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Rev. Rul. 58-135, 1958-1 CB 519

REV-RUL, Gain or loss upon the cutting and disposal of timber and the disposal of coal., Rev. Rul. 58-135, 1958-1 CB 519, (Jan. 01, 1958)

SECTION 117(k).--CAPITAL GAINS AND LOSSES: GAIN OR LOSS IN THE CASE OF TIMBER OR COAL

REGULATIONS 118, SECTION 39.117(k)-1: Gain or loss upon the cutting and disposal of timber and the disposal of coal. For purposes of determining capital gain or loss, timber is considered cut in the year in which, in the ordinary course of business, the quantity of timber felled is first definitely determined, rather than at the time of felling.

Advice has been requested whether the term "timber cut" referred to in section 117(k)(1) of the Internal Revenue Code of 1939 includes all timber cut or felled during the taxable year or whether the term may be construed as being applicable only when the quantity is first definitely determined.

Section 117(k)(1) of the Code provides in part that a taxpayer, under certain circumstances, may elect upon his return for a taxable year to treat the cutting of timber for sale or use in his trade or business as a sale or exchange of such timber cut during such year. In case such an election has been made gain or loss to the taxpayer is recognized in an amount equal to the difference between the adjusted basis for depletion of such timber in the hands of the taxpayer and its fair market value as of the first day of the taxable year in which such timber is cut.

Although section 117(k)(1) limits the application of the section to timber actually cut or felled, for practical timber operations it is generally impossible to obtain a reasonably accurate measurement of quantity at the time the timber is cut or felled.

The problem of ascertaining when timber is cut during the taxable year appears to have been given specific consideration in section 39.23(m)-21(c) of Regulations 118, relating to depletion allowance of timber. This section states that "The depletion of timber takes place at the time the timber is felled. Since, however, it is not ordinarily practicable to determine the quantity of timber immediately after felling, depletion for purposes of accounting will be treated as taking place at the time when, in the process of exploitation, the quantity of timber felled is first definitely determined."

Thus, it has been the general practice in the timber industry to determine the quantity of the timber cut during a taxable year for depletion purposes when in the process of exploitation, the timber is first actually measured. This determination usually takes place at the log landing, river bank or at the mill and also serves as the point when the quantity of logs is inventoried, since it is generally impractical to obtain a reasonably accurate measurement of quantity at the time timber is felled. This is due partly to the fact that timber when first felled, cannot be turned for inspection of defects and damage in falling and the additional fact that the logs may be lost, damaged or destroyed in the course of handling, transportation and dumping.

It is the opinion of the Internal Revenue Service that the treatment provided in the regulations under section 23(m) of the 1939 Code in determining depletion is equally applicable to section 117(k)(1) in determining capital gain or loss. Therefore, it is held that, for purposes of section 117(k)(1) of the Internal Revenue Code of 1939 timber shall be considered cut at the time when, in the ordinary course of business, the quantity of timber felled is first definitely determined, rather than at the time of felling. Taxpayers are required to hold to a consistent scaling practice and may not shift the scaling point to obtain a tax advantage.

There has been included in the regulations under section 631(a) of the Internal Revenue Code of 1954 (which corresponds to section 117(k)(1) of the 1939 Code) a provision under which the position here set forth is made equally applicable under the 1954 Code. See section 1.631-1(a)(2) of the Income Tax Regulations.