Chapter 8 - Selected Timber Rulings and Court Cases - Hardwood Timber Industry

ACCESS ROADS

D. C. Reqan, CA-9, 69-1 USTC P9369, 410 F2d 744, Cert. denied, 396 US 834, 90 SCt 91, J. T. Casey, (CtCls) 72-1 USTC P9419, 459 F2d 495 - The taxpayer was a member of a joint venture that acquired timber cutting rights Subsequent to building access roads to the timber, the cutting rights were transferred to the joint venturer's wholly-owned operating corporation in return for the corporation's payment of specified royalties. The taxpayer was not entitled to deduct as business expenses its proportionate share of the amortized cost of constructing access logging roads. The construction of access logging roads is capital in nature, constituting part of the adjusted depletion basis (cost of the timber), thus reducing the capital gain resulting from the disposition of the timber.

ADVANCE ROYALTIES

Revenue Ruling 77-400, 1977-2 C. B. 206 - Advance royalties paid or accrued by a lessee under a timber-cutting contract are treated as part of the cost of timber under Regs. 1.631-2(e) (1) and constitute part of the lessee's depletable basis in the timber. The advanced royalties are not deductible under Reg. 1.612-3(b) (3)as that provision applies to payments in connection with mineral property.

CAPITAL ASSETS

Blodqett, 13 BTA 1388, Dec. 4539 (Acq., VIII-1 C. B. 3) Dead and down timber owned by a taxpayer who was not in the timber or logging business was a capital asset.

See Internal Revenue Code Section 631 for information concerning the election to treat the cutting of timber as a sale or exchange. If an election is made to treat the cutting of timber as a sale or exchange, using IRC 631, the timber is treated as used in the trade or business under Internal Revenue Code Section 1231 to determine if capital gains treatment is available.

CAPITAL GAIN VS. ORDINARY INCOME

C. J. Snider, 34 TCM 530, Dec. 33.156(M), TC Memo 1975-111 -Sales of timber contracts not in the ordinary course of the taxpayers' trade or business resulted in taxable capital gains.

Patterson vs. Belcher, (CA-5) 62-1 USTC P9426, 302 F2d 289, rev'q, in part (DC) 60-2 USTC P9733, Rehearing denied (per Curiam), (CA-5) 62-2 USTC P9585, 305 F2d 557, Cert. denied, 371 U. S. 921 (1962), W A. Belcher, Jr., 24 TCM 1, Dec. 27,199(M), TC Memo 1965-1 - For a partnership whose principal business activity was the sale of real estate and timber, gain from timber sales is ordinary income.

W. J. Wineberg, (CA-9) 64-1 USTC P9156, 326 F2d 157, Aff'g 20 TCM 1775, TC Memo 1961-336, Rutland vs. Tomlinson, (CA-5) 64-1 USTC P9267, 326 F2d 189, Aff'q per Curiam 63-1 USTC P 9173 (M.D. Fla 1962) - A taxpayer sold timber in which he retained no economic interest. He was in the business of selling timber. As a result, the sale of timber resulted in ordinary income.

W. Ouderkirk, 36 TCM 526, Dec. 34,376(MI, TC Memo 1977-120 -Timberland was not real property used in a trade or business but was held for investment and, as such, was a capital asset.

Revenue Ruling 62-81, 1962-1 C.B. 153 - Taxpayer contracted with a paper company for a period of 60 years allowing the paper company to grow timber and to cut timber on the taxpayer's land. The paper company agreed to pay the taxpayer each year, regardless of the quantities of timber cut. When the contract originated, there was a stand of timber on the tract with a known FMV. Payments equal to the FMV of the timber at the origination of the contract represent proceeds of sale of timber and any gain is capital gain provided Internal Revenue Code Sections 1221 or 1231 are met Any excess payments over FMV is ordinary income.

Revenue Ruling 78-267, 1978-2 C.B. 171 The application of Internal Revenue Code Section 483, unstated interest provision, to long-term timber contracts is described in situations where the taxpayer is:

a. A landowner who receives the total contract price in full on the date the contract is signed;

b. A landowner who is to receive payments over a 60-year period under a contract for the sale of timber and the lease of the land on which the timber is growing; and

c. A paper company which makes payments similar to those in situation b.

P. E. Godbold, Jr., 82 TC 73, Dec. 40,918 - A timber cutting company contracted for a period of 62 years to pay a taxpayer for cutting a minimum of 640 cords of wood per year. The timber cutting company, per contract, had to pay the taxpayer even if the cutting company did not sever any trees. As the taxpayer did not retain an economic interest that was contingent on the severance of the timber, payments received by the taxpayer in excess of the value of the timber in existence at the execution of the contract were taxable as ordinary income.

G. Jantzer, (CA-9) 60-2 USTC P9802, 284 F2d 348, aff'g 32 TC 161 (1959) - An oral agreement between a partnership that held timber cutting rights and a corporation whereby the corporation was given the rights to cut timber and to buy the cut timber at a stated price was not a disposal with a retained economic interest. The oral agreement was in the nature of a continuing offer to Sell rather than a disposal conveying a right and obligation to cut. Profit therefrom resulted in ordinary income.

J. R., Simplot Co., 26 TCM 488, Dec. 28,458(m), TC Memo 1967-104 - A sawmill business holding timber cutting contracts realized losses upon the transfer of timber cutting contracts. These losses are ordinary losses per the doctrine of Corn Products Refining Co., 55-2 USTC P9746. This doctrine states that an asset may result in ordinary income or loss when the asset is an integral part of the taxpayer's business.

M. Schnitzer, (DC) 69-1 USTC P9160 - Taxpayers who acquired title to timber under a timber production agreement but did not have the right to cut timber on their own account or for use in their own trade or business were not owners of the timber for purposes of IRC 631(b). Profits in respect of the timber was not entitled to capital gains treatment.

Revenue Ruling 56-434, 1956-2, C. B. 334 An independent pulpwood contractor was licensed to cut pulpwood at specific rates per cord from the tree tops and limbs remaining from a timber harvest. The contractor was also licensed to cut designated standing trees to convert into pulpwood. The benefits of Internal Revenue Code Section 631 (b) did not apply to the cutting of pulpwood from the tops and limbs lying on the ground as there was no disposal of standing timber.

CONTRACT CUTTING

Revenue Ruling 77-247, 1977-2 C. B. 211 - A subsidiary that had a contract with its parent providing that future timber cutting rights acquired by the subsidiary be immediately transferred to the parent was not the owner of an interest in timber with regard to cutting rights obtained after the date of the contract.

DATE OF FELLING

Revenue Ruling 58-135, 1958-1, C. B. 519 - The general practice in the timber industry is to determine the quantity of timber cut for depletion computations when the timber is first actually measured. This may occur at the log landing or mill, at which time the quantity of logs may be inventoried. For the election to treat the cutting of timber as a sale or exchange of the timber cut, the timber is considered to be cut, when in the ordinary course of business, the quantity of felled timber is first definitely determined, rather than at the time of felling. Taxpayers may not shift the scaling point to obtain a tax advantage and must apply a consistent scaling practice.

Revenue Ruling 73-267, 1973-1 C. B. 306, distinguished by Revenue Ruling 73-489 - The taxpayer was considered to have first definitely determined the quantity of timber cut, for purposes of the election to treat the cutting of timber as a sale or exchange, when truck scale was made Using the bureau scaler at the time the logs arrived at the sawmill even though a mill deck scale was made later by a scaler from the U.S. Forest Service.

Revenue Ruling 73-489, 1973-2 C. B. 208 - The volume of timber cut by the taxpayer was first definitely determined when the US Forest Service scaled at the mill deck the logs cut from the timber. Under the IRC 631(a)election to treat the cutting of timber as a sale or exchange of the timber cut, the timber was considered cut when the logs from the timber were scaled on the mill deck.

INSECTS

Revenue Ruling 87-59, 1987-2 C.B. 59 Loss of timber in trees killed by an unexpected and unusual attack of southern pine beetles was not a casualty loss because the entire process of attack by beetles, death of trees, and eventual physical destruction of wood in the trees was not sudden. However, because the loss of timber was unexpected and unusual, it was allowable as a noncasualty loss in the year the timber became worthless. The timber was real property used in the taxpayer's trade or business, and the loss was netted with other IRC 1231 gains and losses.

Weyerhaeuser v. United States, 94-'2 USTC P50,471 - Alleged loss of timber due to insects was denied where taxpayer failed to substantiate the Claimed loss.

INTERNAL REVENUE CODE SECTION 631 (a)

Section 311(d) (2) of the Tax Reform Act of 1986 - Any IRC 631(a) election made for a tax year beginning before January 1, 1987, may be revoked on a one-time basis by the taxpayer without the permission of the Secretary of the Treasury for any tax year ending after December 31, 1986. Such a revocation is to be disregarded in determining whether the taxpayer may make a subsequent election. Revocation of a subsequent election requires permission from the Secretary.

GAIN OR LOSS IN THE CASE OF TIMBER

(a) Election to Consider Cutting as Sale or Exchange -

If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than 1 year) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such Cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this subsection, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on, the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary. For purposes of this subsection and subsection (b), the term "timber" includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.

Revenue Ruling 74-271, 1974-1 C. B. 151 - The taxpayer acquired the unrestricted right to cut and to use timber in its lumber manufacturing business. The terms of the contract were not relevant in determining the fair market value of timber cut for purposes of Internal Revenue Code Section 631(a).

J. A. Carpenter, 36 TC 797, Dec. 24,960 (Acq., 1962-1 C. B. 3) Logger received the option to purchase a tract of timber and the right to cut it. However, this timber tract was subject to the consent of one party involved in litigation over this tract. The logger maintained the requisite "contract right to cut" the timber per Internal Revenue Code Section 631(a).

STEWARDSHIP INCENTIVE PROGRAM

Revenue Ruling 94-27, 1994-1, C. B. 26 - The Stewardship Incentive Program is substantially similar to the type of program described in Internal Revenue Code Section 126(a) (1) through (8). Internal Revenue Code Section 126 improvements made in connection with small watersheds under the SIP are within the scope of IRC 126(a) (9). A small watershed is a watershed, or subwatershed that does not exceed 250,000 acres and does not include any single structure providing more than 12,500 acre-feet of floodwater detention capacity, nor more than 25,000 acre-feet of total capacity.

INTERNAL REVENUE REGULATIONS 1.631-2
GAIN OR LOSS UPON THE DISPOSAL OF TIMBER UNDER CUTTING CONTRACT

(a) In general -

(1) If an owner disposes of timber held for more than one year before such disposal, under any form or type of contract whereby he retains an economic interest in such timber, the disposal shall be considered to be a sale of such timber. The difference between the amounts realized from disposal of such timber in any taxable year and the adjusted basis for depletion thereof shall be considered to be again or loss upon the sale of such timber for such year. Such adjusted basis shall be computed in the same manner as provided in Section 611 and the regulations thereunder with respect to the allowance for depletion. See paragraph (e) (2) of this section for the definition of "owner." For the purpose of determining whether or not the timber disposed of was held for more than one year before such disposal the rules with respect to the holding period of property contained in Section 1223 shall be applicable.

(2) In the case of such a disposal, the provisions of Section 1231 apply and such timber shall be considered to be property used in the trade or business for the taxable year in which it is considered to have been sold, along with other property of the taxpayer used in the trade or business as defined in Section 1231(b), regardless of whether such timber is property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Whether gain or loss resulting from the disposition of the timber which is considered to have been sold will be deemed to be gain or loss resulting from a sale of a capital asset held for more than one year will depend upon the application of Section 1231 to the taxpayer for the taxable year.

(b) Determination of date of disposal

(1) For purposes of Section 631(b) and this section, the date of disposal of timber shall be deemed to be the date such timber is cut. However, if payment is made to the owner under the contract for timber before such timber is cut, the owner may elect to treat the date of payment as the date of disposal of such timber. Such election shall be effective only for purposes of determining the holding period of such timber. Neither Section 631(b) nor the election thereunder has any effect 'on the time of reporting gain or loss. See Subchapter E, Chapter 1 of the Code and the regulations thereunder. See paragraph (c) (2) of this section for the effect of exercising the election with respect to the payment for timber held for one year or less. See paragraph (d) of this section for the treatment of payments received in advance of cutting.

(2) For purposes of Section 631(b) and this section, the "date such timber is cut" means the date when in the ordinary course of business the quantity of timber felled is first definitely determined.

(1) The election to treat the date of payment as the date of disposal of timber shall be evidenced by a statement attached to the taxpayer's income tax return filed on or before the due date (including extensions thereof) for the taxable year in which the payment is received. The statement shall specify the advance payments which are subject to the election and shall identify the contract under which the payments are made. However, in no case shall the time for making the election under Section 631(b) expire before the close of March 21, 1958.

(2) Where the election to treat the date of payment as the date of disposal is made with respect to a payment made in advance of cutting, and such payment is made one year or less from the date the timber disposed of was acquired, Section 631(b) shall not apply to such payment, irrespective of the date such timber is cut, since the timber was not held for more than one year prior to disposal.

(d) Payments received in advance of cutting -

(1) Where the conditions of paragraph (a) of this section are met, amounts received or accrued prior to cutting (such as advance royalty payments or minimum royalty payments) shall be treated under Section 631(b) as realized from the sale of timber if the contract of disposal provides that such amounts are to be applied as payment for timber subsequently cut. Such amounts will be so treated irrespective of whether or not an election has been made under paragraph (c) of this section to treat the date of payment as the date of disposal. For example, if no election has been made under paragraph (c) of this section, amounts received or accrued prior to cutting will be treated as realized from the sale of timber, provided the timber paid for is cut more than one year after the date of acquisition of such timber.

(2) However, if the right to cut timber under the contract expires, terminates, or is abandoned before the timber which has been paid for is cut, the taxpayer shall treat payments attributable to the uncut timber as ordinary income and not as received from the sale of timber under Section 631(b). Accordingly, the taxpayer shall recompute his tax liability for the taxable year in which such payments were received or accrued. The recomputation shall be made in the form of an amended return where necessary.

(3) (i) Bonuses received or accrued by an owner in connection with the grant of a contract of disposal shall be treated under Section 631(b) as amounts realized from the sale of timber to the extent attributable to timber held for more than one year.

(ii) The adjusted depletion basis attributable to the bonus shall be determined under the provision of Section 612 and the regulations thereunder. This subdivision may be illustrated as follows:

Example: Taxpayer A has held timber having a depletion basis of $90,000 for two months when he enters into a contract of disposal with B. B pays A a bonus of $5,000 upon the execution of the contract and agrees to pay X dollars per unit of timber to A as the timber is cut. A does not exercise the election to treat the date of payment as the date of disposal. It is estimated that there are 50,000 units of timber subject to the contract and that

the total estimated royalties to be paid to A will be $95,000. A must report the bonus in the taxable year it is received or accrued by him. The portion of the basis of the timber attributable to the bonus is determined by the following formula:

Bonus/Bonus + amount X Basis of Timber = Basis Attributable to Bonus
of expected royalties

$5,000 X $90,000 = $4,500
$100,000

(iii) To the extent attributable to timber not held for more than one year, such bonuses shall be treated as ordinary income subject to depletion. In order to determine the amount of the bonus allocable to timber not held for one year, the bonus Shall be apportioned ratably over the estimated number of units of timber covered by the contract of disposal. This subdivision may be illustrated as follows:

Example: Assume under the facts stated in the example in subdivision .(ii) of this subparagraph that B cuts 10,000 units of timber that have been held by A for 1 year or less. The amount of the bonus (as well as the royalties) attributable to these units must be reported as ordinary income subject to depletion. The amount of the bonus attributable to these units is determined by the following formula:

# of units cut held for 1 year or less Amount Amount of bonus
Total units covered by contract Bonus X of = treated as ordinary
as ordinary income subject Bonus income subject to depletion

10,000 X $5,000 = $1,000
50,000

The amount of the depletion attributable to the portion of the bonus received for timber held for one year or less is determined by the following formula:

Amount of bonus attributable Adjusted Basis for Depletion allowance on
To timber held for one year X Depletion for Bonus = timber held for 1 year or less
Less or less
Total Bonus

$1,000 X $4,500 = $900
$5,000

(iv) If the right to cut timber under the contract of disposal expires, terminates, or is abandoned before any timber is cut, the taxpayer shall treat the bonus received under such contract as ordinary income, not subject to depletion. Accordingly, the taxpayer Shall recompute his tax liability for the taxable year in which such bonus was received. The recomputation shall be made in the form of an amended return where necessary.

(e) Other rules for application of section

(1) Amounts paid by the lessee for timber on the acquisition of timber cutting rights, whether designated as such or as a rental, royalty, or bonus, shall be treated as the cost of timber and constitute park of the lessee's depletable basis of the timber, irrespective of the treatment accorded such payment in the hands of the lessor.

(2) The provisions of Section 631(b) apply only to an owner of timber. An owner of timber means any person who owns an interest in timber, including a sublessor and a holder of a contract to cut timber. Such owner of timber must have a right to cut timber, for sale on his own account or for use in his trade or business in order to own an interest in timber within the meaning of Section 631(b).

(3) For purposes of Section 631(b) and this section, the term "timber" includes evergreen trees which are more than 6 years old at the time severed from their roots and are sold for ornamental purposes such as Christmas decorations. Tops and other parts of standing timber are not considered as evergreen trees within the meaning of Section 631(b). The term "evergreen trees" is used in its commonly accepted sense and includes pine, spruce, fir, hemlock, cedar, and other coniferous trees.

INTERNAL REVENUE REGULATIONS 1.611-3 RULES APPLICABLE TO TIMBER

(b) Computation of allowance for depletion of timber for taxable year -

(1) The depletion of timber takes place at the time timber is cut, but the amount of depletion allowable with respect to timber that has been cut may be computed when the quantity of cut timber is first accurately measured in the process of exploitation. To the extent that depletion is allowable in a particular taxable year with respect to timber the products of which are not sold during such year, the depletion so allowable shall be included as an item of cost in the closing inventory of such products for such year.

(2) The depletion unit of timber for a given timber account in a given year shall be the quotient obtained by dividing (i) the basis provided by Section 1012 and adjusted as provided by Section 1016, of the timber on hand at the beginning of the year plus the cost of the number of units of timber acquired during the year plus proper additions to capital, by (ii) the total number of units of timber on hand in the given account at the beginning of the year plus the number of units acquired during the year plus (or minus) the number of units required to be added (or deducted) by way of correcting the estimate of the number of units remaining available in the account. The number of units of timber of a given timber account cut during any taxable year multiplied by the depletion unit of that timber account applicable to such year shall be the amount of depletion allowable for the taxable year. Those taxpayers who keep their accounts on a monthly basis may, at their option, keep their depletion accounts on such basis, in which case the amount allowable on account of depletion for a given month will be determined in the manner outlined herein for a given year. The total amount of the allowance for depletion in any taxable year shall be the sum of the amounts allowable for the several timber accounts. For a description of timber accounts, see paragraphs (c) and (d) of this section..

(3) When a taxpayer has elected to treat the cutting of timber as a sale or exchange of such timber under the provisions of Section 631(a), the taxpayer shall reduce the timber account containing such timber by an amount equal to the adjusted basis of such timber. In computing any further gain or loss on such timber, see paragraph (e) of Regulation 1.631-1.

(1) Every taxpayer claiming or expecting to claim a deduction for depletion of timber property shall keep accurate ledger accounts in which shall be recorded the cost of other basis provided by Section 1012 of the property and land together with subsequent allowable capital additions in each account and all other adjustments provided by Section 1016 and the regulations thereunder.

(2) In such accounts there shall be set up separately the quantity of timber, the quantity of land, and the quantity of other resources, if any, and a proper part of the total cost or value shall be allocated to each after proper provision for immature timber growth. See paragraph (d) of this section. The timber accounts shall be credited each year with the amount of the charges to the depletion accounts computed in accordance with paragraph (b) of this section or the amount of the charges to the depletion accounts shall be credited to depletion reserve accounts. When the sum of the credits for depletion equals the cost or other basis of the timber property, plus subsequent allowable capital additions, no further deduction for depletion will be allowed.

(d) Aggregating timber and land for purposes of valuation and accounting -

(1) With a view to logical and reasonable valuation of timber, the taxpayer shall include his timber in one or more accounts. In general, each such account shall include all of the taxpayer's timber which is located in one "block." A block may be an operation unit which includes all the taxpayer's timber which would logically go to a single given point of manufacture. In those cases in which the point of manufacture is at a considerable distance, or in which the logs or other products will probably be sold in a log, or other market, the block may be a logging unit which includes all of the taxpayer's timber which would logically be removed by a single logging development. Blocks may also be established by geographical or political boundaries or by logical management areas. Timber acquired under cutting contracts should be carried in separate accounts and shall not constitute part of any block. In exceptional cases, provided there are good and substantial reasons, and subject to approval or revision by the district director on audit, the taxpayer may. divide the timber in a given block into two or more accounts. For example, timber owned on February 28, 1913, and that purchased subsequently may be kept in separate accounts, or timber owned on February 28, 1913, and the timber purchased since that date in several distinct transactions may be kept in several distinct accounts. Individual tree species or groups of tree species may be carried in distinct accounts, or special timber products may be carried in distinct accounts. Blocks may be divided into two or more accounts based on the character of the timber or its accessibility, or scattered tracts may be included in separate accounts. If such a division is made, a proper portion of the total value or cost, as the case may be, shall be allocated to each account.

(2) The timber accounts mentioned in subparagraph (1) of this paragraph shall not include any part of the value or cost, as the case may be, of the land. In a manner similar to that prescribed in subparagraph (t) of this paragraph, the land in a given "block" may be carried in a single land account or may be divided into two or more accounts on the basis of its character or accessibility. When such a division is made, a proper portion of the total value or cost, as the case may be, shall be allocated to each account.

(3) The total value or total cost, as the case may be, of land and timber shall be equitably allocated to the timber and land accounts, respectively. In cases in which immature timber growth is a factor, a reasonable portion of the total value or cost shall be allocated to such immature timber, and when the timber becomes merchantable, such value or cost shall be recoverable through depletion allowances.

(4) Each of the several land and timber accounts carried on the books of the taxpayer shall be definitely described as to their location on the ground either by maps or by legal descriptions.

(5) For good and substantial reasons satisfactory to the district director, or as required by the district director on audit, the timber or the land accounts may be readjusted by dividing individual accounts, by combining two or more accounts, or by dividing and recombining accounts.

(e) Determination of quantity of timber -

Each taxpayer claiming or expecting to claim a deduction for depletion is required to estimate with respect to each separate timber account the total units (feet board measure, log scale, cords, or other units) of timber reasonably known, or on good evidence believed, to have. existed on the ground on March 1, 1913, or on the date of acquisition of the property, whichever date is applicable in determining the basis for cost depletion.

This estimate shall state as nearly as possible the number of units which would have been found present by careful estimate made on the specified date with the object of determining 100% of the quantity-of timber which the area covered by the specific account would have produced on that date if all of the merchantable timber had been cut and utilized in accordance with the standards of utilization prevailing in that region at that time. If subsequently during the ownership of the taxpayer making the return, as the result of the growth of the timber, of changes in standards of utilization, of losses not otherwise accounted for, of abandonment of timber, or of operations or development work, it is ascertained either by the taxpayer or the district director that there remain on the ground, available for utilization, more or less units of timber at the close of the taxable year (or at the close of the month if the taxpayer keeps his depletion accounts on a monthly basis) than remain in the timber account or accounts on the basis of the original estimate, then the original estimate (but not the basis for depletion) shall be revised. The depletion unit shall be changed when such revision has 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 revision is made and all subsequent taxable years until a change in facts requires another revision.

Determination of fair market value of timber property -

(1) If the fair market value of the property at a specified date is the basis for depletion deductions, such value shall be determined, subject to approval or revision by the district director upon audit, by the owner of the property in the light of the most reliable and accurate information available with reference to the condition of the property as it existed at that date, regardless of all subsequent changes, such as changes in surrounding circumstances, and methods of exploitation, in degree of utilization, etc. Such factors as the following will be given due consideration:

(i) Character and quality of the timber as determined by species, age, size, conditions, etc.;

(ii) The quantity of timber per acre, the total quantity under consideration, and the location of the timber in question with reference to other timber;

(iii) Accessibility of the timber (location with reference to distance from a common carrier, the topography and other features of the ground upon which the timber stands and over which it must be transported in process of exploitation, the probable cost of exploitation and the climate and the state of industrial development of the locality); and

(iv) The freight rates by common carrier to important markets.

(2) The timber in each particular case will be valued on its own merits and not on the basis of general averages for regions; however, the value placed upon it, taking into consideration such factors as those mentioned in this paragraph, will be consistent with that of other similar timber in the region. The district director will give weight and consideration to any and all facts and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties, the margin between the cost of production and the price realized for timber products, market value of stock or shares, royalties and rentals, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property has been involved, the amount at which the property may have been inventoried or appraised in probate or similar proceedings, disinterested appraisals by approved methods, and other factors.

(h) Information to be furnished, by taxpayer claiming depletion of timber -

A taxpayer claiming a deduction for depletion of timber and for depreciation of plant and other improvements shall attach to his income tax return, a filled-out Form T-Timber for the taxable year covered by the income tax return, including the following information:

(1) A map, where necessary, to show clearly timber and land acquired, timber cut, and timber and land sold;

(2) Description of, cost. of, and terms of purchase of timberland or timber, or cutting rights, including timber or timber rights acquired under any type of contract;

(3) Profit or loss from sale of land, or timber, or both;

(4) Description of timber with respect to which claim for loss, if any, is made;

(5) Record of' timber cut;

(6) Changes in each timber account as a result of purchase, sale, cutting, re-estimate, or loss;

(7) Changes in improvements accounts as the result of additions to or deductions from capital and depreciation, and computation of profit or loss on sale or other disposition of such improvements;

(8) Operation data with respect to raw and finished material handled and inventoried;

(9) Statement as to application of the election under Section 631(a) and pertinent information in support of the fair market value claimed thereunder;

(10) Information with respect to land ownership and capital investment in timberland; and

(11) Any other data which will be helpful in determining the reasonableness of the depletion or depreciation deductions claimed in the return.

INTERNAL REVENUE CODE SECTION 194
AMORTIZATION OF REFORESTATION EXPENDITURES

(a) Allowance of Deduction -

In the case of any qualified timber property with respect to which the taxpayer has made (in accordance with regulations prescribed by the Secretary) an election under this subsection, the taxpayer shall be entitled to a deduction with respect to the amortization of the amortizable basis of qualified timber property based on a period of 84 months. Such amortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the amortizable basis at the end of such month divided by the number of months (including the month for which the deduction is computed) remaining in the period. Such amortizable basis at the end of the month shall be computed without regard to the amortization deduction for such month. The 84-month period shall begin on the first day of the first month of the second half of the taxable year in which the amortizable basis is acquired.

(b) Limitations

(1) Maximum Dollar Amount- The aggregate amount of amortizable basis acquired during the taxable year which may be taken into account under subsection (a) for such taxable year shall not exceed $10,000 ($5,000 in the case of a separate return by a married individual (as defined in Section 7703)).

(2) Allocation of Dollar Limit -

(A) Controlled Group - For Purposes of applying the dollar limitation under paragraph (1)-

(i) all component members of a controlled group shall be treated as one taxpayer, and

(ii) the Secretary shall, under regulations prescribes by him, apportion such dollar limitation among the component member of such controlled group. For purposes of the preceding sentence, the term "controlled group" has the meaning assigned to it in Section 1563(a), except that the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in Section 1563(a)(1).

(B) Partnerships and S Corporations - In the case of a partnership, the dollar limitation contained in paragraph (1) shall apply with respect to the partnership and with respect to each partner. A similar rule shall apply in the case of an S corporation and its shareholders.

(3) Section Not to Apply to Trusts - This section shall not apply to trusts.

(4) Estates - The benefit of the deduction for amortization provided by this section shall be allowed to estates in the same manner as in the case of an individual. The allowable deduction shall be apportioned between the income beneficiary and the fiduciary under regulations prescribed by the Secretary. Any amount so apportioned to a beneficiary shall be taken into account for purposes of determining the amount allowable as a deduction under this section to such beneficiary.

For purposes of this section -

(1) Qualified Timber Property - The term "qualified timber property" means a woodlot or other site located in the United States which will contain trees in significant commercial quantities and which is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products.

(2) Amortizable Basis The term "amortizable basis" means that portion of the basis of the qualified timber property attributable to reforestation expenditures.

(3) Reforestation Expenditures -

(A) In general - the term "reforestation expenditures" means direct cost incurred in connection with forestation or reforestation by planting or artificial or natural seeding, including,

(i) for the preparation of the site;

(ii) of seeds or seedlings; and

(iii) for labor and tools, including depreciation of equipment such as tractors, trucks, tree planters, and similar machines used in planting or seeding.

(B) Cost-Sharing Programs - Reforestation expenditures shall not include any expenditures for which the taxpayer has been reimbursed under any governmental reforestation cost-sharing programs unless the amounts reimbursed have been included in gross income of the taxpayer.

(4) Basis Allocation - If the amount of the amortizable basis acquired during the taxable year of all qualified timber property with respect to which the taxpayer has made an election under subsection (a) exceeds the amount of the limitation under subsection (b) (1), the taxpayer shall allocate that portion of such amortizable basis with respect to which, deduction is allowable under Subsection(a) to each such qualified timber property in such manner as the Secretary may by regulations prescribe.

(d) Life Tenant and Remainderman -

In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.