• Home
• Federal Income Taxes
• State Tax Laws
• Estate Planning
• Publications
• Professional Research
  • Master Index
  • Case Law
  • Revenue Rulings
  • Private Letter Rulings
  • Regulations
  • Internal Revenue Code
  • Public Laws
  • Research Process
• Tax Workshops/Education
• Tax Policy
• Links

Rev. Rul. 77-229, 1977-2 CB 210

REV-RUL, Christmas trees sold on "choose and cut" basis., Rev. Rul. 77-229, 1977-2 CB 210, (Jan. 01, 1977)

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.
(Also Section 1231; 1.1231-1.)

[IRS Headnote] Christmas trees sold on "choose and cut" basis.--
Income realized from the sale of Christmas trees that are selected and cut on the taxpayer's land by individual purchasers is ordinary income. However, the taxpayer may elect to treat the cutting of trees as sales or exchanges of timber as prescribed by section 1.631-1 of the regulations.

Advice has been requested whether, for Federal income tax purposes, income realized from the following described transaction is taxable as long-term capital gain.

The taxpayer is in the business of growing evergreen trees and selling them to customers on a "choose and cut" basis for use as Christmas trees. The trees are more than 6 years old when severed from their roots.

In early December, the taxpayer advertises the Christmas trees for sale at its farm on a "choose and cut" basis. Customers, usually families, drive to the taxpayer's farm where the taxpayer shows them the growing trees, and explains that each customer may cut down one or more trees of the customer's choosing and, upon leaving the farm, must pay at specified rates per tree for each tree cut. Rates of payment vary, depending upon the height and shape of the tree. The customers are under no obligation to cut a tree but must pay for all trees actually cut. The transactions are not complete until the customers accept the taxpayer's standing offer by cutting a tree, thereby incurring a liability to pay at the specified rate.

In a typical situation, the taxpayer lends a hand saw to the customer who, upon having cut the chosen tree, returns the saw, pays for the tree at the agreed upon rate, loads it in the car and leaves the farm.

Section 611(a) of the Internal Revenue Code of 1954 provides that in the case of timber, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion.

Section 631(a) of the Code provides that if on the return the taxpayer so elects for a taxable year, then the cutting of timber (for sale or for use in the taxpayer's trade or business) during the year by the taxpayer who owns, or has a contract right to cut the timber (providing the taxpayer has owned the timber or has held the contract right for more than 9 months for taxable years beginning in 1977 or for more than one year for taxable years after 1977) is considered a sale or exchange of the timber cut during the year. If the election has been made, gain or loss to the taxpayer is recognized in an amount equal to the difference between the fair market value of the standing timber as of the first day of the taxable year in which the timber is cut, and the adjusted basis for depletion of the timber in the hands of the taxpayer. For purposes of section 631, the term "timber" includes evergreen trees that are more than 6 years old at the time they are severed from the roots and are sold for ornamental purposes.

Section 631(b) of the Code provides that in the case of the disposal of timber held for more than 9 months (one year for taxable years after 1977) before disposal, by the owner thereof under any form or type of contract by virtue of which the owner retains an economic interest in the timber, the differences between the amount realized from the disposal of the 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 the timber.

Section 1.631-1(d)(4) of the Income Tax Regulations provides that for any taxable year for which the cutting of timber is considered to be a sale or exchange under section 631(a) of the Code, the timber cut shall be considered as property used in the trade or business for the purposes of section 1231, along with other property the taxpayer used in the trade or business as defined in section 1231(b), regardless of whether the timber is property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business.

Section 1.631-1(e)(1) of the regulations provides that in case the products of the timber are sold after cutting, either in the form of logs or lumber or in the form of manufactured products, the income from these actual sales shall be considered ordinary income.

Section 631(b) of the Code does not apply to the transactions in the instant case because there was no contract between the parties by virtue of which the customer had both a right and an obligation to cut timber. Ah Pah Redwood Co. v. Commissioner, 251 F.2d 163 (9th Cir. 1957); Jantzer v. Commissioner, 284 F.2d 348 (9th Cir. 1960); and Patterson v. Belcher, 302 F.2d 289 (5th Cir. 1962), opinion amended and reh. den., 305 F.2d 557, cert. den. 371 U.S. 921 (1962).

In the instant case, the taxpayer retained all rights and interest in the standing timber. Consequently, the customer never acquired title to, an economic interest in, or a contract right to cut any timber. By the act of cutting a tree, the customer acquires both the right and the obligation to purchase the cut tree. The transaction between the taxpayer and the customer is, therefore, a present sale of a cut Christmas tree rather than a sale of standing timber.

Accordingly, income from the sale of the Christmas trees is ordinary income to the taxpayer.

However, the cutting of the trees is treated as a sale or exchange of timber in the manner prescribed by section 1.631-1 of the regulations provided the taxpayer makes the election under section 631(a) of the Code. The gain or loss on such sale (cutting of the trees) is subject to the tax treatment prescribed by section 1231(a) of the Code. Gain or loss on the actual sale of the cut Christmas trees is determined in accordance with section 1.631-1(e)(1) of the regulations.