Title 26 — Internal Revenue CodeRelease 119-73
§631 Gain or loss in the case of timber, coal, or domestic iron ore
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter I— - Natural Resources › Part PART III— - SALES AND EXCHANGES › § 631
Summary
A taxpayer can choose on their tax return to treat cutting timber they own or have a contract right to cut as if it were a sale, but only if they owned the timber or the cutting right for more than 1 year. If they make this choice, the gain or loss is the difference between the timber’s fair market value on the first day of the tax year and the taxpayer’s adjusted depletion basis. That fair market value becomes the cost of the cut timber for other tax purposes. The choice must cover all timber the taxpayer owns or has cutting rights to, and it stays in effect for that year and future years unless the IRS allows a revocation for undue hardship; if revoked, the taxpayer generally cannot make the choice again without IRS permission. “Timber” also includes evergreen trees more than 6 years old at cutting when sold for decoration. When an owner disposes of timber held more than 1 year under a contract where they keep an economic interest or sell it outright, the amount received minus the adjusted depletion basis is treated as gain or loss on a sale. If the owner keeps an economic interest, the disposal date is when the timber is cut unless the owner is paid before cutting and elects to use the payment date. The same basic rule applies to coal (including lignite) and U.S. iron ore held more than 1 year, but you must also add back deductions disallowed under section 272. If the top tax rate on capital gains that year is lower than the top ordinary income rate, the owner cannot take percentage depletion under section 613 for that coal or iron ore. These rules do not apply to owners who are partners or principals in the mining, and they do not apply to certain related-party transfers or to persons owned or controlled by the same interests. For lessees, rent and royalty deductions are figured without using these special rules.
Full Legal Text
Title 26, §631
Internal Revenue Code — Source: USLM XML via OLRC
(a)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 1 year) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this subsection, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary. For purposes of this subsection and subsection (b), the term “timber” includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.
(b)In the case of the disposal of timber held for more than 1 year before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner either retains an economic interest in such timber or makes an outright sale of such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shall be considered as though it were a gain or loss, as the case may be, on the sale of such timber. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. In the case of disposal of timber with a retained economic interest, the date of disposal of such timber shall be deemed to be the date such timber is cut, but if payment is made to the owner under the contract before such timber is cut the owner may elect to treat the date of such payment as the date of disposal of such timber. For purposes of this subsection, the term “owner” means any person who owns an interest in such timber, including a sublessor and a holder of a contract to cut timber.
(c)In the case of the disposal of coal (including lignite), or iron ore mined in the United States, held for more than 1 year before such disposal, by the owner thereof under any form of contract by virtue of which such owner retains an economic interest in such coal or iron ore, the difference between the amount realized from the disposal of such coal or iron ore and the adjusted depletion basis thereof plus the deductions disallowed for the taxable year under section 272 shall be considered as though it were a gain or loss, as the case may be, on the sale of such coal or iron ore. If for the taxable year of such gain or loss the maximum rate of tax imposed by this chapter on any net capital gain is less than such maximum rate for ordinary income, such owner shall not be entitled to the allowance for percentage depletion provided in section 613 with respect to such coal or iron ore. This subsection shall not apply to income realized by any owner as a co-adventurer, partner, or principal in the mining of such coal or iron ore, and the word “owner” means any person who owns an economic interest in coal or iron ore in place, including a sublessor. The date of disposal of such coal or iron ore shall be deemed to be the date such coal or iron ore is mined. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. This subsection shall have no application, for purposes of applying subchapter G, relating to corporations used to avoid income tax on shareholders (including the determinations of the amount of the deductions under section 535(b)(6) or section 545(b)(5)). This subsection shall not apply to any disposal of iron ore or coal—
(1)to a person whose relationship to the person disposing of such iron ore or coal would result in the disallowance of losses under section 267 or 707(b), or
(2)to a person owned or controlled directly or indirectly by the same interests which own or control the person disposing of such iron ore or coal.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2004—Subsec. (b). Pub. L. 108–357, in heading, struck out “with a retained economic interest” after “timber”, in first sentence, substituted “either retains an economic interest in such timber or makes an outright sale of such timber” for “retains an economic interest in such timber”, and, in third sentence, substituted “In the case of disposal of timber with a retained economic interest, the date of disposal” for “The date of disposal”. 1986—Subsec. (c). Pub. L. 99–514 substituted “If for the taxable year of such gain or loss the maximum rate of tax imposed by this chapter on any net capital gain is less than such maximum rate for ordinary income, such owner” for “Such owner”. 1984—Subsec. (a). Pub. L. 98–369, § 1001(c)(1), (e), substituted “on the first day of such year and for a period of more than 6 months before such cutting” for “for a period of more than 1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See
Effective Date
of 1984 Amendment note below. Subsecs. (b), (c). Pub. L. 98–369, § 1001(c)(2), (e), substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See
Effective Date
of 1984 Amendment note below. Pub. L. 98–369, § 178(a), inserted “or coal” after “iron ore” wherever appearing in last sentence of subsec. (c). 1976—Subsec. (a). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”. Pub. L. 94–455, §§ 1402(b)(1)(I), (3), 1906(b)(13)(A), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977 and struck out “before the beginning of such year” before “) shall be considered as a sale” effective for taxable years beginning after Dec. 31, 1976, and “or his delegate” after “Secretary” wherever appearing. Subsec. (b). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”. Pub. L. 94–455, § 1402(b)(1)(I), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977. Subsec. (c). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”. Pub. L. 94–455, § 1402(b)(1)(I), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977. 1964—Pub. L. 88–272, § 227(b)(1), inserted reference to domestic iron ore in heading. Subsec. (c). Pub. L. 88–272, § 227(a)(1), inserted “or domestic iron ore” in heading, “or iron ore mined in the United States” after “coal (including lignite)”, “or iron ore” after “coal” wherever appearing, and provided that the subsection shall not apply to any disposal of iron ore to a person whose relationship to the person disposing of such ore would result in the disallowance of losses under section 267 of 717(b), or to a person owned or controlled by the same interests which own or control the person disposing of such iron ore.
Statutory Notes and Related Subsidiaries
Effective Date
of 2004 Amendment Pub. L. 108–357, title III, § 315(c), Oct. 22, 2004, 118 Stat. 1469, provided that: “The
Amendments
made by this section [amending this section] shall apply to sales after December 31, 2004.”
Effective Date
of 1986 AmendmentAmendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 311(c) of Pub. L. 99–514, set out as a note under section 593 of this title.
Effective Date
of 1984 Amendment Pub. L. 98–369, div. A, title I, § 178(b),
July 18, 1984, 98 Stat. 712, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “(1) In general.—Except as provided in paragraph (2), the amendment made by subsection (a) [amending this section] shall apply to dispositions after
September 30, 1985. “(2) Special rule for fixed contracts.—“(A) In general.—The amendment made by subsection (a) shall not apply to any disposition of an interest in coal by a person to a related person if such coal is subsequently sold before
January 1, 1990, by either such person—“(i) to a person who is not a related person with respect to either such person, and “(ii) pursuant to a qualified fixed contract. “(B) Allocation where more than 1 contract.—If, for any taxable year, there is a disposition described in subparagraph (A) which is not specifically allocable to a qualified fixed contract or to a contract which is not a qualified fixed contract, such disposition shall be treated as first allocable to the qualified fixed contract. “(C) Qualified fixed contract defined.—The term ‘qualified fixed contract’ means any contract for the sale of coal which—“(i) was entered into before
June 12, 1984, “(ii) is binding at all times thereafter, and “(iii) cannot be adjusted to reflect to any extent the increase in liabilities of the person disposing of the coal for tax under chapter 1 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] by reason of the amendment made by subsection (a). “(D) Related person.—For purposes of this paragraph, the term ‘related person’ means a person who bears a relationship to another person described in the last sentence of section 631(c). ” Amendment by section 1001(c) of Pub. L. 98–369 applicable to property acquired after
June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.
Effective Date
of 1976 Amendment Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977. Pub. L. 94–455, title XIV, § 1402(b)(3), Oct. 4, 1976, 90 Stat. 1733, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1976.
Effective Date
of 1964 AmendmentAmendment by Pub. L. 88–272 applicable with respect to amounts received or accrued in taxable years beginning after Dec. 31, 1963, attributable to iron ore mined in such years, see section 227(c) of Pub. L. 88–272, set out as a note under section 272 of this title. Revocation of Elections Under section 631(a)Pub. L. 108–357, title I, § 102(c), Oct. 22, 2004, 118 Stat. 1428, provided that: “Any election under section 631(a) of the Internal Revenue Code of 1986 made for a taxable year ending on or before the date of the enactment of this Act [Oct. 22, 2004] may be revoked by the taxpayer for any taxable year ending after such date. For purposes of determining whether such taxpayer may make a further election under such section, such election (and any revocation under this section) shall not be taken into account.” Pub. L. 99–514, title III, § 311(d)(2), Oct. 22, 1986, 100 Stat. 2220, provided that: “Any election under section 631(a) of the Internal Revenue Code of 1954 made (whether by a corporation or a person other than a corporation) for a taxable year beginning before
January 1, 1987, may be revoked by the taxpayer for any taxable year ending after
December 31, 1986. For purposes of determining whether the taxpayer may make a further election under such section, such election (and any revocation under this paragraph) shall not be taken into account.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 631
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73