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Rev. Rul. 73-267, 1973-1 CB 306, (Jan. 01, 1973)

Determination of quantity; timber cutting treated as a 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.

[IRS Headnote] Determination of quantity; timber cutting treated as a sale or exchange.--
A taxpayer who acquired timber cutting rights under a United States Forest Service cutting contract is considered to have first definitely determined the quantity of timber cut, for purposes of the election to treat cutting of timber as a sale or exchange under section 631(a) of the Code, when a truck scale was made using a bureau scaler at the time the logs arrived at his sawmill even though a mill deck scale was made later by a Forest Service scaler.

Advice has been requested when, under the circumstances described below the quantity of timber cut under a United States Forest Service timber cutting contract is first definitely determined for purposes of section 631(a) of the Internal Revenue Code of 1954.

A calendar year taxpayer, who owns and operates a sawmill, acquired timber cutting rights under various contracts with private and public timber owners, including the United States Forest Service (Forest Service). The taxpayer has elected to treat the cutting of timber for sale or for use in its business as a sale or exchange of such timber under the provisions of section 631(a) of the Code.

The timber is felled, converted to logs, loaded on trucks, and hauled to the taxpayer's sawmill by contract loggers.

At some point the logs must be scaled in order to determine the various amounts due the contract loggers and the timber owners. Log scaling, performed by a scaler, is the procedure customarily used in the industry for measuring logs to determine their content, expressed as board feet log scale. Before 1971 the taxpayer's logs from all sources were scaled while still loaded on the logging trucks that hauled the logs from the woods to the sawmill. This is known as truck scaling and the log scale obtained is called a truck scale. A Forest Service scaler scaled logs produced under Forest Service timber cutting contracts, scalers employed by other public agencies scaled logs produced under their respective timber cutting contracts, and a log scaling bureau scaler scaled the logs produced under private contracts. Such truck scale was considered by the taxpayer to be the first definite determination of the quantity of timber cut, and was used for section 631(a) purposes.

Beginning in 1971 the logs produced under Forest Service cutting contracts and hauled to the taxpayer's sawmill were first truck scaled upon their arrival at the sawmill by a bureau scaler to determine the amount due the contract loggers for logging the timber. When the logs were fed into the sawmill the logs were scaled by a Forest Service scaler. This is known as mill deck scaling. The mill deck scale was used to determine the amount due the Forest Service for timber cut under the provisions of the applicable Forest Service timber cutting contract. The mill deck scale was made from a few days to as long as eight months after the logs arrived at the sawmill, depending on whether the logs went directly from the woods to the sawmill or were stored at the taxpayer's sawmill for later use in the sawmill when weather conditions prevented trucking logs from the woods. Logs from other public agencies and private sources were truck scaled as before.

Section 631(a) of the Code provides 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(a)(2) of the Income Tax Regulations provides that for the purpose of section 631(a) and this section, timber shall be considered cut at the time when in the ordinary course of business the quantity of timber felled is first definitely determined.

The following example illustrates a typical sequence of events in the taxpayer's operations:

1. June 10, 1971, taxpayer acquired timber cutting rights under a private sale contract.

2. June 20, 1971, taxpayer acquired timber cutting rights under a Forest Service timber sale contract.

3. October 20, 1971, the taxpayer began logging on both contract areas.

4. November 3, 1971, the taxpayer began hauling logs from both contract areas. The logs were thereafter scaled on the trucks by a bureau scaler upon their arrival at the taxpayer's sawmill.

5. During February, 1972 the Forest Service logs that were truck scaled in November 1971, were mill deck scaled.

The truck scale performed by a bureau scaler when the trucks arrived at the taxpayer's sawmill beginning on November 3, 1971, was the first definite determination of quantity.

Accordingly, under the circumstances described above, it is held that the quantity of timber cut under a Forest Service timber cutting contract is first definitely determined for purposes of section 631(a) of the Code by the truck scale made by a bureau scaler rather than the mill deck scale made by a Forest Service scaler.