Sub-Section 611, Total Number of Units
Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 611, Total Number of Units
Last amended: 6-26-1978
Total Number of Units
(1) To compute the unit rate for depletion, it is necessary to know the total quantity of timber represented by the adjusted basis referred to in the preceding section. An understatement of the total timber quantity in an account is probably the most common cause of an excessive depletion deduction. The quantity is determined either by a systematic timber cruise or by a casual visual inspection. The accuracy of the latter depends on the experience and judgement of the individual making the inspection. Quantity is usually expressed in thousands of board feet, or cords in the case of pulp timber. However, the other units of measurement are sometimes used. It is important that the estimate of quantity be reasonably accurate. It should be possible to find from the taxpayer's records an indication of the accuracy of its timber estimates. If the records show that the quantity of timber realized from cutting is consistently more than 5 to 10 percent greater than the quantity estimated before cutting, it is an indication that the quantity in the depletion accounts should be increased, thereby reducing the unit rate for depletion. Before a revenue agent suggests an adjustment of timber volumes to the taxpayer, he should secure the advice and help of a forester or an engineer agent. The forester is in a much better position to analyze the facts necessary to establish reasonable quantities.
(2) Changes in the standards of utilization of timber are often the cause of understated quantities. The declining timber supply, the development of more efficient equipment, new processes and products have all contributed to the more complete utilization of the trees in the forest. Not many years ago, many areas were logged for the largest and the highest quality logs only. Competition and the abundant supply of timber made it unprofitable to cut anything but the best. There has, however, been a steady transition through the years. Lower quality logs are now peeled for plywood. Lumber is manufactured profitably from species and logs that were once treated as cull. Also, pulp may now be made from just about any species. Changes in utilization have been rapid in the last two decades. Taxpayers may sometimes fail to consider these changes when determining volumes of merchantable timber. If the examiner finds that the taxpayer is using old timber cruises as a basis for his current quantity estimates, it is probable that the estimates are understated by comparison with modern utilization practices.
(3) Growth also contributes to changes in merchantable timber volumes. The volume of timber estimated in tracts held for long periods of time before cutting will probably be less than they actually contain, unless the earlier estimates have been adjusted for growth. Growth is usually a factor but not always. For instance, growth of forests after reaching a certain age, depending upon the species and other conditions, will become very slow and may eventually, through mortality and decay, begin to lose volume from year to year.
(4) If it is ascertained either by the taxpayer or the District Director that there remains on the ground, available for utilization, more or less units of timber at the close of the taxable year than remain in the timber account on the basis of original estimate, then the original estimate shall be revised. The depletion unit shall be changed when such revisions have been made. The annual charge to the depletion account with respect to the property shall be computed by using such revised unit for the taxable year for which the revisions are made and all subsequent taxable years until a change in facts requires another revision.