September 25, 1919 



HARDWOOD RECORD 



19 



Explanation of Forest Industries Questionnaire 



By E. T. ALLEN 



Forester, National Lumber Manufacturers' Association and Western Forestry and Conservation Association 



This ijaper is designed to help lumbermen and operating timber own- 

 ers fill out the questionnaire (Form T) circulated by the commis- 

 sioner of Internal Eevenue. It may be of greatest service to those 

 lacking in legal or other facilities for interpreting the questions and 

 unable to confer with Treasury representatives. 



Much of the questionnaire is self-exijlauatory. Some questions per- 

 haps puzzling at first reading become clear when all have been studied 

 carefully. A few may remain confusing to some taxpayers, or fail to 

 imply their full importance. The attempt is to touch upon these 

 specifically. 



Before doing so, it is well to approach the questionnaire as a whole, 

 to give an idea of its general purpose, and of wherein it offers desir- 

 able opportunity as well as difficulty. 



The Hearing of thk L.vw 



The laws imposing income and profits taxes present peculiar problems 

 in their application to tluise industries which are obliged to hold and 

 develop natural resources. The revenue of these so-called "wasting 

 industries," like lumbering, mining, oil and gas, consists not onl.v of 

 earnings but also of the«coutiunons liquidation or depletion of their capital 

 assets. It is necessary to allow creilit for this depletion, which is not ■ 

 taxable under these laws. 



The proper depletion of plant and improvements depends not only upon 

 the period during which the.v will remain in usable condition, but also upon 

 the life of the operation as determined by its remaining supply of raw 

 material. 



Under certain i)rovisions of the law, the tax rate is fixed by the relation 

 of earnings to the invested capital, which fi>r this purpose is held by the 

 Treasury Department (although this view has many contestants and 

 ultimate court decision is probable) to be the sum actually invested 

 (including earned surplus) without regard to asset values. In the wasting 

 industries this brings about inequalities of taxation, partly because 

 of the comparatively great investment in material rather than plant, but 

 more because of the difference in time and conditions of acquiring the 

 material. Many lumbermen have also been inclined to be conservative 

 with their capital accounts, reducing them on their books when possible 

 and building up their business from operating without capitalizing better- 

 ments and costs, when, with equally legitimate accounting, to have 

 capitalized certain expenditures rather than to have treated them as 

 expenses would have improved their situation under this system of 

 taxation. 



The problems inherent in applying the law to such industries have 

 required many Treasury decisions which in turn have met difBculty in 

 dealing without discrimination between the wasting industries which, 

 with some common distinctions from others, also have considerable 

 variance of circumstances among themselves. These decisions and regu- 

 lations frequently develop imperfections as precedents for conditions they 

 did not contemplate, as, for example, when applied to lumbering when 

 originally evoked by mining conditions. 



Finall.v, the new revenue law contains certain "relief sections" under 

 which, when taxpayets can show that the prescribed general system taxes 

 them unjustly as compared with others, the Commissioner of Internal 

 Revenue may establish a representative situation with which they may 

 l)e fairly compared, and extend relief accordingly. This also may prove 

 difficult, and, if done upon erroneous premises, set up precedents un.i'ust 

 in other cases. Much contributory information is needed for the wise 

 exercise of this authority. 



Difficulties of the Bureau in Auministration 



Above have been sketched briefly some of the difficulties of the Bureau of 

 Internal Revenue when it became charged with administering the new law. 

 At the same time it had been found impracticable for several reasons to 

 audit lumbermen's tax returns for the years 1916, 1917 and 191S. This 

 means that any statements or claims in these returns (including those 

 as to capital assets on March 1. 1913) are still unapproved and subject 

 to revision. The action still to be taken on them will be both retroactive 

 and the basis of income taxation for years to come. 



To avoid determination of such tremendously important questions by 

 general auditors not familiar with operating conditions, the Revenue 

 Bureau established a Division of Natural Resources, seeking men of expert 

 and practical experience in the industries affected, and inviting the sugges- 

 tions and co-operation of the industries themselves to bring out all pertinent 

 facts. 



When the newly-organized Timber Section approached the task. It found 

 that the necessary information does not exist in the records and is not 

 elicited b.v the ordinary tax returns, often made without understanding 

 either of all present facts or of probable future requirements. 



Inconsistencies and deficiencies In the returns on file leave many doubts 

 which can not with justice be resolved by guesswork in favor of either 

 government or taxpayer. There is such variance as to claims and 

 method of presentation that to accept them at face value would result in 

 discriminatory taxation. Attempts at comparison are equally dangerous. 

 While some taxpayers have every facility of record and legal advice, others 

 are less fortunate and their own presentation does them injustice. More- 

 over, imperfect reports may injure not only the makers but also others by 

 appearing to challenge statements made correctly. 



Study of the law indicates that, as the years pass, changes in conditions 

 will present problems impossible of solution unless there are records of 

 original conditions which have so far not been obtained. 



Decision to Give Taxpayer a New Chance 

 With these things in mind, the Timber Section believed it essential to 

 justice that all lumbermen taxpayers shall have new opportunity to estab- 

 lish their premises correctly for both past and future, without prejudice 

 by reports already made when these were in error or inadequate. Hence 

 this questionnaire, which permits 



la) Revaluation of capital investment assets on March 1, 1913, for 

 depletion and depreciation purposes. 



(b) Opportunity regardless of previous returns to transfer to capital 

 account certain expenses and betterments previously charged to operation. 



(c) Establishment retroactively and for the future of more correct 

 basis for depletion and depreciation. 



It should be regarded wholly in this light ; as designed to bring out 

 facts without which the laws as they stand can not be administered 

 without danger of injustice or discrimination to taxpayers. It is neces- 

 sarily burdensome. Many taxpayers will be unable to reply in full. But 

 their interest lies in doing so as far as practicable. The interest of the 

 industry is involved as well, for nothing less than full understanding by the 

 government of conditions, regionall.v and as a whole, will enable the right 

 treatment of all linnbermen now and later. Furthermore, facts and policies 

 concerning forest finance and profits arrived at now by the Revenue Bureau 

 may infiuence other contacts of the government with the industry. 



All accuracy should be observed. Everything is subject to possible 

 check and the showing made by the industry must be protected against 

 impeachment, even by accident, as far as this is possible. By such a course 

 only can it continue to enjoy the fair treatment extended to It and which 

 it will need all the more when the questionnaires are digested and action 

 as to policy and fact proceeds upon the tax returns and claims made under 

 the relief sections. 



The Questions 



The questionnaire appears more formidable than it really is because it 

 separates different classes of timber ownership and repeats the same 

 questions for each. In some cases, detail which at first seems superfluous 

 will reveal advantages which many taxpayers have failed to understand 

 and claim, although entitled to do so. In the following specific comments, 

 the attempt is not to cover all questions but to add definitions where the 

 meaning may be doubtful, to Indicate purpose where this will be helpful, 

 and to emphasize the importance of certain features. 



General Information. Questions 1-11 



Self-explanatory, unless there is doubt by the recipient as to whether he 

 should observe the questionnaire. It applies to all those who make income 

 tax returns and who are (a) lumber manufacturers ; (b) producers of pulp- 

 wood, logs, ties, timbers, bolts and like forest products ; (c) owners of 

 considerable quantities of timber. Most individuals who are holders of 

 timberland but who receive no taxable income therefrom will not receive 

 the questionnaire at this time. 



Blocks. Questions 12-24 



The term block may be further defined by showing the reason for its 

 adoption. Obviously widespread operations by one taxpayer, perhaps in 

 several states, can not intelligently be dealt with as a unit. Neither 

 should there be local subdivisions to no purpose. The attempt is to distin- 

 guish between areas only as necessary to recognize substantially different 

 governing conditions as to values and conditions of operation. 



The key map merely locates the block in the general region, as one 

 sees a park or reservation located on a state or county map, and the block 

 so located need bear no detail. It appears only as an encircling line. In 

 indicating the relative location of the plant, its character needs no further 

 description than "sawmill," "paper mill," etc. The block map, however, 

 serves as a pictorial record of the taxpayer's conditions and operations. 

 While suggestion as to method is given, it is permissible (Question 23) to 

 substitute any equally graphic mapping method already in use. Bear in 

 mind that no new field work is required ; only the clearest showing possible 

 with material available. 



Important Purchases and Sales. Questions 25-Sl 



The purpose here Is to check the valuation of March 1, 1913, as given 

 by the taxpayer, by means of a record of actual transactions within three 



