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Rev. Rul. 72-515, 1972-2 CB 466, (Jan. 01, 1972)

Property held for productive use in trade or business or for investment

Section 1031.--Exchange of Property Held 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.

Advice has been requested whether, under the circumstances described below, the exchange of fee interests in timberland between the taxpayer and the United States of America (U.S.A.) is a "like-kind exchange" and therefore a nontaxable transaction under section 1031(a) of the Internal Revenue Code of 1954.

The taxpayer owned 50x acres of timberland in fee which he held for investment purposes. Over the past ten years the taxpayer has sold most of the merchantable timber growing on its lands. Some virgin timber remained along with substantial stands of second growth timber.

The taxpayer and the U.S.A. entered into an exchange agreement under which the taxpayer received the unencumbered fee title to 5x acres of timberland in exchange for the unencumbered fee title in its 50x acres of timberland. The timberland received from the U.S.A. supports substantial amounts of virgin timber and is to be held by the taxpayer for investment purposes. No cash payments or other considerations were involved in the exchange.

Section 1031(a) of the Code provides that no gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

Section 1.1031(a)-1(b) of the Income Tax Regulations provides that, as used in section 1031(a) of the Code, the words "like-kind" have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not, under the section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Timber growing on the land is a part of the land. Laird v. United States, 115 F. Supp. 931 at 933 (W. D. Wis. 1953).

Therefore, the timber growing on the timberland included in the exchange is a part of the property being exchanged. Such things as the quantity, quality, age, and species of the timber growing on the land may influence the grade or quality of the timberland involved in the exchange, but do not influence the kind or class of the property exchanged, that is, land.

The taxpayer conveyed fee title, clear of encumbrances, to certain designated tracts of timberland to the U.S.A. In exchange it received fee title, clear of encumbrances, to certain designated tracts of timberland from the U.S.A. This is an exchange of land held for investment, solely for property of a like-kind to be held for investment.

Accordingly, in the instant case no gain or loss is recognized by the taxpayer from the exchange under section 1031(a) of the Code.