Timber and taxation;

              Timber and
The tax-wise owner of timber can realize capital gain
from sales, exchanges or utilization of his timber. This is
permitted under sections 631 and 1231 of the 1954
Code (and its predecessor provisions under the 1939
Code). This article will discuss some of the tax planning
problems which may be encountered in obtaining the
advantages of section 631. Space limitations do not per­mit
as full a discussion as may be desirable, but a list of
additional references is appended.
Need for Legislation
Before discussing the present rules of section 631, some
historical perspective should be helpful. Prior to 1944, a
mill operator could obtain a capital gain benefit only by
an outright sale of timber which was a capital asset or an
asset used in his trade or business. Also an investor could
obtain a capital gain benefit only by an outright sale of
timber. Neither could obtain a capital gain benefit if he
was a dealer. Since private sales of timber usually involve
a considerable amount of money, an outright sale was
difficult to conclude.
To overcome this problem timber was sold on a pay-as-
you-cut basis. That is, a cutting contract was executed
granting timber cutting rights for a unit price per thou­sand
board feet (MBF). This procedure raised the ques­tion
of whether the consideration was for the sale of tim-the
amounts
—Every citizen
•a declaration
estimated tax
• more and he:
eexceeding-*-
d or a widow
rates;
pis;
111 not entitled
entitled to file
ed income of
>y be expected
re mare man
ubject to with-totton.—
Your
Vpril 15, 1963.
in Instructions
rtor of Internal
no legal rest­ed
States, file
ttons. Internal
• estimated tax
n, or in equal
fune 15, 1963,
i, 1964. The
i declaration,
le to Interna)
is designed to
if any, against
sated tax by
bn line 5 and
ly your 1962
:h installment
snt, divide the
3f installments
tion on line 6.
d wife may file
ing cases: No
• the husband
are separated
arate mainte-ars.
If a joint
i not made for
uch year may
r the husband
them in such
sast two-thirds
ling or fishing,
•e January 15,
wait until Jan-mure
balance
xi tion). How-or
before Feb-that
time, you
to file a declaration later. In sue
filing is as follows: June 15, if the
April' 1 and before June 2; Septerr.
occurs after June 1 and before Se
15, 1964, if the change occurs
The estimated tax may be paid L
on the remaining payment dates.
If by January 31, 4964, you fil
tax return and pay in full the bal<
on or before January 15, 1964, yi
any required amended declaratioi
declaration which would be due
January 15, 1964; or (c) pay th
estimated tax.
8. Amended declaration.—If,
a declaration, you find that your <
stantially increased or decrease
change in your income or exempt
an amended declaration on or t
date—June 15, 1963, September
ary 15, 1964. For this purpose, U
on back of the bill if one is mailec
tax payments. If you do not r»
Form 1040-ES (Amended) from ai
Service office.
Any amended declaration shot
District Director with whom the
was filed even if you move to c
whether or not you expect to file yc
tax return for 1963 in that aistri
9. Additional charge for failu
Income tax.—An additional chc
imposed by law for underpayment
mated tax except in certain situ
does not apply if each installmer
(a) is at least 70 percent (66%%
ermen) of the amount due, (b) is
would have been paid if based
year, or (c) is based on a tax cor
income for last year and this year's
ttons. For additional exceptions
Form 2210.
10. Your 1962 income tax.—Th
line 1(a), Form 1040-ES, Is an am
line 12, less the total of any ami
15c, d, e, and f on page 1, Form 1
11. How to estimate your fa
made a 1962 return on Form 1C
income, exemptions, and deductio
same, enter on line 1(b) of your
amount shown on line 1 (a). If yoi
to be $5,000 or more, use Form 10
with related instructions, to assii
your tax for 1963.
If your income (line 9, page 1, Fc
to be less than $5,000, to find yo
may use the tax table in the insfa
and the dividends received cred
come credit if applicable.
You may include estimated se
your declaration of estimated tax
ber or a royalty. The Treasury related timber (a natural
resource) to mineral deposits and held, as in the case of
mineral leases, that the payment represented a royalty
and as such was ordinary income despite the fact that the
timber was a capital asset in the hands of the taxpayer.
This situation depressed the wood products industry
because investors wanted to make only outright sales of
timber and small operators could not meet the terms. Mill
operators with their own stands of timber were reluctant
to cut and create ordinary income out of the apprecia­tion
accruing during a long holding period. To a certain
extent this resulted in mill operators selling blocks of
timber back and forth to attain a tax saving even though
such sales would result in an economic loss because of the
location of the exchanged timber.
Congress concluded that the law discriminated against
taxpayers who disposed of timber by cutting it as opposed
to those who sold it outright. In order to eliminate this
discrimination, the Senate added to the Revenue Act of
1943 an election which permitted the taxpayer who for
more than 6 months before the beginning of the year
had owned timber or had a contract to cut timber to treat
36 THE QUARTERLY