Chapter 5 - Timber Casualty Loss Audit Techniques Guide
Publication Date: September 2005
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
5. Verification of "Volume Loss"
A. Introduction:
The taxpayer must furnish detailed information substantiating the volume of timber comprising the loss. Included in the information required to be furnished by the taxpayer are the location and the volume of timber affected; disposition of the timber (for example totally destroyed, sold, damaged but not salvaged, etc.); the characterization of the damage, as described above; and the extent of the damage (for example total loss or product degradation — saw timber to pulpwood).
B. Field Sampling Techniques
On any casualty loss claim, it is incumbent on the examiner to verify the volume that was reported as lost. Remember, summaries tend to look exact and factual, therefore, request the field notes and work papers to determine the reliability of the data. Typically, when a major company suffers a large casualty, progress reports are being prepared to mitigate the loss. These records alone may be sufficient to reasonably ascertain the volume and product classes involved. The first line manager or the forest inventory (technical) group would typically be the source of these reports.
Various field-sampling techniques may be used by the taxpayer's field foresters to estimate the extent of the loss. The statistical method used should be well documented and should explain in detail how the loss volumes were determined during the field sampling operation.
Field inspection should include obtaining a list of the specifications provided to the operational foresters responsible for the field measurements. Each type of casualty may have a different set of specifications tailored to the particular damage caused by each casualty event. For example; following a windstorm, the field foresters may be required to cruise the damaged area recording various damaged classes as broken tops, leaners of various degrees, main bole broken, blow downs, etc. The specifications should describe what degree of loss is claimed for each category of loss listed in the specifications.
Based on the numerous combinations that could exist in timber loss events, it is impractical to attempt to define the various specifications that would be required in setting up a sampling technique to estimate the timber losses. An IRS forester can best determine what would be required to evaluate a specific loss.
C. Corporate Inventory Systems:
Large timber companies maintain computerized inventory records. Most taxpayers have a continuous forest inventory (CFI) system that measure (on a stand level) the volumes by product class and predicts the net growth. With the current level of technology, most forest products companies maintain a continuous forest inventory system based on GPS (Global Positioning Satellites) mapping and placement of inventory sampling points. Be aware that using data from a CFI is very complex and time consuming. The corporate tax manager probably is not aware of what data is captured by the land management personnel for use in the CFI.
This is an obvious place to do a volume assessment coupled with harvesting records. The examiner will need to get an understanding of the parameters used in gathering and maintaining these records. Judgment will need to be made regarding the application and reliability of this information. The data in the inventory system was not collected for tax purposes and the company can be presumed to have done their best to collect the most reliable information for use in their business plan. If the damaged timber was not cruised, the inventory system will most likely provide the most reliable volume and product class information.
As part of the inventory system, companies have aerial photographs (usually flown on a five-year interval) and timber stand maps. These coupled with any available aerial imaging subsequent to the casualty may assist in the evaluation of the affected timber. Be sure and check public sources for aerial imaging of the damaged site if aerial photos are not available from the company.
D. Harvest Records:
Absent reliable inventory data, the examiner should request the harvest records associated with the claimed loss. The salvage volumes of damaged timber can be determined by securing the harvest records and comparing the stand or compartment numbers on those records with the same stand numbers in the area from which the loss occurred.