[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.611-3]

[Page 400-403]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.611-3  Rules applicable to timber.

    (a) Capital recoverable through depletion allowance in case of 
timber. In general, the capital remaining in any year recoverable 
through depletion allowances is the basis provided by section 612 and 
the regulations thereunder. For the method of determining fair market 
value and quantity of timber, see paragraphs (d), (e), and (f) of this 
section. For capitalization of carrying charges, see section 
1016(a)(1)(A). Amounts paid or incurred in connection with the planting 
of timber (including planting for Christmas tree purposes) shall be 
capitalized and recoverable through depletion allowances. Such amounts 
include, for example, expenditures made for the preparation of the 
timber site for planting or for natural seeding and the cost of 
seedlings. The apportionment of deductions between the several owners of 
economic interests in standing timber will be made as provided in 
paragraph (c) of Sec. 1.611-1.
    (b) Computation of allowance for depletion of timber for taxable 
year. (1) The depletion of timber takes place at the time timber is cut, 
but the amount of depletion allowable with respect to timber that has 
been cut may be computed when the quantity of cut timber is first 
accurately measured in the process of exploitation. To the extent that 
depletion is allowable in a particular taxable year with respect to 
timber the products of which are not sold during such year, the 
depletion so allowable shall be included as an item of cost in the 
closing inventory of such products for such year.
    (2) The depletion unit of the timber for a given timber account in a 
given year shall be the quotient obtained by dividing (i) the basis 
provided by section 1012 and adjusted as provided by section 1016, of 
the timber on hand at the beginning of the year plus the cost of the 
number of units of timber acquired during the year plus proper additions 
to capital, by (ii) the total number of units of timber on hand in the 
given account at the beginning of the year plus the cost of the number 
of units of timber acquired during the year plus the number of units 
acquired during the year plus (or minus) the number of units required to 
be added (or deducted) by way of correcting the estimate of the number 
of units remaining available in the account. The number of units of 
timber of a given timber account cut during any taxable year multiplied 
by the depletion unit of that timber account applicable to such year 
shall be the amount of depletion allowable for the taxable year. Those 
taxpayers who keep their accounts on a monthly basis may, at their 
option, keep their depletion accounts on such basis, in which case the 
amount allowable on account of depletion for a given month will be 
determined in the manner outlined herein for a given year. The total 
amount of the allowance for depletion in any taxable year shall be the 
sum of the amounts allowable for the several timber accounts. For a 
description of timber accounts, see paragraphs (c) and (d) of this 
section.
    (3) When a taxpayer has elected to treat the cutting of timber as a 
sale or exchange of such timber under the provisions of section 631(a), 
he shall reduce the timber account containing such timber by an amount 
equal to the adjusted depletion basis of such timber. In computing any 
further gain or loss on such timber, see paragraph (e) of Sec. 1.631-1.
    (c) Timber depletion accounts on books. (1) Every taxpayer claiming 
or expecting to claim a deduction for depletion of timber property shall 
keep accurate ledger accounts in which shall be recorded the cost or 
other basis provided by section 1012 of the property and land together 
with subsequent allowable capital additions in each account and

[[Page 401]]

all other adjustments provided by section 1016 and the regulations 
thereunder.
    (2) In such accounts there shall be set up separately the quantity 
of timber, the quantity of land, and the quantity of other resources, if 
any, and a proper part of the total cost or value shall be allocated to 
each after proper provision for immature timber growth. See paragraph 
(d) of this section. The timber accounts shall be credited each year 
with the amount of the charges to the depletion accounts computed in 
accordance with paragraph (b) of this section or the amount of the 
charges to the depletion accounts shall be credited to depletion reserve 
accounts. When the sum of the credits for depletion equals the cost or 
other basis of the timber property, plus subsequent allowable capital 
additions, no further deduction for depletion will be allowed.
    (d) Aggregating timber and land for purposes of valuation and 
accounting. (1) With a view to logical and reasonable valuation of 
timber, the taxpayer shall include his timber in one or more accounts. 
In general, each such account shall include all of the taxpayer's timber 
which is located in one block. A block may be an operation unit which 
includes all the taxpayer's timber which would logically go to a single 
given point of manufacture. In those cases in which the point of 
manufacture is at a considerable distance, or in which the logs or other 
products will probably be sold in a log or other market, the block may 
be a logging unit which includes all of the taxpayer's timber which 
would logically be removed by a single logging development. Blocks may 
also be established by geographical or political boundaries or by 
logical management areas. Timber acquired under cutting contracts should 
be carried in separate accounts and shall not constitute part of any 
block. In exceptional cases, provided there are good and substantial 
reasons, and subject to approval or revision by the district director on 
audit, the taxpayer may divide the timber in a given block into two or 
more accounts. For example, timber owned on February 28, 1913, and that 
purchased subsequently may be kept in separate accounts, or timber owned 
on February 28, 1913, and the timber purchased since that date in 
several distinct transactions may be kept in several distinct accounts. 
Individual tree species or groups of tree species may be carried in 
distinct accounts, or special timber products may be carried in distinct 
accounts. Blocks may be divided into two or more accounts based on the 
character of the timber or its accessibility, or scattered tracts may be 
included in separate accounts. If such a division is made, a proper 
portion of the total value or cost, as the case may be, shall be 
allocated to each account.
    (2) The timber accounts mentioned in subparagraph (1) of this 
paragraph shall not include any part of the value or cost, as the case 
may be, of the land. In a manner similar to that prescribed in 
subparagraph (1) of this paragraph, the land in a given block may be 
carried in a single land account or may be divided into two or more 
accounts on the basis of its character or accessibility. When such a 
division is made, a proper portion of the total value or cost, as the 
case may be, shall be allocated to each account.
    (3) The total value or total cost, as the case may be, of land and 
timber shall be equitably allocated to the timber and land accounts, 
respectively. In cases in which immature timber growth is a factor, a 
reasonable portion of the total value or cost shall be allocated to such 
immature timber, and when the timber becomes merchantable such value or 
cost shall be recoverable through depletion allowances.
    (4) Each of the several land and timber accounts carried on the 
books of the taxpayer shall be definitely described as to their location 
on the ground either by maps or by legal descriptions.
    (5) For good and substantial reasons satisfactory to the district 
director, or as required by the district director on audit, the timber 
or the land accounts may be readjusted by dividing individual accounts, 
by combining two or more accounts, or by dividing and recombining 
accounts.
    (e) Determination of quantity of timber. Each taxpayer claiming or 
expecting to claim a deduction for depletion is required to estimate 
with respect to each separate timber account the total units

[[Page 402]]

(feet board measure, log scale, cords, or other units) of timber 
reasonably known, or on good evidence believed, to have existed on the 
ground on March 1, 1913, or on the date of acquisition of the property, 
whichever date is applicable in determining the basis for cost 
depletion. This estimate shall state as nearly as possible the number of 
units which would have been found present by careful estimate made on 
the specified date with the object of determining 100 percent of the 
quantity of timber which the area covered by the specific account would 
have produced on that date if all of the merchantable timber had been 
cut and utilized in accordance with the standards of utilization 
prevailing in that region at that time. If subsequently during the 
ownership of the taxpayer making the return, as the result of the growth 
of the timber, of changes in standards of utilization, of losses not 
otherwise accounted for, of abandonment of timber, or of operations or 
development work, it is ascertained either by the taxpayer or the 
district director that there remain on the ground, available for 
utilization, more or less units of timber at the close of the taxable 
year (or at the close of the month if the taxpayer keeps his depletion 
accounts on a monthly basis) than remain in the timber account or 
accounts on the basis of the original estimate, then the original 
estimate (but not the basis for depletion) shall be revised. The 
depletion unit shall be changed when such revision has been made. The 
annual charge to the depletion account with respect to the property 
shall be computed by using such revised unit for the taxable year for 
which the revision is made and all subsequent taxable years until a 
change in facts requires another revision.
    (f) Determination of fair market value of timber property. (1) If 
the fair market value of the property at a specified date is the basis 
for depletion deductions, such value shall be determined, subject to 
approval or revision by the district director upon audit, by the owner 
of the property in the light of the most reliable and accurate 
information available with reference to the condition of the property as 
it existed at that date, regardless of all subsequent changes, such as 
changes in surrounding circumstances, and methods of exploitation, in 
degree of utilization, etc. Such factors as the following will be given 
due consideration:
    (i) Character and quality of the timber as determined by species, 
age, size, condition, etc.;
    (ii) The quantity of timber per acre, the total quantity under 
consideration, and the location of the timber in question with reference 
to other timber;
    (iii) Accessibility of the timber (location with reference to 
distance from a common carrier, the topography and other features of the 
ground upon which the timber stands and over which it must be 
transported in process of exploitation, the probable cost of 
exploitation and the climate and the state of industrial development of 
the locality); and
    (iv) The freight rates by common carrier to important markets.
    (2) The timber in each particular case will be valued on its own 
merits and not on the basis of general averages for regions; however, 
the value placed upon it, taking into consideration such factors as 
those mentioned in this paragraph, will be coistent with that of other 
similar timber in the region. The district director will give weight and 
consideration to any and all facts and evidence having a bearing on the 
market value, such as cost, actual sales and transfers of similar 
properties, the margin between the cost of production and the price 
realized for timber products, market value of stock or shares, royalties 
and rentals, valuation for local or State taxation, partnership 
accountings, records of litigation in which the value of the property 
has been involved, the amount at which the property may have been 
inventoried or appraised in probate or similar proceedings, 
disinterested appraisals by approved methods, and other factors.
    (g) Revaluation of timber property not allowed. No revaluation of a 
timber property whose value as of any specific date has been determined 
and approved will be made or allowed during the continuance of the 
ownership under which the value was so determined and approved, except 
in the case of misrepresentation or fraud or gross error as to any facts 
known on the date as of

[[Page 403]]

which the valuation was made. Revaluation on account of 
misrepresentation or fraud or such gross error will be made only with 
the written approval of the Commissioner. The depletion unit shall be 
revised when such a revaluation of a timber property has been made and 
the annual charge to the depletion account with respect to the property 
shall be computed by using such revised unit for the taxable year for 
which such revision is made and for all subsequent taxable years.
    (h) Reporting and recordkeeping requirements--(1) Taxable years 
beginning before January 1, 2002. A taxpayer claiming a deduction for 
depletion of timber for a taxable year beginning before January 1, 2002, 
shall attach to the income tax return of the taxpayer a filled-out Form 
T (Timber) for the taxable year covered by the income tax return, 
including the following information--
    (i) A map where necessary to show clearly timber and land acquired, 
timber cut, and timber and land sold;
    (ii) Description of, cost of, and terms of purchase of timberland or 
timber, or cutting rights, including timber or timber rights acquired 
under any type of contract;
    (iii) Profit or loss from sale of land, or timber, or both;
    (iv) Description of timber with respect to which claim for loss, if 
any, is made;
    (v) Record of timber cut;
    (vi) Changes in each timber account as a result of purchase, sale, 
cutting, reestimate, or loss;
    (vii) Changes in improvements accounts as the result of additions to 
or deductions from capital and depreciation, and computation of profit 
or loss on sale or other disposition of such improvements;
    (viii) Operation data with respect to raw and finished material 
handled and inventoried;
    (ix) Statement as to application of the election under section 
631(a) and pertinent information in support of the fair market value 
claimed thereunder;
    (x) Information with respect to land ownership and capital 
investment in timberland; and
    (xi) Any other data which will be helpful in determining the 
reasonableness of the depletion or depreciation deductions claimed in 
the return.
    (2) Taxable years beginning after December 31, 2001. A taxpayer 
claiming a deduction for depletion of timber on a return filed for a 
taxable year beginning after December 31, 2001, shall attach to the 
income tax return of the taxpayer a filled-out Form T (Timber) for the 
taxable year covered by the income tax return. In addition, the taxpayer 
must retain records sufficient to substantiate the right of the taxpayer 
to claim the deduction, including a map, where necessary, to show 
clearly timber and land acquired, timber cut, and timber and land sold 
for as long as their contents may become material in the administration 
of any internal revenue law.

[T.D. 6500, 25 FR 11737, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8989, 67 FR 20031, Apr. 24, 2002; T.D. 9040, 68 FR 4921, 
Jan. 31, 2003]