October 10, 1919 



HARDWOOD RECORD 



Supplement 



Questions and Answers at Tax Questionnaire Meeting 



Editor's Note 



The following is the tirst report of the first meeting of luiiibemieu with representatives of the Department of Inter- 

 nal Revenue to discuss the forest proilucts questionnaire. This is not intruded as an article on the subject. Hardwood 

 Record arranged for a complete stenographic record of the questions aud answers, and this is merely a transposition 

 of those records either verbatim or in digest form. 



In opening the meeting, held at Milwaukee, Wis., on September 29-30, 

 R. B. Goodman, chairman, read an address of an introductory and explana- 

 tory character, which follows in part : 



In behalf of the operating timber owners in Michigan and Wisconsin, 1 

 voice our appreciation of the attitude taken by the commissioner of 

 Internal Revenue toward the timber industries generally, and more par- 

 ticnlarly the manufacturers of lumber. 



We owners of large blocks of timber in this territory are buyers, and not 

 sellers, of timber and, w^ith the exception of some of the railroad corpora- 

 tions and one or two land companies, all of the undeveloped scattering 

 timborJand is owned by small owners and these owners are all sellers of 

 land, in consequence of whicl;i it is true universally throughout this 

 region ; first, that practically all timber is tributary to logging or mill 

 operations and part of operating blocks and more valuable to owners of 

 these operating blocks than to the small timber owner, and, second, that 

 the purchases of timber by the large operators from the small owners con- 

 tain an inherent element of profit to the buyer. If such buyer purchases 

 a small tract of timber before March 1, 1013. this inherent profit is made 

 before that date and such operator should not pay income tax upon this 

 profit when he cuts the timber on this tract some time subsequent to 

 March 1. On the other hand, if the large operator makes such purchase 

 and such profit since March 1, 1913, the purchase profit becomes taxable 

 income not at the time of the purchase but at the time when he cuts or 

 liquidates the timber on this tract. This being true it is quite possible. 

 even probable In many cases, that the unit value of timber and cordwood 

 in the hands of large operators March 1. 1913. should be higher than the 

 corresponding unit costs of timber and cord wood these same owners may 

 have acquired since March 1. 1913. 



The reason why these big holders of timber are not willing sellers of 

 their property enbloc is that they have, through their organizations and 

 good will, a more satisfactory and a more profitable method of selling their 

 stumpage than any possible enbloc sale. Are they not entitled to place a 

 value on the units of their timber property, as of March 1, 1913, com- 

 mensurate with their ability to sell those units through the process of 

 manufacture into lumber, or other products, in equal instalments through 

 a period of yeiyrs varying from two or three to twenty or thirty? And 

 if this is the' actual method we are using to sell our timber, is It not the 

 fair basis for us to use in valuing our timber at any given time If there 

 is not other and more convincing evidence of its value obtainable? 



I realize that our idea of value as of March 1, 1913, cannot be built 

 upon subsequent sales, which could not have been foreseen at that date. 

 However, we are entitled to consider facts known at that time and to 

 argue from those facts a reasonable expectancy as to future conditions. 



In an address before the National Hardwood Lumber Association at 

 Chicago, June. 1915. I presented a diagram showing comparative hard- 

 wood prices from 1R99 to 1915. A composite price line for all hardwoods 

 on this diagram shows an average advance of fifty cents per thousand 

 per year from 1S99 to 1913. While this line is shown on the diagram as 

 straight, it is really a curved line, and the actual increase in hardwood 

 price during this period would show an increase of about forty cents at the 

 beginning of the period, and of seventy cents toward the end of this 

 period, so that in 1913 we had availableinformatlon as to the continuous 

 advance in hardwood lumber values over a period of fifteen preceding years, 

 during which logging and manufacturing costs, that is to say, wages and 

 commodity price, advanced very slightly. The yearly Increase in stump- 

 age realization is a sliding scale starting at twenty cents in 1899 and 

 Increasing to about forty cents 'in 1913. If we assume a hardwood stump- 

 age value of $3 in 1900. in 1910. according to my diagram, the same 

 hardwood stumpage would be worth $5.75. which is an advance equivalent 

 to compounding interest at 6V2 P^r cent, and deducting the taxes and 

 carrying charges from this percentage would leave 5Vi to 6 per cent com- 

 pound interpst on hardwood stumpage over a period of about thirteen 

 years preceding March 1, 1913. The manufacturers of hardwood generally 

 were the ones who knew specifically of these advances in value. Is it any 

 wonder that they preferred to hold" their stumpage for manufacture as the 

 most promising manner of di.^posing of it at the highest price? A similar 

 situation existed with regard to white pine. Hemlock, on the other hand, 

 at thnt time had, and it has since, maintained a price line almost exactly 

 parallel to that of southern nine, which may be roughly described as almost 

 horizontal from 1890 to 189S, and a gradual increase of fifty cents per 

 year from 1898 to 1908, again horizontal to 1911 and again advancing In 

 1912 at about fifty cents per thousand per annum, which advance has 

 been maintnined over since. It Is stumpage with this past performance 

 for its product that we, the operating owners, are asked to value as of 

 March 1. 1913. Are we not to take these facts nnd the fact of our owner* 

 shin into consideration in fixing that value, and are we rot justified in 

 giving such facts greater consideration than actual purchases of scat- 

 tering descriptions of small owners? 



The character of the preceding statements, with respect to value, may 

 give vou, Mr. Mason, the impression that I am advocating the highest 

 possible valuation of stumpage as of March 1, 1913. This is not mv 

 thought and I have counseled stronglv against overvaluation. First, 

 because overvaluation cannot be su.=;tained ; and sernnd. because over- 

 valuation, if allowed, would tend to incrense tnxation In the future, with 

 resnect to the federal capital stork tax. the federal and state inheritancp 

 taxes, and the state, county and township property taxes. Capital stock 

 tax and the property tax are annual taxes which acci.niulate over long 

 periods of time to a higher percentage than the normal federal income 

 tnx. and the state and federal Inheritance taxes are at least on a par with 

 the federnl income taxes. 



The questions and answers then followed : 



Major Mason : If a man bought timber in 1905 at .Stl.OO .1 thousand and 

 thnt timber in 1913 hnd reached a valuation of $3.00 a thousand the 

 increase in vanie which had been taxed before this constitntionnl amendment 

 was. Iiv the constitutional amendment, held to be free from taxation. Jind 

 that amendment is retroactive, by the way, and affects enrlier years. The 

 Income Tax Law of 1918 has exactly the same effect. The whole purpose 

 in this change has been to put on an equal footing with taxp.tvers who 

 bought shortly after March 1, 1913. those taxpayers who had no timber for 



many years before that time. The decision is of very great importance to 

 the lumber industry. 



The Doyle-Mitchell decision and the laws which have followed in regard 

 to income taxes, changing from a cost to a value basis, have created the 

 problem of determining what that value was. You can not expect to have 

 the advantage of that change without the problem which goes with it of 

 determining that value. 



The question has been asked : How far back should it go? (The investi- 

 gation involved in the questionnaire.) The work contemplates the auditing 

 of these returns which have not yet been audited for the years 191(i. 1917 

 and 1918, and in those cases in which it appears there should be a review of 

 the earlier returns that also will be done. 



Mr. Goodman then asked the major if the question of depreciation as 

 determined by the standing timber is a matter that only affects the opera- 

 tions whose life is limited to a shorter period than the natural life of the 

 whole mill. 



On an affirmative answer, Mr. Goodman suggested that many operators' 

 mills will wear out and require replacement before the timber is gone. 

 He said that the logging roads will be limited by the amount of timber to 

 which they lead, hut the mill would wear out before the whole timber is 

 cut. In that case, according to Mr. Goodman, the mill itself would come 

 under the rules of depreciation that are in the regulations, but the 

 logging roads, camps and similar equipment will be worked down to a 

 point of no value in a period of two, three, four or five years, according to 

 the particular timber which it is tapping. Therefore, nearly all operators 

 will have to consider in some of their accountings depreciation on the 

 amount of timber. This he said is not limited to actual holdings but to 

 timber that can properly be bought and manufactured on the particular 

 mill. 



He said that if the operator has not charged off enough depreciation In 

 the past he will be expected to in the questionnaire and maintained that 

 this will reduce income in those years in which not enough 

 depreciation is written off, whereas if too much were written off it would 

 be required to put it back Into capital account which would naturally 

 increase the vested capital. 



The question was asked if the bureau recommended any special form 

 or method of charging off depreciation. 



Major Mason : The recommendations provide at present that any proper 

 or well recognized system, as used in the industry, will be recognized. One 

 method is charging the mill so much depreciation each year, and the other 

 way determining according to the quantity of raw material which goes 

 through it. 



Mr. Osborn : All repairs to be charged to current operations? 



Major Mason: Yes, where they are strictly repairs. 



Mr. Osborn : Ordinary repairs. 



Major Mason (continuing) : And do not involve a new capital invest- 

 ment. 



In reply to Mr. Goodman's question as to how any change the govern- 

 ment might make in depreciation accounts would affect accounting, 

 Mr. Husting, an acc(»untant. prophesied a good deal of trouble in 

 determining the question of depreciation. He said that he considered 

 the proper method in the case of a sawmill plant would be the basis of so 

 much per thousand feet on the number of feet of standing timber which 

 the company owned at any particular date. He said he did not think 

 there was any question but that is the only way to do, taking into con- 

 sideration the salvage value of the plant, as in all cases the plant can be 

 I'eplaced to outlast the timber holdings. 



Mr. Husting said that the adjacent timber available to the mill, but 

 not owned by the company, makes this question of depreciation on tim- 

 ber very uncertain. He said he knows of a number of cases where operat- 

 ing companies have bought complete sawmill outfits in connection 

 with timber purchases. The new timber was then moved to the new 

 mill and cut there instead of going to the old mill, and therefore while it 

 was directly a part of the timber holdings of the original company, the new 

 timber holdings could not be reckoned as having an effect upon the old 

 mill. In endeavoring to reckon the life of a mill in this way the matter 

 is further complicated by the uncertainty of the owners whether they will 

 be able to purchase adjacent stands of considerable portion enough to 

 really be a factor in determining the life of the operation. 



Mr. Husting said he had always disagreed with the government's ruling 

 on depreciation because he felt the only real way to depreciate a plant 

 wa-s on a diminishing value, for as the repairs of the plant increase the 

 depreciation ought to decrease. It often happens that repairs are increas- 

 ing while depreciation is remaining the same. 



Mr. Husting said : 



The Government has ruled we must take a certain rate of depreciation, so 

 much per annum, we will say 5 per cent on $100,000. That means $.'»,000 

 anyway. Now, you can see for the first year of operation the company has 

 no repairs, and eventually at the tail end of the operation had paid $15,000 

 of repairs and charges, and in my mind the only real way would be to fix a 

 diminishing value which would at the end of, say. forty or fifty years bring 

 the plant to a certain value. That would be the proper way and in order to 

 make it very simple determine a fixed basis of so much per cent and there, 

 again, you have a great drawback. You don't know what scrap value you 



