Chapter 7 - Timber Casualty Loss Audit Techniques Guide
Publication Date: April 2011
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.
7. Computations
A. Loss Computation
When a taxpayer makes a casualty loss claim that was in excess of cost basis recovery, then special computations must be made.
An IRS Forester should verify the before and after block fair market value loss prior to making this basis adjustment to reflect the loss of fair market value. The casualty loss allowed can never be larger than the adjusted depletion basis.
If a determination is made that the difference in the before and after fair market value loss is less than the basis in the timber depletion block, then the basis should be adjusted.
B. Reconciliation of Form T
Line 14 on Part II of Form T, permits basis adjustments for casualty losses that exceed normal unit rate values per Rev. Rul. 99-56. Included in this dollar value may be basis reductions due to degradation of the existing timber or for values in excess of the unit rate basis.
C. Adjusting Remaining Basis
Many special circumstances can occur that may affect the way the remaining basis is allocated. Of course there is a finite basis pool to draw from, especially in regard to a taxpayer that has elected to deplete from different timber product sub-accounts (for example, saw timber, pulpwood, premerchantable, or reforestation accounts). How the loss is allocated depends on the size of the loss from each of the individual sub-accounts and the balance available in each sub-account. Consistent with the regulations, which allow an allocation of timber basis to the appropriate timber product classes (i.e. reproduction, premerchantable, pulpwood, saw timber), following are a series of circumstances and the recommended method for adjusting the basis:
1. The basis in each timber account is not exceeded:
This is the most straightforward of the possible scenarios. The fair market value diminution determined for each individual account is deducted from that account basis pool. This is accomplished on the line labeled “Allowable basis of loss” on line14, column b of Part II of the current year’s Form T, See Example 1 below.
2. The fair market diminution in one or more timber accounts exceeds the basis in those individual accounts:
In this scenario, when one account basis is written down to zero, the balance of the loss amount is allocated to the other timber accounts in proportion to their contributing value to the total remaining adjusted basis in the block. All accounts are adjusted for all casualties before this reallocation of the remaining loss is applied. See Example 2 below.
3. The loss was a result of product degradation:
The degradation claim can only be made if the timber will never be suitable for sale as a higher valued product.
The IRS Forester should take special care that if product degradation took place that the allowable deduction for value loss is taken from the basis of the source account and also that an adjustment is made to the target account. For example, if the saw timber was degraded to pulpwood, the affected volume should be transferred to the pulpwood account as a correction. This can be accomplished on line 3 of the depletion schedule for the Pine Pulpwood account. The allowable decrease for loss by degradation (loss net of basis) should be made to the saw timber account as a correction on line14, column b of Part II of Form T. See Example 3 below.
D. Form T - Examples
Examples of required adjustments to the depletion account following casualty losses where the basis limitation is the entire block and not the individual timber unit (cord, ton, MBF, etc.) damaged or destroyed.
Additional important instructions to remember when completing any Part II of Form T:
- Line 1- if MBF, log scale is not the unit used, state what unit is used and explain its derivation.
- Line 3 - Adjust the quantity in MBF, log scale, or other unit remaining at the end of the year for changes in re-inventory, standards of use, scattered and/or indefinitely ascertained losses, inaccuracy of the former estimate, or change in the log scale if the log rule now in use differs from the one used as basis for depletion in earlier years. If you make a change, state clearly the basis for it.
- Line 6 - Analyze the addition to show the individual items included. Include expenditures for taxes, administration, protection, interest actually paid, etc., if you did not treat these expenditures as expense deductions on your return. Carry expenditures for reforestation, such as site preparation, planting, seeding, etc., in a separate deferred account.
- Line 14 - Difference in FMV of SIP before the casualty and FMV of SIP after the casualty less the allowable unit basis of loss. Additional basis is limited to the remaining basis in the SIP (block).
Example 1: The diminution in fair market does not exceed the basis in the respective sub accounts.
A forest products taxpayer experienced a casualty due to wildfires during the 2001 tax year. The merchantable timber that was burned was not salvaged. In addition to the merchantable timber losses, the fire consumed 1,258 acres of a 1999 plantation. Following are the loss volumes and claimed dollar loss:
| Pine Sawtimber | 33,881 Cords | FMV Decrease | $3,469,414 |
| Pine Pulpwood | 37,926 Cords | FMV Decrease | $ 857,128 |
| 1999 Plantation | 1,258 Cords | FMV Decrease | $ 515,780 |
With the issuance of Rev. Rul. 99-56 there were no guidelines on how to account for the additional basis deduction when the diminution in FMV is greater than the normally computed unit rate depletion. The following Part II of Form T demonstrates how the additional basis should be accounted for in the depletion schedule for each sub account to reduce the basis for the additional allowable basis deduction.
Pine Sawtimber Form T Account
NOTE: In the Pine Sawtimber (PST) account the allowable basis of loss using the unit rate calculation is recorded on line 14 of Form T. An additional basis deduction allowed as a result of Rev. Rul. 99-56 is determined by subtracting the allowable unit basis on line 14 of Form T from the claimed casualty loss difference in FMV of the SIP before the casualty and FMV of the SIP after the casualty for the appropriate timber account. The additional basis recovery pursuant to Rev. Rul. 99-56 is also recorded on line 14 of Form T. Additional basis adjustments are limited to the remaining basis in the SIP account.
| Line No. | Part II of Form T, Capital Returnable Through Depletion 2001 | (a) Quantity | (b) Cost Basis |
| 1 |
Name of block and title of account Alabama Block, Pine Sawtimber (PST) account, units in Cords |
Quantity in MBF, log scale, cords, or other unit | Cost or other basis |
| 2 | Estimated quantity of timber and amount of capital returnable through Depletion at end of the immediately preceding tax year | 1,228,624 | $26,587,423 |
| 3 | Increase or decrease of quantity of timber required by way of correction | 0 | |
| 4a | Addition for growth (period covered __one __ years) 6% growth rate | 73,717 | |
| 4b | Transfers from premerchantable timber account | 0 | $0 |
| 4c | Transfers from deferred reforestation account | 0 | $0 |
| 5 | Timber Acquired during year | 0 | $0 |
| 6 | Addition to capital during year | $0 | |
| 7 | Total at end of year, before depletion (add lines 2 thru 6, in each column) | 1,302,341 | $26,587,423 |
| 8 | Unit rate returnable through depletion, or basis of sales or losses | $ 20.42 | |
| 9 | Quantity of timber cut during the year | 0 | |
| 10 | Depletion sustained (line 8 multiplied by line 9) | $0 | |
| 11 | Quantity of standing timber sold or otherwise disposed of during the year | 0 | |
| 12 | Allowable as basis of sale (line 8 multiplied by line 11) | $0 | |
| 13 | Quantity of standing timber lost by fire or other cause during year | 33,881 | |
| 14 | Allowable basis of loss plus additional basis recovery per Rev. Rul. 99-56 | $3,469,414 | |
| 15 | Total Reductions during year: | ||
| 15a | Add line 9, column a, line 11 column a, and line 13 column a | 33,881 | |
| 15b | Add line 10 column b, line 12 column b, and line 14 column b | $3,469,414 | |
| 16 | Net quantity and value at end of year (line 7 column a less line 15a and line 7 column b less the sum of line 15b) | 1,268,460 | $23,118,009 |
Pine Pulpwood Form T Account
NOTE: The following schedule demonstrates how the pine pulpwood account would be adjusted for the loss. This is similar to adjustments in the Pine Sawtimber (PST) account shown above.
| Line No. | Part II of Form T, Capital Returnable Through Depletion 2001 | (a) Quantity | (b) Cost Basis |
| 1 |
Name of block and title of account Alabama Block, Pine Pulpwood (PPW) account, units in Cords |
Quantity in MBF, log scale, cords, or other unit |
Cost or other basis |
| 2 | Estimated quantity of timber and amount of capital returnable through Depletion at end of the immediately preceding tax year | 867,321 | $1,967,593 |
| 3 | Increase or decrease of quantity of timber required by way of correction | 0 | |
| 4a | Addition for growth (period covered __one __ years) 6% growth rate | 52,039 | |
| 4b | Transfers from premerchantable timber account | 0 | $0 |
| 4c | Transfers from deferred reforestation account | 0 | $0 |
| 5 | Timber Acquired during year | 0 | $0 |
| 6 | Addition to capital during year | $0 | |
| 7 | Total at end of year, before depletion (add lines 2 thru 6, in each column) | 919,360 | $1,967,593 |
| 8 | Unit rate returnable through depletion, or basis of sales or losses | $ 2.14 | |
| 9 | Quantity of timber cut during the year | 0 | |
| 10 | Depletion sustained (line 8 multiplied by line 9) | $0 | |
| 11 | Quantity of standing timber sold or otherwise disposed of during the year | 0 | |
| 12 | Allowable as basis of sale (line 8 multiplied by line 11) | $0 | |
| 13 | Quantity of standing timber lost by fire or other cause during year | 37,926 | |
| 14 | Allowable basis of loss plus additional basis recovery per Rev. Rul. 99-56 | $ 857,128 | |
| 15 | Total Reductions during year: | ||
| 15a | Add line 18, column a, line 20 column a, and line 22 column a | 37,926 | |
| 15b | Add line 19 column b, line 21 column b, and line 23 column b | ||
| 16 | Net quantity and value at end of year (line 16 column a less line 24a and line 16 column b less the sum of line 24b) | 881,434 | $1,110,465 |
NOTE: Allowable Basis in acres lost to the casualty would
be computed by multiplying the Seedling Planting Cost/Acre in column D times
the number of Loss Acres destroyed in column E, results in the Basis of Loss
in column F.
NOTE: Column G contains the Claimed Casualty Loss for the
pine plantation acres that represent the diminution in FMV before and after
the casualty. This column will almost always exceed the normal Basis of Loss
represented in column F.
NOTE: Since Rev. Rul. 99-56 allows for greater than the unit
basis recovery, column H represents the Additional Basis Per Rev. Rul. 99-56
recovered from the plantation account. This is computed by subtracting the
Basis of Loss in column F from the Claimed Casualty Loss in column G.
NOTE: Column I is the remaining basis or Ending Deferred
Reforestation in each year's plantation account after subtracting the
Basis of Loss and the Additional Basis Per Rev. Rul. 99-56 from the Beginning
Deferred Reforestation in column B.
|
Deferred Reforestation Account |
||||||||
|
A |
B |
C |
D |
E |
F |
G |
H |
I |
| Beginning | Seedling | Claimed | Additional | Ending | ||||
| Vintage | Deferred | Beginning | Planting | Loss | Basis of | Casualty | Basis per | Deferred |
| Year | Reforestation | Acres | Cost/Acre | Acres | Loss | Loss | RR 99-56 | Reforestation |
| 1986 | $343,505 | 15,111 | $22.73 | $0 | $343,505 | |||
| 1987 | $3,306469 | 14,749 | $224.18 | $0 | $3,306469 | |||
| 1988 | $3,357,244 | 20,581 | $163.12 | $0 | $3,357,244 | |||
| 1989 | $3,972,567 | 25,429 | $156.22 | $0 | $3,972,567 | |||
| 1990 | $4,785,181 | 23,703 | $201.88 | $0 | $4,785,181 | |||
| 1991 | $3,705,598 | 15,204 | $243.73 | $0 | $3,705,598 | |||
| 1992 | $3,518,339 | 12,599 | $279.26 | $0 | $3,518,339 | |||
| 1993 | $4,951,240 | 26,054 | $190.04 | $0 | $4,951,240 | |||
| 1994 | $4,479,524 | 20,534 | $218.15 | $0 | $4,479,524 | |||
| 1995 | $6,776,708 | 36,390 | $186.22 | $0 | $6,776,708 | |||
| 1996 | $6,183,699 | 45,045 | $137.28 | $0 | $6,183,699 | |||
| 1997 | $4,816,581 | 37,073 | $129.92 | $0 | $4,816,581 | |||
| 1998 | $4,860,300 | 31,401 | $154.78 | $0 | $4,860,300 | |||
| 1999 | $3,667,523 | 30,339 | $120.88 | 1,258 | $152,073 | $515,780 | $363,707 | $3,151,743 |
| 2000 | $4,611,852 | 28,967 | $159.21 | $0 | $4,611,852 | |||
| 2001 | $9,079,508 | 39,982 | $227.09 | $0 | $9,079,508 | |||
| Total | $72,415,838 | 423,161 | $152,073 | $515,780 | $363,707 | $71,900,058 | ||
In this scenario, when one sub-account basis is written down to zero, the balance of the allowable loss is allocated to the other timber sub-accounts. For instance, if the basis in the pulpwood account is exceeded by a FMV loss claim then the additional basis recovery must come from another merchantable timber sub-account.
The same forest products taxpayer in Example 1 experienced several more fires in 2002. However, the fires only destroyed stands of timber containing pine pulpwood (PPW). The taxpayer lost 147,651 cords of PPW. The diminution in value of the block (the SIP) as a result of this loss was $2,362,416. The following entries in the Part II of Form T would be necessary to account for the basis recovery as a result of the loss.
- The PPW account beginning balances for 2002 reflect the ending balances from 2001.
- Notice that the total basis remaining in the PPW account is not sufficient to cover the loss of $2,362,416. The basis in this sub-account has been exceeded but not the basis in the entire block (the SIP).
- The additional basis recovery must come from another merchantable timber account, preferably of the same species. In this case, the basis will be taken from the Pine sawtimber (PST) account.
- Note how the loss is taken from the PST account on Part II of Form T for the Pine Sawtimber account for 2002.
Pine Pulpwood Form T Account
| Line No. | Part II of Form T, Capital Returnable Through Depletion 2002 | (a) Quantity | (b) Cost Basis |
| 1 |
Name of block and title of account Alabama Block, Pine Pulpwood account, units in Cords |
Quantity in MBF, log scale, cords, or other unit |
Cost or other basis |
| 2 | Estimated quantity of timber and amount of capital returnable through Depletion at end of the immediately preceding tax year | 881,434 | $1,110,465 |
| 3 | Increase or decrease of quantity of timber required by way of correction | 0 | |
| 4a | Addition for growth (period covered __one __ years) 6% growth rate | 52,886 | |
| 4b | Transfers from premerchantable timber account | 0 | $0 |
| 4c | Transfers from deferred reforestation account | 0 | $0 |
| 5 | Timber Acquired during year | 0 | $0 |
| 6 | Addition to capital during year | $0 | |
| 7 | Total at end of year, before depletion (add lines 2 thru 6, in each column) | 934,320 | $1,110,465 |
| 8 | Unit rate returnable through depletion, or basis of sales or losses | $ 1.19 | |
| 9 | Quantity of timber cut during the year | 0 | |
| 10 | Depletion sustained (line 8 multiplied by line 9) | $0 | |
| 11 | Quantity of standing timber sold or otherwise disposed of during the year | 0 | |
| 12 | Allowable as basis of sale (line 8 multiplied by line 11) | $0 | |
| 13 | Quantity of standing timber lost by fire or other cause during year | 147,651 | |
| 14 | Allowable basis of loss plus additional basis recovery per Rev. Rul. 99-56 | $1,110,465 | |
| 15 | Total Reductions during year: | ||
| 15a | Add line 9, column a, line 11 column a, and line 13 column a | 147,651 | |
| 15b | Add line 10 column b, line 12 column b, and line 14 column b | ||
| 16 | Net quantity and value at end of year (line 7 column a less line 15a and line 7 column b less the sum of line 15b) | 786,669 | $0 |
NOTE: Line 14 reflects the additional basis recovery per Rev. Rul. 99-56 that was transferred from the PPW account due to insufficient basis in that account to cover the casualty loss.
NOTE: There was no activity in the PST account during 2002; however, this account was reduced by $1,251,951 as a result of the PPW casualty loss.
Pine Sawtimber Form TAccount
| Line No. | Part II of Form T, Capital Returnable Through Depletion 2002 | (a) Quantity | (b) Cost Basis |
| 1 |
Name of block and title of account Alabama Block, Pine Sawtimber (PST) account, units in Cords |
Quantity in MBF, log scale, cords, or other unit 1 |
Cost or other basis |
| 2 | Estimated quantity of timber and amount of capital returnable through Depletion at end of the immediately preceding tax year | 1,268,460 | $23,118,009 |
| 3 | Increase or decrease of quantity of timber required by way of correction 2 | 0 | |
| 4a | Addition for growth (period covered __one __ years) 6% growth rate | 76,108 | |
| 4b | Transfers from premerchantable timber account | 0 | $0 |
| 4c | Transfers from deferred reforestation account | 0 | $0 |
| 5 | Timber Acquired during year | 0 | $0 |
| 6 | Addition to capital during year 3 | $0 | |
| 7 | Total at end of year, before depletion (add lines 2 thru 6, in each column) | 1,344,568 | $23,118,009 |
| 8 | Unit rate returnable through depletion, or basis of sales or losses | $ 17.19 | |
| 9 | Quantity of timber cut during the year | 0 | |
| 10 | Depletion sustained (line 8 multiplied by line 9) | $0 | |
| 11 | Quantity of standing timber sold or otherwise disposed of during the year | 0 | |
| 12 | Allowable as basis of sale (line 8 multiplied by line 11) | $0 | |
| 13 | Quantity of standing timber lost by fire or other cause during year | 0 | |
| 14 | Allowable basis of loss (line 17 multiplied by line 22) plus additional basis recovery per Rev. Rul. 99-56 4 | $1,251,951 | |
| 15 | Total Reductions during year: | ||
| 15a | Add line 9, column a, line 11 column a, and line 13 column a | 0 | |
| 15b | Add line 10 column b, line 12 column b, and line 14 column b | $0 | |
| 16 | Net quantity and value at end of year (line 7 column a less line 15a and line 7 column b less the sum of line 15b) | 1,344,568 | $21,866,058 |
The degradation claim can only be made if the timber will never be suitable for sale as a higher valued product.
The IRS Forester should take special care that if product degradation took place that the allowable deduction for value loss is taken from the basis of the source account and also that an adjustment in volume is made to the target account. For example, if the saw timber was degraded to pulpwood, the affected volume should be transferred to the pulpwood account as a correction. This can be accomplished by decreasing the volume in the sawtimber account on line 13 and increasing the volume in the pulpwood account on line 3. The additional basis recovery, for the diminution in FMV by product degradation (loss net of depletion), should be made to the saw timber account on line 14.
The same forest products taxpayer in Example 1 experienced an ice storm in 2002. The ice storm resulted in product degradation from sawtimber to pulpwood. The affected volume of sawtimber was 43,253 cords which resulted in a FMV decrease in the block of $1,730,120. The following entries in Part II of Form T would be necessary to account for the basis recovery as a result of the loss.
- The PST account beginning balances for 2002 will reflect the ending balances from 2001.
- The volume of PST that was degraded will be listed as a loss in the PST account on line 13, column a. The associated reduction of depletion basis will appear on line 14, column b.
- The basis recovery will appear on line 14, column b of the PST account.
- The volume of PST degraded will be transferred to the PPW account as an addition on line 3, column a but there will be no basis associated with those units.
Pine Sawtimber Form T Account
| Line No. | Part II of Form T, Capital Returnable Through Depletion 2002 | (a) Quantity | (b) Cost Basis |
| 1 |
Name of block and title of account Alabama Block, Pine Sawtimber (PST) account, units in Cords |
Quantity in MBF, log scale, cords, or other unit |
Cost or other basis |
| 2 | Estimated quantity of timber and amount of capital returnable through Depletion at end of the immediately preceding tax year | 1,268,460 | $23,118,009 |
| 3 | Increase or decrease of quantity of timber required by way of correction | 0 | |
| 4a | Addition for growth (period covered __one __ years) 6% growth rate | 76,108 | |
| 4b | Transfers from premerchantable timber account | 0 | $0 |
| 4c | Transfers from deferred reforestation account | 0 | $0 |
| 5 | Timber Acquired during year | 0 | $0 |
| 6 | Addition to capital during year | $0 | |
| 7 | Total at end of year, before depletion (add lines 2 thru 6, in each column) | 1,344,568 | $23,118,009 |
| 8 | Unit rate returnable through depletion, or basis of sales or losses | $ 17.19 | |
| 9 | Quantity of timber cut during the year | 0 | |
| 10 | Depletion sustained (line 8 multiplied by line 9) | $0 | |
| 11 | Quantity of standing timber sold or otherwise disposed of during the year | 0 | |
| 12 | Allowable as basis of sale (line 8 multiplied by line 11) | $0 | |
| 13 | Quantity of standing timber lost by fire or other cause during year | 43,253 | |
| 14 | Allowable basis of loss plus additional basis recovery per Rev. Rul. 99-56 | $1,730,120 | |
| 15 | Total Reductions during year: | ||
| 15a | Add line 9, column a, line 11 column a, and line 13 column a | 0 | |
| 15b | Add line 10 column b, line 12 column b, and line 14 column b | $1,730,120 | |
| 16 | Net quantity and value at end of year (line 7 column a less line 15a and line 7 column b less the sum of line 15b) | 1,301,315 | $21,387,889 |
Pine Pulpwood Form T Account
| Line No. | Part II of Form T, Capital Returnable Through Depletion 2002 | ||
| 1 |
Name of block and title of account Alabama Block, Pine Pulpwood (PPW) account, units in Cords |
Quantity in MBF, log scale, cords, or other unit |
Cost or other basis |
| 2 | Estimated quantity of timber and amount of capital returnable through Depletion at end of the immediately preceding tax year | 881,434 | $1,110,465 |
| 3 | Increase or decrease of quantity of timber required by way of correction | 43,253 | |
| 4a | Addition for growth (period covered __one __ years) 6% growth rate | 52,886 | |
| 4b | Transfers from premerchantable timber account | 0 | $0 |
| 4c | Transfers from deferred reforestation account | 0 | $0 |
| 5 | Timber Acquired during year | 0 | $0 |
| 6 | Addition to capital during year | $0 | |
| 7 | Total at end of year, before depletion (add lines 2 thru 6, in each column) | 977,573 | $1,110,465 |
| 8 | Unit rate returnable through depletion, or basis of sales or losses | $ 1.14 | |
| 9 | Quantity of timber cut during the year | 0 | |
| 10 | Depletion sustained (line 8 multiplied by line 9) | $0 | |
| 11 | Quantity of standing timber sold or otherwise disposed of during the year | 0 | |
| 12 | Allowable as basis of sale (line 8 multiplied by line 11) | $0 | |
| 13 | Quantity of standing timber lost by fire or other cause during year | 0 | |
| 14 | Allowable basis of loss plus additional basis recovery per Rev. Rul. 99-56 | $0 | |
| 15 | Total Reductions during year: | ||
| 15a | Add line 9, column a, line 11 column a, and line 13 column a | 0 | |
| 15b | Add line 10 column b, line 12 column b, and line 14 column b | $0 | |
| 16 | Net quantity and value at end of year (line 7 column a less line 15a and line 7 column b less the sum of line 15b) | 977,573 | $1,110,465 |