Section 810, General
Internal Revenue Manual
Specialized Industry Guidelines - Timber
Section 810, General
Last amended: 6-26-1978
General
(1) Set forth below are the normal operations of a timber company in the order they appear in the cost of sales determination.
(a) Harvesting
1 Including depletion cost, or
2 Fair Market Value under IRC 631(a)
3 Felling and bucking(b) Decking
1 Yarding and loading
2 Decking labor
3 Overhead
4 Transportation(c) Cost of contract logging
(d) Cost of logs purchased at pond or mill
(e) Pond Cost
1 Pond labor
2 Peeling or barking(f) Cost of logs sawn
1 Net of above costs after taking into account opening and closing inventories
2 Green lumber handling
3 Drying
4 Planer mill and reworking plant
(2) From this point on, the logs have been manufactured into lumber or by-products and are in inventories. The remaining costs are:
(a) storage and inventory;
(b) shipping;
(c) selling; and
(d) administrative.
(3) In the cost of sales determination, there are various inventory points in the average return. The following inventories are used.
(a) Woods inventories
1 Felled timber, before bucking
2 Felled timber, bucked into logs
3 Decked logs(b) Pond inventory
(c) Lumber inventories, by grades, species and size
(4) Most of the items peculiar to the lumber industry are included in the cost of sales determination. The auditing of the return will be mainly centered on the figures included in the cost of sales.
(5) In a typical lumber company, the starting point is logging, which includes the timber cost and cost of felling the trees. Other than the timber cost (depletion), the main cost is labor. Usually the fallers are paid on a log scale basis. The cost records that are maintained can be used to verify the expense. This is also true of many of the labor operations. As a consequence, the lumber companies have numerous detailed records that can be used to verify log scales and labor costs.
(6) Bucking, transportation, yarding, loading, and decking are all logging operations and can be similarly verified. Some companies maintain inventories of these operations. If so, it will be necessary to verify the inventories as explained under the heading LIFO inventories. See Chapter 400 of these guidelines. This is necessary to determine if the inventory method is being consistently followed.
(7) To illustrate the preparation of operating statements and a typical LIFO inventory, pro forma statements have been prepared showing the cost of pine sold of the fictitious West Coast Pine Company. The Company owns 900 million feet of pine timber costing $15 per 1,000 board feet (M B.F.). The IRC 631(a) fair market value as of January 1, 1975, was $40 per M B.F. which resulted in a capital gain of $25 per M B.F. LIFO inventory was elected for logs and lumber on January 1, 1958.
(a) Cost of Pine Lumber Manufactured and Sold--Exhibit 800-1.
(b) Log Inventories--LIFO Values--Exhibit 800-2.
(c) Lumber Inventories--LIFO Values--Exhibit 800-3.
(8) These are the closing LIFO inventories for the year ended December 31, 1976. Increases in the bucking, pond and peeling inventories have occurred. The bucking inventory consists of labor only. In verifying the inventory increase for 1976, it is necessary to compute the average cost of bucking for the year to determine if the $4.50 unit cost is correct. This taxpayer originally elected to value increases at the average cost for the year. The volume figures should also be verified from the inventory records.
(9) The peeling inventory is labor only and can be verified in a similar manner. The pond inventory, in addition to labor costs, also included cost of logs and fair market value of logs. The increase due to the use of fair market value is $25.00 ($74.00 less $49.00). This should be the rate per thousand board feet reported as capital gain under IRC 631. The remainder is actual cost of logs and labor accumulated to the pond inventory point in the cost of sales computation and should be verified from the cost records.
(10) Under the taxpayer's method of computing LIFO inventories, current costs are reflected in rough-green lumber and surfaced-dry lumber since these were increased volumes for 1976. The current cost for the increased volume of rough-green lumber is the log transfer value of $77.00 plus sawmill and green yard costs of $10.00 and $2.00, respectively. The surface-dry lumber costs include the following. The cost of the logs (lumber tally) was $77.00. The sawmill cost $10; the green yard $2; the dry yard $3. The dry kiln cost $4 and the planning mill $6. The total cost per M B.F. equaled $102. The IRC 631(a) gain increments in log and lumber inventory for tax purposes are normally reflected in Schedule M-1, reconciling book income to taxable income.
(11) Logs are sometimes purchased from other operators, in the woods and at the pond or mill. The prices paid, if the quality is similar, can be used to check the reasonableness of the taxpayer's costs at the point of delivery.
(12) Prices paid by the taxpayer for timber cutting rights will often help in checking the reasonableness of the fair market values claimed. If the seller does his/her own scaling, the seller's scale may be used to verify the taxpayer's log scale.