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Rev. Rul. 73-489, 1973-2 CB 208

REV-RUL, Time timber considered cut; cutting treated as a sale or exchange

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

26 CFR 1.631-1: Election to consider cutting as sale or exchange.

[IRS Headnote] Time timber considered cut; cutting treated as a sale or exchange.--
A fiscal-year accrual-method taxpayer who acquired timber cutting rights under U.S. Forest Service cutting contracts requiring that, for payment purposes, the 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) of the Code when the logs are scaled on the mill deck by the Forest Service scaler in the ordinary course of business; Rev. Rul. 73-267 distinguished.

Advice has been requested as to when timber is considered cut of the purposes of section 631(a) of the Internal Revenue Code of 1954 under the circumstances described below.

The taxpayer files its returns on a fiscal year basis and uses the accrual method of accounting. In its current taxable year the taxpayer acquired several sawmills which will cut timber exclusively from National Forest lands under Forest Service timber cutting contracts requiring that, for payment purposes, the logs be scaled by a Forest Service scaler.

At some point the logs must be scaled on order to determine the various amounts due the contract loggers and the Forest Service. Log scaling, performed by a scaler, is the procedure customarily used in the industry for measuring logs to determine their board foot content, expressed as board feet log scale.

In the situation presented in this case the timber will be logged by contract loggers and hauled on trucks to the sawmills. The truck loads of logs will be counted, but the individual logs will not be scaled, counted, or identified by species prior to reaching the mill deck. The contract loggers will receive an advance payment for logging the timber based on an estimated average log scale per truck load of logs hauled. They will receive a final payment based on the Forest Service mill deck scale made later in the production process.

When the loads of logs reach the sawmill they will either be dumped into the mill pond or stacked in a storage deck in the mill yard. The logs in the mill pond will be fed into the sawmill and sawed within a few days, but the logs in the storage deck will be held until winter or spring when bad weather prevents the hauling of logs from the woods. At such times logs from the storage deck will be fed into the sawmill.

By agreement between the taxpayer and the Forest Service all the logs will be scaled on the mill deck. This means that the Forest Service scaler will not scale the logs until they enter the sawmill. This mill deck scale will be the first time the logs are identified by species, measured, and their quantity in board feet log scale definitely determined.

Section 631(a) of the Code provides that if the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than six months before the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year.

Section 1.631-(a)(2) of the Income Tax Regulations provides that for the purposes of section 631(a) of the Code timber shall be considered cut at the time when in the ordinary course of business the quantity of timber felled is first definitely determined.

Taxpayers are required to hold to a consistent scaling practice and may not shift the scaling point to obtain a tax advantage. Rev. Rul. 58-135, 1958-1 C.B. 519.

Rev. Rul. 73-267, 1973-1 C.B. 306, considered the mill deck scaling of timber cut under various contracts with private and public timber owners, including the Forest Service. In Rev. Rul. 73-267 the Forest Service mill deck scale was preceded by a truck scale made by a log scaling bureau scaler. That Revenue Ruling holds that, under the circumstances described therein, the quantity of timber cut under the Forest Service timber cutting contract there considered is first definitely determined for purposes of section 631(a) of the Code by the truck scale made by a bureau scaler rather than by the later mill deck scale.

Rev. Rul. 73-267 is distinguishable on its facts from the instant case. In the instant case there is no bureau truck scale preceding the Forest Service mill deck scale. The loggers receive only a part payment for logging and hauling the timber to the mill based on the estimated average quantity in board feet of logs hauled per truck load. A final settlement with the loggers is not made until the quantity board feet log scale is determined by the Forest Service mill deck scale. For purposes of section 631(a) of the Code, this Forest Service scale is the first definite determination of the quantity in board feet log scale of timber felled as provided in section 1.631-1(a)(2) of the regulations.

Accordingly, in the instant case, if the taxpayer elects under section 631(a) of the Code to consider the cutting of timber as a sale or exchange of such timber, the timber is considered cut for the 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.

Rev. Rul. 73-267 is distinguished.