Capital Gains Determination
The last item that needs to be considered before determining if you qualify for capital gains treatment under Section 631(b), ("disposal with an economic interest retained"), is if payment was based on the volume actually cut.
There must be a "day of reckoning" - Many contracts include terms requiring an advance payment before cutting starts and regular payments for the amount of timber expected to be cut over the next payment period. These and similar provisions will meet the economic interest retained requirement as long as there is an eventual "day of reckoning." On this day the total amount due the lessor (the owner of the timber) under the terms of the contract based on the amount of timber actually cut must be determined and if necessary adjustments be made. If the lessee has paid for more timber than was finally cut, the lessor must reimburse the lessee for any such over payment, or vice versa.
Was payment based on the actual volume cut?