Page 115 - Virtual Currencies

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Fileid: … tions/p544/2022/a/xml/cycle03/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
All substantial rights to a patent are not payments are a substantial part of the • Cut the timber for sale or for use in your
transferred if any of the following apply to the transfer agreement. trade or business.
transfer.
• The rights are limited geographically within Subdivision of Land Making the election. You make the elec-
a country. tion on your return for the year the cutting takes
• The rights are limited to a period less than If you own a tract of land and, to sell or ex- place by including in income the gain or loss on
the remaining life of the patent. change it, you subdivide it into individual lots or the cutting and including a computation of the
• The rights are limited to fields of use within parcels, the gain is normally ordinary income. gain or loss. You do not have to make the elec-
trades or industries and are less than all However, you may receive capital gain treat- tion in the first year you cut timber. You can
the rights that exist and have value at the ment on at least part of the proceeds provided make it in any year to which the election would
time of the transfer. you meet certain requirements. See section apply. If the timber is partnership property, the
• The rights are less than all the claims or in- 1237 of the Internal Revenue Code. election is made on the partnership return. This
ventions covered by the patent that exist election cannot be made on an amended re-
and have value at the time of the transfer. turn.
Timber Once you have made the election, it re-
Related persons. This tax treatment does not mains in effect for all later years unless you can-
apply if the transfer is directly or indirectly be- Standing timber held as investment property is cel it.
tween you and a related person as defined ear- a capital asset. Gain or loss from its sale is re- If you previously elected to treat the cutting
lier in the list under Nondeductible Loss, with ported as a capital gain or loss on Form 8949 of timber as a sale or exchange, you may re-
the following changes. and Schedule D (Form 1040), as applicable. If voke this election without the consent of the
IRS. The prior election (and revocation) is disre-
1. Members of your family include your you held the timber primarily for sale to custom- garded for purposes of making a subsequent
spouse, ancestors, and lineal descend- ers, it is not a capital asset. Gain or loss on its election. See Form T (Timber), Forest Activities
ants, but not your siblings or half siblings. sale is ordinary business income or loss. It is re- Schedule, for more information.
ported in the gross receipts or sales and cost of
2. Substitute “25% or more” ownership for goods sold items of your return. Gain or loss. Your gain or loss on the cut-
“more than 50%.” Farmers who cut timber on their land and ting of standing timber is the difference between
If you fit within the definition of a related per- sell it as logs, firewood, or pulpwood usually its adjusted basis for depletion and its fair mar-
son independent of family status, the sibling ex- have no cost or other basis for that timber. ket value on the first day of your tax year in
ception in (1), earlier, does not apply. For exam- These sales constitute a very minor part of their which it is cut.
ple, a transfer between siblings as beneficiary farm businesses. In these cases, amounts real- Your adjusted basis for depletion of cut tim-
and fiduciary of the same trust is a transfer be- ized from such sales, and the expenses of cut- ber is based on the number of units (feet board
tween related persons. The sibling exception ting, hauling, etc., are ordinary farm income and measure, log scale, or other units) of timber cut
does not apply because the trust relationship is expenses reported on Schedule F (Form 1040). during the tax year and considered to be sold or
independent of family status. exchanged. Your adjusted basis for depletion is
Different rules apply if you owned the timber also based on the depletion unit of timber in the
Franchise, Trademark, longer than 1 year and elect to either: account used for the cut timber, and should be
figured in the same manner as shown in section
• Treat timber cutting as a sale or exchange,
or Trade Name or 611 of the Internal Revenue Code and the rela-
• Enter into a cutting contract. ted regulations.
If you transfer or renew a franchise, trademark, Timber is considered cut on the date when, in Timber depletion is discussed in chapter 9
or trade name for a price contingent on its pro- of Pub. 535.
ductivity, use, or disposition, the amount you re- the ordinary course of business, the quantity of
felled timber is first definitely determined. This
ceive is generally treated as an amount realized Example. In April 2022, you had owned
from the sale of a noncapital asset. A franchise is true whether the timber is cut under contract 4,000 MBF (1,000 board feet) of standing tim-
or whether you cut it yourself.
includes an agreement that gives one of the ber longer than 1 year. It had an adjusted basis
parties the right to distribute, sell, or provide Under the rules discussed below, disposi- for depletion of $40 per MBF. You are a calen-
goods, services, or facilities within a specified tion of the timber is treated as a section 1231 dar-year taxpayer. On January 1, 2022, the tim-
area. transaction. See chapter 3. Gain or loss is re- ber had a fair market value (FMV) of $350 per
ported on Form 4797. MBF. It was cut in April for sale. On your 2022
Significant power, right, or continuing inter- tax return, you elect to treat the cutting of the
est. If you keep any significant power, right, or Christmas trees. Evergreen trees, such as timber as a sale or exchange. You report the
continuing interest in the subject matter of a Christmas trees, that are more than 6 years old difference between the FMV and your adjusted
franchise, trademark, or trade name that you when severed from their roots and sold for or- basis for depletion as a gain. This amount is re-
transfer or renew, the amount you receive is or- namental purposes are included in the term ported on Form 4797 along with your other sec-
dinary royalty income rather than an amount re- “timber.” They qualify for both rules discussed tion 1231 gains and losses to figure whether it is
alized from a sale or exchange. below. treated as capital gain or as ordinary gain. You
A significant power, right, or continuing inter- figure your gain as follows.
est in a franchise, trademark, or trade name in- Election to treat cutting as a sale or ex-
cludes, but is not limited to, the following rights change. Under the general rule, the cutting of FMV of timber January 1, 2022 . . . . . . . $1,400,000
in the transferred interest. timber results in no gain or loss. It is not until a Minus: Adjusted basis for depletion . . . . (160,000)
• A right to disapprove any assignment of sale or exchange occurs that gain or loss is re-
the interest, or any part of it. alized. But, if you owned or had a contractual Section 1231 gain . . . . . . . . . . . . $1,240,000
• A right to end the agreement at will. right to cut timber, you can elect to treat the cut-
• A right to set standards of quality for prod- ting of timber as a section 1231 transaction in The FMV becomes your basis in the cut timber,
ucts used or sold, or for services provided, the year the timber is cut. Even though the cut and a later sale of the cut timber including any
and for the equipment and facilities used to timber is not actually sold or exchanged, you re- by-product or tree tops will result in ordinary
promote such products or services. port your gain or loss on the cutting for the year business income or loss.
• A right to make the recipient sell or adver- the timber is cut. Any later sale results in ordi-
tise only your products or services. nary business income or loss. See Example, Outright sales of timber. Outright sales of
• A right to make the recipient buy most sup- later. timber by landowners qualify for capital gains
plies and equipment from you. To elect this treatment, you must: treatment using rules similar to the rules for cer-
• A right to receive payments based on the • Own or hold a contractual right to cut the tain disposal of timber under a contract with re-
productivity, use, or disposition of the timber for a period of more than 1 year be- tained economic interest (defined below). How-
transferred item of interest if those fore it is cut, and ever, for outright sales, the date of disposal is
Page 24 Chapter 2 Ordinary or Capital Gain or Loss