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Expenditures for Replanting Forest Plantations that Fail

Note: This ISP Paper was Decoordinated on July 31, 1995

October 31, 1991

ISSUE

Whether the costs of replanting areas where the initial planting was unsuccessful and the poor survival rate of planted tree seedlings was not due to a casualty should be:

(1) Allowed as an ordinary and necessary business expense under Section 162;

(2) Allowed as a loss under Section 165(a); or

(3) Treated as a capital expenditure under Regs. 1.611-3(a) in a manner identical to the original planting costs.

BACKGROUND, LAW, AND ANALYSIS

Replanting is necessary when the original planted seedlings fail to survive or where survival does not meet a specified percentage of the total plant. The unsuccessful portion must then be replanted to complete stocking of the reforested area.

While normal mortality of seedlings may be anticipated, abnormal mortality may be due to a variety of factors; (1) improper planting or setting of the new seedlings, (2) poor quality seedlings, (3) planting too early or too late in the season, (4) improper handling of the seedlings, (5) rodents and insects, (6) soil quality, or (7) an act of nature such as fire, flood, prolonged wet periods or drought conditions.

Regulation section 1.611-3(a) provides in part: "Amounts paid or incurred in connection with the planting of timber (including planting for Christmas Tree purposes) shall be capitalized and recoverable through depletion allowances. Such amounts include, for example, expenditures made for the preparation of the timber site for planting or for natural seeding and the cost of seedlings." See also Rev. Rul. 75-467, 1975-2 C.B. 93.

SERVICE POSITION

All planting costs, including replanting costs should be capitalized in accordance with Regulation 1.611-3(a). This position is also contained in Rev. Rul. 81-2, 1981-1 C.B. 10. Replanting costs arising due to a "casualty" must also be capitalized, however, a casualty loss deduction on the original planting would be allowable in the year of the loss, (not year of the replanting).