1939 BTA LEXIS 945 | B.T.A. | 1939
Lead Opinion
The taxpayer took deductions of $19,425.11 for 1934 and $45,234.64 for 1935, which the Commissioner disallowed entirely. The Commissioner held that any loss resulting from the Tillamook fire was sustained in 1933, when the fire occurred, and was therefore entirely deductible in that year. In the notice of deficiency, the explanation of the disallowance is stated as follows:
The fire occurred In 1933 and the entire loss is held to be deductible in that year. All of the cedar and the hemlock as well as practically all the fir were fire killed.
The petitioner attacks this as contrary both to fact and law. The contention is that although the fire occurred entirely in 1933 and killed the timber in that year, this alone was not the occasion of a complete loss in 1933, because the timber was not destroyed but was still useful and valuable; that the destructive agents were the insects and fungi which invaded the dead timber with progressively destructive effect in the following years, resulting in successive annual losses.
To support its contention, petitioner has produced scientific and practical evidence showing that although the fire killed the trees,
As soon as the trees are killed by fire they become the object of a continuing onslaught by insects and fungi. These insects enter at the outside, go through the bark, then penetrate the sapwood, and finally bore into the heartwood. If the owner is fortunate enough to have an immediate market and facilities for getting to it, he can sell his timber at once despite the killing by the fire. The attack by the insects is not immediately effective, but takes time. Witnesses from the United States Forestry Service and the Bureau of Entomology, testifying disinterestedly, left no doubt that this sort of damage was not felt at once but could be expected to progress over a period of years. Supplementing this testimony was that of practical and experienced timber men, those for petitioner reiterating it explicitly and those for respondent tacitly, while shifting the emphasis to marketing and transportation difficulties.
From all the evidence it has been found as a fact that petitioner’s entire investment in its timber was not lost in the year of the fire, and it follows that any deduction for loss on that account was not limited to 1933. That year is not directly involved in this proceeding, and hence it is not proper that a finding be made as to what loss was in fact sustained that year. There was, doubtless, an immediate loss of some sort, and it may be presumed that a proper deduction for that year was taken and allowed. But, in the light of the evidence, it would have been clearly incorrect for petitioner on its 1933 return to have taken a deduction for the entire cost' of its timber as a loss, and equally incorrect for the Commissioner to have allowed it. It is not suggested that either committed that error.
The respondent, having in this proceeding determined that all the timber loss occurred in 1933, held that there could be no deduction for 1934 or 1935. His position here is absolute and unyielding. Therefore the issue is not a choice between a presumptively correct amount or foxmula used by the Commissioner and an amount claimed
The Government’s witnesses testified not that the damage or destruction of the timber all occurred in 1933; indeed they left it fairly clear that they did not believe it had. Their testimony was directed more to the adverse condition of the timber market and the difficulties of logging operations and transportation. It was indicated that it would have been impracticable to remove the timber from the forest, and in any event unprofitable to do so because the prevailing price was less than cost. This condition, however, was not demonstrably permanent; it would not have reasonably justified an abandonment of the timber in 1933 as worthless. Indeed, the evidence shows that logging was carried on to a substantial extent in 1934 and 1935 in the Tillamook area, this petitioner’s tract alone in 1935 yielding 869,273 feet of fir and 17,898 feet of hemlock under the Trask-Willamette contract. If, therefore, petitioner had sought a deduction for 1933 based upon the evidence relied upon by respondent, the deduction must have been disallowed because there had been no definitive loss — no identifiable event such as sale, abandonment, or demonstrable worthlessness. There was only a showing of operating difficulty and commercial depression similar for our purposes to a mere market fluctuation. Such a showing would not support a deduction for loss, but indicates that the capital asset did not disappear in the earlier year.
Eespondent also argues that petitioner’s evidence indicates that there will be substantial salvage, and that this must serve to reduce the present loss. This argument proceeds from a misconception of the petitioner’s claim. The claim is for an annual loss of an estimated portion of the composite whole, consisting of all of the timber on petitioner’s tract. Even though there be a profitable disposition of some of the units of the mass, it is a mistake to treat this as if it were' the salvaging of a part thought to have been destroyed. The rejection of the conception of a complete loss in 1933 carries with it the rejection of the idea that there may be salvage in later years in respect of the property mistakenly believed to have been lost. In addition to this it must be borne in mind that all logging operations resulting in commercial disposition of the timber will present the usual problems of depletion.
In the entire record there is, in our opinion, nothing to prevent the petitioner from deducting in each of the years in question the cost of the proportionate amount of timber which by fair and reasonable estimates can be found to have been destroyed in that year.
Reviewed by the Board.
Decision will be entered wider Rule 50.