You make the call

Question:

Tristan owns land with standing timber that he sells as part of his business. He has held the timberland for several years and decided to cut the timber this year. Tristan’s basis in the standing timber is computed as $15 per cord. As of Jan. 1 in the year he is cutting the timber, the fair market value (FMV) is $35 per cord. A logging company will be cutting and hauling the timber at $75 per cord. He will be selling the timber for $200 per cord. Tristan wishes to make the election to treat the cutting as a sale or exchange under §631(a). Under this method, how much of the gain will be taxed as ordinary income and how much will be taxed as capital income on a per cord basis?

Answer:

Tristan will have an overall gain of $110 per cord. Of that gain, $20 per cord will be taxed as capital gain, while $90 will be taxed as ordinary income.

The capital gain portion is calculated as follows: $35 FMV - $15 basis = $20 capital gain.

The ordinary income portion is calculated as follows: $200 sales price - $75 cost to have logger cut and haul timber - $35 FMV = $90 ordinary income.