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describes the cost basis provided by section 612, which, in turn,
describes an "adjusted basis" provided by section 1011. The
adjusted cost basis under section 1011 for determining gain or
loss from the sale of property is the cost basis or other basis
determined under section 1012 adjusted as provided by section
1016.
Annual depletion deductions are allowed only to the owner of
an "economic interest" in standing timber. See Palmer v. Bender,
287 U.S. 551, 557 (1933); Georgia-Pacific Corp. v. United States,
648 F.2d 653, 657-659 (9th Cir. 1981); sec. 1.611-1(b)(1), Income
Tax Regs.
For purposes of this discussion it is assumed that
petitioners' right to cut contracts made them owners of economic
interests in timber in the year at issue. See International
Paper Co. v. United States, 33 Fed. Cl. 384, 407-409 (1995). As
owners of economic interests in timber, petitioners would, as
they contend, be entitled to depletion deductions. That would
not, however, change the result in this case because "The
depletion of timber takes place at the time timber is cut", not
at the time of payment. Sec. 1.611-3(b)(1), Income Tax Regs. To
the extent that depletion is allowable in a year with respect to
timber the products of which are not sold during the taxable
year, the depletion allowable is included "as an item of cost in
the closing inventory of such products for such year." Id.
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