FOREST TAXATION IN THE UNITED STATES 407 
not only ordinary and necessary expenses of the business and de- 
preciation of the plant, but also the stumpage value of the timber 
taken from the forest. The portion of the annual receipts which 
represents this stumpage value is a return of capital and as such 
cannot properly be included in taxable income. 
The basis for the determination of the stumpage value which may be 
deducted from gross income as depletion of timber is highly important. 
This basis has been fixed as original cost, with proper adjustments for 
capital increases or deductions, except when the timber was acquired 
prior to March 1,1913. In that case, if the cost so adjusted to that 
time is less than the fair market value at that date, the fair market 
value on March 1, 1913, rather than the cost, governs the depletion 
allowance. The latter provision insures against taxation of any 
appreciation in value which occurred before the date March 1, 1913, 
when the income tax law went into effect. Capital additions to cost, 
or to value as of March 1, 1913, may include taxes and other carrying 
charges on unimproved and unproductive real property, unless they 
have been taken as a deduction by the taxpayer in determining the 
net income for the taxable year or prior taxable years.” 
The allowance for depletion is based upon the number of units of 
timber felled during the year and the unit value of the timber in the 
account or accounts pertaining to the timber cut. This unit value is 
known as the depletion rate. The depletion rate for a given timber 
account in a given year is the quotient obtained by dividing the sum 
of the value of the timber on hand at the beginning of the year and the 
cost of the number of units acquired during the year and proper 
additions to capital, by the sum of the total number of units of timber 
on hand in the given account at the beginning of the year, and the 
number of units acquired during the year, and the number of units 
required to be added (or deducted) by way of correcting the estimate of 
the number of units remaining available in the account. The amount 
of the deduction for depletion with respect to a given timber account 
is the number of units cut during the year from the timber covered 
by that account multiplied by the appropriate depletion rate. While 
depletion of timber takes place at the time that the timber is felled, 
depletion for purposes of income-tax accounting is treated as taking 
place at the time when, in the process of exploitation, the quantity of 
awa so felled is first definitely determined (223, art. 249; 227, art. 
241 
The above method of accounting for depletion is designed primarily 
to fit the usual lumbering operation, where the forest is being destruc- 
tively cut and growth of timber is a negligible factor. The Federal 
revenue acts do not make special mention of growth, but the regula- 
tions of the Treasury Department pursuant to these acts provide that, 
if as a result of growth, or for other reasons, the quantity of timber 
becomes greater than the balance shown in the timber account, a new 
estimate of the recoverable units may be made as a basis for a new 
depletion rate (223, art. 255; 227, art. 246). For example, if the 
timber account at the end of a given year, before deducting depletion 
for the year, shows a balance of 10,000,000 board feet and $60,000, 
and a new estimate of the timber shows the actual quantity on the 
22 For more detailed information refer to current Treasury Department regulations. This paragraph is 
based on regulations 77 (227, arts. 240-248). 
