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We are persuaded that respondent's position on the
unreported income issue was reasonable. Respondent's position
was based on petitioners' failure to fully account for the item.
Further, the issue was settled within a reasonable period after
petitioners gave sufficient information to respondent. See
Harrison v. Commissioner, 854 F.2d 263, 265 (7th Cir. 1988),
affg. T.C. Memo. 1987-52; Wickert v. Commissioner, 842 F.2d 1005
(8th Cir. 1988), affg. T.C. Memo. 1986-277; Ashburn v. United
States, 740 F.2d 843 (11th Cir. 1984); McDaniel v. Commissioner,
supra.
Reasonable Basis in Law
According to petitioners, respondent unreasonably determined
that they were not entitled to current deductions for
downpayments on "right to cut" timber contracts. Petitioners
argue that the payments on the timber contracts were either
amounts subject to regular depletion deductions or depletable
advanced royalty payments deductible for 1994.
In the case of timber, taxpayers are allowed as a deduction
in computing taxable income, a reasonable allowance for depletion
under regulations prescribed by the Secretary. See sec. 611. In
the case of standing timber, the depletion must be computed
solely upon the adjusted basis of the property. See sec. 1.611-
1(a), Income Tax Regs. The depletable basis applicable to timber
is contained in section 1.611-3(a), Income Tax Regs. which
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