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Rev. Rul. 84-67, 1984-1 CB 28, (Jan. 01, 1984)

Reimbursements under the forestry incentives program

Section 126.--Certain Cost-Sharing Payments

26 CFR 16A.126-1: Certain cost-sharing payments--in general.
(Also Sections 61, 194, 611; 1.61-1, 1.611-3, 1.194-1, 16A.126-2.)

[IRS Headnote] Reimbursements under the forestry incentives program.--
The excludable portion of cost-sharing payments received under the forestry incentives program (F.I.P.) is excludable from gross income, and the total costs of reforestation less the excludable portion are to be capitalized as a cost of timber. Under the election not to have section 126 of the Code apply to the F.I.P. payment, the entire payment is includable in gross income, and the total costs of reforestation (not reduced by any portion of the F.I.P. payment) are to be capitalized as a cost of timber. Rev. Rul. 76-6 modified and superseded.

ISSUE

Are cost-sharing payments the taxpayer received under the forestry incentives program (F.I.P.) authorized by the Cooperative Forestry Assistance Act of 1978 excludable from the taxpayer's gross income and capitalized as a cost of timber?

FACTS

The cash basis taxpayer paid the total costs of reforesting the taxpayer's nonindustrial private forest land in 1982 by planting tree seedlings. Under the cost-sharing provisions of the F.I.P., the taxpayer received reimbursement from the Federal government equal to 65 percent of the reforestation costs.

LAW AND ANALYSIS

Section 61 of the Internal Revenue Code provides, in general, that gross income means all income from whatever source derived, unless excludable by law. As a general rule, gross income under section 61 of the Code includes government cost-sharing payments the taxpayer receives under soil conservation and similar programs. Baboquivari Cattle Co. v. Commissioner, 135 F.2d 114 (9th Cir. 1943), 1943 C.B. 1013, aff'g 47 B.T.A. 129 (1942); Harding v. Commissioner, T.C.M. 1970-179; Driscoll v. Commissioner, No. 13,716 (T.C.M. 1944), aff'd in part and rev'd in part, 147 F.2d 493 (5th Cir. 1945).

Section 126(a) of the Code, an exception to the general rule of section 61, provides that gross income does not include the excludable portion of cost-sharing payments, within the meaning of section 126(b), received under the F.I.P. Section 126(e) provides that notwithstanding any provision of section 1016 (relating to adjustments to basis) to the contrary, no adjustment to basis shall be made with respect to property acquired through the use of any F.I.P. payment when such adjustment would reflect any amount excluded from gross income under this section. Under section 126(c)(1), however, the taxpayer may elect not to have the provisions of section 126 apply to the excludable portion of an F.I.P. payment.

Section 1.611-3(a) of the Income Tax Regulations provides that amounts paid in connection with the planting of timber shall be capitalized and recoverable through depletion allowances.

In Rev. Rul. 76-6, 1976-1 C.B. 176, the taxpayer received an F.I.P. payment in connection with reforestation of the taxpayer's nonindustrial private forest land. That revenue ruling holds that the F.I.P. payment is includable in the taxpayer's gross income in the tax year received. Rev. Rul. 76-6 no longer applies because the treatment of such payments received after September 30, 1979 was changed with the enactment of section 126 of the Code.

HOLDING

Under the provisions of section 126 of the Code, the excludable portion of the F.I.P. payment within the meaning of section 126(b) is excludable from the taxpayer's gross income. The total costs of reforestation less the amount of the excludable portion of the F.I.P. payment are to be capitalized as a cost of timber.

If the taxpayer elects not to have section 126 of the Code apply to the F.I.P. payment received, the entire F.I.P. payment is includable in gross income in the year received. In this situation, the total costs of reforestation (not reduced by the amount of the F.I.P. payment) are to be capitalized as a cost of timber.

In general, the capitalized amounts are recoverable through allowances for depletion as the timber is cut, or as adjusted basis in the event of sale or other disposition of the timber. However, all or a portion of the capitalizable reforestation costs may be recovered through an allowance for amortization under the provisions of section 194 of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 76-6, 1976-1 C.B. 176, is modified and superseded.