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Revenue Ruling 72-252, 1972-1 CB 193, (Jan. 01, 1972)

Election to consider cutting as sale or exchange

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.
The holding period of each of several tracts in a timber acreage purchased under a single indivisible contract providing for annual payments and release of deeds from escrow based on tracts selected for cutting begins on the day after execution of the contract.

Advice has been requested when, under the circumstances described below, a purchaser's holding period began for purposes of section 631(a) of the Internal Revenue Code of 1954.

A lumber company (purchaser) entered into a single indivisible contract with a seller to purchase 50 x acres of timberland consisting of 120 separate tracts, the deeds to which were placed in an escrow account, for a total consideration of 110 y dollars. A payment of 10 y dollars was made upon execution of the contract and ten additional annual installments of 10 y dollars each with interest at 5 percent per annum were to be made.

The purchase price of each of the 120 tracts was specified in the contract, the sum of such prices being 110 y dollars. The prices varied according to the size of the tract and the value of the timber standing thereon as of the effective date of the contract.

The contract provided that upon making each annual payment the purchaser would select tracts equal in value to the annual payment and at that time the escrowed deeds to those tracts would be released. Each annual payment was to be equal to the sum of the prices of the selected tracts and not less than 10 y dollars. If the sum of the purchase prices of the selected tracts exceeded 10 y dollars, the excess would be credited to the next annual payment.

The contract further provided that the purchaser may, at its option, pay the entire balance or any portion of the balance of the total consideration at any time, in which event deeds to tracts equal in aggregate price to the amount of the payment would be released from escrow and delivered to the purchaser concurrently with the receipt of such payment.

The contract also provided that: (1) the purchaser could not cut any timber on tracts not yet paid for, except that in the event of catastrophe the purchaser had the right to salvage damaged or dead timber on any portion of the 50 x acres; (2) the purchaser could construct logging roads on or across all 50 x acres; (3) the purchaser had to bear the risk of loss on all 50 x acres; (4) the purchaser had to bear the full burden of the taxes on all 50 x acres; and (5) if the purchaser failed to pay any installment as it came due the seller had the right to enforce the contract in equity, whereupon the entire sum then owing became payable.

Section 631(a) of the Code provides in pertinent part:

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 (provided he has owned such timber or has held such contract right for a period of more than 6 months before the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year.

Normally, ownership of real property is considered transferred on the date of the delivery of the deed to the purchaser. However, where the purchaser has assumed the burdens and privileges of ownership of such property but delivery of the deed is delayed to secure payment of the purchase price, the time when such burdens and privileges of ownership are transferred will control for purposes of determining when the holding period properly begins. See Ted F. Merrill, 40 T.C. 66 (1963), affirmed per curiam, 336, F. 2d 771 (1964); Rev. Rul. 54-607, C.B. 1954-2, 177.

When the purchaser executed the unconditional contract to purchase the timberland, which included both the land and standing timber, it acquired the right to possession and assumed the burdens and privileges of ownership with respect to the 50 x acres. Under the rationale of Revenue Ruling 54-607, the purchaser's holding period for its real property (land and timber) began on the day following the day the right to possession was acquired and the burdens and privileges of ownership were assumed.

Accordingly, it is held in the instant case that the purchaser's holding period for purposes of section 631(a) of the Code began on the day following the day the contract of purchase was signed.