Cost Basis -Sale of Stumpage

[peanut]

I have a client who purchased 40 ac of woodland in 1993. In 2007 $ 9700 of pulpwood was cut. How do you estimated the cost basis of the pulpwood cut? Does anyone know of tables showing the increase in value of stumpage?
Thanking You

[erchess]

My view

is that to claim basis in purchased timber you need some reasonable evidence of its value at the time you bought it. For example if the US Forest Service did a tree survey and estimate of its value within weeks on either side of the sale to you that would be good evidence. Also if the sales contract specifies that you were paying x for land and y for trees, you are probably ok claiming that. You might even get by with saying that you got but rejected a written offer for the timber at about the time you bought it. Failing that I think that you don''t have basis. I do think that the US Forest Service or the Forestry Department of a University could tell you haw fast trees of these types grow on average but I don't think that information can be relied upon for tax purposes

Note that in a case similar to yours but involving timber on land that was inherited, you have no basis unless the US Forest Service did a tree survey and estimate of value within weeks on either side of the decedent's date of death. The problem in the case of inherited timber is that its value at the time of the inheritance would be the basis and if that was not reliably determined at the time there is no way subsequently to go back and figure it out because how fast trees grow depends among other things on specific weather conditions and the level of husbandry.

[Snaggletooth]

Check Out the Story

ICOUNT, check out the "rest of the story."

I'm not answering your question, but be suspicious of someone who tells you they cut pulpwood and nothing else.

Pulpwood is a by-product of logging, not a principle product. The proceeds from pulpwood will not pay a logger to bring in his equipment, cut pulpwood only, haul it to the paper mill. If a logging operation is cutting oak, poplar, pines, maples, etc, this is their primary product. They end up with pulpwood because in the process of logging more valuable wood, they knock down trees, misjudge hollow trees, remove unusable trees for navigation, etc. This kerf product is not worth but a fraction of the good logs. Because they've already spent the nickel to drive their truck in there, because it is on the ground, and because they have to clean up their mess, they haul this stuff to the paper mill (not the lumber mill), and it barely pays their gas to haul it.

Since pulpwood is virtually worthless for construction, flooring, furniture, etc. the only thing it is fit for is to mash, wash, and make paper.

[MRTAX4EA]

What about Depletion of Timber?

Instead of making the election to treat the transaction as a sale, why not use depletion on the sale of timber?

[thomtax]

Pulpwood is a by-product of logging, not a principle product. The proceeds from pulpwood will not pay a logger to bring in his equipment, cut pulpwood only, haul it to the paper mill. r.

Snag - I believe that this would depend on the area of the country. In our area there are pulpwood companies and pulpwood haulers/loggers. They go in and buy timber specifically for pulpwood. Ordinarily they do not have all the big skidders, loaders, etc. It may have changed recently, but some of them still used mules for dragging things out of the woods to load. They are also usually much smaller buys and deals than what is thought of as logging contractors.

LT

[Snaggletooth]

Thomtax

Thom - I don't see how, but I believe you to be credible so I'll take your word for it.

Almost all logging here is hardwood, much more valuable than pine, but also slower to grow and harder to harvest. That would apply to the entire eastern US except for the pines in the NorthWoods, and pines in the deep south of GA, AL, MS and Carolinas.

There are expansive miles and miles of pines which are bought by International Paper, Boise-Cascade and Georgia Pacific -- bought so they will have pulpwood. However, their harvesting operations make more cutting non-pulpwood.

Not sure what happens in the sparsely forested west.

[Snaggletooth]

Getting Back to the Question

I apologize that my post took the conversation so far away from the original question, so let's please return before this thread floats off into the nether recesses of TMI cyberspace...

What was the original cost of the 40 acres back in 1993? And in what state? Each state has its own Forestry Association. I'll do some website research and get back with you.

[peanut]

Stumpage Cost

The state is WI. It is very common that a purchase of land includes growing timber or in this case pulp wood. At the time of purchase no attempt is made to allocate between the land & the growing stumpage. 15- 20 yr later when some is sold the question is what is the cost basis of the the pulpwood sold. My conversation with the client he is going to talk to a forester and try to back track pulpwood costs back to 93. I think it is not correct to say no cost basis-----an educated estimate should be allowed. The problem is how do you arrive at the educated estimate.
Thanks

[Snaggletooth]

Rates

ICON - your state is divided into 40 geographic regions for purposes of stumpage rates by species -- reason being not all species are common to the entire state. Regions range from Chippewa River to Lake Michigan.

One problem in this approach is that "pulpwood" is a mixture of all species. I would equate it to either Basswood or Beech, two species on the low end of the spectrum. Basswood has a very limited market, and Beech is of so little value it is commonly left in the woods, or left to the landowner for firewood.

Here is a helpful guide to stumpage pricing for these geographic areas of Wisconsin:

http://dnr.wi.gov/forestry/StateForests/2461/2461.pdf

Important to keep in mind that this handbook is targeted to state-owned lands and many of the sections are dedicated to further bureaucratic terms and conditions. I wouldn't read the rest of the handbook beyond stumpage rates.

Growth rate since 1993 should enter the formula. My exposure to the commonly held notion that timber grows 3-5% annually is a unrealistic. This applies only to very young and very small trees. I would assign pulpwood to a 12" diam. which over the course of 14 years is assigned a rate of 2.9%. Wisconsin most likely has average growth rates as its northern climate is offset by lower-than-average elevation.

In 14 years, the value of your pulpwood by virtue of growth alone is factored down by 153%. Stated differently $7000 in 2007 would have been $4575 in 1993, but this is in terms of 2007 dollars and doesn't allow for inflation. According to US Bureau of Labor Statistics, the CPI for Wisconsin has increased 147% between 1993 and 2007, so the $4575 factors down to $3112 for 1993.

Finally, if you choose to use $3112 as a basis, remember this will have to be subtracted from the basis of the land itself. That's why knowing what these 40 acres cost in 1993 is so important. In Wisconsin I would think this land could have cost $100/acre to $20,000/acre depending on where it is. Also, is this ALL the timber? Half of it? If half of it, is there yet another $3112 in 1993 dollars left to harvest?

I might add that stands of Walnut or Cherry would have increased 1500% instead of 225% supported by the above calculation for your pulpwood. I only mention this to emphasize how fact-specific this situation can be.

[Snaggletooth]

Correction

Stated differently $7000 in 2007 would have been $4575 in 1993, but this is in terms of 2007 dollars and doesn't allow for inflation. According to US Bureau of Labor Statistics, the CPI for Wisconsin has increased 147% between 1993 and 2007, so the $4575 factors down to $3112 for 1993.

My apologies, not for the theory, but I assumed $7000 for the proceeds. The original post said the sale of pulpwood was $9700. Using the growth rate and inflation index of 153% and 147% respectively, the basis would be $4313 and not $3112 as stated above. ICOUNT must have thought I had lost my mind...

[peanut]

Snaggletooth

I would never think that you would have lost your mind . I want to thank you very much for your thoughts on this situation. I am just curious----the time that you posted was 12:10 AM --Is this what you do when you can't sleep-go on line and answer tax questions?
Thanks Again
ICOUNT

[Snaggletooth]

Answer

After midnight is nothing unusual. In addition to taxes, I work as a consultant for three different companies and most of the work is done at home on my computer. (Callie wishes I had a real job!!) Without the compunction to be somewhere at 8:00 A.M, it is not unusual for me to be awake until 1 or 2 a.m. and nearly always wake up around 8. Most of my work in the off-season is in financial performance analysis (and recovery) of federal defense contracts.

Yes, I do ask and answer a lot of questions, and some of my answers are not the best since I shoot from the hip instead of researching. I am one of the frequent visitors to this board; mostly because I have learned so much tax knowledge from others. I also enjoy others with whom I have built a comraderie in cyberspace, and a surprising number of people I have met personally. Should you travel from Nashville to Chattanooga, let me know in advance and I'll meet you for lunch or dinner in my hometown.

And watch out - I have made 4 trips through all parts of Wisconsin in recent years, and my brother and I may yet take a canoeing trip up there before cold weather!

Probably more about me than you cared to know, but thanks for reading this far.