• Home
• Federal Income Taxes
• State Tax Laws
• Estate Planning
• Publications
  • Ag. Handbook #731
  • Internal Revenue service
  • Tax Articles
  • Historical Documents
  • Forest Service Publications
• Professional Research
• Tax Workshops/Education
• Tax Policy
• Links

Section 410, General

Internal Revenue Manual
Specialized Industry Guidelines - Timber
Section 410, General
Last amended: 8-4-1981

General

(1) Last in First Out (LIFO) inventories are widely used by timber companies. The inventories may be logs only, lumber only, or both logs and lumber, or cordwood, or chips, or both cordwood and chips. Standing timber has no place in a LIFO or other inventory method used to determine the cost of goods sold. In verifying LIFO inventories, it is necessary to determine that the items covered by the LIFO election on Form 970, Application to Use LIFO Inventory Method, whether by specific unit or by grouping, do not vary from the original election or by a subsequent formal election on the first return in which a new LIFO inventory is used establishing a new base cost. LIFO inventories must always be at cost and cannot be written down to market.

(2) The examiner should determine that all appropriate costs are included in each pool covered by the LIFO election. The understatement of the base year or opening LIFO layers will have an everlasting effect on inventory valuation in subsequent years. For example, IRC 631 gain increments are an integral part of the cost of log and lumber inventories and should be included in the base year inventories. In some situations, taxpayers may attempt to claim low IRC 631(a) timber values in the year prior to the LIFO election to reduce the base year costs. Regulation 1.472-4 requires that the taxpayer make such adjustments incident to the change in inventories of the prior taxable year or otherwise as determined on examination by the Internal Revenue Service.

(3) The annual layers of LIFO inventories should be examined and a determination made that the increases are being costed by a consistent method explained in the original election and used in the base years. These methods are the most recent purchases, average cost for the year, or in order of acquisition.

(4) Usually, if a timber company uses LIFO inventories, the logs will be valued separately and subsequent forest operations such as falling, bucking, hauling, decking, etc., will be inventories and will consist of labor and depreciation costs. This would also be true if First in First Out (FIFO) were used.