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Rev. Rul. 76-290, 1976-2 CB 188

REV-RUL, Depletion; reforestation expenditures., Rev. Rul. 76-290, 1976-2 CB 188, (Jan. 01, 1976)

Section 611.--Allowance of Deduction for Depletion

26 CFR 1.611-3: Rules applicable to timber.

[IRS Headnote] Depletion; reforestation expenditures.--
The expenditures for destroying undesirable hardwood trees and brush in naturally reforested stands of southern pine young growth are related to the seeding and establishment of the pine seedlings and are capital expenditures recoverable through depletion.

Advice has been requested whether, under the circumstances described below, expenditures for control of unwanted hardwood trees in naturally regenerated (reforested) stands of southern pine young growth must be capitalized in accordance with section 1.611-3(a) of the Income Tax Regulations.

A taxpayer owns extensive areas of timberlands in the south and manages them for the continuous production of wood. Much of the land supports forest stands of the loblolly-shortleaf pine type. The species composition of these stands, other than the predominating loblolly pine (Pinus taeda) and shortleaf pine (Pinus echinata), includes a number of hardwoods. The hardwood species, because they are more shade tolerant than the pines, often form dense understories in the mature pine stands. The pine stands are considered by the taxpayer to be mature and ready for harvesting at age 40 years.

Most of the hardwood trees have little or no market value because of their defectiveness, poor form, or small size. When the merchantable trees in such stands are cut (harvested), the residual undesirable hardwoods soon dominate the site so that regeneration of the valuable loblolly-shortleaf pine forest is prevented unless effective measures are taken to control the hardwoods, either by eliminating them or reducing their growth and vigor.

The taxpayer's method of providing for the reforestation of an area is to harvest all the merchantable timber except for an average of six pine seed trees per acre. The expectation is that the seed trees will drop enough seeds to achieve an adequate stocking of pine reproduction (seedlings) within a period of 3 to 5 years. Although the taxpayer recognizes at the time that the merchantable timber is harvested that the hardwood trees and brush then existing will have to be controlled in order to allow the new pine seedlings to grow to a commercially salable size, the performance of control activities is deferred by the company until after the adequacy of the stocking of pine seedlings can be determined.

If the taxpayer finds, within 3 to 5 years after the harvest cut, that the stocking of pine seedlings is inadequate for the regeneration of the loblolly-shortleaf forest, the taxpayer resorts to artificial reforestation. This is accomplished by first harvesting the pine seed trees, and then preparing the site for planting by eliminating or controlling the undesirable hardwood trees through the use of fire or chemicals, or by mechanical means. Finally, nursery grown pine seedlings are planted. The costs of such site preparation and planting of seedlings are capitalized by the taxpayer in accordance with the provisions of section 1.611-3(a) of the regulations.

If, however, the taxpayer finds that within 3 to 5 years after the harvest cut, an adequate stocking of pine seedlings has been achieved, the natural regeneration of the loblolly-shortleaf forest is considered to be feasible. The pine seed trees are then harvested and the taxpayer inspects the stand of young seedlings to determine the nature and extent of the work that must be done to control the undesirable hardwood trees so that they will not dominate the area to the exclusion of the more valuable pines. Implementation of the control procedures in the naturally reforested areas is usually undertaken by the taxpayer when the pine young growth is from 3 to 7 years old.

Various procedures may be used to accomplish the hardwood control. Mechanical or chemical methods are generally used to destroy or weaken the undesirable hardwoods. On the larger undesirable hardwood trees, a manually operated poison injector may be used. Regardless of the procedure used the objective is the same, to prevent the undesirable residual hardwood trees from dominating the site at the expense of the pine young growth. Such control procedures are a one-time endeavor with respect to each new stand of pine seedlings rather than a recurring type of activity.

Section 1.611-3(a) of the regulations provides, in part, that amounts paid or incurred in connection with the planting of timber (including planting for Christmas tree purposes) shall be capitalized and recovered through depletion allowances. Such amounts include, for example, expenditures made for preparation of the timber site for planting or for natural seeding and the cost of seedlings.

Rev. Rul. 66-18, 1966-1 C.B. 59, provides that brush removal work performed a year or two after the planting of Christmas tree seedlings is considered to be proximately related to the establishment of the seedlings. Such work is essentially a part of the planting operation, and its cost is to be capitalized.

Rev. Rul. 75-467, 1975-2 C.B. 93, holds that direct costs incurred in connection with reforestation by planting are capital expenditures. That Revenue Ruling provides specifically that one category of such expenditures is preparation of the site, including any girdling or brush removal work to afford good growing conditions. The term "girdle" means to encircle the stem of a living tree with cuts that completely sever bark and cambium and often are carried well into the outer sapwood, for the purpose of killing the tree.

The taxpayer's hardwood control activities accomplish the same purpose as the girdling referred to in Rev. Rul. 75-467, and are comparable to the site preparation work referred to in that Revenue Ruling and in Rev. Rul. 66-18.

Accordingly, in the instant case, the expenditures made for control of unwanted hardwood trees and brush in naturally regenerated stands of southern pine young growth are proximately connected with the seeding and establishment of the pine seedlings and must be capitalized in accordance with section 1.611-3(a) of the regulations.