Rev. Rul. 73-222, 1973-1 CB 373, (Jan. 01, 1973)
Gain from timberland sale
Section 1231.--Property Used in the Trade or Business and Involuntary Conversions
26 CFR 1.1231-1: Gains and losses from the sale or exchange of certain
property used in the trade or business.
(Also Section 1375; 1.1375-1.)
[IRS Headnote] Gain from timberland sale.--
Gain realized by an electing small business corporation from the sale of
timberland held primarily for the production of timber products and not for
sale to customers is gain from the sale of real property used in a trade or
business under section 1231(b) of the Code, subject to section 1.1375-1(d)
of the regulations.
Advice has been requested whether any gain realized under the circumstances described below is gain from the sale of real property used in the trade or business, within the meaning of section 1231(b) of the Internal Revenue Code of 1954.
M, a small business corporation, as defined in section 1371 of the Code, made a proper election, pursuant to section 1372 of the Code, not to be subject to the Federal income tax provisions of chapter 1 of subtitle A of the Code. Such election was in effect for the taxable year 1969. M is engaged in the management and operation of timberlands owned by itself, the management of timberlands owned by others, the purchase, production, and sale of pulpwood and other timber products, survey work, and the cruising of timberlands. M does not hold land or timberland primarily for sale to customers in the ordinary course of its trade or business.
As of the close of the taxable year 1968, M owned 150,000 acres of timberland that was held for the production of pulpwood and other timber products. During 1969 M sold approximately 140,000 acres of such land that it had held for more than six months.
Section 1231(b) of the Code provides, in pertinent part, that the term, "property used in the trade or business," means real property used in the trade or business held for more than six months, which is not (1) property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or (2) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
For purposes of section 1231(b) of the Code, real property includes land with timber standing thereon. See Rev. Rul. 72-515, 1972-2 C.B. 466.
Accordingly, subject to the provisions of section 1.1375-1(d) of the Income Tax Regulations relating to the level for determining the character of gain in the case of an electing small business corporation, any gain realized as a result of the sale of timberland by M in 1969 is gain from the sale of real property used in its trade or business within the meaning of section 1231(b) of the Code.
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