THE SMALL

TIMBER OWNER

and his

FEDERAL INCOME TAX

Agricultural Handbook No. 52

UNITED STATES DEPARTMENT OF AGRICULTURE

Forest Service
THE SMALL TIMBER OWNER

AND HIS

FEDERAL INCOME TAX

By

ELLIS T. WILLIAMS

Division of Forest Economics

Forest Service

Agriculture Handbook No. 52

U. S. Department of Agriculture February 1953

For sale by the Superintendent of Documents, U. S. Government Printing Office

Washington 25, D. C. - Price 20 cents

PREFACE

ACOMITTEE of the Society of American Foresters

appointed in 1949 to study the effect of forest taxation

on forest practices had an important part in the conception and development of this handbook. The members

of this committee believe (1) that many, if not most, small

forest-land owners pay more in income taxes on timber

sold or harvested than the law requires; (2) that overpayment detracts from the economic incentive to practice forestry; and (3) that forest practices on small holdings

would be improved if the owners were informed of their

actual income-tax obligations and opportunities. Members of the committee were helpful in proposing the preparation of this publication, assisting in its organization,

and reviewing the manuscript. The committee is composed of Kalph W. Marquis, chairman. Upper Darby, Pa. ;

Lloyd P. Blackwell, Euston, La. ; W. D. Hagenstein, Portland, Oreg.; E. G. Wiesehuegel, Norris, Tenn.; and

E. T. F. Wohlenberg, Ukiah, Calif.

This publication has been reviewed and approved by

the Bureau of Internal Eevenue, Department of the Treasury, Washington, D. C.

(Ill)

CONTENTSPage

Introduction 1

Receipts from sales of timber and forest products 3

The method to use 3

Treating receipts as ordinary income 5

Treating receipts as capital gains 5

The recognized gain or loss and the depletion allowance 6

Separate schedule D 13

Losses from fire, windstorm, or other casualty 20

Types of loss that may be deducted 20

Determining the recognized loss 20

Calculating the tax deduction 22

Costs of forest ownership and operation 24

Operating expenses 24

Carrying charges and development expenditures 25

Capital expenditures. ^ 27

The land account 27

The timber account 28

The equipment account 28

Depreciation allowances 28

Concluding section 31

Questions and answers 31

Problems 36

Key for ready reference to taxpayer's situation 40

Appendix 41

Exhibit A : Individual income tax return (Form 1040) 43

Exhibit B: Schedule of farm income and expenses (Form 1040F) 47

Exhibit C: Schedule of profit (or loss) from business or profession

(separate schedule C) 60

Exhibit D : Schedule of gains and losses from sales or exchanges of

property (separate schedule D) 51

Exhibit E: Sample timber statement for use with separate schedule D__ 52

Exhibit F: Income tax estimated useful lives and depreciation rates 52

Exhibit G : Turpentine depletion 54

(V)
INTRODUCTION

How should timber receipts and expenditures be reported when

making out a Federal income-ta.x return ? Can a deduction be claimed

when timber is damaged by fire or windstorm? How large a deduction will be allowed ? Such questions are more easily asked than answered, since little material is available to tell the small owner in nontechnical language how to handle the Federal income-tax aspects of

his forest operations. This handbook is designed to meet this need. . Small timber owners are here thought of as those holding less than

5,000 acres. In the aggregate such owners possess three-fourths of the

private commercial forest land area of the United States. The group

is composed of some 3 million farmers whose forest holdings average

40 acres, and 1 million others with average holdings of 130 acres. The

nonfarm properties are held by a wide diversity of owners including

sawmill operators, investors, and business and professional persons;

the great majority are absentee owners.

This handbook is intended not only for the timber owner himself,

but also for those who may be called upon to advise him on his tax

problems. Such persons will include extension foresters, service foresters, and consulting foresters; and in some cases the taxpayer's attorney, banker, accountant, or other business consultant.

There are a number of reasons why a handbook such as this may

serve a useful purpose. The timber provisions of the Internal Revenue

Code are complex, and it is likely that many timber owners are currently paying a larger tax than is required by law. At the same time

higher prices for standing timber and forest products are directing

more and more attention to the forest as a source of income. It is unfortunate both for the timber owner and for the community if timberlands are not fully utilized for production of forest products because of a mistaken belief that the proceeds will be largely taxed away.

It is equally unfortunate if owners fail to protect, maintain, and improve their timber property because they do not understand that expenditures may be capitalized or treated as deductible expenses.

A clearer understanding of income-tax procedures should benefit

the taxpayer financially and should at the same time encourage better

forest management. It is hoped that savings realized through use of

correct procedures in reporting timber receipts and expenditures will

act as incentives for timber owners to grow more timber, to protect it

better, and to utilize it more wisely.

As the table of contents indicates, the discussion falls under three

broad headings. The first to be taken up is the treatment of receipts

from the sale of timber and forest products. Both the so-called

"ordinary income" method and the "capital gains" method will be de-

(1)
scribed. This section deals with the money taken in by the timber

owner. Second is the treatment of timber losses from fire, windstorm,

or other casualty. Such losses may or may not involve cash transactions, but they will mean a reduction in the value of the timber asset

for which the taxpayer can in some cases claim credit in his tax return.

The third is the treatment of timber expenditures, both those that

may be deducted as operating expenses year by year and those that

must be capitalized and recovered over a period of years through depletion or depreciation. This section deals with money paid out by

the timber owner. The concluding section contains questions and

answers, problems illustrating specific situations, and a key to assist

the taxpayer in finding the tax procedure that applies to his particular situation. Sample income-tax forms are reproduced in the

appendix.

The field of Federal income taxation is an extensive one. It has

been practical to cover only the more usual questions of interest to the

small individual timber owner. Larger owners, corporations, estates

and partnerships, and those with special tax problems may need to

consult their Director of Internal Revenue (formerly known as Collector of Internal Revenue), his deputy, or other tax authority.

In general, no attempt has been made to provide background information dealing with our Federal income-tax system as a whole,

with accounting periods and methods, or with the filing of returns.

For treatment of these and similar topics not related specifically to

forest operations, the reader is referred to the following publications :

Your Federal Income Tax. Issued annually by the U. S. Treasury Department, Bureau of Internal Revenue. For sale by

Superintendent of Documents, Washington 25, D. C, price 25

cents.

Farmers Income Tax. Issued annually. Prepared cooperatively

by the State Extension Services and the IT. S. Department of

Agriculture. Obtainable from county agricultural agents.
RECEIPTS FROM SALES OF TIMBER AND FOREST

PRODUCTS

There are two methods of treating receipts when preparing your

Federal income-tax return. The first is known as the ordinary income

method and the second as the capital gains method. In some situations you have no choice but must use the ordinary income method.

In some other situations the tax return will involve the use of the

ordinary income computation for certain types of receipts and use

of the capital gains computation for other types of receipts.

THE METHOD TO USE

There are four situations in which you are required to report receipts

from forest operations as ordinary income. The first and second

relate to sales of standing timber, the third and fourth to sales of

forest Droducts

(1) Proceeds from sales of standing timber "held by the taxpayer

primarily for sale to customers in the ordinary course of his trade or

business" must be reported as ordinary income. This language is

regarded as applying to dealers engaged in both buying and selling

timber or forest properties and does not generally apply to the farmer

or other timber owner making occasional sales.

(2) Proceeds from sales of standing timber sold under a "pay-ascut" contract must be reported as ordinary income if the timber has

been held for 6 months or less. A pay-as-cut contract is one in which

you are paid on a scale basis at so much per thousand board feet, per

cord, or other unit as the timber is cut. If you think that your timb-r

sale fits this situation, you may wish to turn to numbered paragraph 3

of the section headed "Separate Schedule D," where the pay-as-cut

contract is more fully explained.

(3) Proceeds from sales of forest products (logs, lumber, poles,

mine timbers, cross ties, pulpwood, fence posts, fuel wood, etc.) must

be treated as ordinary income, subject, however, to one very important qualification. If the products were processed from timber that

you had held for more than 6 months before the beginning of your

tax year you can, if you wish, consider the cutting of such timber

during the year as a sale of the timber so cut, and report the transaction in two parts (a) the increase in value of the standing timber

up to the time you cut it and (b) the increase in value due to cutting

and processing. You can treat the increase in value under (a) as a

capital gain, but you must treat the increase in value under (b) as

ordinary income. This choice is discussed on pages 16-18. ^ The cutting of timber held 6 months or less does not give you the

choice just described and income from thé^sale of resulting products

must be treated as ordinary income.

235834°—53 2 (3)
(4) Proceeds from sales of products harvested from the standing

tree such as naval stores, maple sirup, bark, fruits, nuts, oil, or

Christmas greens must always be treated as ordinary income.

Except for the four situations just described, your timber receipts

will normally be entitled to capital-gains treatment. A capital gain,

in the case of assets held more than six months, may under certain

conditions be taxed at less than the rate applying to your ordinary

income. This means that use of the capital gains method can result

in your having a substantially smaller tax to pay. On the other hand,

the capital-gains method requires you to make a more lengthy calculation of your tax and also requires you to keep more detailed records

of your forest operations. For these reasons many timber owners

who usually sell only small amounts may not consider the capitalgains calculation to be worth while and may j)refer to use a short cut

by simply reporting their receipts as ordinary income.

' The question "How small is small?" will be answered differently

by different taxpayers, and each must decide for himself at what point

his sales of timber justify the capital-gains calculation. As a guide

in reaching this decision the table that follows may be of assistance.

The table shows for various tax brackets under 1952 tax rates, the

saving in tax that could result through use of capital-gains treatment,

assuming that the timber sold or cut has been held for more than 6

months and that the taxpayer is married and files a joint return. Note

that the receipts listed in the first column are net of expenses of sale

and allowance for depletion (the return of your investment in the

timber cut). The income brackets refer to net income (item 3 of the

tax computation on page 3 of your return), after personal exemptions

have been subtracted. In view of present-day tax rates it seems likely

that many taxpayers will wish to consider use of the capital-gains

method when net proceeds from sales of timber exceed roughly $100 in

amount.

TABLE 1.—Possible savings at 1952 tax rates through use of

capital-gains treatment

Timber receipts less expenses of

sale and depletion allowance

Net income less exemptions

Up to

$4,000

$4,001 to

$8,000

$8,001 to

$12,000

$12,001 to

$16,000

$25 - $2.78

5.55

11. 10

27. 75

55. 50

111. 00

$3. 08

6. 15

12. 30

30.75

61. 50

123. 00

$3.63

7. 25

14. 50

36. 25

72. 50

145. 00

$4. 25

$50 --- - 8. 50

$100 --- 17.00

$250 __- - -- 42.50

$500 - 85.00

$1,000 170. 00
TREATING RECEIPTS AS ORDINARY INCOME

If you are a farmer and file Form 1040F (Schedule of FarmIncome

and Expenses) and use the cash method of accounting, you will enter

your receipts from sale of timber or forest products on page 1 under

item 3, "Other Farm Income," opposite either "wood and lumber" or

"other forest products" as the case may be (see Exhibit B, Appendix).

If you are a farmer using the accrual method of accounting, sales of

timber or forest products will be reported on page 2 of Form 1040F

along with your sales of other farm products.

You are permitted a reasonable allowance, known as depletion, for

the return of your original capital investment in the timber cut. For

example if, when you bought the farm, a reasonable allocation of the

purchase price between timber, land and improvements if any, showed

that the cost of the timber alone was $1,500 and if this year you sold

one-fifth of the timber, you may deduct $300 (one-fifth of $1,500) as

depletion or return of capital. The depletion allowance that you are

claiming together with a brief note as to how the figure was arrived at

should be entered on page 3 of Form 1040F under "Other farm

expenses."

The calculation of the depletion allowance can raise numerous questions when timber operations are larger and these are explained in

detail under the paragraph heading The Recognized Gain or Loss

and the Depletion Allowance on the following page. Such questions

are not likely to arise, however, in connection with the ordinary income

method.

If you are not a farmer and therefore do not file the fai*m schedule

(Form 1040F), the way in which you report ordinary income from

sales of timber or forest products will depend upon whether or not

you are engaged in a business related to your timber operations, as for

example sawmill operation, or manufacture of furniture, containers,

etc. If you are engaged in such a business, receipts should be entered

on separate Schedule C,^ Profit (or Loss) from Business or Profession

(see Exhibit C, Appendix) under item 1, ''Total receipts from business or profession." The depletion allowance should be entered under

item 19 with a note as to how the figure was determined.

If you are not engaged in a business related to your timber operations, your income from sales of timber should be entered directly on

the return (Form 1040). Receipts should be listed on page 2, Schedule G, under income from other sources and should bè shown net of

depletion allowance. The depletion allowance should then be explained in an attached statement.

TREATING RECEIPTS AS CAPITAL GAINS

The calculation of capital gains and losses need not be difficult and

if you will follow the steps outlined below, you should have little

trouble in finding the amount to be reported. In reporting your

^ Separate Schedule C should not be confused with the Schedule C Summary

on page 2 of Form 1040. See Exhibit A, Appendix.
capital gain or loss you must make use of separate schedule D,^ Gains

and Losses from Sales or Exchanges of Property (see Exhibit D,

Appendix). This form is required no matter whether you are a farmer

and file the Schedule of Farm Income and Expenses (Form 1040F),

or a businessman filing the Schedule of Profit (or Loss) from Business or Profession (Schedule C) or whether you file neither of these

schedules. Before you startto fill out Schedule D, however, itis necessary to find the "recognized" gain or loss. This is the first step and

will be taken up before describing the use of Schedule D.

The recognized gain or loss and the depletion allowance

The gain or loss recognized for tax purposes is found by taking

the difference between the "grQiS.sal^.^xice" (column 4 on separate

Schedule D) on the one hand and the "cost or other basis" of the units

sold or cut (column 6) on the other. These terms require explanation.

The cross sales price,—^When you sell standing timber for cash, the

gross sales price will simply be the cash received. If other property or

obligations of the purchaser are taken in payment, their fair market

value must be included. Fair market value is a question of fact that

is determined in the light of the available evidence and may be defined as the cash price that a willing buyer would pay a willing seller,

both being reasonably informed as to the facts.

When you cut timber for sale or for use in your business under the

condition ^ mentioned in numbered paragraph 3 on page 3, you may,

as has been pointed out, report the increase in value in two parts

and claim as a capital gain the increase in the value of the standing

timber up to the time of cutting. (The date of valuation is given in

the next paragraph below.) The law thus permits you in effect to

treat the cutting of the timber as a fictional sale of the timber to yourself. While you are not required to follow this practice, it will ordinarily be to your interest to do so. Further reference to this option

(Sec. 117 (k) (1) of the Internal Revenue Code) will be found on

pages 16-18. At this point we are merely interested in finding the

figure that should be used as the "gross sales price", assuming that

you do follow this practice.

The law provides that the figure to use as the "gross sales price" in

this situation shall be the fair market value of the timber as of the first

day of the taxable year in which it is cut. If you use the calendar

year basis of accounting, this means that you place a fair market

value on the timber cut as it stood in the woods on January first.

As a practical matter, you are not likely to have great diíEculty in

placing a reasonable stumpage value ^ on the timber that you have

cut. Your extension or service forester or the local representative

of the State Forester will probably be able to furnish the "going"

price per thousand board feet, per cord, or other unit for stumpage

in your area. This average figure can then be adjusted as may be

^Separate Schedule D should not be confused with the Schedule D printed

on page 2 of Form 1040.

^ That is, that you have held (owned or had a contract right to cut) the timber

for more than 6 months prior to the beginning of your taxable year.

^ Stumpage value is the value of timber as it stands uncut in the woods.
necessary to reflect the condition of your own timber. Among factors

to be considered are (a) the character and quality of the timber as

determined by species, age, size, and condition, (b) the quantity of

the timber per acre, the total quantity of timber under consideration,

and its location with reference to other timber, (c) accessibility^ of the

timber from the standpoint of its distance from a common carrier and

probable cost of cutting and transportation, (d) the freight rates

charged by common carriers to important markets.

The Bureau of Internal Kevenue will give due weight to all evidence

that has a bearing on the fair market value of the timber in question.

Such evidence can be classified under the following headings.^

1. Sales of GompamUe tracts,—Th.^.BQ^ will usually furnish the best

lead to fair market value provided the sales are close to the valuation

date. Sales of other tracts may be useful as a guide even though the

timber differs in certain respects if allowances in the value are made.

to reflect such differences.

2. Realization value,—This will be indicated by amounts actually

realized from sales of forest products less costs of cutting, transportation, processing, and reasonable profit—in other words, the margin

between cost of production and the price realized or what may be

called the "net value back to the stump."

3. Offers to buy and sell comparable tracts,—Such offers may serve

to place upper or lower limits on the estimate of fair market value.

4. Market conditions in the trade a>nd business conditions in general.—Prices of lumber, pulpwood, or other forest products will have

a bearing on stumpage values, as will the underlying state of business

confidence. Such factors will be useful in adjusting values of earlier

sales to current conditions.

5. Cost to the tojxpayer of the timber in question,—This, if the timber is of recent purchase, will assist in determining fair market value

but must be adjusted to reflect conditions as of the valuation date.

6. Valuations for other purposes,—A. market value established for a

different purpose may be useful as a guide. Thus values placed upon

timber for estate or gift-tax purposes, partnership accountings, in

connection with litigation, or for State or local taxation can be given

consideration. It should be borne in mind, however, that assessed

valuation for local tax purposes will in many cases not coincide with

true market value.

7. Opinion testimony.—'EiX^c^vt opinion of qualified individuals

may serve to support estimates of fair market value, but the expert

should, in each case, state the basis for his opinion. The facts upon

which the opinion is based will determine the weight that will be

attached to it.

To illustrate the determination of gross sales price, take the example

mentioned in the preceding section. Treating Receipts as Ordinary

Income. Assume first that you did not cut the timber yourself but

sold it standing (as stumpage), and that the contract of sale called

^ The material in the following numbered paragraphs is based on *'Tax Treatment of Timber Cutting under Section 117 (k) The Internal Revenue Code" by

Charles V7. Briggs, Forest Industries Committee on Timber Valuation and Taxation, 1319 Eighteenth Street NV^., Washington 6, D. O. 1952. Pp. 10-14.
8

for lump sum payment of $500. In this situation the gross sales price

is clearly $500. Assume now that you made the stumpage sale under

a pay-as-cut contract with payment based upon the physical volume

actually removed, and that you were paid $540 for the volume cut

during the year. Here the gross sales price is $540'. As a third

alternative, assume that you cut the timber yourself and sold it in the

form of logs. The money that you receive for the logs is not the

"gross sales price" of the timber for capital-gains purposes, since your

capital gain is calculated only on the increase in value up to time of

cutting. You must therefore establish, a "selling price," and this will

be the fair market value of the stumpage on the first day of your tax

year. The logs may have sold for $1,200, but if the stumpage value

was say $540, then $540 is the '^gross sales price" of the timber from

the standpoint of the capital-gains calculation.

The depletion allowance,—Wh^n. you have foundjthe''g^

price" you have one of the two figures needed to determine tÏÏe recognized gain or loss. The other figure is the '"^cost or other basis" of the

timber sold or cut, which means the basis used in cômpuîîng the depletion allowance. In its simplest form this is nothing more than the

original cost of the timber in question as adjusted for anyTäter capital

additions or deductions. In terms of the illustration used previously,

suppose that you had bought 100 acres of timberland in 1940 for a

total price of $2,500. You estimate that at time of purchase the fair

value of the land was $1,000 and the fair value of the tij^r was

$1,500. In 1952 you made a partial cutting that removed one^fth of

the original stand. What is your depletion allowance (assuming for

purposes of the illustration that there have been no capital additions

or deductions and that the volume has not been adjusted for growth

since purchase) ? Your cost will be one-fifth of $1,500 or $300, since

that is the portion of the original purchase price that applies to the

timber cut. This is your depletion allowance and represents the return of your capital investment in the timber harvested. Clearly, if

the "gross sales price" of the timber sold or cut were $500, your recognized gain is not the full $500 but only the difference between $500,

the ''selling price," and $300 the cost, or $200.

In discussing the depletion allowance, it will be useful to consider

first the basis for depletion, second the adjusted basis, and third the

unit depletion. These three terms all refer to your timber tract as a

whole. The unit depletion when multiplied by the volume of timber

sold or cut will then give the depletion allowance that may be claimed

in calculating your recognized gain or loss for the year.

1. The basis for depletion.—This depends upon the manner in which

the property was acquired, as for example by purchase, by gift or

through inheritance.^ In the case of timber purchased on or after

March 1,1913 (the date that the Federal income tax law became effective), the basis is ordinarily the cost of the timber, excluding, as

always, the value of the land and any improvements. The fair market

value at time of purchase of personal services or nontimber property

® A more complete discussion of this subject, including other means by which

property may be acquired, will be found in the Treasury Department booklet.

Your Federal Income Tax, listed in the introduction.
given in exchange should be considered part of the purchase price.

Finding the basis of timber that was received in exchange for other

timber can.raise special questions and if you own timber acquired in

this way you may need to consult your Director of Internal Revenue

or other authority in order to ascertain the basis to be used.

Timber purchased before March 1, 191S, presents a somewhat

different case from that bought, on or after that date. If, as is

likely to be the situation, the timber is being sold at a gain, your

basis for depletion is the cost of the timber or its fair market value

as of March 1, 1913, whichever is the greater. Thus, if the cost of

timber, say in 1911 had been $8,000, but its fair market value as of

March 1,1913, was only $7,000, you would be entitled to use the higher

figure and so would have a smaller taxable gain as compared with

the sales price. In the unlikely event that your timber bought before

March 1, 1913, is being sold at a loss, your basis for depletion is the

actual cost.

The fair market value of your timber as of March 1,1913, will often

be difficult to estimate with accuracy. The assistance of a forester

may be needed. Only the timber that was merchantable as of March

1, 1913, should be included in the valuation. This means that the

present timber volume must be reduced by the amount of any timber

growth since the basic date ^ in order to find the merchantable volume

at that time.^ The volume estimated to have been present on the

basic date will then be multiplied by a fair unit value ^ for the species,

region, and year in question in order to find the fair market value on

the basic date. If the stand in question was not of average quality,

adjustments may need to be made.

The basis of timber acquired as a gift (except under a will) depends

upon the date of gift. If received before January 1, 1921, the basis

is the fair market value at the time of gift. If received on or after

January 1, 1921, the basis used in determining a gain is the basis of

the last preceding owner by whom the timber was not acquired as a

gift. In determining a loss, you must use the basis of the last preceding owner by whom it was not acquired as a gift or the fair market

value of the timber at the time of gift, whichever is less.

Timber acquired by inheritance or under will takes as its basis the

fair market value at date of death, or 1 year thereafter if the executor

of the estate valued the property for estate-tax purposes as of the

later date.

2. The adjusted basis,-—Some timber owners will have no adjustments to make to their basis for depletion and can proceed directly

to the third step, the calculation of the unit depletion. Others, however, will have adjustments to make. Adjustments may be of two

kinds, additions to the basis and deductions from the basis.

^ The basic date is the date as of which the basis is to be determined, in this

ease March 1, 1913.

^ See problem No. 3 in Concluding Section for an example of the method that

a forester might use in calculating the merchantable timber volume as of a

prior date.

^ Steer, H. B., "Stumpage Prices of Privately Owned Timber in the United

States," U. S. Dept. Agr. Tech. Bui. No. 626, 1938, may be used as a guide in

determining stumpage prices for earlier years.
10

Additions to the basis for depletion will result from acquisition of

additional timber or from expenditures that have been capitalized

and not deducted as ordinary expenses year by year as they were

incurred. The first situation needs little explanation since your basis

for depletion must naturally be adjusted upward to include the cost

or other basis of any additionaltracts of timber that you have acquired.

This adjustment will take the form of charging (debiting) your

timber account by the amount of the basis of additional timber

acquired (see the sample Timber Account—Value on page 13. In

general, you include all your timber in the same timber account unless

it is so widely separated as not to form a single operating unit. An

operating unit is thought of as all the timber that would logically

go to a single given point of manufacture or which would logically

be removed in a single logging development.

Additions to the depletion basis that result from capitalization of

expenditures are discussed in the chapter dealing with costs offorest

ownership and operation. If you have properly expensed timber

expenditures in the past, you will not be entitled to adjust your basis

for depletion with respect to such items.

Deductions from the basis for depletion must be made if you have

cut or sold timber previously or if you have sustained a recognized

loss of timber by reason of fire, windstorm, or other casualty. In such

cases the depletion basis should be reduced, that is to say, the timber

account should be credited by the depletion allowance that was claimed

and allowed on the timber previously cut, sold, daniaged, or destroyed.

The treatment of fire and other casualty losses is taken up in the

following chapter.

3. The unit depletion,—Assuming now that you have determined the

basis for depletion of your timber tract as a whole and that the

timber account has been charged or credited to reflect any necessary

adjustments, it remains to find the unit depletion. This is done by

dividing the basis or adjusted basis by the total volume of merchantable timber (as explained in the following paragraph) expressed in

board feet, cords, or other unit. The quotient is the u^it, depletion

expressed, for example, as so many dollars per thousand board feet.

The unit depletion, multiplied by the number of units cut or sold

during the year, then gives the depletion allowance. As depletion

allowances are claimed from year to year, the basis must be reduced

accordingly and when the entire basis or adjusted basis has been

recovered the timber account will have been exhausted and no further

depletion allowances may be taken.

The total volume of merchantable timber to use in the denominator

of the fraction is found by taking the volume on hand on the basic

date and adjusting it upward or downward for changes since that

time. The original volume should be estimated on the basis of the

full quantity of timber that the tract would have produced on the

basic date if all the merchantable timber had been cut and utilized

in accordance with the standards of utilization prevailing in the

region at that time. The original volume should then be increased to

include the volume of any timber that has been acquired since the

original tract and also to include any changes in the original esti-
11

mates that result from timber growth, changed standards of utilization, correction of inaccuracies, or change in log rule. The volume

should be reduced, on the other hand, by the quantity of any timber

cut or sold, or lost through fire or other casualty up to the beginning

of your current tax year.

Taking the illustration that has been used before assume that you

bought 100 acres of timberland in 1940 and that $1,500 of the purchase price was allocated to timber (3,000 board feet per acre or 300 M

board feet in all, valued at $5 per M board feet). In 1952 you sell

60 M board feet to a sawmill as stumpage. Assume further in order

to simplify the illustration that you had no capital additions or

deductions and have made no volume adjustment for growth since

purchase. What is your basis, adjusted basis, unit depletion, and

depletion allowance? The basis will be the original cost or $1,500.

The adjusted basis will be the same, since we are supposing for the

moment that there have been no adjustments. The unit depletion

$1 500

will then be QAA lyr UA if ^^ $^ P®^ -^ board feet. The depletion

allowance will be 60 M board feet (the volume sold) multiplied by

$5, or $300.

In many cases the calculation of the depletion allowance will not

be as simple as that shown above. Assume, for example, that 10

years later in 1950 you purchased an additional tract of 50 acres for

$2,600, of which $600 was allocated to land and $2,000 to timber

(4 M board feet per acre or 200 M board feet in all, valued at $10

per M board feet or $2,000). You make the same stumpage sale as

before of 60 M board feet. This time you revise your timber volume

to include the growth on the original tract. The growth between

1940 and 1952 is estimated to be 90 M board feet. What now is your

basis, adjusted basis, unit depletion, and depletion allowance? Your

basis willbe $1,500 as before but will be increased by $2,000, the

cost of the second tract (timber only), making the adjusted basis

$3,500. The timber volume is now the sum of three figures : The

original volume of 300 M board feet, the estimated growth of 90 M

board feet, and the original volume on the second tract ^^ of 200 M

board feet, totaling 590 M board feet. The depletion unit is now

$3 500

^90 Mb"—d f t ^^^ ^^'^^ ^^^ ^ board feet. The depletion allowance will then^be 60 x $5.93 or $355.80. These figures will be found

in the sample Timber Account on page 13.

While adjustments for changes in volume due to sales or cutting

of timber are readily determined and may be made annually, it is more

difficult to know the amount of annual growth, and such adjustments

made at intervals such as every 5 years are usually acceptable. Note

that when you increase the volume figure by including growth, it

increases the denominator of the fraction and so results in a lower

unit depletion and depletion allowance. It therefore has the effect of

^® Growth since purchase on the second tract could also be included, but is

omitted in the interest of simplicity.

235834°—53 3
12

increasing the recognized gain. On the other hand, the addition of

growth volume spreads the depletion over a longer period and postpones' the day when, under sustained-yield operation, the basis for

depletion will have been fully recovered.

In the preceding discussion it has been assumed that your timber is

of reasonably uniform quality and that an average depfetion rate over

the stand as a whole will be satisfactory. Deçletion is actually; related to value rather than volume, however, and if the stand is admixed

one containing varied species or groups of species of differing value,

it may be worth your while to calculate the unit depletion separately

for each such group. This is known as species or value depletion,

rather than average depletion, and is accomplished by establishing

separate depletion accounts and allocating a proper portion of the

total basis to each. In the same way you may wish to set up separate

accounts to reflect varying age classes of timber, diameter limits, or

quality—for example, timber yielding high-grade veneer logs. If

such a separation is made, the removal of low-value trees in an improvement cutting will not reduce the basis for depletion disproportionately, but will leave a larger basis to be used when the crop trees

are harvested. Furthermore, if high-quality trees are removed first,

a higher depletion allowance may be taken and the recognized gain

will be reduced accordingly. If you wish to claim species or group

or selective depletion, the basis of the selection should be explained

in a statement attached to your, return. Probably most small timber

owners will not need to establish separate depletion accounts but will

find the average depletion method suited to their needs.

Records reqmred,—The timber depletion account (or as it is often

called, simply the timber account) is one of three of primary interest

to the timber owner. The other two are the land account and the

equipment account, both of which are discussed in the section Costs

of Forest Ownership and Operation. In addition to these three basic

accounts, taxpayers engaged in sawmill operation or other forest products manufacture will of course need the usual business records covering such activities.

The Income Tax Eegulations do not call for any one type of timber

account, but they do require that accurate records be kept in order

that depletion allowances claimed may be supported. As a minimum,

two records should be maintained. The first, expressed in dollars,

will show the original cost or other basis of your timber adjusted from

time to time as already described. The second, expressed in board

jEeet, cords, or other physical unit will reflect the adjusted volume of

your timber holdings. Below are examples that may be useful as a

guide in setting up these accounts.

The Bureau of Internal Revenue Forest Industries Schedule (Form

T—^Timber) may be required of taxpayers claiming a depletion allowance. This form calls for a detailed statement of some 10 pages and

in certain cases maps also, and is suited to the operations of the larger

timber owners. The author understands that Form T will not ordinarily be required of the smaller owners such as those for whom this

handbook is intended.
13

TIMBER ACCOUNT

Value

Debit Credit

Mar. 1,1940: July 10, 1952: Sold 60 M bd. ft.

Tract No. 1 purchased at total Dec. 31, 1952: Calculation of depletion

cost $2,500 allowanceCharged to land acct 1,000 $3 500

>:! =$5.93/M bd. ft.

Charged to timber acct., 300 M ^^^ ^ ^^' ^*-

bd. ft. at $5/M $1,500.00 60 M bd. ft.X$5.93 $355.80

Aug. 15, 1950:

Tract No. 2 purchased at total

cost 2,600

Charged to land acct 600

Charged to timber acct., 200 M Dec. 31, 1952: Adjusted basis for depletion

bd. ft. at $10/M 2,000.00 carried forward 3,144.20

3,500.00i 3,500.00

Jan. 1, 1953: Adjusted basis for depletion

brought forward- 3,144.20

Volume

Debit

(bd.ft.)

Mar. 1, 1940: Estimated merchantable

timber volume at purchase. Tract No. 1.

Aug. 15, 1950: Estimated merchantable

timber volume at purchase. Tract No. 2.

Dec. 31, 1952: Growth since purchase of

Tract No. 1

July 10, 1952: Sold..

200,000

90,000 Dec. 31, 1952: Volume carried forward.

Credit

(bd.ft.)

60,000

530,000

590,000 590,000

Jan. 1, 1953: Volume brought forward. 530,000

Separate Schedule D

This schedule (see Exhibit D, Appendix) is the foundation of the

capital-gains calculation. Now that the gross sales price and the cost

or other basis have been determined, thus giving the recognized gain

or loss, you are ready to complete Schedule D. It is made up of two

parts: (1) Capital Assets and (2) Property Other Than Capital

Assets. The former is further divided into short-term and long-term

capital gains and losses. The first step, then, is to classify your timber

operations so that you will know which part of the schedule to use.

Classification of^ timber operations.—The usual types of timber

operation giving rise to capital-gains treatment are listed below and

will be taken up in turn.

1. Sale outright of standing timber held 6 months or less.
14

2. Sale outright of standing timber held more than 6 months.

3. Sale under a pay-as-cut contract of standing timber held more

than 6 months.^^

4. Cutting by the taxpayer of timber held more than 6 months

before the beginning of the tax year.^^

(1) Sale outright ^^ of standing timber held 6 months or less. This

type of sale is listed under the heading "Short-term capital gains and

losses—assets held not more than 6 months." Note that the 6-months

period is calculated back from the actual date of sale.

(2) Sale outright of standing timber held more than 6 months.

This situation resembles the first, but now you enter the sale under the

heading "Long-term capital gains and losses—assets held for more

than 6 months."

(3) Sale under a pay-as-cut contract of standing timber held more

than 6 months. This situation is often referred to as 117 (k) (2),

since that is the section of the Internal Eevenue Code which describes

how it is to be handled. Before considering the procedure to follow,

it is well to have a clear idea of just what is meant by a pay-as-cut

contract.

The section of the Eevenue Code in question speaks of "any form or

type of contract by virtue of which the owner retains an economic

interest in such timber." When, then, do you retain an economic interest in timber following its sale ? The test is whether or not you receive

income from the severance and sale of the timber. Thus if the contract

provides that you are to be paid on a scale basis at so much per thousand board feet as the timber is cut, if will qualify as a pay-as-cut contract. So, too, if you are to be paid from the proceeds that the buyer

realizes from his sale of logs or other products derived from your

timber, it will be regarded as a pay-as-cut contract.^^ On the other

hand, the mere sale of timber with provision for installment payment

whether or not the timber is cut would not be considered a pay-as-cut

contract.

If your timber sale qualifies under section 117 (k) (2), your recognized gain or loss from the timber sale must be compared with the recognized gains or losses that you may have realized during the year

from the following five sources :

(a) The sale or exchange of depreciable property used in your

business and held more than 6 months—for example, trucks or

tractors.

(b) The sale or exchange of real property used in your business

and held more than 6 months—for example, part of your farm

land.

" Proceeds from sale, under a pay-as-cut contract, of timber held 6 months or

less must be treated as ordinary income.

'^ If the timber that you cut had been held 6 months or less, capital-gains treatment is not permitted.

^^ By outright sale is meant a sale on a lump sum basis as, for example, an area

or boundary sale rather than one under a pay-as-cut contract as described in

paragraph 3 following.

" Provided the contract does not make you a partner or joint venturer with the

other party, instead of vendor or lessor.
15

(c) The sale or exchange under certain conditions of unharvested crops and of livestock held for draft, breeding, or dairy

purposes.

(d) Damage by fire or other casualty or condemnation of the

tyxjes of property listed under (a), (b), and (c) or of capital

assets including standing timber held more than 6 months.

(e) Cutting of timber in accordance with procedure provided

by section 117 (k) (1).

Further reference to (d) is made in the section on losses in this

handbook, and to (e) later in this section. For a general discussion of

the comparison of recognized gains and losses from the sources listed,

see the chapter on Capital and Noncapital Gains and Losses in the

Treasury booklet, "Your Federal Income Tax," listed in the

Introduction.

If the total gains from the sources listed above exceed the total

losses, then each gain and each loss must be stated separately on

Schedule D under the heading "Long-term capital gains and losses—

assets held for more than 6 months." But if the total gains are not

greater than the total losses, then each gain and each loss must be listed

separately at the foot of Schedule D under the heading, "Property

Other Than Capital Assets," or in the case of loss by casualty as

explained in the section on losses.

Two examples will serve to illustrate the way in which you compare

gains and losses from timber sold under a pay-as-cut contract with the

other kinds of gains and losses listed above.

Example A (gains exceed losses)

Qain Loss

Gain ^ on sale of timber sold under pay-as-cut contract (117 (k) (2) ) _ $240'

Gain on sale of tractor 100

Gain on sale of farm land 600

Loss on sale of livestock _ _ . $400

Loss from forest fire 39

940 439

Excess of gains over iosses^ 501

Each item must be listed individually on Schedule D as a long-term capital gain

or loss.

Example B (gains do not exceed losses)

Gain Loss

Gain ^ on sale of timber sold under pay-as-cut contract (117 (k) (2) ) _ $240

Gain on sale of tractor : . 100

Loss on sale of livestock : $400

Loss from forest fire ._ 39

340 439

Excess of gains over losses None

Each item must be listed individually at the foot of Schedule D under ''Property

Other Than Capital Assets," or in the case of loss by casualty as explained in

the section on losses.

^ This is the recognized gain already described, that is to say, gross sales price

less depletion allowance.
16

(4) Cutting by the taxpayer of timber held more than 6 months

before the beginning of the taxable year. This is often referred to

as the ll7(k) (1) situation and will apply to a large number of timber

owners. Unlike the procedure under 117 (k) (2) just described, however, use of the treatment provided by section 117 (k) (1) is optional

with the taxpayer, subject to the requirement that a consistent practice be followed from year to year. Although proceeds from the sale

of standing timber have long been permitted capital-gains treatment,

it was not until 1944 that similar treatment was accorded to timber

owners who cut timber for sale or for use in their business. As previously mentioned, the purpose of section 117 (k) (1) is to allow you

to take advantage of capital-gains treatment on the increase in value

of your standing timber up to the time that it is cut (the date used

is actually the first day of the taxable year). However, you must still

pay at ordinary income rates on the difference between the value of the

stumpage when cut and the price received for the products (logs,

lumber, etc.) when sold, less all proper deductions for cost of manufacturing and selling.

The intent of section 117 (k) (1) will be clearer if you think of the

cutting of the timber as a sale of the timber to youfself as of the first

day of the taxable year at its fair market value on that date. The

milling or other processing or manufacture of the timber is then a

separate transaction and the value added by manufacture is treated

like any other ordinary income. The five paragraphs that follow

explain: (a) when you are permitted to use 117 (k) (1), (b) when it

is to your interest to use 117 (k) (1), (c) how you indicate your election to use 117 (k) (1), (d) reporting the capital gain up to time of

cutting, (e) reporting the increase in value from time of cutting to

sale of products.

(a) When you are permitted to use 117 (k) (1). Four conditions

must be met if you are to use this method. First, you must have

owned, or had a contract right to cut, the timber more than 6 months

before the beginning of the taxable year. If you report on a calendar

year basis, this will mean that you must have held the timber before

July first of the preceding year. Note that you can use the treatment

provided by section 117 (k) (1) even though you are not the owner

of the timber, provided that you have had for the required period a

contract right to cut it. This means that if you bought timber from

another under a pay-as-cut contract, let us say as a sawmill operator,

you can use 117 (k) (1) when you cut the timber, provided the requisite

period has elapsed. The second condition is thatthe timber must have

been cut by the taxpayer and not sold standing. Timber cut by the

taxpayer, personally, by those working for him or under contract to

him, will satisfy this requirement. Third, the timber cut must be

intended for sale or for use in your trade or business. This would

rule out timber cut for your own use as domestic fuel, for example, or

for use as fence posts on your own residential property. Fourth, you

must elect to use 117 (k) (1) by making a statement to that effect on

your return. The form of this election will be described under (c).

(b) When it is to ^rour interest to use 117 (k) (1). In general you

will find it in your interest to take advantage of the capital-gains
17

treatment provided by 117 (k) (1). Once the decision to use this

method has been made, however, the decision is binding with respect

to all future timber that you cut and that meets the holding period and

other requirements listed above. You must get consent of the Bureau

of Internal Revenue to stop using 117 (k) (1), and while this permission is freely given in cases where there is a showing of undue hardship, you are likely to find the Bureau reluctant to authorize resumption of the practice at a future date.

When only small amounts of timber are usually cut, you may prefer

not to use 117 (k) (1) but may prefer instead to report sales of forest

products as ordinary income and make no split between the increase in

value up to time of cutting and the increase in value due to processing

or manufacture. You may refer to table 1 in this connection, bearing

in mind that the amounts shown in the first column will apply to the

increase in stumpage values only and not to receipts as a whole.

It is possible to have a combination of circumstances in which use

of 117 (k) (1) could actually cost you money. Suppose, for example,

that the price of stumpage were to fall below your cost or other basis,

so that you sustain a recognized loss up to time of cutting, and suppose

also that you have an excess of gains over losses after making the comparison, as in example A above. In such case your timber loss would

be treated as a capital loss and would reduce the net long-term capital

gain to which the 50-percent reduction factor (after deducting any

net short-term capital loss) would be applied. In view of the rising

trend of stumpage prices over a long period of years, a drop in price

sufficient to result in a recognized loss seems unlikely to occur with

frequency. Hence the timber owner has little to fear from use of

section 117 (k) (1)./ >

As a general rule it would seem desirable to elect use of 117 (k) (1)

in the first year in which a substantial saving can be secured.

(c) How you indicate your election to use 117 (k) (1). The election

takes the form of a computation as explained in the following paragraph, and may be accompanied by a statement, "I claim gain (or

loss) from the cutting of timber in accordance with section 117 (k)

(1)." (See sample timber statement, Exhibit E, Appendix.)

(d) Reporting the gain realized up to time of cutting. As in the

case of sales under cutting contract, the recognized timber gain or loss

is compared with the recognized gain or loss that you have realized during the year from any of the sources listed on page 14. Examples A and

B above apply equally wellto the cutting of timber exceptthat "Gain on

cutting of timber in accordance with section 117 (k) (1)" should be

substituted for the first item. As before, if the total gains exceed the

total losses, each item is listed individually on Schedule D as a longterm capital gain or loss, but if total gains do not exceed total losses,

each item is listed at the foot of Schedule D under "Property Other

Than Capital Assets" or in the case of casualty losses as explained in

the section on losses.

(e) Reporting the gain realized from time of cutting to sale of

products. While this increase in value represents ordinary income,

it is discussed here because it is closely related to the 117 (k) (1) situation just described. Since you are regarded as having sold the timber
18

to yourself as of the first day of the taxable year at its fair market

value on that date, the fair market value that has been used becomes

the "cost" of the timber for purposes of calculating the manufacturing

profit. Suppose, for example, that you cut 60 M board feet of timber

and that you sell the resulting logs during the same year for $1,200.

If the timber had an original cost or other basis of $5 per thousand

board feet or $300 and its fair market value as of the first day of the

taxable year was estimated to have been $9 per thousand board feet or

$540, the difference or $240 would be entitled to capital-gains treatment under 117 (k) (1) as already explained. The $540 then becomes

the "cost" of the timber cut and may be shown as an expense, together

with logging, transportation, and other costs and will in effect be subtracted from the $1,200 that you received for the logs in determining

your taxable income* The sale of the logs may be listed at the foot of

separate Schedule D under "Property Other Than Capital Assets," and

the gain will thus be treated as ordinary income.

• If you did not sell the logs in the same year as the timber was cut

but carry them as inventory atthe year end, the same principle applies.

The fair market value used in determining your capital gain under

117 (k) (1) or $540 will be taken as the cost of the timber. To this

should be added the costs of cutting, logging, and all other expenses

incidentto the cost of converting the standing timber into the products

in inventory. The fact that the fair market value of the stumpage

is taken as the cost of the timber, however, does not prevent taxpayers,

using the "cost or market whichever is the lower" or other approved

method of computing inventories, from continuing to do so.

A practical application of the use of section 117 (k) (1) is given

in problem No. 4 in the concluding section.

Completion of Schedule Z>.—At the top of the schedule are eight

column headings. These apply alike to short-term and long-term

capital gains and to gains from property other than capital assets.

1. Kind of property,—Since more information is needed than can

be shown in the space available, you can write "See statement attached." This statement may be entitled "Timber" and should contain the following information under the caption "description of

property" (see sample statement, Exhibit E, Appendix) :

Name, location, and acreage of tract where sale was made or cutting was done.

Name of individual from whom tract was acquired and whether acquisition was

by purchase, gift, inheritance, or in other manner.

Original cost of the tract as a whole. If land was included in the purchase show

the allocation of the cost or other basis to land, to improvements, and to

timber, respectively.

Description of merchantable timber present at time of acquisition. Show estimated volume, leading species, and character such as virgin or second growth.

Description of timber sold or cut during the taxable year (volume, leading species,

and intended use as for example lumber, veneer, or fuel).

2. Date acquired,—Show here the date upon which the timber came

into your possession, whether by purchase, gift, inheritance, or in

other manner.

3. Date sold.—For outright sales of standing timber give the date

that the sales contract was signed, or if the contract was verbal, the

date the agreement was made. For sales under a pay-as-cut contract.
19

give the date the timber was cut.^^ For timber that you cut and to

which you wish to apply the capital-gains treatment under 117 (k) (1),

write under Date Sold the first day of your taxable year. Thus if

your return is made on the calendar year basis, you will write

January 1.

4. Gross sales price.—The determination of the amount realized has

already been explained in the section Treating Eeceipts as Capital

Gains. If you sold stumpage outright, show here the full contract

price; if you sold timber under a pay-as-cut contract, show the sum

of payments actually received or accrued during the year. If you

cut timber, show its fair market Value on the first day of your taxable

year (see Exhibit E, Appendix).

5. Depreciation allowed.—This heading does not apply to sales or

cutting of timber. It would apply, however, to sales of such depreciable business assets as trucks, tractors, and logging equipment. Depreciation is discussed in the chapter on costs of forest ownership and

operation.

6. Cost or other hasîs.—Here you show the depletion allowance,

calculated as previously explained in the section treating receipts as

capital gains. The calculation should be shown on the timber statement attached to the return (see Exhibit E, Appendix).

7. Expense of sale.—^Here you show the sum of expenses related

directly to the sale, such as advertising timber for sale; timber survey

or cruise ; cost of marking trees for cutting ; fees for consulting foresters, accountants, or attorneys; travel ; and other expenses of similar

nature. The items making up the total should be listed on the timber

statement.

8. Gain or loss.—This will be the gross sales price (column 4) less

the sum of the cost or other basis (column 6) and the expense of sale

(column 7).

The remainder of Schedule D and transfer of figures to Form 1040

should be carried through in accordance with the directions indicated

on the schedule. An important change was made by the Revenue Act

of 1951 in the method of determining net capital gain or loss. Formerly only 50 percent of the net long-term capital gain or loss was

taken into account. The Act requires that long-term gains and losses

for taxable years beginning on or after November 1, 1951, be taken

into account in full, but allows a deduction from gross income equal to

50 percent of the amount by which the net long-term capital gain

exceeds the net short-term capital loss. Schedule D for the calendar

year 1952 reñects this change. Under certain conditions the new

method will make no difference in your tax liability, under other conditions it can reduce, and under still other conditions it can increase

your tax liability.

On Schedule D you will find provision for a computation of alternative tax. You need not be concerned with this calculation unless your

net income less exemptions exceeds $14,000 ($28,000 if you file a joint

return or, for 1952 or later years, $20,000 if you file as head of a house-

^^ Note, however, that the date of the contract is used in calculating the 6

months qualification period under 117 (k) (2).

235834°~53 4
20

hold). The effect of the computation is to limit the tax on net longterm capital gains to a maximum of 26 percent (formerly 25 percent)

regardless of your tax bracket. If your net income less exemptions is

below the amounts indicated, your effective rate of tax will be less than

26 percent in any case, so that the computation of alternative tax will

be unnecessary.

LOSSES FROM FIRE, WINDSTORM, OR OTHER

CASUALTY

If your timber has been damaged by fire or other casualty during the

year, you may be entitled to claim a deduction on your income tax

return. In order to do this, it is necessary to know what types of loss

may be deducted, how the damage is to be measured, and how the tax

deduction is calculated.

TYPES OF LOSS THAT MAY BE DEDUCTED

The losses that may be deducted comprise for the most part those

which involve actual physical damage and are of sudden, unusual, or

unexpected character, öome are caused by natural physical forces or

''acts of God," such as lightning, windstorm, ice, hail, sleet, unusually

heavy rains, flood, freezing, drought, and, if of epidemic nature, insect

infestation or plant disease.^^ Others are man-caused, such as those

resulting from fire or plane crash or from war.

Two types of loss that differ from those just described but are treated

in a similar manner, are those resulting from seizure or requisition by

public authority through exercise or threat of exercise of the power

of condemnation, and those resulting from theft.

Progressive deterioration resulting from a steadily operating cause

such as soil erosion is not recognized for tax deduction, nor is loss of

an incidental or minor character or mere retardation of growth.

Losses resulting from the willful negligence of the taxpayer cannot be

claimed as tax deductions.

DETERMINING THE RECOGNIZED LOSS

Since you must be able to support any statement of loss claimed as

a deduction on your tax return, it is desirable to secure an accurate

appraisal of the damage. This appraisal may be made immediately

after the fire or other casualty if there is no doubt as to the death of

the trees. On the other hand when there is doubt as to survival, the

appraisal should not be made until after the following growing season. Since a casualty loss is deductible only for the year in which it

occurred, you may need to file an amended return.

A consulting forester may be employed to estimate the damage if

values are large and a substantial amount of work is involved. But

in many cases the local district forester, forest fire warden, or other

^^ Losses from forest insects or disease when of endemic character, that is, those

resulting from a low level of pest incidence usually present under normal conditions, are not deductible.
21

representative oï the State forestry department will be able to give

you a damage estimate for attachment to your tax return as a proof

of loss. -n

In requesting a damage estimate it is well to be specific as to 3ust

what information is needed, since the basis for calculating the tax

deduction is frequently not understood. Your recognized loss for tax

purposes with respect to timber intended for sale or for use in your

business ^^ is the difference between the adjusted basis for depletion

of the damaged timber and the sum of (a) the salvage value if any

of the timber plus (b) any insurance recovery. This means that you

need to do two things : Establish the "basis" ^^ of the timber damage,

and find its salvage value. You should, therefore, ask the forester

or other appraiser two questions : First, what is the volunie, by leading species, of the damaged timber? Second, what is its salvage

value on the stump? Unless the salvage value is less than your basis

for loss, you do not have a recognized loss and can claim no deduction.

An example will help to clarify procedure in determining loss. The

district forester in reply to the first question tells you'that he estimates

the fire to have burned over 5 acres with an average volume of 3,900

board feet to the acre or 19,500 board feet in all. This permits you to

determine your basis for the timber damaged. Assuming that there

is -no compensation received by insurance or otherwise, that your

original cost was $5 per thousand, and that there have been no adjustments to the original cost figure, your depletion allowance is

$5 X 19,500 board feet or $97.50. Assume now that in answer to the

second question you find the salvage value to be $3 per thousand board

feet or a total salvage value of $58.50. Your recognized loss is $97.50

less $58.50, or $39.00. If there were no salvage value, your recognized

loss would be the full $97.50.

Loss from theft of timber is calculated in the same way except that

there will be no salvage value. In case of public condemnation there

will likewise be no salvage value, but there will be a condemnation

award. If the award falls short of the basis of the timber, you have

a recognized loss to the extent of the difference.

In determining your recognized loss following damage to a plantation or to immature timber, whether planted or natural second growth,

the same principle applies. In such cases, however, there is likely to

be no salvage value. Your basis for loss on a plantation will be the

original cost plus such carrying charges as have been properly capitalized up to the time of the fire or other casualty. In the case of

natural second growth, you may have no basis for loss at all and in

such event could claim no loss.

Confusion will be avoided if you bear in mind that the loss recognized for tax purposes is determined differently from, for example, an

insurance loss or the amount of damages for which a negligent party

might be sued. In the latter cases, the measure of damage will normally be the difference between the sound value of the timber before

the casualty and its damaged value after the casualty. For tax pur-

" In contrast with shade or ornamental trees, described below.

'' See the explanation under the paragraph heading The depletion allowance in

the section Treating Receipts as Capital Gains.
22

poses, however, you need to find the difference between your adjusted

basis for the damaged timber (intended for sale or for use in your business) and its damaged value after the casualty as increased by any

insurance or other recovery.

A different method of determining the recognized loss is used in the

case of damage to individual shade or ornamental trees standing on

residential or other nonbusiness properties. In such cases the recognized loss is the difference in the value of the property as a whole before

and after the windstorm, lightning, or other casualty. The deduction

claimed may not be greater than the adjusted basis of the property as

a whole and must be reduced by any insurance or other recovery. The

following schedule while not officially accepted by the Treasury Department has been used in the past as a guide in claiming deductions

for damage to shade or ornamental trees in certain residential areas.

The figures are based upon replacement value up to 10 inches diameter

and upon the basic value as a tree above that diameter.

Replacement values only: ' ^ZT'^t,

1-3 inch diameter P^- ^

3-6 inch diameter 15. 00

6-10 inch diameter 20. 00

Basic value as a tree only (where replacement is not feasible) :

10-20 inch diameter ^^•^'

20-35 inch diameter 25. 00

35 inches and over 35. 00

The actual value of the tree may differ from that indicated above

by reason of the relation of the tree to house, garden, or landscape

scene, by reason of the hardiness, age, or physical appearance of the

tree, or by reason of prior injury. If the loss that you claim is not

in accord with the figures shown in the schedule, an explanatory statement should be attached to your return.

If the tree is replaced by another tree, it seems likely that the actual

replacement cost, provided such cost is reasonable in amount, will be

accepted as the measure of loss.

CALCULATING THE TAX DEDUCTION

Once you have determined your recognized loss from fire or other

casualty as outlined above, it must be entered at the appropriate

place on the return. ^ i •

If you had owned the damaged timber 6 months or less at the time

of the casualty, the recognized loss is listed on Schedule D under

the heading, "Short-term capital gains and losses—assets held not

more than 6 months."

The recognized loss on a shade or ornamental tree standing on a

residential or other nonbusiness property owned 6 months or less

IS not deductible from gross income in computing adjusted gross

income, as are capital losses, and therefore it should be entered with

an explanatory note on page 3 of Form 1040 under the heading,

"Losses from fire, storm, or other casualty, or theft."

If you owned the damaged timber or shade tree more than 6 months,

the recognized loss comes under paragraph (d) on page 15 and must

be grouped with other recognized gains and losses listed on that page.

If there is an excess of gains over losses, the fire or casualty loss is
23

listed on Schedule D as a long-term capital loss. If total gains do

not exceed total losses, tken a fire or other casualty loss on timber

intended for sale or for use in your business must be listed on Schedule

D under "Property other than capital assets," and a shade tree loss

must be entered on page 3, Form 1040, under the heading, "Losses

from fire, storm, or other casualty, or theft."

When making entries on Schedule D, the information called for by

the eight column headings should be supplied in a manner similar

to that outlined earlier under "Completion of Schedule D." Under

"Date sold" in column 3 will be shown the date of the fire or other

casualty. Under "Gross sales price" in column 4 should be shown

the sum of the salvage value and any recoveries received, such as a

condemnation award, recoveries under policies of insurance, or court

awards for damages. In column 7 may be shown the sum of any

expenses incurred in connection with the casualty as cost of appraisal,

timber cruise, legal fees, etc. The sample timber statement (Exhibit

E, Appendix) contains an entry relating to fire loss that will serve

as a guide.

Your recovery following a casualty or condemnation may possibly

exceed the adjusted basis of the damaged or condemned timber. Such

a situation could arise, for example, as the result of a condemnation

award or recovery under an insurance policy. Instead of a recognized

loss you would have a recognized gain to the extent that the award

or recovery exceeds the adjusted basis of the timber in question. If

the timber had been held 6 months or less, the recognized gain would

be listed under "Short-term capital gains and losses—assets held not

more than 6 months." If the timber had been held more than 6 months

the gain would be combined with other recognized gains and losses,

as mentioned above.

There is one exception to the treatment of a recognized gain following a casualty or condemnation that should be borne in mind. The

law provides that when the entire award or other recovery is promptly

reinvested in similar property, no gain shall be recognized. If, on the

other hand, only a portion of the recovery is reinvested in similar

property, a gain is recognized to the extent that the amount reinvested

falls short of the total recovery. For example, suppose that the

adjusted basis of your damaged timber was $1,200 but that its actual

sound value before the fire was $2,000. If your insurance recovery,

assuming a total loss, were the full $2,000, the recovery would be $800

in excess of your adjusted basis. This $800 would be recognized as

a gain unless you promptly reinvested the entire $2,000 in timber.

If only $1,500 were reinvested in timber, then a gain would be recognized to the extent of $500 ($2,000 less $1,500).

Relatively little insurance is now being placed on standing timber

and the situation just described is not likely to occur except in the

case of a condemnation award. As forest insurance becomes increasingly common in the future, however, the principle just explained will

be of growing importance. The timber owner who might hesitate to

insure his timber for fear that the excess of any insurance recovery

above his basis would be taxed as a capital gain, should not overlook

the fact that such gain would not be recognized to the extent that he

promptly reinvested his insurance proceeds in timber property.
24

If you find yourself in the position of having a recognized gain following timber casualty or condemnation, you may need to consult your

Director of Internal Revenue or other tax authority as to the exact

requirements relating to reinvestment of the proceeds.

COSTS OF FOREST OWNERSHIP AND OPERATION

From an income-tax standpoint two broad types of costs are recognized, charges against income and charges against capital. The

former are "expensed," thatis, treated as deductions from gross income

year by year. The latter are "capitalized," that is, included in the

adjusted basis ^^ of the property, and, for the most part, recovered

through depreciation or depletion. With respect to certain items,

moreover, you may choose either method.

The costs that are expensed year by year are, in general, the ordinary

and necessary expenses directly related to the business of the taxpayer

or related to the production of income. Also deducted annually are

allowances for depreciation. The costs that must be capitalized include outlays for acquisition of property having a useful life of more

than 1 year, such as land or equipment and also outlays for permanent

improvements or betterments to such property. ^ The costs that may

be either expensed or capitalized include carrying charges, such as

taxes and interest relating to unimproved and unproductive timber

tracts and also development expenditures made for any forest lands

with a view to production of income at a later time.

The costs of forest ownership and operation are considered under

the following headings :

1. Operating expenses.

2. Carrying charges and development expenditures.

3. Capital expenditures.

4. Depreciation allowances.

OPERATING EXPENSES

Expenses for current operations are those directly related to the

production of income and are thus incurred in connection with timber

stands from which merchantable products are being harvested. Such

expenses, provided that they are reasonable in amount, are deductible

from your gross income year by year as they are paid or incurred.

Operating expenses include the cost of hired labor,^^ such as that

engaged in timber cutting or processing; hire of animals, trucks,

tractors, or other equipment; purchase of tools of short life or small

cost such as axes, saws, sledges, wedges, etc.; cost of materials and

supplies; incidental repairs; operating expenses of trucks, tractors,

or other machines ; construction of temporary roads; and management

expenses including the fee of a consulting forester, lawyer, accountant,

or other adviser. Advertising and other costs related directly to a

specific sale of standing timber, however, should be treated as an

^^ For the meaning of this term see page 9.

^ The value of the taxpayer's own time or that of his dependent children cannot be treated as an operating expense.
25

expense of sale and, if a capital gain or loss is involved, should be

listed on schedule D as described on page 19.

If you are a farmer and file the Schedule of Farm Income and

Expenses (Form 1040F), your operating expenses will be listed on

page 3 under the heading Farm Expenses for Taxable Year. If you

file the Schedule of Profit (or Loss) from Business or Profession (separate Schedule C), your operating expenses will be listed either under

"Cost of goods sold" or "Other business deductions." If you file

neither Form 1040F nor Schedule C, your operating expenses may be

listed in a separate statement attached to the return and should be

deducted from the income reported in Schedule G, line 2 on page 2 of

the return. If operating expenses exceed the income reported on

line 2 of Schedule G, the difference should be shown as a red figure

and subtracted in determining the total income figure to be entered

as item 3, page 1 of the return.

CARRYING CHARGES AND DEVELOPMENT EXPENDITURES

You can either expense or capitalize carrying charges and development expenditures, as you may choose, provided that you follow a

consistent practice from year to year. The nature of such costs will be

explained before taking up the question of how they should be treated.

Carrying char^^ thought of as deductible costs that are

incurrea while timber lands are unimproved and unproductive or

during the time that timber lands are being developed or improved.

Annual taxes, interest payments, protection costs as for fire or pest

control, and insurance premiums are examples of carrying charges.

General property taxes are payable annually irrespective of harvest

operations and can be considered as carrying charges during the time

that the property is unimproved and unproductive, or is being developed or improved. On the other hand, general property taxes incurred

in connection with an income-producing property are in the nature

of operating expenses and must be expensed. Yield or severance taxes

are payable at the time of timber harvest and seem likewise to come

under the classification of operating expenses. Taxes in the nature

of assessments for local benefits that increase the value of the property

as a whole cannot be expensed but may, however, be capitalized.

Deduction of Federal income taxes, excess profits taxes, estate taxes,

and gift taxes is prohibited by law.

Interest payments include those due on bank loans and other shortterm credit and also those on mortgage indebtedness. Interest charges

of an accounting character which represent the cost of capital invested

in the property but which are not actual out-of-pocket expenditures

may not be deducted.

Protection costs include expenditures for labor, materials, and tools

needed in the maintenance of fire lanes (costs of constructing fire lanes

are regarded as capital expenditures) or other protection measures

including costs of actual fire suppression. Contributions to fireprotection associations also come under this heading. Protection costs

incurred for the purpose of controlling forest insects or diseases are

treated similarly.
26

Premiums for standing timber insurance are recognized as carrying

charges and the same is true oí the cost of fire or other insurance on

buildings or other facilities. The cost of automobile insurance and

workmen's compensation insurance, on the other hand, should normally be treated as operating expenses.

Interest payments, protection costs, and insurance premiums when

incurred in connection with income-producing properties are in the

nature of operating expenses and must be expensed.

Development expenditures are incurred during the "developmental

period" of a farm or other property, during which the timber owner

may be put to expense in caring for timber stands which, though

already established, do not yet produce income. The cost of thinning

and improving stands of young timber prior to the time that the production stage is reached come within the meaning of development

expenditures. Such costs include expenditures for girdling, poisoning,

pruning, and improvement cuttings but should be reduced by incidental amounts received for any salable products.

Since you have a choice as to whether you will expense or capitalize

carrying charges and development expenditures, which course should

you take? It seems clear that if you have income from which to

deduct them, it will in general be to your advantage to expense all

items that you are permitted to treat in this way. By doing so you

take credit for the expense year by year as it is paid or incurred, and

accordingly reduce your gross income and consequently your tax also.

If, on the other hand, you capitalize an expenditure, the best you can

do is to recover it through depreciation or depletion over the life of

the asset or as the timber is harvested. Thus an expenditure of $500

for an improvement cutting, if capitalized, would become an adjustment to the cost or other basis of your timber (see the section Treating Eeceipts as Capital Gains) and would become a part of the depletion allowance for which credit could eventually be taken as the timber

was cut or sold. Most timber owners will doubtless feel that a bird in

the hand is worth more than a bird in the bush and will prefer to

expense their costs year by year to the extent permitted by law. Moreover, the bird in the bush may be only half a bird, since a cost that

is capitalized and recovered through the depletion allowance, to the

extent that it is used to offset a long-term capital gain, may be only

half as effective in reducing your tax as would a straight expense

deduction, because of the lower rate at which long-term capital gains

may be taxed.

While it will usually be to your advantage to expense rather than

capitalize your carrying charges and development expenses, this will

not invariably be true. If you operated at a loss in a given year, for

example, and had no adjusted gross income (line 4, page 1 of your

return) against which the expenses could be offset, it may be preferable

to capitalize the carrying charges and development expenditures. In

this situation, however, it is suggested that you refer to the net operating loss carryback and carry over provisions explained in the Treasury

publication Your Federal Income Tax listed in the Introduction.

Again, an owner might for some reason prefer to capitalize his carrying charges with a view to building up his basis for depletion and in

this way reduce his ultimate capital gain. On the whole, however, the
27

expensing of such items is likely to be the usual procedure, especially

since the decision once made is binding for future years unless permission to make a change is secured from the Director of Internal

Revenue.

The entries to make on your return when costs are expensed were

described in the section on Operating Expenses; the entries to make

when costs are capitalized will be described in the following section

on Capital Expenditures.

CAPITAL EXPENDITURES

The_ timber owner may incur capital expenditures either for the

acquisition of property or for permanent improvements or betterments

that increase the value of property that he already owns. Examples

of the former type of capital expenditures are purchases of timber and

purchases of equipment having a useful life of more than 1 year.

Examples of the latter type are expenditures for land improvements,

such as construction of bridges, roads, and fire lanes; for timber

^"improvements,'^ such as planting and seeding; and for major repair

of equipment that prolongs its useful life. Capital expenditures

whether for acquisition or improvement of property can be classified

usefully under three headings : The land account, the timber account,

and the equipment account.

The land account

The cost of bare-land purchases will be charged to the land account

and will not be subject to recovery through depreciation. So, too,

when tracts of mature or immature timber are acquired, the land

account should be charged with its proportion of the total price paid.

If itis desired to allocate something over and above the minimum bareland value to the land account in recognition of the potential value of

young growth of presently unmerchantable size, this may be done

and such amounts may then be reallocated to the timber account when

the young growth reaches merchantable size. Land improvements of

a permanent or nondepreciable nature such as road construction, grading, ditching, etc., are likewise charged to the land account without

recovery through depreciation. The construction cost of depreciable

improvements, on the other hand, such as bridges, culverts, and fences,

while also charged to the land account, may be recovered through

depreciation.

Main line or "permanent" roads present a special problem although

one not likely to affect many of the smaller timber owners. If you

can establish that such roads, once the timber to which they give access

has been cut, will not be needed again until a new timber crop has

grown and are in fact^depreciating in value during the waiting period,

recovery of the capital investment through depreciation may be

permitted. The dividing line between a permanent or nondepreciable

asset on the one hand, and a depreciable asset on the other is sometimes

hard to draw. To be the subject of depreciation, however, property

must have a limited and determinable useful life and must be used in

the taxpayer's business or for earning nonbusiness income.
28

The land account should be credited each year with the depreciation

allowable as explained in the final section of this chapter.

The timber account

The timber value account (see sample on page 13) is charged with

(a) the cost (excluding land value) or other basis of timber acquisitions whether acquired by purchase, inheritance, gift, or in other

manner, together with the cost of cruising or examining the timber

prior to purchase, (b) expenditures for timber "improvements" such

as seeding and planting, and (c) such carrying charges and development costs as you may have elected to capitalize, rather than to expense

year by year. The timber value account is credited when depletion

allowances or casualty losses are claimed.

The timber volume account will show the volume of merchantable

timber as adjusted from time to time. The timber account as a whole

enables you to calculate the depletion allowance as explained in an

earlier section.

The equipment account

This account will be charged with the cost of durable equipment

such as trucks, tractors, or power saws. It will also be charged with

any major repair or reconstruction costs that materially increase the

value or prolong the life of such equipment.

The equipment account will be credited with the depreciation aii'owances taken year by year, as explained in the following section.

DEPRECIATION ALLOWANCES

Depreciation occurs when a capital asset wears out as a result of

service ; obsolescence occurs when a capital asset gradually becomes

out of date before it is physically worn out. Both terms must be distinguished from depletion which results from the reduction or exhaustion of an asset such as timber or other natural resource.

Depletion relates to the timber account whereas depreciation and

obsolescence relate to the equipment account and to depreciable assets

in the land account.

Allowances for depreciation and obsolescence differ from the three

types of costs already taken up (operating expenses, carrying charges,

and capital expenditures) in that they are accounting or bookkeeping

items rather than actual outlays of money. They are, nevertheless,

very real costs of forest ownership and operation, since they represent

that portion of the cost or other basis of depreciable property that you

estimate will be used up or that should be written off because of

obsolescence during the current tax year. The purpose of the depreciation allowance is thus to permit you to recover, during the useful

life of the property, the capital that you have invested in it, less the

estimated salvage value.

Three elements enter into the determination of the depreciation

allowance for a given piece of property : Its cost or other basis, its

salvage value, and the period of its useful life. The basis of the

asset will normally be its purchase price in the case of trucks, tractors.
29

power saws, and other equipment; or its cost of construction, including

labor and materials, in the case of depreciable improvements in the

land account such as buildings, roads, bridges, and culverts. From

this basis the estimated salvage value, if any, at the end of the asset's

useful life must be subtracted and the remainder is then divided by

the estimated period of the asset's useful life. For example, equipment

purchased at a cost of $1,200 and estimated to have a salvage or tradein value of $200 after 5 years will normally be depreciated at the rate

of one-fifth of the $1,000 difference, or $200 per year.

The method described is known as the straight-line method of depreciation and will doubtless meet the needs of most small timber

owners, although other methods may be adopted if in accord w^ith

the actual character of your forest operations and if consistently followed from year to year. Thus, equipment that can be used only in

a given logging operation may be depreciated over the period of the

cut at a rate established by current exhaustion of stumpage, rather

than on the basis of the physical life of the property.

Since the rate of depreciation will generally depend upon the useful life of the property, a guide to the estimated useful lives of machinery and equipment used in timber operations is needed. Such a

guide is contained in Bulletin F published by the Treasury Department (see Exhibit F, Appendix). Items from the Lumber and Wood

Products Schedule and from the Agriculture Schedule likely to be

of interest to the small timber owner have been listed. Estimated useful lives for machinery used in lumber remanufacturing plants and

creosoting plants may be found by referring to Bulletin F.

The depreciation allowances that you claim as deductions in any

year must be itemized either in the Depreciation Schedule on page

3 of the farm form (Form 1040F), in Schedule C-1 on page 1 of the

business form (separate Schedule C), or in Schedule H on page 2 of

the return itself (Form 1040). The three schedules call for the same

information and contain identical headings as shown in figure 1.

These will be taken up in turn. Entries are assumed to have been

taken from a tax return covering the year 1952.

DEPRECIATION (See Instructlont)

1. Kind of urooart» (If !iulldin?j, sU!e

msterlal of wiiich constructed). Eniude

bnil and other mmdepreciatiie property

2. Dat»

acquired 3. Got! or tther basis 4. Depreciation allowed (or

allowaWe) in prior years

5. «etnalnltiî cost or ottier

basts to be recovered

s. Ule used in

atsumulatint

depredation

7. Estimated

nie Irom

beelnnliiîof

year

this year ;

Tractor No,l...li1PA8 $ 1,800. QQ.. $ 220.

1 Q.Q.j$ 1^080 PP..1 10 yrl 6 yi $ 180 .9.9..

Wire.fencing

....:£xAçt..Bo.z.M10/5-0. .laaJQQ.. 12. QQ-- - -iM .00.. -I5..xr- .13-2/12.yT., 12 .00.

1

_. i _ 1 1 1 ! 1 1 1 1 1 1 '"

.„• L.....I 1

1 ! 1 1 ¡

i 1 _ ^—_ ,.—- \ —çz:—H -_ . 4— , -,

FIGURE 1- -Depreciation schedule in Form 1040 (schedule H),

schedule O.

Form 1040F, and
30

1. Kind of j>Toperty,—This description should be in sufficient detail to clearly identify the item and should be repeated in the same

form from year to year, for example. Tractor No. 1 or Wire fencing,

Tract No. 2.

2. Date acquired.—The month and date should be shown so that

depreciation allowable (column 8) may be prorated on a monthly

basis. If month and date are not given, only one-half the allowable

annual depreciation may be claimed for the full year.

3. Oost or other basis.—Here will be entered the purchase price,

or other basis if the asset was not acquired by purchase. The cost

of any major repairs or improvements that prolong the useful life

of the asset may be added to the basis to form the adjusted basis, or

it may be carried as a separate item. If the latter course is adopted

a useful life and depreciation allowance is calculated for the

improvement.

If you maintain detailed ledger accounts covering your depreciable

equipment, the basis or adjusted basis may be entered on the depreciation schedule directly from such accounts. Otherwise, the basis may

be carried forward from your income tax return for the year before,

subject to adjustments to reflect depreciation already charged off and

improvements or repairs made during the taxable year.

4. Depreciation allowed {or alloioahle) in prior years.—This will

be a cumulative figure including all depreciation claimed in earlier

years and any depreciation that should have been claimed but was, in

fact, not claimed. You are not permitted to claim in later years depreciation that applies to earlier years and such depreciation is, in

effect, forfeited,

5. Remaining cost or other lyasis to he recovered.—This will be the

difference between columns 3 and 4.

6. Life used in accumulating depreciation.—Here should be shown

the estimated useful life of the asset in question (see Exhibit E). If

major repairs have prolonged its useful life^ the additional period

should be added unless the improvement is being set up as a separate

item as mentioned in numbered paragraph 3 above. ^

7. Estim^ated life from beginning of year.—This will be the total

estimated useful life (from column 6) less the number of years that

have already elapsed since the acquisition of the asset.

8. Depreciation allowable this year.—This will be the remaining

cost or other basis to be recovered (column 5) less the estimated salvage

value, if any, divided by the estimated life from beginning of year

(column 7).

The sum of the depreciation allowances claimed on your depreciable

assets for the taxable year will be carried by those using the farm

schedule (Form 1040F) from page 3 either to line 7 of summary on

page 1 (cash basis) or to line 8, page 2 (accrual basis). If you file

the business schedule (separate Schedule C), the total depreciation

as claimed in Schedule C-1 will be carried to item 17 of the same

Schedule C, Depreciation and obsolescence.

If you sell a depreciable asset such as a tractor, the depreciation

allowed or allowable in past years, that is the total depreciation that

should have been claimed, must be entered under column 5 on Schedule

D and will affect the calculation of the recognized gain or loss.
31

Turpentine depletion, although not strictl^r speaking a depreciation

allowance, may logically be mentioned at this point since it involves

annual deductions rather than periodic deductions at time of sale or

cutting, as in the case of timber depletion. The Treasury Department

has issued an information release dealing specifically with turpentine

depletion and this is presented as Exhibit G, Appendix.

CONCLUDING SECTION

In the preparation of this handbook State Foresters and State

Extension Foresters were given an opportunity to list the income-tax

questions most frequently asked of their field representatives. The

questions that follow are based very largely upon the responses.

Acknowledgment is also made to E. J. Kussell, Associate Professor

of Forestry, and Harold J. Smolinski, C. P. A., Professor of Accounting, Louisiana Polytechnic Institute, for use of material based upon

their article, "Tips on Federal Income Tax Computations for the

Small Woodland Owner," in the February 1952 issue of the Forest

Farmer.

QUESTIONS AND ANSWERS

1. What are two methods of treating receipts from sales of timber?

The ordinary income method and the capital gains method.

2. Should proceeds from sales of timber be reported with farm

income or should they be reported separately?

If the ordinary income method is used, timber sales should be

reported on the farm schedule (Form 1040F), but should be listed

separately. If the capital gains method is used, timber sales should

be listed individually on separate Schedule D.

3. Is income from forest land taxed at the same rate as income from

farm land?

While the tax rate itself does not differ with the source of income,

forest land income may in effect be taxed at a lower rate than certain

types of farm income, because of the capital gains provisions applying

to timber sales.

4. Should the timber owner fail to cut overmature timber in order

to a(ümd increasing his income tax?

Generally, no. It should be remembered that overmature timber is

adding no net growth and may actually be decreasing in value. If

capital gains treatment is used the tax cannot take more than 26 percent of the excess of the net long-term capital gain over any net shortterm capital loss.

5. Should a timber owner stagger his timber sales in order to keep

down his income tax?

Periodic cuts will tend to average out receipts from timber operations and will thus avoid large lump sum receipts that could have the

effect of placing the taxpayer in a higher tax bracket. Periodic cuts,

moreover, will usually be in accord with good forest management by

maintaining the productivity of the stand. However, the tax rate
32

applicable to capital gains cannot exceed 26 percent of the profit on

sales of standing timber held over 6 months.

^, Under what conditions is there a maximum limit of ßß percent

tax {formerly 25 percent) on long-term capital gains? <

Use of the alternative tax computation on separate schedule D

means that under no circumstances can the tax amount to more than

26 percent of the excess of net long-term capital gain over net shortterm capital loss. In effect this ceiling will reduce the tax of the

larger taxpayer only (on a joint return if one-half the net income less

one-half the exemptions exceeds $14,000), since smaller taxpayers will

be below the 26-percent limit.

7. Can you handle the sale of timber under the capital gains treatment even though you do not treat your other income in this womj?

S Does the income tax favor an owner who practices sustained

y^eld operatton?

Not insofar as treatment of receipts is concerned, but provisions for

expensing and capitalizing costs of forest ownership and operation

do, m eltect, encourage sustained yield operation.

9. /^ timber considered a long- or short-term investment?

This will depend upon whether the timber has been held for more

or less than 6 months.

10. Y]^^i i^ (^ long-term capital gain and what is a short-term cavitat gain? ^

A long-term capital gain or loss results from the sale or exchange

o± a capital asset held for more than 6 months. A short-term capital

gam or loss results from the sale or exchange of a capital asset held

lor 6 months or less.

11. How should sale of land he treated when timber and land are

sold together?

The price received should be allocated on a reasonable basis between

the two, and the recognized gain or loss on the land should be listed

separately on Schedule D.

12. Is timber growth taxable?

^ Timber growth is not taxable as such. Increase in value of standing timber, whether due to growth or to market appreciation, is taxable at such time as the timber is sold or, in certain cases, when it is

cut, but IS not subject to income tax until that time.

13. How should stumpage value be separated from returns due to

labor m arriving at fair valus of stumpage ?

The stumpage value should represent the price at which timber of

comparable quahty and location is currently selling as it stands uncut

m the woods The local district forester will usually be in a position

to estimate the unit selling price for comparable timber.

, ^.f-,^^^ ^^ould actual cost be allocated between timber, lam.d, and

buitdings,^ when the property was bought substantially below (or

above) fair market value?

^i.^}^ l^^^^} amount paid for the property should be allocated over

tHe timber, land, and buildings in the proportion that the fair market
33

value of each, as of the date of purchase, bears to the fair market

value of the property as a whole, as of the date of purchase.

15. How do you place a value upon timber as of its acquisition datef

The volume of merchantable timber standing on the tract as of its

acquisition date should be estimated and a fair unit stumpage value

applied. (See page 9.)

16. now\ do you place a value upon tiinber cut for home use?

The fair market value of the timber cut should be estimated as it

stood in the woods on the first day of the taxable year. This value will

be indicated by current sales of stumpage of comparable quality and

location.

17. What is the difference between depletion and depreciation?

Depletion is the reduction or exhaustion of an asset such as timber

or other natural resource. Depreciation is the wearing out of an asset

due to service.

18. Under what circumstances will it pay a timher owner to set up

his lands upon a depletion basis?

Land is not subject to depletion for income tax purposes. All timber owners should establish the cost or other basis for depletion of their

timber in order that the depletion allowance may be determined at

such time as timber is sold or cut.

19. What is meant by the basis for depletion or ^'basis^^ of a timher

holding? What is meant by the adjusted basis? Suppose the property

was not acquired by purchase.

The basis for depletion represents the original capital investment in

the property. The adjusted basis will reflect increases in the capital

investment (as a result of acquiring additional timber or capitalizing

costs) or decreases (as a result of recovering the capital investment

through depletion allowances). If not acquired by purchase, the basis

is determined as explained on page 9.

20. What is the basis for depletion of a plantation?

The actual cost to the taxpayer of establishing the plantation plus

any carrying charges that have been properly capitalized.

21. What is the basis for depletion of a stand that has resulted from

natural reseeding of an idle field?

Unless carrying charges or other costs have been capitalized, the

basis for depletion will be zero.

22. What is the depletion unit and what is the depletion allowance?

The depletion unit is found by dividing the basis or adjusted basis

of the timber by the total number of units (board feet, cords, etc.) in

the timber account. The depletion allowance is found by multiplying the number of units sold or cut during the year by the depletion

unit.

23. Whatis species or selective depletion?

The calculation of the depletion allowance separately for particular species, groups of species, or quality classes rather than for the

timber as a whole.

24. Howi can a farmer calculate the depletion allowunce when cutting fence posts^ pulpwood^ or dogwood bolts?
34

The depletion allowance is calculated in the same way, irrespective

of the nature of the forest products harvested. Species or selection

depletion may, however, be adopted as explained in the answer to the

preceding question. Volumes should be converted to the same unit

(such as board feet or cords) used in the timber account. If necessary your district forester can be asked to supply conversion factors.

25. Is the depletion unit or the depletion allowam.ce calcmlated differentlp in the case of selective cutting than in the ca^se of clearcuttingf

The same method applies in either situation.

26. Are you allowed to claim a depletion allowance when you/p hasis

for depletion has ieen fully recovered?

No. Once the cost or other basis has been fully recovered, the taxpayer has secured a return of hi^ capital investment in the timber and

no further depletion may be taken.

27. Should a tirriber oviner claim a depletion allowance tohen making an improvement cut or when thinning his stand?

Depletion is not taken in the case of unmerchantable thinnings.

When merchantable products having a "basis" are cut, depletion

should be claimed, but the cutting may be deferred if you want to

maintain the basis for depletion with a view to claiming depletion allowance, and so reducing the taxable gain at time of future harvest.

Depletion should be claimed when merchantable timber is cut and

cannot be deferred beyond the year of the cutting. If thinnings are

of low grade, the depletion rate may be reduced pro rata in accordance

with the actual value.

28. When should land^ on which tirriber ha^ been cut^ he depreciated?

Land is not subject to depreciation at any time, although some land

improvements such as bridges or fences may be depreciated.

29. // depredation is not taken in a given year may it he taken later?

No. Depreciation not taken for the year when allowable is in effect

forfeited as a deduction from income, and allowances claimed in later

years may not be increased to include such depreciation.

30. What is meant hy a section 117 {k) (1) situation?

This section of the Internal Revenue Code refers to the situation in

which a timber owner cuts timber held more than 6 months, for sale

or for use in his business (such as farming). The increase in value up

to the beginning of the year in which the cut is made may be treated

as a capital gain, but the increase in value due to processing must be

reported as ordinary income. (See pages 16-18.)

31. // a farmer cuts his own timher and sells the rough lumber^

does he have to pay tax on the net profit or is it considered a capital

gain?

^ This situation is covered by section 117 (k) (1). The cutting of the

timber can be thought of as a sale of the timber by the owner to

himself at the price prevailing on the first day of the taxable year.

The increase in value up to this point may then be treated as a capital

gain. The net profit from sale of products is taxed as ordinary

income.
35

32. //timberis felled and the resulting logs are sold during the same

year^ must the transaction le reported in full in that year? If the

logs were sold in a later year^ what would he the status of thß sale as

well as of the inventory? . i . i

In accordance with section 117 (k) (1) the capital gam up to the

beginning of the year in which the cut is made is reported for that

year. If the resulting logs are sold during the same year, the increase

m value up to time of sale, minus processing and other costs, is reported as ordinary income for that year. If the logs are not sold by

the end of the tax year, the stumpage value at time of cutting (used

in determining the capital gain up to that point) is taken as the "cost

of the timber cut. This cost plus processing costs will then be the

year-end inventory value.

33. Is a timber owner lihely to find it a hardship to continue using

the capital-gains provision after electing to do so in a year when he

has cut a large volume of timber?

This should not prove burdensome, since the timber owner will

already have set up his timber depletion account, and calculation of

the depletion allowance would in any case be necessary if the ordinary

income method were used. Moreover, the timber owner will be accustomed to the requirement relating to establishment of fair market

value and to use of Schedule D.

34. What is meant by a section 117 (k) (^) situation?

This section of the Internal Revenue Code permits the taxpayer to

claim, capital gains treatment when timber held more than 6 months

is sold under a pay-as-cut contract (see numbered paragraph 3 on

page 14).

35. Is it possible {and legal) to have (prior agreement to sell timber

on a scale basis^ receiving payment as the timber is cut^ and still use

the capital gains treatment?

Yes. This situation is covered by section 117 (k) (2).

' 36. What are the two ways of treating costs of forest ownership

and operation?

Costs may either be expensed or capitalized.

37. What is meant by expensing costs?

Costs that are expensed are deducted from gross income for the

year in which they were paid or incurred.

38. What is meant by capitalizing costs? ^ i . j.

Costs that are capitalized are added to the basis or adjusted basis of

the property and are recovered through depletion (in the case of

timber) or through depreciation (in the case of equipment and other

depreciable assets).

39. Is it necessary to wait until timber harvest before deducting any

or all expenses? -, i x« N'o. Costs that are expensed may be deducted year by year Irom

gross income. Costs that are capitalized, on the other hand, cannot be

recovered until timber harvest.

40. When do you have a choice between expensing and capitali^^ing

costs of forest ownership and operation?
36

Carrying charges and development expenditures allowable by law

as deductions from income may be either expensed or capitalized as

the taxpayer may choose, provided the practice is consistent from

year to year.

41. What costs may he expensed?

Ordinary and necessary operating expenses if reasonable in amount

and if paid or incurred during the taxable year. Also carrying

charges, development expenditures, and depreciation allowances.

42. Is a taxpayer permitted to deduct as an expense the value of his

own labor?

No.

43. Can the expense of timber stand improvement such as poisoning^ girdling^ and removal of undesirable hardwood trees be deducted

from taxable income?

Yes. Development expenditures such as those for timber stand improvement may be expensed or they may be capitalized, but the practice adopted should be followed consistently,

44. What costs must be capitalized?

Those incurred for the acquisition of property having a useful life

of more than 1 year and for permanent improvements or betterments

to such property; also the cost of preparing land for seeding and

planting.

45. Can a landowner obtain a tax deduction for reforesting idle

land?

Costs of seeding and planting including labor are capitalized and

may be recovered through future depletion; such costs cannot be

expensed.

46. Ho%o do you determine damage done to your timber by fire or

other casualty?

The local district forester can be asked to estimate the volume of

timber damaged and its salvage value on the stump.

47. Is the recognized loss following a fire or other casualty the difference between the sound value of the timber before the casualty and

its damaged value afterwards?

No. The loss recognized for tax purposes in the case of timber intended for sale or use in your business, will be the amount of your

investment in the timber (the basis for depletion) less the salvage

value and any insurance or other recoveries.

48. Can a tax deduction be claimed for loss of future growth following afire?

No.

PROBLEMS

NUMBER 1

Smitli made an outright sale of timber (lump sum basis) for $800 in 1952.

This was the first income that he had received from his timber since he purchased

the property in 1915. The original purchase price did not include a timber value

since there was no merchantable timber on the tract when acquired. Smith paid
37

general property taxes varying from 4 to 16 cents per acre over the 87-year

period and deducted these year by year from his ordinary income when filing

his income tax return. He had incurred no other carrying charges and had made

no expenditures for development of his timber. How much of the $800 that

Smith received is taxable? Should it be treated as ordinary income or as a

capital gain ?

The entire amount should be reported on separate Schedule D as a long-term

capital gain. Since Smith can allocate no part of the original purchase price

to his timber and since he has not capitalized any costs, he has no basis for

depletion and can claim no depletion allowance. If Smith had elected to capitalize

his property taxes rather than to expense them year by year, he could deduct from

his $800 proceeds such part of the capitalized taxes as relate to the timber sold.

NUMBER 2

Jones sold 26,500 board feet of timber in 1952 under a pay-as-cut contract for

$30 per M board feet, or $795 in all. Fee for timber cruise and other expenses

of sale brought the net proceeds down to $740. The farm had been bought in

1940 for $6,500. How should Jones calculate the tax on his timber sale?

In order to determine his basis for depletion, Jones must allocate a reasonable

portion of the purchase price to his timber. The farm had a total of 104 acres

of which 23 acres were in timber. The buildings at time of purchase had been

in very poor condition. A reasonable allocation was made as follows after

taking into consideration sales of similar farms in the same general area:

Buildings and improvements '. $1, 500

Land 3,000

Timber - 2, 000

6, 500

The timber sold was estimated to represent roughly 25 percent of the total

merchantable volume at time of purchase, so that a depletion allowance of $500

(one-quarter of $2,000) was claimed. The recognized gain was then:

Gross sales price $795

Less expenses of sale 55

$740

Less depletion allowance .. . 500

240

The $240 should be compared with other gains and losses as listed on pages

14-15 and then entered on separate Schedule D.

NUMBER 3

A widow in Wisconsin acquired two timber tracts, by inheritance from her

husband in 1931. In 1944 the timber, amounting to 250,000 board feet of hardwoods, was sold outright (lump sum basis) for $1,600, or the equivalent of

$6.40 per M board feet. The depletion allowance will depend upon the value of

the timber as of the date of death. How should this be calculated?

The analysis that follows is more detailed than would be required in many

cases, but is included as a guide to show the approach that a forester might

use.

According to the purchaser-logger, the trees averaged about 17 inches in

diameter at breast height. Trees of this size usually yield about 2 16-foot logs

and would have a volume of 182 board feet by the Scribner log rule. On this

basis, 250,000 board feet, log scale, the total volume sold would have been

represented in 1,374 trees. The logger estimated that the total volume harvested

in 1944 was distributed by species as follows :

Board feet

Sugar maple 125, 000

Red oak, basswood, and soft elm 125, 000

250, 000
38

Sugar maple in the upper Mississip^pi Valley Region grows at an average rate of

1.1 inches in diameter, inside bark, in 10 years. The growth for 13 years thus

would be 1.1X1.3=1.43 inches. The diameter breast high, outside bark=109

percent of the diameter breast high, inside bark. It follows that sugar maples

which measured 17 inches in diameter on the stump in 1944 were 15.60 inches

in diameter at breast height, inside bark ( 17 divided by 1.09 ). This latter figure—

15.60 inches—minus the growth (1.43 inches) gives the diameter, inside bark

(14.17 inches) 13 years ago. By multiplying 14.17 by 109 percent we obtain the

diameter, outside bark, at breast height of the trees 13 years ago. This amounts

to 15.44 inches or to the nearest half inch, 15^^ inches. The corresponding

volume figures are : 17-inch tree (1944) =182 board feet ; ISVs-inch tree (1931) =

148 board feet.

Red oaJc, Msswoody and soft elm grow at an estimated rate of 1.50 inches per

10 years, or 1.95 inches in 13 years. The diameter at breast height, outside

bark, for these three species=110 percent of the corresponding diameter, inside

bark. Using the same method of computation as for sugar maple, we obtain :

17 inches d. b. h. (1943) ^^^g 45 inches (diameter inside bark, 1944)

1.10

15.45 inches minus 1.95 inches (13-year growth) equals 13.50 inches. Diameter

inside bark at breast height in 1931 13.50 inches multiplied by 110 percent=14.85

inches or to the nearest half-inch, 15 inches. This is the diameter outside bark

in 1931. The corresponding volume figures per tree are : 17-inch tree (1944) =182

board feet ; 15-inch tree (1931) =137 board feet.

Valuation of timber sold:

Volume of sugar maple— Board feet

In 1944 equals 687 trees times 182 board feet 125, 000

In 1931 equals 687 trees times 148 board feet 101, 676

Accrual in growth 23, 324

Volume of red oak, basswood, and elm—

In 1944 equals 687 trees times 182 board feet 125, 000

In 1931 equals 687 trees times 137 board feet 94,119

Accrual in growth— 30, 881

Volume of all species (maple, oak, elm, and basswood) —

In 1944 equals 1,374 trees times 182 board feet 250, 000

Total growth since 1931 54, 205

Volume of timber cut in 1944 present in same trees in 1931_— 195, 795

Value of timber acquired by inheritance in 1931—

195,795 board feet X $4.00 per M ^=$783.18. This is the depletion allowance.

The recognized gain on sale of the timber amounts to the difference between

$1,600 (the gross sales price) and $783.18 (the depletion allowance, or $816.82.

This should be reported on separate Schedule D as a long-term capital gain.

NUMBER 4

An elderly couple had a choice of selling the stumpage from their woodland

or operating the timber themselves and selling the products. They chose to

^The average stumpage price in the Lake States region during the period

1923-1931 was $6.16 according to an article by Henry B. Steer, '^Relation of

Stumpage and Log Prices to Other Commodity Prices," published in the Journal

of Forestry in 1933 (vol. 31, pp. 783-795). The above figure is considered a safe

average to use in this instance—with this difference: the 1944 sale price was

$6.40 as against a community average of $10.00. The reason for this lower-thanaverage figure was attributed to the especially bad logging chance on a portion

of the area cut over, and to the small size of the tract in question. Under the

circumstances, it seems logical to place the 1931 valuation at a level of about 65%

of the 1923-1931 unit value, i. e., $6.16 times 65%=$4.00 per M. In other words,

the same factors which rendered the timber of less-than-average value in 1944

would have prevailed in 1931 as well-
39

harvest the timber themselves. Being unable to work in the woods, they had to

hire all the work done at a total cost of $946.17. They cut 32,695 board feet of

saw and veneer logs, 1,781 tie cuts, and 950 board feet of aspen logs, and realized

a total of $3,044.79. How should their income tax be calculated?

Expenses:

Felling and bucking—

32,695 board feet at $3.75 per M $122. 61

1,781 tie cuts at 180 per tie 320. 58

950 board feet of aspen at $3.75 per M 3. 56

Skidding—

32,695 board feet at $3.50 per M 114. 43

1,781 tie cuts at 120 per tie 213. 72

950 board feet at $3.50 per M_l___ 3. 33

Reskidding for loading _- 29.13

Shelter barn for horses 1- 66. 05

Telephone calls^ 5.15

Insurance . 67. 61

946.17

Revenue from products sold :

21,990 board feet veneer logs at $58 per M 1,275. 42

10,705 board feet sawlogs at $35 per M 374. 68

1,781 tie cuts at 70'<^ per cut 1, 246. 70

950 board feet aspen logs at $25.25 per M 23. 99

Fuel from tops 124. 00

3,044.79

The couple elected to use the procedure provided by section 117 (k) (1) so

that the tax is calculated in two parts : (a) The increase in value of the stumpage up to the beginning of the year in which the cut was made, and (b) the

increase in value from time of cutting to sale of products.

(a) The increase in value of the stumpage up to time of cutting :

The fair market value of the stumpage cut as of the first day of the

taxable year, was determined to be as follows :

32,695 board feet veneer logs and sawlogs at $25 per M $817. 38

1,781 tie cuts at $0.35 per cut 623. 35

950 board feet aspen at $5 per M 4. 75

1,445.48

The depletion allowance was calculated as follows :

32,695 board feet veneer logs and sawings

71,240 board feet tiecuts (at 40 board feet per cut)

950 board feet aspen

104,885 board feet total cut.

Assuming a depletion unit of $5 per M board feet, the depletion

allowance is 104,885 board feet times $5 524.43

Gain in value of stumpage . 921. 05

(b) The increase in value from time of cutting to sale of products :

Revenue from products sold 3, 044. 79

"Cost" of products (the fair stumpage value) $1, 445. 48

Expenses for felling, bucking, skidding, etc 946.17

~- 2, 391. 65

Gain from processing 653.14

The net effect of using the procedure provided by section 117 (k) (1) has been

to secure the advantage of capital gains ^ treatment on $921.05 and to pay at

ordinary income rates on only $653.14.

^ Assuming that aggregate gains exceed aggregate losses in the comx)arison

illustrated on page 15.
40

Revenue received from products sold $3, 044. 79

Less depletion allowance $524. 43

Expenses 946.17

1, 470. 60

Total gain 1, 574.19

Taxed as capital gain 921. 05

Taxed as ordinary income. 653.14

1,574.19

NUMBER 5

A young farmer is pruning and thinning in his 30-year-old stand. He has

other management costs such as fencing, firebreaks, taxes, etc. Thirty years

from now he may clear-cut. When and how should he report his expenses over

the 30-year period?

The costs of firebreak construction and of fencing are regarded as capital

improvements and should accordingly be capitalized. A permanent graded firebreak is not regarded as a depreciable or depletable asset. The expenditure for

fencing, on the other hand, can be recovered over its useful life by means of a

depreciation allowance.

The costs of pruning and thinning (less the proceeds of merchantable products), taxes, firebreak maintenance and other carrying charges, and development

expenditures may either be expensed (deducted year by year as paid or incurred)

or capitalized at the option of the taxpayer, provided a consistent practice is

followed.

NUMBER 6

A Christmas tree grower recently suffered a serious fire and lost 2,500 trees,

worth 50 cents each on the stump. This year he had no mature trees to sell.

Can he claim a deduction for the trees destroyed by fire?

The owner's capital investment (basis for depletion) allocable to the trees

destroyed, less any salvage or insurance recovery, is recognized as a loss and

may be entered on Schedule D.

KEY FOR READY REFERENCE TO TAXPAYER'S SITUATION

Sales of standing timber :

Timber held 6 months or less— ^^^^

Sale outright , 14

Sale under pay-as-cut contract 3

Timber held more than 6 months—

Sale outright 14

Sale under pay-as-cut contract . 14

Cutting of timber :

Timber held 6 months or less 3

Timber held more than 6 months 16

Sales of forest products :

Products derived from cutting of timber . _ 3,17

Products derived from standing tree 4
APPENDIX

EXHIBIT A

FORM 1040

U.S. TraMury Department U. S. INDIVIDUAL INCOME TAX RETURN

FOR CALENDAR YEAR »52 ^

or taxabie year beginning , t952, and endtng , 195..

(PLEASE PRINT. If this

HOME ADDRESS

joint letutn of husband and 'wife, use &t$t names of both)

(PLEASE PRÏNTr"StVeVt'and"nVmber

>r post ofiice) (Postal lone number) (State)

Social Security No OccupatioD

1952

Do Mi write in (iiese ^»ces

(Casbier's Sump)

Your

rI

I

fvour

^ inIcome

How to

figure

the tax

Tax

due or

refund

1. List your name. If your wife (or husband)

had no income, or if this is a joint return,

list also her (or his) name.

A „

B.

laimedon anotherreturn)

Cfieck below if at the end of

your taxable year you oi

your wife were—

65 or over Q

65 or over O

Bund D

Blind D

On lines A and B b

If neither 65 nor blind write the figure 1

U eUber 65 or blind write the figure 2 &

if both -65 and blind write the ligure 3

Number of exemptions for you

Number of her (or his).exemptions,,

aitiiress it dlffertnt Urn jwti (Your wife's name—donotlist ifexempt!

C. List names of your children (including stepchildren and legally adopted

children)with 1952 gross incomes of

less than $600 who received more

than one-half of their support from

you in 1952. See Instructions. j Enter number of children listed.

D. Enter number of exemptions claimed for close relatives listed in Schedule I on page 2 .

E. Enter total number of exemptions claimed in A to D above

2. Enter your total wages, salaries, bonuses, commissions, and other compensation received in 1952, before pay*

roll deductions. Persons claiming traveling or reimbursed expenses, see Instructions.

--'-• • Wh*roEiii*f«)f««(Ctt]f»i4 state) ^ —-

Enter total «^ L

3. If you received dividends, interest, or any other income, give de- *--

tails on page 2 and enter the total here .'.

4. Add income shown in items 2 and 3, and enter the total here ]$_

"(Before figuring your tax, see Schedule J for "Head of Household.** If you claim such status, check here Q.)

IF YOUR INCOME WAS LESS THAN $5,000.—Use the tax table on page 4 unless you itemize deductions. The table allows

about 10 percent of your income for charitable contributions, interest, taxes, medical expenses, etc. If your deductions exceed 10 percent, it will usually be to your advantage to itemize them and compute your tax on page 3.

IF YOUR INCOME WAS $5,000 OR MORE.—Compute tax on page 3. Use standard deduction or itemize deductions, whichever is to your advantage. —

'5. (A) Enter your tax from table on page 4, or from line 13, page 3.

(B) Enter yourself-employment taxfromline35,scparatcScheduleC,

6. How much have you paid on your 1952 income tax?

(A) Bytaxwithheld(initem2,above). Attach Original FormsW-2. $-

(B) By payments on 1952 Declaration of Estimated Tax (include

any overpayment on your 1951 tax not claimed as a refund)

Enter total here m^

Enter total her« m^

balance of tax due here. This balance must be paid

8. If your payments (item 6) are larger than your tax (item 5), enter the overpayment here ..

7. If your tax (item 5) is larger than payments (item 6),

"" ' ' ' ' id in full with return.

Enter amount of item 8 you want $. $..,

(Refunded ) (Credited o

Do you owe any prior year Federal tax for which you have been hillcà'i (Yes ot No) Is your wife (or husband)

making a separate return for 1952? (Yes or No) . .. If "yes," write her (or his) name

If you have filed a return for a prior year, state latest year Where filed?

To which director's (formerly collector's) office did you pay amount claimed in item 6 (B), above?

I declare under the penalties of perjury that this return (including any accompanying schedules and statements) has

been examined by me and to the best of my knowledge and belief is a true, correct, and complete return.

(Signature of person, other than taxpayer, preparing this »turn) (Signature of taxpayer)

(Name of ¿rm or employer, if any)

To assure split*iflconie benefits, husband and wife mus

(Signature of taxpayer's wife or husband it this is a joint tetara)

include all tbeir income and, even though only one has income. BOTH MUST SIGN.

(43)
44

EXHIBIT A^—Continued

SchcdMl* A—IWCOWIt FROW MVIDENDS

Nairn t( ur;traUiin itwiarbif dUtdtwi

Papa

Nmv Of cofiwtilM tfKiarïni «MMd

Ent«r total hartt>>

CRt«r total li«rea>^

Schedule C Sumimiry.-»PROFIT (OR LOSS) FROM BUSINESS OR PROFESSION, FARMING, AND PARTNERSHIP

1. Business profit (ox loss} from separate Schedviic C, line 13

2. Farm profit (or loss) from separate schedule. Form 1040F

3. Partnership, etc., profit (or loss) from Form 1065, Schedule K, Column 3.

"(Päft'netship r

4. Total of lines 1, 2, 3 .

5. Less: Net operating loss deduction (attach statement)..

6. Net profit (or loss) (line 4 less line 5).

Schedule D^NET GAIN OR LOSS FROM SALES OR EXCHANGES OF CAPITAL ASSETS, ETC.

1. From sale or exchange of capital assets (from separate Schedule D)

2. From sale or exchange of property other than capital assets (from separate Schedule D)..

Schedule E.—INCOME FROM ANNUITIES OR PENSIONS

X. Cost of annuity (amount you paid).

2. Cost received tax-free in past years.

3. Remainder of cost (line 1 less

line 2)

4. Amount I received this year.

5. Excess of line 4 over line 3.

6. Enter line 5, or 3 percent of line 1, whichever is greater (but not more than line 4).

I. mt toi louUoB oi propwH

Schedule F.—INCOME FROM RENTS ANO BOYALTIES

• ro/Jltr (íxp/ain In Scludul« H)

. Totals i

s. Ottw Hp«AtM (attach

2. Net profit (or loss) (column 2 less sum of columns 3, 4. and 5)> ^

*^ Schedule C .-INCOME FROM ESTATES AND TRUSTS AND OTHER SOURCES

1. Estate or trust .

2. Other sources (state nature) r—

Total income (or loss) from above sources (Enter here and as item 3, page 1) ]^

Schedule H.—EXPLANATION OF DEDUCTION FOR DEPRECIATION CLAIMED IN SCHEDULE F

iMAdepreclabi« fropertjr

Schedule {.EXEMPTIONS

z mi^uaRshrp

FOR CLOSE RELATIVES-CSee Instructions)

3, Old depandenl durini 1952-

4.If aniwer to either 3(b) or 3(c) it "No"

mter amount igani for dependant't tupport

1, Hams a ieptntfart «bttn. W» iw mtmttuntmiummn "ÄÄS* '•ér Rttaln andre support You (and your «in. H

thltlsajolntretw«) $.

Others, and bf dependant from own (»ndt

$„„.......

,.... T'"" Î

Enter here and as item ID, page 1, the number of close relatives claimed above .

(Not applicable where wife 0

1. Were you unmarried (or legally separated) at the close of your

taxable year? (Yes or No) -

2. Did any petsoQ tó whom yoa ate cntU\c4 to afv exeiaption, ot yoMt

unmarried child, grandchild, or stepchild, even though not a

dependent, share during your entire taxable year your home which

was your principal residence? (Yes or No) ,

List nainc(s) and relationship to you

, Did you furnish more than one half of the cost of maintaining 'the

household during the taxable year? (Yes or No)

If you did not furnish the entire cost, state total amount furnished by you $ î by all others (including

those sharing youf home) $—

If all of the above questions are answered "Yes," you may determine your tài as Head of a Household.
45

EXHIBIT A—Continued

ITEMIZED DEDUCTIONS^OR PERSONS NOT USING TAX TABLE ON PACE 4 OR STANpARp DEDUCTION ON LINE 2 »SLOW- Ptfi $

If Husband and Wife (Not Legally Separated) File Separate Returns and One Itemizes Deductions, the Other Must Also Itemize

Contributions

Geseilte OedacUws ami (Utt te »Iwn fiM. M man space li oeedeA aibcli ttmmi tímü. $

Allowable Contributions (not in excess of 20 percent of item 4 pagel)...;...! .—

Interest

$ . .

Total interest 1 ...^

Taxes

$ .....

Total Taxes —.«»

Losses from

fire, storm, or

other casualty, or theft

$

Total Allowable Losses (not compensated by insurance or otherwise) ...<4

Medical

and dental

expenses

(if over 65 see

Instructions)

$

$ . ...

— Net Expenses (not compensated by insurance or otherwise)

Allowable Medical and Dental Expenses. See Instructions fot limitation '"•M

Miscellaneous

(See

Instructions)

$.

Total Miscellaneous Deductions

Total Deductions $

TAX COIWPUTATION-FOR PERSONS NOT USING TAX.TABLE OW PAGE 4

1. Enter amount shown in item 4, page. 1. This is your Adjusted Gross Income •..

2. If deductions are itemized above, enter total of such deductions. If deductions arc not itemized

and line I, above^ is $5,000 or more: (a) married persons filing separately enter $500, (F) all

others enter 10 percent of line 1, but not more than $1,000

3. Subtract line 2 from line 1. Enter the difference here. This is your Net Income

4. Multiply $600 by total number of exemptions claimed in item IE, page I. Enter total here ..

5. Subtract line 4 from line 3. Enter difference here. (If line 1 includes partially tax-exempt

interest, see Instructions)

I( line 5 Is not more than $2,000 ' 6. Enter 22.2 percent of amount shown on line 5 and disregard lines 7, 8, and 9..

If line S Is more than $2,000

7. And you are a single person, a married person Wine separately, or a head of bouseiiold ——

Single persons and married persons fiiing separately use Tax Rate Schedule I on page 12 of

Instructions' to figure tax on amount on line 5; heads of household Use Tax Rate Schedule II

8. And you are filing a joint return

(ji) Enter one-half of amount on line 5

(¿) Use Tax Rate Schedule I on page 12 of Instructions to figure tax on

amount on line 8 {a) .... .-,

(c) Multiply amount on line 8 (¿) by 2.

, 9. If alternative tax computation is made, enter here tax from separate Schedule D.

Disretard lines tO, 11, and 12, and copy on line \Z the same figure you entered on Una 6,7,8 (c), or S, unless yon «

10. Enter here any income tax payments to a foreign country or Ü. S, possession

(attach Form 1116) .'

11. Enter here any income tax paid at source on tax-free covenanc bond interest.

12. Add the figures on lines 10 and 11 and enter the total here

13. Subtract line 12 from line 6, 7, 8 (c\ or 9. Enter difference here and as item 5 (A), page 1.
46

EXHIBIT A—Continued

If you use this «able,, tear oK this page and Iflle only pages 1 and 2

TAX TABLE F©ll CALENDAR YEAR 1S52

Pa» 4

^ d««. »«.JSSrbâJTA'a i^r^^^ rx-^^Zä-^^^m mm^.

KLT.»!^ I r^Ä.«».?! 1 :^mmm.. AMI DM MMdMr *t KMiyUMt MmA in itM IE. put 1, lv>

I

%

1 2 3

4«

mmmsr^ 1 AsdyMtr*- Mnim- _ ^¿^

4 S 6 7

r ^lÄ cr*

IMfMI AkM< ((»

kMMtMM S iWî S«

H«

Ytffta ^

Tw m to—

" ft mts' $0 $0 $0 $0 m^^ $2,350 S334 S334 $201 ^201 $201 $67 $67 $67 $0 $0 $0 $0 $0

«?s ' - fm. 4 0 0 0 :%:sm- 2.375 339 339 206 206 206 72 72 72 0 0 0 0 0

im .i.^-'ïf^s d 0 0 0 :;¿„37é' 2.4C0 344 344 211 211 211 77 77 77 0 0 0 0 0

7M UM 14 0 0 0 f^^:4m-ym-4^'- 349 349 216 216 216 82 82 82 0 0 0 0 0

tm'- 19 0 0 0 \m^'^-W^&^- 354 354 221 221 221 87 87 87 0 0 0 0 0

?TS. ©Ä|i 24 0 0 0 pC4$Ô:E?,;475, 359 359 226 226 226 92 92 92 0 0 0 0 0

< 80^ 29 0 0 0 rs^'sM':'M-sûà- 364 364 231 231 231 97 97 97 0 0 0 0 0

«2S g:;-yggfe/^ 34 0 0 0 m^mm 'W^m^ 369 369 236 236 236 102 102 102 0 0 0 0 0

SS« :Sf^-^iyi5 39 0 0 0 '^:Mmm:-' i:mMm 374 374 241 241 241 107 107 107 0 0 0 0 0

' «?.$' ÜÄ 44 0 0 0 m:m&': ::mm' 379 379 246 246 246 112 112 112 a 0 0 0 0

9«^ 'Bíitó 49 0 0 0 tEÄ? WèM^ 384 384 251 251 251 117 117 117 0 0 0 0 0

92$ BS'ÉS^s 54 0 0 0 ^iém^' :mm^' 389 389 256 256 256 122 122 122 0 0 0 0 0

. 9510).

ff

69 0 0 0 .«¿62ri :^4^sso;- 394 394 261 261 261 127 127 127 0 0 0 0 0

' 97/1 64 0 0 0 mm::m^' 399 399 266 266 266 132 132 132 0 0 0 0 0

69 0 0 0 ¥ÍA*iilfét^ 404 404 271 271 271 137 137 137 4 0 0 0 0

Ä^ 74 0 0 0 h^$m::^ wMwm' 409 409 276 276 276 142 142 142 9 0 0 0 0

]*•«&$<'- 79 0 0 0 'lè0M^ iêm^: 414 414 281 281 281 147 147 147 14 0 0 0 0

t,ms- iii'Ä''' 84 0 0 0 ::mm:Ifif^O: 419 419 286 286 286 152 152 152 19 0 0 0 0

I, im iifeÄ; 89 0 0 0 si*#- lÄÄ 424 424 291 291 291 157 157 167 24 0 0 0 0

hiu -K-i^'s 94 0 0 0 :;2ÍÍ:J8«^ %!m:B^-: 429 429 296 296 296 162 162 162 29 0 0 0 0

him 99 0 0 0 m^^^' m¡m:' 434 434 301 301 301 167 167 167 34 0 0 0 0

I, I7ÍÍ lll^l^i 104 0 0 0 W^Ê mm&i 439 439 306 306 306 172 172 172 39 0 0 0 0

1,200 ¿:;¥ä^ 109 0 0 0 íí^íÍTIí Íi^::Í®ÍN: 444 444 311 311 311 177 177 177 44 0 0 0 0

1» 2}2U- '>Í¿"í8gi(^": 114 0 0 0 ..i^i'oeft- td^m. 449 449 316 316 316 182 : 182 182 49 0 0 0 0

Î. 25$ï pmM^' 119 0 0 0 m^^^'-'W&mi 455 454 321 321 321 187 187 187 64 0 0 0 0

l,2?tí Sfe^> 124 0 0 0 l»Ä:. m^m^^- 460 459 326 326 326 192 192 192 59 0 0 0 0

il âS)»

::iiv^:i 129 0 0 0 .íÉíé7t< m^' 466 465 331 331 331 197 197 197 64 0 0 0 0

Wrüi' 134 0 0 vÉmm: :i:^Mm.: 474 473 338 338 338 205 205 205 72 0 0 0 0

l,35fö :;I*;ä^: 139 6 0 0 m^mé:mmm^ 485 483 348 348 348 215 215 ! 215 82 0 0 0 0

î, »7ß ;:S^«e, 144 il 0 0 -m'm^. mm»n 496 494 358 358 358 225 226 ; 225 92 0 0 0 0

1.404)! 149 16 0 0 ;:^«,;li«; i^méi 507 504 368 368 368 235 235 235 102 0 0 0 0

l,4&". 154 21 0 0 m^^mi. iùêMm: 518 515 378 378 .378 245 245 245 112 0 0- 0 0

î. 451) ällsü:: 159 26 0 0 timmm liiiiösp 529 525 388 388 388 255

-¿65

255 122 0 0 0 0

l,47îi :;•;«« 164 31 0 0 lliiÄ ÜÄfe; 541 536 398 398 398 266 265 132 0 0 0 0

Ï,5ÎM) S'BÄ 169 36 0 0 .iiÄ iSÄ* 552 546 408 408 408 275 275 275 142 8 0 0 0

1,521^; ip. 174 41 0 0 mm». .i|,iS5«äi 563 557 418 418 418 28.^. 285 285 162 18 0 0 0

I,5S# 179 46 0 0 i*ÄSs ^^m^ 574 567 42S 428 428 295 295 295 162 28 0 0 0

1.67^ ÍÉ«Íí^: 184 51 0 0 a»l »Ä; 585 578 438 438 438 305 305 305 171 38 0 0 0

l,«^!' S'SIlii^ 189 56 0 0 ;?^iÄ mm& 596 588 448 448 448 315 315 315 181 48 0 0 0

l,tó*¿1

194 61 0 0 #1^^ f«sr 607 599 459 459 458 325 325 325 191 58 0 0 0

l.&S«^ 199 66 0 0 ;%ti®f:: ä*fio':-^ 618 610 470 469 .468 335 335 335 201 68 0 0 0

î,tU 204 71 0 0 Mmi mMé- 629 620 482 480 478 345 345 345 211 78 0 0 0

1,70«/

•i;72äv

209 76 0 0

»

ÄÄ- 640 631 493 490 488 355 355 355 221 88 0 0 0

214 81 0 0 m-srn^' 651 641 504 501 498 365 365 365 231 98 0 0 0

îMi^jîi- 219 8G 0 0 :^«> m:m^^ 662 652 515 511 508 375 375 375 241 108 0 0 0

i,77ir lliÄP'^ 224 91 0 0 i;s.^îi,:J:miS»;: 673 662 626 522 518 385 385 385 261 118 0 0 0

I,«W' liÄ. 229 96 0 0 iS,Äiii Mm^- 684 673 537 532 528 395 395 395 261 128 0 0 0

I»«2ä~- SS' 234 101 0 0 r^.:O0O- 'mm^' 696 683 548 543 538 405 405 405 271 138 5 0 0

,l,«î® 239 106 0 0 ; 4» 0611 ::sam': 707 : 694 559 653 548 415 416 415 281 148 15 0 0

1,87« :;si|so<^^ 244 in 0 0 wm.- '::mm.. 718 704 570 564 558 425 426 425 291 168 25 0 0

U9©« iiiÄ 249 116 0 0 :ë,tèéi iÄÄ:^ 729 715 581 * 574 568 435 435 435 301 168 36 0 0

:î,92» 254 121 0 0 .^.i®@-: sirj»^ 740 725 592 Î 585 578 445 ; 445 445 311 178 45 0 0

l,»M :^^;. 259 126 0 0 :mm:': ii,tÄ 751 736 603 : 596 588 456 ! 455 455 321 188 56 0 0

.1,978- 264 131 0 0 m,m&i mm: 762 746 614 ; 606 698 467 466 465 331 198 65 0 0

2»02fi ?P^:, 269 136 2 0 ë^^}^ m^-m^ 773 757 625 ; 617 608 478 ' 476 475 341 208 75 0 0274 141 7 0 à,Âm^ ',M.:m 784 768 636 ! 627 618 489 487 485 351 218 85 0 0

3?» 050

2,07S

279 146 12 0 4i^' ^mmQ- 795 778 648 ! 638 628 500 • 497 495 361 228 95 0 0

::iâië 284 161 17 0 p^,m) .mm 806 789 659 i 648 638 511 508 504 371 238 105 0 0

2,10« ^i:^Ä 289 156 22 0 4,Ä: í0;0^- 817 799 670 ! 659 648 522 618 614 381 248 115 0 0

i,m ÄÄ 294 161 27 0 j^.m^ ^ï^iÉI®' 828 810 681 669 658 533 529 524 391 258 125 §

0

2,154» 299 166 32 0 'm^m- 839 820 692 i 680 666 644 639 534 401 268 135 0

2» 176 liS^liil: 304 171 37 0 mtm^ =--^,:-?áft: 851 831 703 ; 690 678 555 550 644 411 278 145 12 0.

ÄÄW iil|SilÄ- 309 176 42 0 Mm: t,M 862 841 714 i 701 688 666 560 654 421 288 165 22 0

1^ 314 181 47 0 %m^:t4,m®. 873 862 725 Î711 698 577 671 564 431 298 165 32 0

Ä 319 186 52 0 'mm^'ivm^- 884 862 736 722 708 689 661 674 441 308 175 42 0

,2.2Wf 324 191 67 0 s4¿f®®<m»6®- 895 873 747 : 732 718 600 692 684 461 318 185 62 0

.fsö©- 51Ä 329 196 62 .± mmiâm 906 883 1 758 ? 743 728 611 603 594 461 32« 195 62 0
47

EXHIBIT B

FORM HMO F

U.S.TrMMiryDapatiiiMMt SCHEDULE OF FARM INCOME AND EXPENSES

For Calendar Year 1$S2

1952

Attach TMs Form to Your

Inconw Tax Return Form

1040 and FUf H WKh tho

Of taxable year beginning ,1952, and ending.......... ,195....

If Your Accounts Are Kept on

a Cash Basis, fill In Pates 1

Name

andS.

If You Keep Booits on an

Diroctor (fomiorly Collector) Address . ... -............ - . - - - —. Accrual Basis and Desire to

DflntemalRevettM for Your

District

Location of farm or farms .

Number of acres in each farm

Use TMs Form. Fill In Paies.

2 and 3 Instead.

FAKM INCOME FOR TAXABLE PERIOD COMPUTED ON CASH RECEIPTS AND DISBURSEMENTS BASIS

1. SALE OF LIVESTOCK RAISED 2. SALE OF PRODUCE RAISED 3. OTHER FARM INCOME

KM Qimti« A«««. KM Quntity A»««. Item A«Mirt

Cattle . $ ...... Grain

Hay

$... . Mdse. rec'd for produce..

Mabhine work

Hire of teams

$.. ..

Mules . Cotton.

Tobacco

Potatoes

Sheep

Swine

Breeding fees

Rent rec'd in crop shares.

Work off farm ......

Wood andlimiber

Sugar beets....

Vegetables....

Chickens . Fruits.

Nuts

Dairy products.

Eggs

Other forest products....

Turkeys

Ducks

Agricultural program

payments

Goats.... Patronage dividends, rebates or refunds, ii

not reported elsewhere

in return '

Other (specify):

Bees....... Meat products.

Other Poultry, dressed

(specify): Wool and mohair

Honey

Sirup and sugar.

Other (specify):

•

TOTAL...

(EiiUr

$-...-..

ytelM)

TOTAL

(ERtW

$

MlMZartUffllMniHmw)

TOTAL

<E»lir

$ L...

MHneSilwmRitf^lNlMi)

4. SALE OF LIVESTOCK AND QTMER ITEMS PURCHASED

t»^ 2. Oatt

amrira«

3. GreualKirin 4.CMtir«tlMfbaiili

Mmh 1,19» '^tf""

.<5 __^ _ J $ ... . $. $

..._........

"

1 .. ....... 1 ...

r

i.._j i.„.^

TOTAL (enter on line 4 of summary below),. $

1. Sale of livestock raised $ ...... 6. Expenses (from page 3)

7. Depreciation (from page 3)

$ ......

3. Other farm income 8. Other deductions ispecify):

4. Profit on sale of livestock and other

5. GROSS PROFITS ! $ 9. TOTAL DEDUCTIONS $

10. Net farm profit (or loss).(line 5 minus line 9) to be reported in Schedule C Summary, Form 1040. . . $
48

EXHIBIT B—Continued

rARM INVD«TORV rom mCOMK eOMPUTKD «N AN ACCRUAL »ASI« P«i«2

•Bwiradictor

O.H,^-¿H^« P»tluMiOarl«yt)r itaiM< (tatet Tor CmmiitfwLHtltaiit SiMDwtnV«« 0»MMitfilMilY«r

T «^,^ Qatttiti AmnlnM r |«r«l«(T*ilH Qun- IWMiHinlW ^'

taMortmiM límate}**»

$ $ $ — $..-..... — $ $

,

"

'

* '' .

...

1

1

"

.......

.—- .

TOTALS *iS.-Uk t 4î $ $ $

IM« ' (Mr M tel) 1* 1 1" 1 (&to«i >N2) (EatonlMt)

1. Inventory of livestock, crops, and products at end of $ 7. Expenses (from page 3)

8. Depreciation (from page 3).

9. Other deductions (specify):

$.

2. Sales of livestock, crops, and products during year..

2a. Other miscellaneous receipts (specify):

^

4 Trt-r*». $

4. Inventory of livestock, crops, and

products at beginning of year

5. Cost of livestock and products pur-

- 1^

$

6/ Gross twofits Oine 3 minus the sum of lines 4 and 5).. $ 10. TOTAL DéDUCTIONS. . $

11. Net farm profit (or loss) CHne 6 minus line 10) to be reported in Schedule C Summary, Form 1040. . $
49

EXHIBIT B—Continued

FARM EXPENSES FOR TAXABLE YEAR (SM ln«lriMtlans>

)e Mt iRclgtfa pmna H Utrlni expensa or nfvmt net atlrlbutable b irediKMoR if fn IKMM, such at Ul«t,lBtur»c«, ttfikt, tic., tn ywr d)

Paces

1. Item lAnsuRt 3. llmt

(SMtlMeri)

A. kma»t

(CMtll«K)

Labor hired.......« $. Rent of farm, part of farm, or pasturage...

Freight, yardage, express, and trucking...

Automobile upkeep (farm share)

Other farm expenses (specify):

$

Feed purchased

Seed and plants purchased

—.*.•

Machine hire

Supplies purchased

Cost of repairs and maintenance

-

Breeding fees

Fertilizers and lime

.....

Veterinary and medicine for livestock

Gasoline, other fuel and oil for farm business

Storage and warehousing.. ';

Taxes

Insurance on property Cexccpt your dwelling) ,

Interest on farm notes and mortgages

"* '"•

Water rent, electricity, and telephone

TOTAL or COLUMNS 2 AND 4 (enter on

(accrual basis)) . ;

line 6 of summary on page 1 (cash basis) or line 7, page 2

$

DEFRECIATION (SM

Maa4füMrm<epriciaiiiefn»«^ ^% 3b CttltritlivbMU iaewabi«)iii|rieri(art

IRemalRlHceetereUw

kadstikerecemed %' 'rsÄ—

$ $ $ $ * "***

"""•

.

......

.

......

-—..

......

"**~* —... —

1

•

.......

......

......

"•***

......

......

•""%

......

TOTAL (enter on line 7 of summary on page 1 (cash basis) or line 8, page 2 (accrual basis)) $

'
50

EXHIBIT C

PROFIT (OR LOSS) FROM BUSINESS OR PROFESSION 1952

CF«r Computation of Self-Employment Tax, see Page 3>

For Caleiidar Year Í952 or taxable year beginning , 1952, and ending

Name and Address (from Form 1040)

..,195..

(Partnerships and joint ventures should file on Form 1065)

(0 Principal business activity (sec instructions)

. 00 Business name ,

(IV) Business address (sec instructions)

(Retail trade, wholesale trade, lawyer, etc.) (Principal product or service)

(HI) FICA employer identification number,

if any (see instructions)

(Street and number or rural route) (City, town, post office)

<V) Were you the sole, proprietor of this business in 1951? Yes D No D. If "No," check whether this business in 1952 became a successor to

a corporation , a partnership Q, another sole proprietorship Q, or started as an entirely new business Q. Where applicable, give name of such

predecessor - -

\ Do NOT include cost of goods withdrawn for personal use or deductions not connected with your business or profession j

Total receipts from business or profession

COST OF GOODS SOLD

Inventory at beginning of year

Merchandise bought for manufacture or sale

Cost of labor. , ,

Material and supplies

Other costs (explain in Schedule C-2)

Total of lines 2 to 6

Less inventory at end of year

Net cost of goods sold (line 7 less line 8) ,

Gross profit (line I less line 9)

OTHER BUSINESS DEDUCTIONS

Salaries and wages not included in line 4

Rent on business property

Interest on business indebtedness

Taxes on business and business property

Losses of business property (attach statement)

Bad debts arising from sales or services

Depreciation and obsolescence (explain in Schedule C-1)

Repairs (explain in Schedule C-2)

Depletion of mines, oil and gas wells, timber, etc. (submit schedule)....

Amortization of emergency facilities (attach statement)

Other business expenses (explain in Schedule C-2)

Total of lines 11 to 21.

Enter net profit (or loss) (line 10 less line 22). Also enter on line 24, page 3, and on line 1,

Schedule C Summary, Form 1040

««lf«lMl> C-a. EXfUWATION Off PgPUCTIOM rOW PCWIECIATIOW CtAiMgP OH t-IMB 17

I. KM d pnpN« (H tallMHt, iM( mWil tf aUnMkltMijMr

CttaMNtk EVIMMIM .- ÄV EiybtulifB AMHt

$. . $.—.—

•*"**•"""'

•*"*"•'"*'*"

^.
51

EXHIBIT D

GAINS AND LOSSES FROM SALES OR EXCHANOES OF PROPERTY 1952

For Calendar Year 1952 or taxable year beginning ^ 1952, and ending ......^ ., 195^^

Name and address.

Cl) CAPITAL ASSETS 1«—<I71W-1 j,

iHtmnMiiät Mt ttmn Mn»)

{.DtttM^utrJ IDitew

Mt. Osr Vor Ms. Oaf Ï

ctfritt)

(c(lunia4|ln ^

«MunaSlmtiMitt

SHORT-TERM CAPITAL GAINS AND LOSSES-ASSETS HELD NOT MORE THAN « MONTHS

1 k $ $.. $. $.

2. Enter your share of net short-term gain or loss'from partnerships and common trust

X Vntfr iiniici>/1 r^Wml 1n«c rarrv-nvcr frnm S rircrciiino- favaVilí- ví-ars: í'affarh «faffmcfi

funds

t)

4. Enter sum of short-term gains or losses or difference between short-term gains and 1 osses shown above. $

LONG-TERM CAPITAL GAINS AND LOSSES-ASSETS HELD FOR WORE THAN 6 MONTHS

6. Enterthe full amount ofyourshare of net long-termgain or lossfrom partnerships and common trustfunds

7. Enter sum of long-term gains or losses or difference between long-term gains and losses shown above.. $

' " ~~ ——— — ——__ Cain Of UM to be taten íntt wttuiit

8; Enter net short-term gain or loss from line 4

9. Enter net long-term gain or loss from line 7

Use lines 10 through 13 only if gains exceed losses in lines 8 and 9*

10. Enter short-term gain (line 8, col. a) reduced by any long-term loss (Hne 9, col. b)..

11. Enter long-term gain (line 9, col. a) reduced by any short-term loss (line 8, col. b). .

12. Enter 50 percent of line 11

13. Enter here and on line 1, Schedule D, page 2, Form 1040, the sum of lines 10 and 12.,

Use lines 14 and 15 only if losses exceed gains in lines 8 and 9»

14. Enter the excess of losses over gains on lines 8 and 9

15. Enter here and on line 1, Schedule D, page 2, Form 1040, the smallest of the following:

(a) the amount on line 14; (b) net income computed without regard to capital gains

and losses; or (c) $1,000

X X X X

X X X X

X X X X

X X X X

COMPUTATION OF ALTERNATIVE TAX

Use only if you had a net Ions-term cairital gain or an excess ol net long-term capital gain over net short-term capital loss, and line 5 or B(a), page 3, Form 1040, exceeds $14,000

16. Enter from page 3, Form 1040, the income from line 5 if separate return or line 8 (a) if joint return.

17. Enter amount from line 12, col. a, ifseparate return or half of such amount if joint return

18. Balance (line 16 less line 17)

19. Enter tax on amount on line 18 (use appropriate Tax Rate Schedule in Form 1040 Instructions).

20. If joint return, multiply amount on line 19 by two

21. Enter 52 percent of amount on line 17

22. If joint return, multiply amount on line 21 by two

23. Alternative tax (line 19 plus line 21 if separate return; line 20 plus line 22 if joint return)

24. Enter tax from page 3, Form 1040 (either line 7, or line 8 (c), whichever is applicable)

25. Tax liability (line 23 or 24, whichever is smaller). Enter here and also on line 9, page 3, Form 1040.

<2> PROPERTY OTHER THAN CAPITAL ASSETS .-;

f. Kind«« m»««

2. Dale acquired

M*. Dai Year

^DateteU

Ml. Hit Ye»

i ems tatet prit*

(centract price) SHS

{.Cost Mattier basis an!)

7.fiptm«trt»K

L Gain or lest

telumntfianl})

1 $ $ $ $ $ „

„

2. Enter here the sum of gains or losses or aifFerence between gains and

enter on line 2, Schedule D, page 2, Form 1040

osses shown above. Also $
52

EXHIBIT E

SAMPLE TIMBER STATEMENT FOR USE WITH SEPARATE SCHEDULE D

Sale of Timder

1. (a) Description of property. Tract No. 1, lOO acres adjacent to home farm.

Acquired March 1, 1940, by purchase from John Smith. Original cost of tract

$2,500 of which $1,000 allocated to land acct. and $1,500 allocated to timber acct.

Tract estimated to have contained 300 M. board feet of merchantable secondgrowth pine timber at time of purchase.

(Ô) Description of timber sold. 60 M board feet of pine stumpage sold on

lump sum basis to William Brown of Oakdale, sawmill operator.

6. Cost or other basis. (Here show the calculation of the depletion allowance.

As given in the sample timber account page 13 this would be $355.80. Sufficient

detail should be given to support the allowance claimed.)

Cutting of Timber

1. (a) Description of property. (The information needed will be similar to

that shown under Sale of Timber above.)

(Ô) Description of timber cut. 60 M board feet of pine cut for sale as logs.

I claim gain ( or loss) from the cutting of such timber in accordance with section

117 (k) (1) of the Internal Kevenue Code.

4. Gross sales price. (Explain how you arrived at the estimated fair market

value of the stumpage as of the first day of your taxable year. For example,

"Recent sales of pine stumpage on neighboring tracts averaged $9 per M board

feet according to information furnished by District Forester. Fair market

value of timber cut $540 (60 M board feet at $9 per M board feet)."

6. Cost or other basis. (Calculation of depletion allowance will be similar to

that under Sale of Timber above. )

Loss of timber by fire

1. {a) Description of property. (The information needed will be similar to

that shown under Sale of Timber above. )

(Ö) Description of timber burned. Five acres pine burned over. Average

volume per acre 3,900 board feet or 19,500 board feet in all. Salvage value

estimated by District Forester to average $3 per M. (Letter from District Forester may be attached.)

6. Cost or other basis. (Here show calculation of depletion allowance similar

to that under Sale of Timber above. )

EXHIBIT F

INCOME TAX ESTIMATED USEFUL LIVES AND DEPRECIATION RATES '

LUMBER AND WOOD PRODUCTS

Where depreciation is computed on a physical-life basis, accounts set up vary

from single items through all degrees of group or classified accounts to a single

composite plant account ; but commonly three broad classifications are used, their

composite lives being about as follows :

Years

Logging machinery and equipment 10-15

Sawmill machinery and equipment 20-25

Portable sawmills and equipment 10-12

' Adapted from Income Tax Depreciation and Obsolescence : Estimated Useful

Lives and Depreciation Rates, Bulletin F (Revised 1942), U. S. Treasury Department. For sale by Superintendent of Documents, Washington 25, D. 0. Price

30 cents.
53

LOOGING MAOHINEEY AND EQUIPMENT

Average

useful life

{years)

Arches ¿.. 10

Big wheels, horse-drawn 5

Blacksmith shop _——— 15

Caterpillar tractors —-— 5

Harness 5

Horses and mules ^_____— 6

Log wagons, horse-drawn 5

Logloaders : — 20

Average

useful life

(pears)

Power shovels 15

Saws, power 3

Skidders 20

Sleds, horse-drawn 5

Trucks :

Heavy 5

Light - 2

SAWMILL MACHINERY AND EQUIPMENT

Average

useful life

{years)

Bandmills 25

Burners- 15

Circular mills :

Portable, complete 15

Stationary 25

Conveyor chains 10

Dry kilns :

Blowers 20

Brick and concrete 40

Frame 20

Steam coils and piping 20

Edgers 25

Fire-protection equipment 10

Average

useful life

{years)

Hogs 10

Live rolls 25

Log carriage and feed 20

Lumber buggies 10

Lumber docks, open 12

Niggers and turners 20

Plumbing 25

Saw filing machinery 15

Slashers 25

Sprinkler systems—.- 40

Surfacers ^ 20

Trimmers . 25

AGRICULTURE

On a composite basis, agricultural property is generally divided into buildings,

taking approximately a 50-year average life, and machinery and equipment,

taking a 15-year average life.

Average

"useful life

Animals: {years)

Horses, breeding or work- 10

Mules, work 10

Barrels, dip 6

Cables 8

Carts :

Dump and farm 8

Hand 5

Covers, canvas .— 8

Culverts : Masonry and cast-iron pipe 50

Galvanized corrugated iron 25

Riveted steel 33

Cups, turpentine 5

Cutters :

Rotary stump 20

Engines :

Gasoline .— 10

Diesel - 15

Stationary, steam 20

Fence machines 5

Fence posts, steel 30

Fences : Wood 15

Fencing, woven wire 15

Forges, portable 12

Average

iseful life

{years)

Furrow openers, disk . 15

Harness . 7

Planters 15

Plows 15

Pumps :

Bucket 22

Centrifugal or rotary 20

Plunger 15

Saws, circular 15

Sprayers 15

Tanks :

Turpentine 5

Water—

Steel 40

Wood 20

Watering 20

Tarpaulins 8

Tractors . 10

Vats, dipping 10

Wagon beds and racks 6

Wagon gear—wood wheels 12

Wagons :

Light 12

Trucking, heavy duty 10
54

EXHIBIT G

BUREAU OF INTERNAL REVENUE

Income Tax Unit

Washington 25, D. G.

INCOME TAX INFORMATION RELEASE NO. 1

December 28,1949.

Turpentine Depletion

Ordinarily the basis for turpentine depletion is cost, although the basis of

property acquired prior to March 1, 1913, or subsequently by inheritance for

example, is generally the fair market value at March 1, 1913, or the fair market

value at date of inheritance. A brief -summary of the basis of property for

purposes of depletion is hereinafter set forth.

In circumstances which require the determination of fair market value as of

any given date, the value of the timber should first be determined. Of the value

so determined, a reasonable amount may be allocated to the turpentine, taking

into account the difference in value between round and turpentined timber. If

the basis is cost, and only the turpentine rights were purchased or leased, the

basis is obviously the consideration paid, but if a tract of land is purchased in

fee, it is necessary to allocate the total cost between the land, timber, and any

other elements of value in proportion to the relative values involved. The total

cost allocated to the timber may then be divided, on a reasonable basis, between

the turpentine and wood products.

It should be noted that there ordinarily would be no basis either for the timber

or the turpentine in the case of timber which has grown to merchantable size

during the ownership of the taxpayer. In other words, timber growth, as such,

does not give rise to any increased basis for the determination of gain or loss

or depletion.

That portion of the total cost or other basis assigned to turpentine may be

amortized or recovered through depletion deductions on any reasonable basis

over the period of actual turpentining. ^

In the case of lessees, the cost of the lease may be recovered during the period

of the lease on the basis of the number of cups or crops worked each year, or on a

time basis if the operations are approximately equal from year to year. In cases

in which the lessee pays a percentage of his gross receipts to the lessor, the

amount paid is a proper deduction from the gross income of the lessee.

In the case of lessors and owner-operators, the cost or other basis may be

recovered over the period required to exhaust the turpentine. In determining

the annual deductions, consideration may be given to the fact that the yield and

value per cup is decreased somewhat as the height of chipping increases.

The following depletion table is suggested for the ordinary type of lease:

JFirst year

Second year.

Third year__

Fourth year_

Fifth year___

Sixth year__.

Lease period (years)

Percent

30

30

25

15

30

25

20

15

10

30

25

20

10

10

5
55

In cases in which long-term leases are involved, for example, 11 years (6 years

face and 5 years back-face), the following depletion table is suggested:

Back-face : Percent

Seventh year 10

Eighth year_^ 10

Ninth year 10

Tenth year 9

Eleventh year 8

Pace : Percent

First year 10

Second year_^ 10

Third year 10

Fourth year 9

Fifth year

Sixth year 6

In the case of lessors receiving, income on a percentage basis, either in kind or

in cash, an estimate of the total production or receipts from the particular lease

should be made and depletion deducted in proportion to the actual receipts.

Lessors receiving a lump-sum cash payment should claim as depletion the proportionate part of the basis for the year in which the payment is received. For

example, if a three-year lease is made for a lump-sum cash payment, and it is

expected that the lease will be renewed for another period or periods, the proportionate part of the basis should be applied to the first payment.

Basis for depletion :

In accordance with section 114 (b) (1) of the Internal Revenue Code, the basis

for depletion is the basis prescribed in section 113 (a), adjusted as provided in

section 113 (b).

The basis for individual owners may be briefly summarized as follows :

(1) Fair market value as of March 1, 1913, if acquired prior to that date,

unless cost or basis otherwise determined with proper adjustment to March 1,

1913, is higher.

(2) Cost, if acquired by purchase subsequent to March 1, 1913.

(3) Fair market value at date of acquisition (date of death of decedent) if

acquired by bequest, devise, or inheritance.

(4) Fair market value at date of gift or transfer in trust prior to January 1,

1921.

(5) Basis to the donor, or the last preceding owner by whom it was not acquired

by gift, if acquired by the present owner subsequent to December 31, 1920.

In the case of corporate owners, reference should be made to section 113 of

the Code.

Correspondence regarding this release should be addressed to the Commissioner of Internal Revenue, Washington 25, D. C, attention: Engineering and

Valuation Division, Income Tax Unit.

E. I. MCLARNEY,

Deputy Commissioner, Income Tax Unit,

o