Supplement 



HARDWOOD RECORD 



October 10, 1919 



trade subsequent to 1913 of timber you 



recent date of two properties which the owners agreed were of equal value 

 and in which not one cent of cash was exchanged either way. Could this 

 be fairly considered as a sale and a purchase and would it have to be so 

 listed ? 



Mr. Mason replied that under the regulations that interpretation must 

 be put upon it and it must be so entered. 



Mr. Durant : It seems to me under the provisions of the Income Tax Law 

 this is not in any sense a complete transaction until the property purchased 

 has been liquidated by the purchaser and the condition determined whether 

 he made a profit or sustained a loss. Now, if in the cutting of the timber 

 and ultimate sale of that he has made a loss, under the law, as I under- 

 stand it, he can claim a deduction for the loss he has made rather than be 

 assessed tor taxation for the profit he will assume to make, but did not. as 

 a matter of fact, make. In other words, he will be charged for the tax for 

 the year in which he liquidates the timber that he cuts on that particular 

 purchase, but I do not think it can be considered at the time unless all of 

 the trade decision is revoked. 



Major Mason : That is true in regard to the purchase, but not in regard 

 to the sale. 



Mr. Durant : An exchange is the same as a purchase. If not it could not 

 be taxed. The law of the Treasury decision itself so states. For instance, 

 if you exchange stock of a corporation for stock in another corporation that 

 transaction is not completed until after you have disposed of the stock you 

 received in exchange, but when you have done that you are taxed if .vou 

 have made a profit and have the right to take a deduction. 



Major Mason : That would be the equivalent of trading at 1913 values, 

 wouldn't it, in effect? Because then when you get your timber — 



Mr. Durant (interrupting) ; But suppose you bought it subsequent to 

 1913? 



Major Mason : You make i 

 purchased subsequent to 1913? 



Mr. Durant : Yes. 



Major Mason : Then you traded that, disposing of that at cost and 

 getting the other in at cost? 



Mr. Durant : The only point I make is, until you determine by the 

 liquidation of your timber as sales, you can not be taxed, you must be taxed 

 as of the time you make that transaction. 



Major Mason: Now. another case: Mr. Henderson and Mr. Boniface, 

 each of them bought timber prior to March 1, 1913, and held it and each 

 made a profit, each sold to the other, each made a profit and both have to 

 pay a tax, and I don't see how you get away from that. 



Mr, Goodman : They would if the value placed upon the trade was higher 

 than the March 1, 1913, taxes, but if not higher then they wouldn't. Now 

 if we make a trade next year that has to be taken into consideration, too. 

 Where we have a leeway on that is this : I would consider that in trading 

 our tmiber with another man, when cutting scattering timber that had a 

 value per thousand equivalent to the average value of our purchases of 

 scattered timber since March 1, 1913, I think it would be pretty hard to 

 show that our timber was worth any more with respect to that trade than 

 the average price paid for timber since March 1, 1913. That is the point 

 yo^^ made. 



Major Mason : The fact exists that the timber vou receive, no matter 

 how much value you may anticipate, it is of no more value than you gave 

 tor It. Suppose your timber averages you ,$4,00 a thousand, taking into 

 consideration the value fixed March 1, 191,3. and vour purchases since then 

 .vour average is $4.00 and you trade one thousand acres of that timber for 

 yy~ thousand acres of timber, there is probably some timber on it but some 

 difficulty that makes it not quite as attractive, the value ot the timber you 

 receive is only what you gave for it. You can not create an additional 



^y- ^" T"" "^ 5'°" "''^ anticipating profits and that is not permissible 



Mr. Goodman : I think that sounds clear. 



Mr. Osborn maintained that courts would unquestionably hold that an 

 exchange was not a sale, but that the present regulations say that it is. 

 Therefore it must be so entered. He said it is diflicult to determine what 

 the value should be in the question of exchange, the only thing to put 

 down is what is considered a fair valuation and if necessary fight the 

 matter out in the courts later. 



Mr. Hasting : I would like to ask. Major Mason, if— as I know all these 

 nn2"r'f." "■'" i"~-i^,''?.J'"^ ^^^ '^'•■'"•'^ 1- iniS. values on these sales, now! 

 w^fi ^fh„ r?''''° ''"^ l'*-?" .average value and another $.'>.00 average value. 

 Instances? '*'"'''' """" "^^ "^""'"S ^^^ "^""^ value in both 



Major Mason : Each case would have to be considered on its own merits 

 thn„=LTn„';j'''° '^ "'""S IP something that he considers worth $5.00 a 

 ^wf; hi tS "sreceiving equal proportion units of something else, that is 



loZVa!, ma'dra'p'ro^r '" "' "°'""' *-'-°° " *''°"^'"^"- " '"°^' ^ "'""^'^ 

 The point was made that regardless ot the supposed difference in value 



the stumpage was traded evenly because each side figured he could make 



a better profit out ot its utilization. 



Mr. Mason replied that the point is not to determine profits but to 



determine the value of what was sold and what was bought 



The discussion then switched to the question of whether returns were 



expected from present operators or from operators during the term of 



income tax. 



The question was asked that if a corporation owned timberlands and 

 within the last five years disposed of all holdings and liquidated, whether 

 a questionnaire be required from the liquidated company. 



Mr. Mason answered "No." 



On further interrogation on thi.s point Major Mason said the question- 

 naire IS being mailed out to lumber manufacturers and that in this par- 

 ticular case as the company ,s neither a lumber operator nor timber holder 

 at present, it is probable the company will not get a questionnaire. He 

 said further, though, that if for any reason some of the earlier income 

 tax returns are reviewed it would probably be necessary to get from such 

 company such information as is included in the questionnaire. This is a 

 matter, however, of the future. .lui* i» 



tri^nL?"""™",,'' ""-"'"■''"Sht up Question 33 involving the matter of 

 transfer, purchase, sale, gift, etc. The point has a bearing on market 

 values in that, as Mr, Goodman showed, a considerable number of opera- - 

 tions are a present in the hands of the second generation, many ot whom' 

 have organized companies to operate timber that was sold to tbem by the 

 preceding generation, partly for consideration and partly as a gift, enabling 



them to get in on what was considered a good thing. It was pointed out 

 that these inter-family transfers of timber are not valid evidence of 

 market values. 



Mr. Goodman then introduced the general question of how timber 

 values are arrived at, outlining the question in the timber questionnaire 

 covering acreage, complete description, etc. 



Mr. Lingle stated that his company, the Westboro Lumber Company, 

 bought a batch of timber in 1902. Up to 1913 it was logged almost 

 entirely in hemlock, but at that time it struck a good stand of mixed pine 

 and hardwood of exceptional quality. Mr, Lingle was in doubt as to 

 what kind of value he could place on this particular proportion of the 

 original purchase which is very fine quality stuff as compared to the hem- 

 lock which had been logged from the same tract up to 1913. 



Mr. Goodman : Mr. Lingle, why do .vou assume it is a high value? 



Mr. Lingle : It is a high value compared with what a lot of you people 

 have put on your timber. 



Mr. Goodman : What do you call that worth ? 



Mr. Lingle : $T.2.T a thousand in 1913. 



Mr. Goodman : What do you call your hemlock worth? 



Mr. Lingle: At that time? 



Mr. Goodman: Yes. 



Mr. Lingle : Worth more money than previous to 1913 because we are 

 getting a little more money for our bark ; the hemlock lumber was not worth 

 much more, just a trifle. 



Mr. Goodman : Here are eleven different companies put in their pine all 

 the way from ,$11.00 to $15,00, 



Mr, Lingle: I haven't got mine high enough, then, have I? 



Mr. Goodman : No. 



In reply to the question as to timber bought a considerable time ago 

 on which there are no estimates available, Mr, Mason said that it was 

 not expected that anyone go in and do any field work, but that it was 

 expected that he should have enough knowledge of the tract, based on 

 actual experience in cutting similar tracts, to make a reasonably good 

 estimate. 



Mr. Osborn : There is the 100 per cent estimate that Mr. Lingle wanted 

 discussed. 



Mr. Goodman : The answer is in Question 56. which says : "Total esti- 

 mated quantit.v of timber present upon the date of transfer." Now, is there 

 what we put in the 100 per cent estimate? 



Major Mason : Both places. 



Mr. Goodman : Now, how are we going to determine the 100 per cent 

 estimate? Now, don't anybody say we can't get a 100 per cent estimate, 

 because then our whole thing falls to the grounrl and the Department 

 will say : "If you can't reasbnald.v determine 100 per cent estimate on 

 your timber then you can't determine its quantit.v, and you are in the same 

 case with the mines and you haven't got property that is capable of actual 

 valuation," Now. we can, with a reasonable amount of accuracy, whether 

 there have been estimates or not on our timber, come pretty close — and 

 everyone knows in his heart he can come pretty close — to telling someone 

 else, for instance the directors in his company, just what he expects to cut 

 off of that purchase. That is what is meant, as I understand it. by 100 per 

 cent estimate. 



Mr. Osborn : By comparison with timber he has cut? 



Mr. Goodman : By comparison. One method is. the land in the different 

 towns is classified and where they are cutting in different towns they cut 

 so much per acre and gradually cut an acre. We have our cutting records, 

 every one of us, through a large number of years. We have been through 

 our timber and know within 2 or 3 per cent what the 100 per cent estimate 

 is. Now, I would like to have IMajor Mason say just what explanation we 

 are to make in regard to how we get at the 100 per cent estimate. The 

 trouble is going to be to get the other fellow to believe it. 



Major Mason then went on further to describe the 100 per cent esti- 

 mate proposition, saying that at various points in the questionnaire entries 

 must be made ot acres of timberland cut-over in the holdings of the 

 operation and to show just what the cut was per acre ot the different 

 species. 



At this point Mr. Mason suggested that the 100% might be put in at this 

 point, stating in justification of what is termed the actual cutting opera- 

 tions which have taken place over a certain number of years showing that 

 they have yielded so much per acre on the average and that the particular 

 timber, as described at that point, is of the same general character as the 

 other timber cut. This 100% would, of course, apply to conditions as 

 they were March 1, 1913, covering the timber that was there at that time 

 and the utilization based on the same utilization practiced at that time. 

 Also if material losses have been experienced since the 1913 date these 

 must be taken into consideration and the operator must set up all of the 

 timber standing as ot March 1, 1913. 



On the other hand in the case of growing timber, the amount of acreage 

 should be deducted from the present quantity in order to put the stand 

 on the March 1, 1913, basis. 



Mr. Collier: I have in mind a performance after 1913, and in setting up 

 the value of their stumpage is the actual price they paid for the stumpage 

 to be taken, or is the price to be taken later on different tracts in the same 

 locality, to be used as a basis? 



Major Mason : Take the actual price since 1913, and take the actual cost, 

 but you set up the unit of timber on this 100 per cent basis just the same. 



Mr. Collier : And that will be determined on the average thousand feet 

 per acre that has been cut? 



Major Mason : Determine the quantity as best you can. One method is 

 perhaps as good as another where you have estimates of getting out the 

 quantity. 



Mr. Collier : I didn't know which way you wanted that figured. 



Mr. Goodman : I will answer Mr. Collier in another way, that all of the 

 profits you realized out ot that purchase are taxed during the years you cut 

 the timber on that tract. There is no appreciation in that value that 

 escapes taxation. There is no element there that is not taxable under the 

 law. It is itself something that took place since 1913. 



I have in mind certain transactions which might give a little trouble In 

 answering some of these questions. For instance, we may iiave completed 

 logging operations In a certain district, and our woodsmen have been 0%'er 



