Hardwood Timber Industry Guide Name Audit Technique Guide›Audit Technique Guide Subtitle›Table of Contents
A.4. Example 1
0725 Publ 6116 (PDF) · 2026-10-03 edition · updated 2026-10-04 · United States
(1) A taxpayer purchased a 40-acre tract of timberland 11 years ago. The value
attributable to the 200 thousand board feet (MBF) of timber on the land totaled $10,000 or $50/MBF. An additional 10 acres of adjoining forestland with 50 MBF of timber was purchased 5 years later, with $3,750 attributable to the timber. From forest inventory data collected by a professional forester, timber growth on the properties from date of purchase through last year was estimated to be 50 MBF, resulting in standing timber volume of 300 MBF. The basis in the timber was $13,750. Therefore, the depletion unit rate was $45.83/MBF ($13,750 divided by 300 MBF).
(2) Let us say the timber is grown in another year and the taxpayer disposes of
100 MBF on a payas-cut basis. As a result of the additional year's growth of 10 MBF, the depletion unit rate is reduced to $44.35 ($13,750 divided by 310 MBF). The taxpayer receives $200/MBF. A consulting forester was consulted on the sale, for which the taxpayer paid a 15 percent commission. The taxpayer also incurred another $500 of direct sale-related expenses. The gross receipts of $20,000 are reduced by the adjusted basis of $4,435 (100 MBF multiplied by $44.35 unit rate) and the costs of sale of $3,500 (15 percent multiplied by $20,000 sales price plus $500 direct sale expense), netting the landowner a $12,065 profit.
(3) The particulars of the transaction are reported on Part III of Form T and
transferred to Part I of Form 4797, Sale of Business Property. If Form 4797 shows a net gain, it is reported as long-term capital gain in Part II of Schedule D Form 1040.
Get a plain-English answer with a citation back to this text.
Ask AI about this code