Supplement 



HARDWOOD RECORD 



October 10, 1919 



are Koing to have, and it seems to me every individaul case will have to be 

 treated differently, and the case of one plant being used as the basis for 

 Bome other plant won't work at all." 



On Mr, Goodman's question as to the effect of changing the tax payers 

 rate of depreciation and how the account could thereby be altered, and 

 what other corrections and changes would be necessary, Mr. Ilusting stated 

 that if one figure is changed the entire return must be changed, and with 

 it must be offered a complete explanation as to why the change was made 

 and the amended return niu.st be submitted, telling all about it, giving the 

 same figures over again and causing a great deal of trouble. If any 

 figure of the income is changed, regardless of size, it automatically effects 

 the invested capital. 



He further said that if depreciation in 1916 is increased this will re- 

 duce the income for that year, and thus at the beginning of 1917 there 

 will be a smaller invested capital to consider. Thus every change in 

 income changes the invested capital at the same time. 



In commenting on this discussion. Major Mason said that it will not 

 at all be the intention of the department to make arbitrary or unnecessary 

 changes. The questionnaire is being handled from the valuation point of 

 view, he said, to determine whether the valuations are reasonable or not. 

 If they appear reasonable no changes will be made, but if they appear 

 unreasonable, changes will be required. 



Major Mason further stated that in contradiction to Mr. Husting's 

 opinion of government rulings on depreciation, that he did not think the 

 department specifies any particular way of handling depreciation. The 

 department requires that it must be handled in accordance with good 

 accounting practice and customs recognized in the industry, provided 

 the rate of depreciation is reasonable. 



In commenting on the question of depreciating the mill plant against 

 the timber owned by the taxpayer, Major Mason said he knows of one 

 $000,000 plant which was put in on an ownership of two quarter sections. 

 Obviously it was presumed that this plant had good reason to anticipate 

 getting additional timber, and obviously therefore it would not be allowed 

 to depreciate on the basis of the two quarter sections. 



There was further comment on methods of depreciation, one speaker 

 saying that no matter what method is used there will be an adjustment. 

 Mr. Mason emphasized, however, that all the department is seeking is a 

 reasonable handling of the matter and that there need be no tear of 

 arbitrary adjustments in that case. 



The meeting then attacked the heading "Physical Property." 



Mr. Goodman raised the question as to charging off specifically his 

 depreciation against each item of his plant as it is divided into logging, 

 transportation, mill, etc. Mr. Goodman said that it seems customary with 

 lumbermen to take off a total amount of depreciation each year, which 

 would build up from so much on each class of timber manufactured. This 

 would then be totaled and spread over the investment as a percentage. 

 It has never been attempted to figure out the depreciation back against 

 the specific items of property. 



Mr. Goodman asked if there was anyone whose accounts kept the in- 

 formation in the shape asked for on the sheet entitled "Physical Property 

 Depreciation." 



Mr. Mason interrupted saying that it is not contended that the lumber- 

 men shall report in that particular form, but it does assume that reports 

 would be made in the way in which the accounting is kept, and it offers 

 the partition shown on this form in the event that is the method used. 



Mr, Goodman made the further comment that it was particularly de- 

 sirable that everyone understand the questionnaire properly. The ac- 

 counts and records must not be revamped and made over in such a way 

 as to answer all the things asked in the questionnaire in the way they are 

 asked. It is desired that everything be shown as it was done rather than 

 how it might have been done. 



Mr, Mason then said that where depreciation accounts are brought up 

 by the different classes of property it should be reported in the question- 

 naire in that way, whereas if it is brought up in a lump sum it should be 

 reported that way, 



Mr, Goodman then referred to page 22 of the questionnaire covering 

 raw material handled, Mr. Goodman said that this covers a good many 

 different items in northern lumber operations and that a good many times 

 it would bo impossible to give a listing of records of various classes and 

 kinds of logs held at the time of inventorying the different years. 



Mr. Mason said that the questionnaire does not ask for an.v segregation. 



Mr. Goodman then asked how lumbermen are going to define what their 

 log scale is. He said : "My log scale differs from that of Mr. Phillips 

 and his may differ from Mr, Osborn's," He said that his is one of the 

 few companies operating on the strictly old-fashioned Doyle scale. He 

 said that as the decimal scale is the legal scale of Wisconsin, he would 

 work back to his lumber product No. .3 and better from the mill and then 

 figure that the correct log scale would be one which would over-run in 

 lumber twenty-five per cent. 



Mr. Goodman then asked the meeting the question as to whether the 

 relation between the lumber product and the log scale was sufBciently 

 uniform In the Wisconsin territory to be counted as the same in that 

 territory. 



Mr. 'Von Platen said that in his opinion the proper way to figure those 

 questions would be on the lumber basis as there is too much inconsistency 

 as between the different scales and also in the findings of different In- 

 Kaectors using the log rule. 



Mr. Goodman stated that a well-known lumber accountant had raised 

 objection to that method. 



Mr. Goodman then said that the records of the association show that 

 the ratio of log scale to lumber product is quite uniform and develops 

 an over-run of around 23 ^^^ per cent. He said that where a big over-run 

 beyond this is being secured the log scale is incorrect and it should be 

 corrected on the basis of the average ratio of log scale to lumber. 



In reply to the question as to the inconsistency of the scalers, Mr. 

 Goodman said his over-run varies from 31 to 47 per cent according to the 

 different years. He said that to make a continuous report he has to get 

 himself back to a corrected scale that will yield 125 per cent lumber ; that 

 there is no necessity of going to that trouble unless your scale is at vari- 

 ance with the ordinary scale throughout the territory. His scale Mr. 

 Goodman stated includes everything that comes out of the mill. 



Mr, Goodman : The table on the next page deals with our lumber and 

 that would show if our lumber scale was out. Now, the very important 

 question conies up in regard to our inventory of lumber. If we are inven- 

 torying our lumber at cost how is this ? We are taking the average stump- 

 age — now, follow this — our stunipage in most cases with us is so much for 

 white piue, so much for Norway, so much for maple, birch, etc. Now, what- 

 ever mixture goes into our product makes an average stumpage per 

 thousand cut for the year, and we will say that is $4.S7 it averages up. 

 Now, that is the average stumpage, then the cost of manufacturing hard- 

 w^ood is a lot more than the manufacture of hemlock, but the mixture we 

 get of hardwood and hemlock is the same as the average cost of sawing the 

 two. So we have as a cost, as a determination of our inventory value, the 

 average on the mixture so that it does not appear to me to be of any 

 assistance to the Forest Unit, or to ourselves in any way to make this more 

 complicated than we need to, as we are simply dealing there with total 

 number of feet of lumber, cases of lath, lumber, shingles, posts and poles. 



Major Mason : We do ask for division of the species because we want to 

 see about what sort of stuff you are cutting that year, and also — 



Mr, Goodman (interrupting) : lint you didn't want that division of 

 species carried through that item of the inventory? 



Major Mason : No, not through that on page 23 ; that comes in on 

 page 24. 



Major Mason : That is a good point to bring out. I would like a chance 

 to explain that at this time. We do not aim to have anyone give any data, 

 manufacture any data, that he hasn't got. All we want is a report of the 

 data which your records show. If you have never done any cruising and 

 haven't any estimates, of course you can't make any. or if you don't know, 

 if .vour inventory records do not show what different species you have on 

 hand and you haven't any division in the species in a given year, you can't 

 give it. We do not want you to give it unless you have got it, but if you 

 have got it we think it is of advantage to you to present it because it shows 

 your position that much more clearly. Throughout this work we have gone 

 on this policy, that whereas there are some lumbermen who keep their 

 accounts on the back of an old envelope, some on a shingle — I went into one 

 office where I asked for some data and the manager got out a package of 

 some old envelopes and that was his record for the past twenty years. I 

 was surprised what good data he could give me from that sort of an 

 accounting system. But I don't think he could answer this questionnaire 

 fully from that. But any company that has a good set of accounts can. I 

 think, answer this pretty clearly. However, if you haven't got the informa- 

 tion you can't give it. We do not expect you are going into the woods with 

 a cruising crew, or surveying crew, to get the information, but if you have 

 the information in your office — it may require some compilations to get it 

 out, but we think it is reasonable to ask for it. 



Monday Afternoon Session 



Then followed a general talk by Dr. Wilson Compton, secretary-manager 

 of the National Lumber Manufacturers' Association, who was asked some 

 questions. 



Mr. Goodman : I would like to ask if there is an actual case now ready 

 for adjudication on the question of determining the point in regard to 

 the vested capital that .vou brought up. 



Dr. Compton said that Frank Hagerman. a special attorney for the 

 National Lumber Manufacturers' Association, had several select cases 

 which did not quite satisfy him as clear-cut cases of discrimination be^ 

 tween the man whose invested capital is put in at cost when there is a 

 very wiile margin between the original cost and the market value as of 

 1913, and he has competitors nearby who purchased their timber at a 

 figure which may be called as the figure of March 1, 1913. 



Dr. Compton said that if it could be shown that in so far as they made 

 the amount of taxes payable under the excess profits or war profits tax 

 feature contingent upon the proportion which that taxable income bears 

 to the invested capital, the revenue laws of 1918 or preceding laws could 

 be shown as depriving taxpayers of equal protection under the law and 

 thus violating the constitution. The cases will be brought to issue as 

 quickly as possible. 



Mr. Goodman then said that in addition to the legal question involved 

 in the definition of "invested capital" there is also the relief clauses of the 

 .\ct by which the revenue commissioner is given authority to rule on 

 invested capital in cases that would mean a hardship to the taxpayer. 



He then asked Dr. Compton as to whether he knows of any treasury 

 decision under the relief clause. 



Both Dr. Compton and Major Mason said they knew of no such cases. 



Mr. Goodman then commented at considerable length on the absolute 

 necessity for giving a true statement of valuations on stumpage. He 

 advised the most careful thought on this question of 1913 unit stumpage 

 values, saying that the probabilities are that the higher this is put the 

 more taxes will have to be paid, whereas also in under-valuing stumpage 

 as of March 1, 1913, there is danger of unfavorable results from another 

 angle. All this is because the income tax law is only one feature of 

 taxation. 



He stated that federal inheritance laws immediately take advantage 

 of placing too hi.gh a valuation on stumpage, as if the valuation Is 

 placed too high for the federal income and excess profits tax, these values 



