STUMP AGE VALUES 193 



start, stumpage value does not need to increase beyond the 

 amount needed to meet any increased costs, in order to maintain 

 the dividend rate. Furthermore, this rate is certain to in- 

 crease, on account of reduced carrying charges, even if the value 

 of stumpage remains stationary. 



The claim that the value of stumpage must increase at a 

 rate sufficient to return compound interest on all costs, or the 

 result will be financial loss or bankruptcy, must therefore be 

 flatly rejected except for purely speculative holdings, or for 

 operators attempting to carry far larger holdings than they 

 can take care of with their own capital. An owner of stumpage 

 must either have sufficient capital to carry all charges for an 

 indefinite period, or he must operate and obtain revenue annu- 

 ally. In either case, if he expands his operations by borrow- 

 ing on the security of the timber, he must conduct such a 

 transaction with considerably greater caution and conserva- 

 tism than is necessary in many other forms of business, or 

 he may lose his holdings. For a concern which is earning 

 annual dividends, increased costs, especially taxation, is the 

 only factor which will necessitate the realization of higher values 

 in order to maintain profits. Very strong combinations of 

 capital holding timberlands and operating, may, by a policy 

 of cutting calculated to cancel carrying charges, put themselves 

 annually in a better financial condition, until, after the period 

 of pressure and over-production has passed, they will reap 

 relatively large profits, representing more than average divi- 

 dends on outstanding capital investments. 



This distinction between the separation of a business into 

 parcels, and the treatment of the business as a unit, is recog- 

 nized by the U. S. Commissioner of Internal Revenue in inter- 

 preting the income tax law as applied to corporations dealing in 

 timberlands. A cost account is to be kept for each parcel of 

 land as the basis for determining net income (25), and on sale 

 of this parcel the value received can be reduced by the amount 

 of the original cost of the parcel, but cannot be absorbed by 

 applying it to cancel capital cost for any other parcel. On the 

 other hand, net income is treated as applying, not to the parcel, 



