioner, Tax Court Memorandum Opinion, entered July 27, 1953.

It has been held that expenditures for the construction of access roads that are directly related to a disposal of timber under section 631(b) of the Code should be offset against capital gains realized on the disposal. Dorothy C. Regan v. United States, 410 F. 2d 744 (1969).

Accordingly, it is held that expenditures directly attributable to a disposal of timber subject to the provisions of section 631(b) of the Code are reductions of the "amount received" for the purpose of computing gain or loss from such disposal. Whether any expenditure is directly attributable to a disposal of timber is 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 expenditure is incurred to the disposal of the timber.

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