Any timber experts?

[natiro]

Client bought timber property as an investment. He is making one sale in 2005 and doesn't plan another for the next 20 years. He is a professor and is clearly not in the timber trade or business.

He is currently selling some logs. He has contracted with the mill directly and will be paid by the board foot. He has contracted separately with the logger. The mill will be paying my client and the logger in shares - 60% to my client, 40% to the logger.

When I read the timber tax rules, which I've now spent hours on, it appears that if my client had made the sale in a lump sum, and since he is clearly not in the timber trade or business, the sale would definitely be reported on Sch D, and would get capital gain treatment. However, he did not make a lump sum sale and I find the 631(a) and 631(b) rules confusing and can't figure out how they apply here.

On the National Timber Tax Website, and other publications I've read, they warn that if you sell on a shares contract then you may be considered to be in the timber trade or business and you would have ordinary income (although there are elections available under 631(a) and (b) to report some of the gain as capital gain.)

I would still contend that even though my client has entered into a shares contract (and actually, I'm not sure this really is a shares contract), he is still NOT in the timber trade or business and that his income would be reported on Sch D.

Can anyone offer any insight? Many thanks.

[Gene V]

I'm not sure what you mean by shares, but standing timber taxpayer held as investment property is a capital asset. Gain or loss from its sale is capital gain or loss reported on Schedule D. (from Pub. 225 page 58).
I use Sec. 631A (u-cut) with my christmas tree farmers, this way we get to use the capital gain on the trees that are over 6 years old.

Since you are in Oregon, you might call Susie Gregory, she writes article on Timber in the local EA publication. Address is in Roseburg, phone 503-673-1247.

[Snaggletooth]

Capital Gains

Natiro, having worked at a sawmill, and familiar with logging arrangements, I don't believe your client has done a thing to jeopardize Sch D treatment. The "Shares" arrangement only supports the fact that the owner is not in the logging business. The sawmill is simply dividing their purchase price into two segments. It is almost universal that sawmills pay loggers by the board foot, but usually not dependent upon the species since it requires virtually the same effort whether they are harvesting cheap poplar or expensive cherry. In this case, the loggers are getting a piece of the species, and therefore I wouldn't be surprised if they leave a lot of pulpwood (virtually worth very little) laying in the stand.

Sometimes a sawmill will contract to harvest an existing tract with a landowner, and thus giving the owner a required 1099-S (which, again, guarantees capital gains). In those cases, the sawmill will decrement the price of the standing timber by the estimated cost of logging the tract.

The concept of "more than one sale" also is a redundancy since logging a tract is a continuous process which can take several weeks. There is only one harvest -- although there may be multiple checks or "progress payments."

I think your guy is in good shape - Regards, Ron J.