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in certain circumstances, the payee receiving the advanced
royalty payments on standing timber to take a depletion deduction
from his gross income in the year the payments are made. And
section 1.612-3(b)(3), Income Tax Regs., allows the payer of
amounts under a "minimum royalty provision" to deduct them when
paid, but only in connection with mineral property.
Petitioners' payments are not described in section 1.612-
3(b)(1), or (3), Income Tax Regs., and their downpayments must be
capitalized. Section 1.631-2(e)(1), Income Tax Regs., requires
that amounts paid for timber cutting rights be treated as the
cost of timber and "constitute part of the lessee's depletable
basis of the timber, irrespective of the treatment accorded such
payment in the hands of the lessor."1
Once petitioners' counsel presented to respondent's counsel
sufficient evidence that two of the contracts represented
situations where the timber was cut in the same year the payments
were made, respondent conceded the issue within a reasonable
time. See Harrison v. Commissioner, supra at 265; Ashburn v.
United States, supra; Wickert v. Commissioner, 842 F.2d 1005 (8th
1Generally, sec. 162 requires that an item be paid or
incurred and the benefit exhausted during the taxable year to be
a business deduction. Where the value of the item extends beyond
the taxable year, that is evidence that the expenditure is a cost
of acquisition, a capital item. See Wells Fargo & Co. v.
Commissioner, 224 F.3d 874 (8th Cir. 2000), affg. in part and
revg. in part sub nom. Norwest Corp. v. Commissioner, 112 T.C. 89
(1999); Central Tex. Sav. & Loan Association v. United States,
731 F.2d 1181, 1183 (5th Cir. 1984); see also sec. 1.461-1,
Income Tax Regs.
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