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Petitioners resided in Bellevue, Iowa, at the time they
filed their petition.
The Examination
Timber Expenditures
Stephen Roling (petitioner) operates a logging business as a
sole proprietor. As part of his business petitioner enters into
"right to cut" contracts with landowners. The contracts allow
petitioner to enter onto the land to cut specifically identified
trees within a certain time frame, usually from 12 to 15 months.
Petitioner does not actually cut the timber until he has a buyer
for it. The buyer, a lumber mill, picks up the cut trees from
the landowner's property.
Typically, petitioner makes a payment of 20 percent of the
contract price (downpayment) at the time the contract is signed,
and the balance is paid at the time the timber is cut. The
landowner retains ownership of the trees until the contract is
paid in full. Petitioner, a cash basis taxpayer, deducted the
downpayments on the contracts to cut in the year the payments
were made.
Upon examination of petitioners' Federal income tax return
for 1994, the Internal Revenue Service (IRS) determined that
petitioners' contract downpayments were not currently deductible.
It was respondent's position at the examination that the contract
payments must be capitalized into "inventory" to match
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