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Rev. Rul. 74-529, 1974-2 CB 185

REV-RUL, Timber cutting rights; option agreement; holding period., Rev. Rul. 74-529, 1974-2 CB 185, (Jan. 01, 1974)

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] Timber cutting rights; option agreement; holding period.-- The Service will not follow the Grover B. Kelsay decision in applying section 631(a) of the Code to cases in which a right to cut timber is exercisable only after a future date or occurrence or is contingent upon an election or a transfer of additional consideration by a taxpayer. In such cases the holding period of the right to cut commences only when that right becomes exercisable.

In Grover B. Kelsay, 31 CCH Tax Ct. Mem. 1232 (1972), the United States Tax Court held that section 631(a) of the Internal Revenue Code of 1954 applied to the cutting of certain timber by the taxpayer's partnership. The facts of the case indicate that the partnership exchanged certain property for property of another party, plus the right to cut and remove a fixed amount of timber at a specified price from other designated property upon thirty days' notice. This right to cut was characterized by the parties as an "option."

The court held that the taxpayer's partnership had a contract right to cut the specified timber under section 631(a) of the Code notwithstanding the fact that the partnership was not itself bound to cut the timber. It further held that the partnership held an enforceable right to cut the timber specified from the time of the exchange agreement, or in any event not later than the date upon which the "option" was granted to it, which was more than six months before the beginning of the tax
year in which the timber was cut. The court held that the partnership's required notice to the other party and its assumption of the customary obligations of any logger cutting timber on the other party's lands merely implemented that right.

The Internal Revenue Service agrees that under the facts in Kelsay the taxpayer's partnership acquired a contract right to cut the timber in question no later than when such timber was designated by the other party.

The Service emphasizes, however, that the Kelsay case will not be followed in applying section 631(a) of the Code to cases in which a 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. In such cases, the holding period of the right to cut commences only when that right becomes exercisable.