Basis, Depletion and Allowance

Useful definitions related to Revenue Rulings.

Christmas trees, capital and operating expenditures
In connection with the cultivation, as a trade or business, of Christmas trees for purpose of sale when they are more than 6 years old, the expenditures incurred for planting, must be capitalized. Expenditures incurred for silvicultural practices such as weeding, cleaning, and noncommercial thinning are deductible as ordinary and necessary trade or business expenses. The cost of land improvements is capitalized in the land account. The cost of purchased equipment and other depreciable assets, such as culverts and fences, should be capitalized and recovered through the allowance for depreciation. Modified by Rev. Rul. 71-228.
Full Text: 66-18, 1966-1 C.B. 59

Logging roads, permanent vs. temporary, investment credit
A taxpayer's logging truck roads are "section 38 property" for investment credit purposes since they are an integral part of the operation of sawmills, the production of lumber and related products, or the manufacture of paper. Distinguished by Rev. Rul. 73-217. Treas. Reg. 1.46-3(e)(4),(5); 1.46-3(c)(1); 1.48-1(k); 1.48-1(b)(4), 1.48-1(d)(2),(4). (Secs. 38, 48).
Full Text: 68-281, 1968-1 C.B. 22

Christmas tree, capital and operating expenditures
Costs incurred for shearing and basal pruning of trees grown for the Christmas tree market are deductible business expenses. (Sec 62). Rev. Rul. 66-18 modified.
Full Text: 71-228, 1971-1 C.B. 53

"Purchaser credit" road construction contract, Forest Service
The basis for cost depletion of timber does not include the "purchaser credit" earned for specified road construction under a Forest Service contract. Further, amounts expended for construction of such roads are recovered through depreciation if the roads are used for harvesting the timber or added to the depletion basis of the roads are not used for harvesting the timber. Treas. Reg. §§1.611-5, 1.612-1, 1.631-1, (Secs. 611, 612, 631).
Full Text: 71-354, 1971-2 C.B. 246

Qualification; lumber marketing cooperative
An incorporated organization that markets lumber for the independent lumber producing companies controlling such organization, whose members share in its surplus or deficit on the basis of their stock interests, does not qualify for exemption as a "farmers', fruit growers, or like association, organized and operated on a cooperative basis," under section 521(a) of the Code; I.T. 1312 superseded.
Full Text: 73-570, 1973-2 C.B. 194

Reforestation
Generally, direct cost of reforestation including girdling, herbicide application, baiting of rodents, labor and tool expense, and the planting and seeding equipment depreciation are capital expenditures recoverable through depletion allowances when the timber is cut or as adjusted basis if the timber is sold. Indirect cost, deducted in the year incurred or capitalized cumulatively under Section 266, include interest paid on money borrowed or service charges on performance bonds in lieu thereof to satisfy a State law requiring a deposit to guarantee reforestation. Rev. Rul. 55-252 superseded. Treas. Reg. §§ 1.263(a)-1, 1.611-3, 1.1011 (Sec's 263, 611, 1011)
Full Text: 75-467, 1975-2 C.B. 93

Long term contracts, royalties vs. rent
The fair market value of the timber existing at the time of the execution of a long-term timber purchase contract constitutes the basis for depletion of the timber and payments in excess of the fair market value are consideration for the use of land deductible as a business expense. Amplified by Rev. Rul. 78-267. Treas. Reg. §§1.162-1, 1.612-1. (Secs. 162, 612).
Full Text: 75-59, 1075-1 C.B. 177

Reforestation expenditures
The expenditure for destroying undesirable hardwood trees and brush in naturally reforested stands of southern pine young growth when related primarily to the seeding and establishment of the pine seedlings are capital expenditures recoverable through depletion. Treas. Reg. §1.611-3. (Sec. 611).
Full Text: 76-290, 1976-2 C.B. 188

Timberland, conveyances of cutting rights and title to different persons
No part of the value of land is includible in the gross estate of a taxpayer who conveyed timber rights for five years to one person for cash and four unsecured promissory notes payable on the anniversary dates of the sale, sold the land to another person a month later, and died with 23 months remaining under the conveyance of timber rights with one note unpaid.
Full Text: 77-193, 1977-1 C.B. 273

Timber, disposal to parent, interest
A subsidiary that has a contract with its parent providing that future timber cutting rights, which the subsidiary obtains on its own account, be immediately transferred to the parent is not the owner of an "interest in timber" within the meaning of section 631(b) of the Code with respect to cutting rights obtained after the date of the contract.
Full Text: 77-247, 1977-2 C.B. 211

Cutting contract, advanced royalties
Advanced royalties paid or incurred by a lessee under a timber cutting contract in a tax year for timber cut during that tax year are not deductible under the provisions of reg. 1.612-3(b)(3), but are to be added the the lessee's depletable basis in the timber. Treas. Reg. §§1.612-3, 1.631-2. (Secs. 612, 631)
Full Text: 77-400, 1977-2 C.B. 206

Investment credit, seed trees, timber producer
Trees comprising a timber producer's seed orchard that are used to produce genetically superior seedlings for the producer's timber growing operation are section 38 property. They are placed in service when they bear sufficient seed to warrant harvesting.
Full Text: 78-264, 1978-2 C.B. 9

Inventories and change in accounting methods
Section 352 of the Revenue Act of 1978 exempts accrual method farmers, nurserymen, and florists, not required to capitalize preproduction period expenses, from the requirement that they inventory the value of growing crops, trees, and plants and from the requirement that they obtain the Commissioner's approval prior to switching to the cash method of accounting. Rev. Ruls. 76-242 and 77-64 revoked.
Full Text: 79-102, 1979-1 C.B. 184

Reforestation, replacing dead seedlings
A timber producer sustains no deductible loss on the death, not due to casualty, of tree seedlings planted to reforest land from which it has harvested the mature timber. Amounts paid or incurred in replanting to replace the lost seedlings must be capitalized in accordance with reg. 1.611-3(a). Modified by Rev. Rul. 90-61. Treas. Reg. §§1.165-1, 1.611-3. (Secs. 165, 611).
Full Text: 81-2, 1981-1 C.B. 78

Reforestation,payments under forestry incentives program
The excludable portion of cost-sharing payments received under the forestry incentives program (FIP) is excludable from gross income, and the total costs of reforestation less the excludable portion are to be capitalized as a cost of timber. Under the election not to have Section 126 apply to the FIP payment, the entire payment is includable in gross income, and the total costs of reforestation (not reduced by any portion of the FIP payment) are to be capitalized as a cost of timber. Rev. Rul. 76-6 modified and superseded. Treas. Reg. §§ 1.61-1, 16A.126-1 16A. 126-2. 1.194-1, 1.611-3. (Secs. 61, 126, 194, 611).
Full Text: 84-67, 1984-1 C.B. 28

Inventories: LIFO: Timber: Election
A taxpayer may not use the LIFO inventory identification method in arriving at the adjusted basis of timber for purposes of computing gain or loss when the timber is cut under a section 631(a) election. Rev. Rul. 60-244 clarified. BACK REFERENCES: 87FED ¶2964.145, 87FED ¶3526.025, 87FED ¶3588.13 and 87FED ¶4516.968.
Full Text: 86-152, 1986-2 C.B. 72

Logging roads, depreciation
Depreciation of logging truck roads is distinguished in situations where (1) the road is expected to be useful to the taxpayer for an indefinite period, and (2) the road has a determinable useful life to the taxpayer. In the first situation, where the surfacing, bridges and culverts of a logging truck road are expected to have a determinable useful life to the taxpayer, these assets are depreciable or amortizable. Since the roadbed of a well maintained road has an indefinite useful life, its cost is not depreciable or amortizable. In the second situation, all components are depreciable or amortizable since all have a determinable useful life to the taxpayer.
Full Text: 88-99, 1988-2 C.B. 33

Cost sharing payments under stewardship incentive program
The stewardship incentive program (SIP) was determined to be substantially similar to the enumerated programs in Section 126 of the Code. Thus, SIP cost-sharing payments in connection with improvements in small water-sheds may be eligible for exclusion from gross income under Section 126. (As a result, the excludable portion of these cost-sharing payments is excludable from gross income, and the total cost of improvements less the excludable portion are to be capitalized to the appropriate land or timber account). Reg. §§1.61-1, 16A.126-1, 16A.126-2. (Secs. 61, 126).
Full Text: 94-27, 1994-1 C.B. 26

Acquisition costs: Amortization of: Start-up expenditures: Investigatory costs: Capital costs.
Acquisition costs: Amortization of: Start-up expenditures: Investigatory costs: Capital costs.--The IRS has clarified that expenditures incurred by a taxpayer in the course of a general search for, or investigation of, an active trade or business in order to determine whether to enter a new business or which existing business to acquire qualify as investigatory costs that are amortizable as start-up expenditures under Code Sec. 195 . By contrast, costs incurred in an attempt to acquire a specific business are capital in nature and, thus, are not characterized as start-up expenditures. Examples have been provided.
Full Text: 99-23, I.R.B. 1999-20

Exclusions from income: Cost-sharing payments: Agricultural Management Assistance Program
The IRS has determined that all or a portion of cost-share payments received under the Agricultural Management Assistance (AMA) Program is eligible for exclusion from gross income to the extent permitted by Code Sec. 126. The AMA Program is substantially similar to the type of programs described in Code Sec. 126(a)(1) through (8); thus, it falls within the scope of Code Sec. 126(a)(9).
Full Text: 03-15, I.R.B. 2003-4

Exclusions from income: Cost-sharing payments: Conservation Reserve Program
Exclusions from income: Cost-sharing payments: Conservation Reserve Program. �– The IRS has determined that all or a portion of cost-share payments received under the Conservation Reserve Program (CRP) is eligible for exclusion from gross income to the extent permitted by Code Sec. 126. The CRP is substantially similar to the type of programs described in Code Sec. 126(a)(1)through (8); thus, it falls within the scope of Code Sec. 126(a)(9). However, rental payments and incentive payments made to CRP participants do not qualify as cost-share payments and, therefore, are includible in gross income.
Full Text: 03-59, I.R.B. 2003-24

Unlimited deduction for amounts paid for a charitable purpose
Qualified conservation contribution. This ruling clarifies the Service�'s position that a trust is not allowed either a charitable deduction under section 642(c) or a distribution deduction under section 661(a)(2) of the Code with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution under section 170(h). Rev. Rul. 68�–667 amplified.
Full Text: 03-123, I.R.B. 2003-50

Change of accounting method: Deductible business expenses: Capital expenses: Timber fertilization.
Deductible business expenses: Capital expenses: Timber fertilization. - Costs incurred by a timber grower for post-establishment fertilization of an established timber stand are deductible as ordinary and necessary business expenses under Code Sec. 162. Such costs are similar to other deductible post-establishment costs such as the cost of fire, disease, insect and brush control in that they are performed to manage, maintain and protect the timber stand.
Change of accounting method: Deductible business expenses: Capital expenses: Timber fertilization. - The IRS issued guidance to clarify that costs incurred by a timber grower for post-establishment fertilization of an established timber stand are deductible as ordinary and necessary business expenses under Code Sec. 162. The IRS notes that a taxpayer changing its method of accounting to comply with this guidance must file a Form 3115 in accordance with the automatic change method of accounting under Rev. Proc. 2002-9, 2002-1 CB 327. Rev. Proc. 2002-9 is modified and amplified to include in the Appendix a taxpayer's change in the treatment of post-establishment fertilization costs.
Full Text: 04-62, 2004-25 I.R.B. 1

Exempt income: Cost-sharing conservation payments: Conservation Security Program.
Exempt income: Cost-sharing conservation payments: Conservation Security Program. — The IRS has determined that all or a portion of cost-share payments received under the Conservation Security Program (CSP) is eligible for exclusion from gross income to the extent permitted by Code Sec. 126. The IRS accepted the conclusion of the U.S. Department of Agriculture (USDA) that the CSP is a small watershed program under Code Sec. 126(a)(9) that is substantially similar to the type of programs described in Code Sec. 126(a)(1) through (8).
Full Text: 06-46 , I.R.B. 2006-39