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(5) grading and sorting the logs; (6) stacking the logs at a
landing point; and (7) loading the logs onto trucks for further
use or processing.
Petitioner chose to take the seven steps described in the
preceding paragraph, rather than attempting to sell the damaged
trees in place to a third party. Once it performed the seven
steps, its options were to (1) attempt to sell the partially
processed damaged trees to a third party; or (2) complete the
processing of the damaged trees in its own plants in the ordinary
course of its business. Petitioner chose the latter and
completed the processing itself.
Petitioner relies on section 1033 for involuntary conversion
treatment (deferral of gain).4 Petitioner did not realize income
from harvesting and processing the damaged trees until it sold
the products it manufactured from the damaged trees. Petitioner
is seeking to defer only that portion of the gain attributable to
the difference between its basis and the fair market value of the
damaged trees as of the time its salvage of them began; that is,
the value petitioner contends would have been recognized if it
4 Petitioner on its returns mistakenly claimed involuntary
conversion treatment under sec. 631(a) due to its pro forma use
in prior years’ returns in which sec. 631(a) treatment had been
properly elected and claimed. Petitioner concedes that sec.
631(a) treatment is not available based on the fact that it did
not have a sec. 631(a) election in place during the years in
issue. For the 1992 taxable year, one of petitioner’s
subsidiaries made a valid sec. 631 election, but the subsidiary
was liquidated at the end of the 1992 calendar year. With that
exception, petitioner and its subsidiaries were not entitled to
sec. 631 treatment for the taxable years 1992 through 1995.
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