April 01, 2007 | By Keith Martin in Washington, DC

Timber properties can be converted into cash without having to pay taxes immediately on the gain.

Temple-Inland Inc. announced a restructuring plan in late February to stave off a takeover attempt by corporate raider Carl Icahn. Among the steps the company plans to take is a sale of its timber properties. It plans to sell them for a note requiring installment payments over time. It will then borrow against the note and distribute the cash to its shareholders.

There are two problems with this strategy in most ordinary situations. One is the United States lets anyone selling property for installment payments over time report gain from the sale over the same period the installment payments are received. However, the seller must pay interest to the government on the deferred taxes as if taxes were due on the entire gain at inception. The interest charge is at a government borrowing rate.

In addition, if the installment note is pledged as collateral for a loan, the entire gain becomes taxable immediately. That’s because the seller has essentially received the full gain up front.

Both problems disappear under a special rule in the tax code for sales of property “used or produced in the trade or business of farming.” Farming is defined as growing crops or fruit or raising livestock and cultivating trees or preparing them for market.

Keith Martin