Capital Gains Determination
Timber sales prior to January 1, 2005
The sale of standing timber (stumpage) will usually qualify for capital gains treatment provided the timber sold was not "held primarily for sale to customers in the ordinary course of a trade or business."
Timber that was "held primarily for sale to customers in the ordinary course of a trade or business" is not a capital asset under the provisions of Section 1221 of the Code. Instead it is business property under Section 1231 of the Code. However, there is not always a clear line between being "held primarily for sale" and being held for another reason. To help decide whether the stumpage that was sold was being held "primarily for the sale to customers in the ordinary course of a trade or business" the courts have indicated the following tests:
- The frequency of sales of property as opposed to isolated sales or transactions,
- The activity of the seller or those acting under his instructions or in his behalf, such as making improvements to the property and advertising it to attract purchasers,
- The nature and extent of the taxpayers business,
- The purpose for which the property was originally acquired, and
- The purpose for which the property was held during the period in question.
Was the stumpage that you sold prior to January 1, 2005 being held "primarily for sale to customers in the ordinary course of a trade or business"?