Revenue Ruling 74-271, 1974-1 CB 151
REV-RUL, Timber; cutting contract., Revenue Ruling 74-271, 1974-1 CB 151, (Jan. 01, 1974)
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] Timber; cutting contract.--
The terms of a contract under which the taxpayer acquired the unrestricted
right to cut and use timber in its lumber manufacturing business are not
relevant in determining the fair market value of timber cut for the purposes
of section 631(a) of the Code.
The taxpayer elected to treat the cutting of timber as a sale or exchange of such timber under the provisions of section 631(a) of the Internal Revenue Code of 1954. The timber cut was acquired under a contract that granted to the taxpayer the right to cut and use such timber in its lumber manufacturing business. However, while the contract did not restrict the taxpayer's rights in the logs or the lumber produced from the timber, it contained a formula for computing stumpage payments based on percentages of profits that varied according to the end products produced and sold. In addition, the contract contained other provisions that required the taxpayer to pay all taxes and other charges levied against the lands and timber included under the contract, required the purchaser to pay for all merchantable logs left in the woods 30 days after logging, granted the seller the right to demand that the taxpayer's management be maintained at a level of competence at least equal to similar competitive operations, required that all roads necessary for logging the timber be constructed at the taxpayer's expense, and provided that all such roads constructed on the seller's land become the property of the seller upon construction.
Held, the provisions of this contract under which the taxpayer acquired the right to cut timber for sale or for use in its trade or business are not relevant in determining the fair market value of the timber cut thereunder for the purposes of section 631(a) of the Code. The fair market value of the timber is to be determined under the objective standards set forth in sections 1.631-1(d)(2) and 1.611-3(f) of the Income Tax Regulations.
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