October 10, 1919 



HARDWOOD RECORD 



Supplement 



must holil before the state tax commission of Wisconsin, as it is lilsely the 

 commission will put the same value on the stumpage and returns on the 

 state income tax questionnaire which may come out in the future, as on 

 the federal. The question of local assessments also must be taken into 

 consideration in considering the valuation placed on stumpage. 



Mr. Goodman said that it the value is worked up, or if it is knocked 

 down, it makes very little difference in the ultimate amount of tax to 

 be paid. Tberetore, tbe object should be to follow the safest course 

 which not only would be the only honest course, but would be best for the 

 interest of the lumbermen and to the best of their ability get down to 

 what is an absolutely fair valuation of timber as of March 1, 1913. 



Major Mason : I had one or two things first, just one or two matters I 

 thouKht worth while speaking of before we get into the details of the 

 questionnaire this afternoon. Dr. Compton said cases would be brought 

 before the courts involving the question of invested capital, whether 

 invested capital should or should not be allowed to inilude appreciation of 

 stumpage values over original cost. If the courts should find and do find 

 that appreciation should be included in invested capital, then the question- 

 naire will automatically have already furnished the data upon which that 

 conclusion may be maile so that it will not be necessary to furnish any 

 further data in that respect. I thouaht it was worth while to point that out. 



Q. Only up to March 1, 1913, isn't it? 



A. Yes. 



Q. If it is capital it is capital every year, isn't it? 



A. It would also show a basis, I think, for stumpage values since that 

 (lay, as a matter of fact. 



y. r.ut it could not completely show it, could it? 



A. It might be additional information, especially for later years, say 

 four or five .vears from now, we wouldn't have any data on later years. 



Mr. liissell : Would it be proper to quote from that Supreme Court 

 decision in the case of Mitchell v. Doyle right now, just a word ? 



A. Yes. 



Q. The judge says : "The plaintiff's timber lands, with whatever value 

 it then possessed, was a part of this invested capital." Those were the 

 words of tbe decision. It seems to me if they were part of the invested 

 capital at that time that investment still runs. 



A. That is a very interesting problem. I will have nothing to do in 

 solving it, but may have something to do in applying the change, if one is 

 made from the present ruling. 



Q. It is a different Act we are. working under now, that is the Treasury 

 Department's contention ? 



A. Yes. 



Major Mason then referred to the valuation engineers who he said 

 would be available to the operators in the various regions, being open 

 for consultation at certain points at certain times, and also would be 

 traveling about more or less in the different regions to get in touch with 

 different conditions, to meet lumbermen and talk matters over personally. 

 Also that the different associations are at liberty to arrange for special 

 meetings between tbe association members and the valuation engineers. 



Mr. Goodman then called on Mr. Russell of Milwaukee of the firm of 

 Upham, Black, Rus.sell & Richardson, who are attorneys who have handled 

 a great many tax problems and a good deal of timberland. Mr. Russell 

 spoke along the same lines as Mr. Goodman, he recommending an abso- 

 lutely fair valuation, saying that the higher the values for depletion are 

 Iilaced, the better it is from an income standpoint, whereas the higher 

 these values are placed, the worse it Is from inheritance and capital stock 

 standpoint. He said that there are two sei)arate departments in Wash- 

 ington, one for the inheritance tax and one for the income tax, and be is 

 not able yet to say how much bearing the findings on the income tax is 

 going to have on the inheritance tax. The matter must be reached in a 

 reasonable way and in a manner fair to the taxpayer. If the taxpayer is 

 not going to be fair to himself and tbe government he is going to be 

 caught at one end or the other. 



In commenting on the question of values for depletion, Mr. Russell said : 



Another thing, the.v are attempting here to fix a value for depletion and 

 I think they are trying to get a fair value. When they come to value your 

 property for inheritance tax purposes, if you are a close corporation I think 

 the rule is unless your stock is listed on the .Stock Exchange, or there has 

 been a sale of a large portion, I think they estimate somewhere around 50 

 per cent of your capital stock, then they take your book values for inher- 

 itance tax purposes. Now, there is liable to be a great big difference 

 between the book values. I imagine there are a lot of corporations now in 

 the lumber business who carry values in their books that may be higher 

 than they want to admit they have to pay income tax upon, or vice versa, 

 so in considering all of these questions all our people have decided we must 

 be reasonable and be fair to ourselves, that is all there is to it. If you tr.v 

 to get away from one end of it you ar6 going to fall into the other end of it 

 and get soaked. 



The discussiOB then went on to the consideration of the definition of 

 a block of timber. 



Answering a question, Mr. Mason said that the blocking arrangement was 

 used because on former occasions where it was required that timber be 

 listed en bloc, unfairness has resulted from the fact that many times a 

 company would hold timber in Florida. Michigan and Oregon, which obvi- 

 ously would make it impossible to arrive at a fair valuation. 



He said that for the benefit of the taxpayer the block should be made 

 as comprehensive and as large as possible, as separate listings are re- 

 quired for each block and the more and smaller the blocks the more diffi- 

 cult, complicated and extensive must be the accounting in each case. 



The block he said is a flexible unit and generally speaking should com- 

 prehend timber of the same character and susceptible of the same valua- 

 tion which can be worked all on one operation. This would include solid 

 tracts of timber immediately adjacent to mills or scattered parcels of timber 

 located possibly several hundred miles from the mill, but which is all 

 I logged and brought to the one mill point as a unit operating proposition. 



Jlr. Goodman's comments coincided with Major Mason on this point 

 saying that where a mill is located so that the timber is logged to the 

 mill, all the timber logged to that mill, during its operation, comes under 



one block. This includes timber owned by other parties, but of course in 

 this case the nature of the ownership will determine whether or not the 

 operator could count on getting that particular timber. If it is owned 

 by another operator who has some tendency to trade, then if the first 

 operator also has some timber to trade with him, the chances are that 

 he can count on getting that timber in exchange for some of bis. On the 

 other hand, if it could be anticipated that the second owner would even- 

 tually log and work that timber himself, the first owner would be justified 

 iu saying that he diii not want to include any estimate of that timber in 

 his block. 



Thu.s in working up blocks the operator must include all tinilier that he 

 has or reasonably expects to get, and if in his block are included tracts 

 owned by outside parties, which he does not anticipate cutting, this fact 

 should be noted. In short, in blocking the operator should include all 

 timber available to the mill now or in the future which will have a bear- 

 ing on the duration of the operation. 



A question by Mr. Cousin was that while his mill was being fed by 

 an extensive tract of timber west of the mill, his company owns holdings 

 east of the mill which, however, are scattered and distant and probably 

 never would be operated on his mill. He wondered if these should be 

 worked up as separate blocks. 



Mr. Mason expressed himself as believing that they should. He em- 

 phasized that the whole idea of the blocking arrangement is to clarify 

 and simplify the question of timber holdings and valuations. He also 

 emphasized the desirability of simplifying the blocking arrangement, illus- 

 trating his point by citing a mill in northern Idaho owned by a taxpayer 

 who has about 250,000 acres of timberland. This company has two large 

 mills thirty miles apart, and in logging the logs may go to one mill or the 

 other. Sometimes shipping instructions are not given until the logs are 

 actually on the cars. Therefore this is considered one operation and the 

 whole thing included in one block. 



Mr. Gadd presented as a hypothetical case that a large block valued at 

 $3 a thousand included in it a smaller block valued at .$5 a thousand, and 

 asked what effect that would have in estimating the market value. 



Major Mason in answer said that an intimate description of the two 

 blocks might show that the difference in the character of the timber clearly 

 indicated the disparity in values. 



Mr. Gadd then said he considered that In this hypothetical case 

 both blocks were the same kind, to which Mr. Mason answered that in 

 that case the department may be apt to think that there was no good 

 reason for having different values and would naturally want to look into 

 it further. 



Mr. Goodman : Mr. Gadd, I will answer that question in a way that 

 perhaps Mr. Mason would not want to, but I will answer it this way : That 

 you should see that the owner of that larger block and the owner of that 

 small block got together and talked over the proposition and decided them- 

 selves which is right before filling out their return. (Applause.) 



Mr. Goodman then brought up the heading "Important Purchases and 

 Sales," saying that he understood this included every purchase and sale 

 of 1,000 acres or over from January 1, 1910, explaining that for each pur- 

 chase or sale of 1,000 acres or more since January 1, 1910, such transac- 

 tions must be explained in the manner indicated by the questions. 



He then brought up the question of the exchange of timber. 



Mr. Mason said that according to the rulings of the department now 

 already made, that any exchange of any timberland or capital asset 

 would be considered as a sale of what you gave up and a purchase of what- 

 ever you might receive. Therefore, what timber was given up in exchange 

 would be reckoned as having been sold, and what was received in the 

 exchange would be reckoned as having been bought. 



He explained further that the 1,000-acre limit was used because in 

 small transactions individual and local conditions have an important 

 bearing, and thus they are not typical. 



Mr. Osborn : In this exchange of timber, treating it as a sale, what is the 

 value in that sale expressed in dollars and cents and how are you to get at 

 it? Say the value that the timber had at the time purchased, twenty or 

 thirty vears ago, or the present value? 



Major. Mason: The value at the time of the transaction. 



Mr. Osborn : It is supposed to be the fair valuation at that time. 



Major Mason : If there is any way that the people making that exchange 

 have of knowing what the value is at that time they should treat it in that 

 way. 



Mr. Goodman : Now, just to get the significance of this. If Mr. Quinlan 

 and I exchange some timber land, if we exchange one thousand acres of 

 land he has made a sale and a purchase and I have made a sale and a 

 purchase, and If the value of the timber at the time we make this exchange 

 is held to be higher than this 1913 value, we have each of us made a profit 

 that we have got to return in our income tax. Now, I wtiuld like to ask 

 Major Mason if that is what is contemplated by that decision of a trade 

 being a purchase and sale? 



Major Mason : Yes. sir, I think it is. 



The question of placing a fair value on timberlands exchanged for other 

 timberland came up and in answer to Mr. Goodman's question. Major 

 Mason said that this valuation must be placed on it by the taxpayer. 

 That the consideration is n consideration just the same even though it may 

 be other timberland, and that the value of the consideration received for 

 what is given up should be determined and recorded as accurately as 

 possible. 



Mr. Goodman then pointed out that it is a good thing for the taxpayers 

 to know that the department may place I91S or 1919 value, according to 

 the year the trade was made, on both sides of the trade and the difference 

 between that and the 1913 value would represent profit because the sale 

 would be implied. 



The question was asked bearing on a trade transaction of 



