• 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. 58-579, 1958-2 CB 361

REV-RUL, Election to consider cutting as sale or exchange., Rev. Rul. 58-579, 1958-2 CB 361, (Jan. 01, 1958)

SECTION 631.--GAIN OR LOSS IN THE CASE OF TIMBER OR COAL

26 CFR 1.631-1: Election to consider cutting as sale or exchange.
A taxpayer who acquires by contract the right to cut, remove and sell timber from the land of another for the account of the landowner, but not the right to cut the timber for sale on his own account or for use in his trade or business, is not the holder of "a contract right to cut" such timber within the meaning of section 631(a) of the Internal Revenue Code of 1954, nor is the taxpayer entitled to the treatment provided by section 631(b) of the Code, relative to a disposal by the owner.

Advice has been requested regarding the treatment for Federal income tax purposes of proceeds received by a taxpayer under a certain contract relating to timber.

By written instrument, M company, the owner of timberlands, authorized the taxpayer, an individual, for a period of one year, to enter its lands and to cut and remove therefrom specified timber and to deliver such cut timber in the form of saw logs and cordwood to a sawmill to be designated by the taxpayer in writing to the landowner prior to milling. It was provided that the sawmill so designated was to pay direct to M company stated amounts per unit for the saw logs and cordwood delivered to such mill. The agreement provided for the conduct of logging operations in a safe and prudent manner. Any dispute regarding the manner of conducting logging operations was to be resolved in accordance with the judgment of M company and the agreement was terminable at the option of M company for the violation of any its terms. The taxpayer was ascribed the status of independent contractor. Any right or interest acquired under the agreement by the taxpayer was made assignable, after first obtaining the written consent of M company.

By separate agreement, subsequently entered into by the taxpayer and X lumber company, of which the agreement between the taxpayer and M company was made a part, X lumber company undertook to and did cut and remove the timber of M company in such a manner as to comply in every way with the taxpayer's agreement with M company, delivered the timber in the form of saw logs and cordwood to its mill, and paid therefore direct to M company the amount specified in the taxpayer's agreement with M company. In addition, X lumber company also paid to taxpayer a specified amount per unit for the saw logs and cordwood cut and delivered by X lumber company to its mill, pursuant to the terms of its separate agreement with the taxpayer.

The question raised is whether the amount received by the taxpayer under his separate agreement with X lumber company is taxable to him as ordinary income or whether such amount may be accorded capital gain treatment under the provisions of sections 631(a) or 631(b) of the Internal Revenue Code of 1954.

Section 631(a) of the Code provides in part that "* * * If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than six months before the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year. * * *"

Section 1.631-1(b)(1) of the Income Tax Regulations provides that in order to have a "contract right to cut timber" within the meaning of section 631(a), a taxpayer must have a right to sell the timber cut under the contract on his own account or to use such cut timber in his trade or business.

Section 631(b) of the Code provides in part that "In the case of the disposal of timber held for more than six months before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner retains an economic interest in such timber, the difference between the amount realized from the disposal of such 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 such timber. * * * For purposes of this subsection, the term 'owner' means any person who owns an interest in such timber, including a sublessor and a holder of a contract to cut timber."

Section 1.631-2(e)(2) of the regulations provides that the provisions of section 631(b) of the Code apply to an owner of timber; that an owner of timber means any person who owns an interest in timber, including a sub-lessor and a holder of a contract to cut timber, and that such owner of timber must have a right to cut timber for sale on his own account or for use in his trade or business in order to own an interest in timber within the meaning of section 631(b) of the Code.

The right acquired by the taxpayer from M company, the owner of the timberlands, with respect to the timber standing thereon, is the right to cut, remove and sell such timber for the account of M company. Such right is not a right to sell the timber cut under the contract on taxpayer's own account or to use such cut timber in his trade or business. Therefore, the taxpayer is not the holder of "a contract right to cut timber" within the meaning of section 631(a) of the Code and the regulations thereunder and is not entitled to the election granted therein.

Similarly, since such right is not the right to cut timber for sale on the taxpayer's own account or for use in his trade or business, but only for the account or use of another, the taxpayer is not entitled to the treatment provided by section 631(b) of the Code and the regulations thereunder. Consequently, the taxpayer is not entitled to the capital gain treatment provided by that section.

In essence the two agreements evidence but one single transaction whereby M company secured the services of the taxpayer to dispose of its timber for its own account in consideration of the amount, over and above that specified and paid by X lumber company direct to M company, which was agreed upon between the taxpayer and X lumber company.

In view of the foregoing, it is held that the amount received by the taxpayer constitutes ordinary income in the nature of a selling commission for disposing of the timber for the account of M company.