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had sold the damaged trees on the open market instead of further
processing and/or milling the damaged trees into finished
products. Petitioner further contends that it is not attempting
to defer any portion of the gain attributable to the processing,
milling, or finishing of products.5 Respondent determined that
petitioner understated income by improperly deferring gain from
the sale of the end product of the damaged trees, as follows:
1992--$647,953; 1993--$2,276,282; 1994--$3,592,035; and
1995--$4,831,462.
Discussion
The specific question we consider is whether petitioner is
disqualified from electing deferral of gain under section 1033
because it processed damaged trees into end or finished products
5 Based on a hypothetical example presented by petitioner,
the majority of the gain deferred would appear to be attributable
to the difference between the fair market value of the damaged
trees and petitioner’s basis. Petitioner posed a hypothetical
example which included the premises that the damaged trees had a
$100 basis and a $475 selling price if sold in place. If the
damaged trees were processed into logs, the processing cost would
be $25 resulting in a $500 selling price. Petitioner further
posits that the cost of milling timber is $100 and that a
finished product would have a $610 selling price, resulting in
$10 of gain from milling. Petitioner argues that, under this
hypothetical, respondent would have allowed a deferral of the
$375 gain if petitioner had sold the damaged trees in place.
Petitioner contends that respondent has denied any deferral
whatsoever, even though the milling of timber into a final
product adds only $10 of additional gain in the context of
petitioner’s hypothetical. We consider here only whether
petitioner is entitled to use sec. 1033. The parties have left
to another day the question of the amount of gain to be deferred
if petitioner’s motion for partial summary judgment is granted.
See infra note 6.
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