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My wife and I have just this year sold our 40 acre parcel of…

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My wife and I have...
My wife and I have just this year sold our 40 acre parcel of forest land located near Astoria, OR. In October, 1988 I heard that this parcel would be auctioned by a large timber company because it was too small and isolated from their other properties to be managed efficiently. As the President of my then PC pension and retirement plan I bidded $28,000 for the property both land and timber then on it. I won the bid and paid for the parcel and had a formal cruise of the timber and real value of the property by a professional forester and so had an initial basis value to later work with.
Sometime later, approximately 3 years, I pulled this parcel out of my PC, paying all taxes and penalties in order to manage it and to work and recreate on it. as we did over the years until May of last year, 2015. All during this time we managed the property well although we were ignorant of how to deal with depletion losses.
We had several salvage harvests following storms starting in 1992, land and timber at that time no longer in my IRA; a harvest as a thinning procedure, and finally a major harvest in the late spring and summer of 2004.
Throughout this time we were generally ignorant of how to deal with depletion losses due to one thing or another - i.e., storm wind throw damage; heat and wind dehydration and checking of cut logs; poor manufacture and shady logging practices.
My wife and I believed that, when we eventually sold the property, as we have done, we could bring all of the potential loss and expense deductions together as deductions from the capital gains tax.
We assumed that, even though those losses and expenses might not be clear to us at the time - such as how to account for storm and environment and poor timber managment and just bad luck - once we could get a handle on the origins of such losses we would make a declaration. We felt no sense of urgency, thinking that we would have time to collect and clarify such things when we eventually sold the property.
An example of these latter losses occurred just after we started our 2004 major harvest. A massive, powerful wind and ice storm struck NW Oregon and SW Washington, closing hundreds of roads, highways, streets in towns with downed trees, large root wads, shattered limbs and branches. Both states declared disaster level conditions and urged loggers and truckers to help clear and clean. The enticement to the loggers from the city, county and state was, as we understood it, that the loggers would be able to keep and sell what merchantable timber that they were able to salvage. The logger contracted to our harvest job begged to go and "help".
We agreed to his doing that to ease the emergency, not to make him rich. We had decks of logs down and cut and ready to be delivered to mills. Log truck availability evaporated. Mills were so glutted with logs that they had no room to store them. Log prices fell. The logger did not return full time to work until late August, 3 months after the storm. During that hot summer there was no rain and constant high winds (can be established at Astoria Airport). Logs down and delivered late all had high levels of dehydration checking damage on the cut ends. Pulp dried out and tonnage turned to low weight straw-like levels of damage with very low return per load. Much of the log damage was obscured when clearly damaged logs were manufactured shorter than usual before delivery to mill. Needless to say, our losses were obscured in various ways.
We hired trained foresters to help us along the way over the years. None of those people helped us to understand depletion losses well and we did not even begin to comprehend how to handle the losses due to not only the storm but to a logger taking advantage of our lack of ignorance.
We joined the Oregon Small Woodlot Owner's Association to take advantage of some of the classes available through their excellent yearly education programs and now we can talk at length about depletion losses and know what we are talking about but we know nothing of what, if any, statutes of limitations there might be upon such complex losses as described above.
Some people have told us that we can still salvage such chronic loss deductions. Others have said that there could only be deductions from the taxes pertaining to the year previous. Others have said that the IRS has exceptions to the rules most times if they understand why you did not declare such losses as you might have done - that they may cut us some slack and allow fair deductions for the losses that we suffered over the years. We don't know.
We know that we suffered significant losses to depletion over the years and we, relying upon poor information from paid professional foresters to help us with management, had never declared such depletion losses. We think that there should be some fair solution to our dilemma that would mitigate our losses to recurrent depletion.
John L. Carter
Submitted: 2 years ago.Category: Tax
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Answered in 15 hours by:
1/29/2016
Tax Professional: Robin D., Senior Tax Advisor 4 replied 2 years ago
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 18,011
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello

The sale of the timberland now is going to be reported using the cost on the date you took it out of the pension. It's value then that you paid tax on is your starting point for the reporting.

When the land was distributed from the pension, all income from cutting or losses from storms would have been reported in those prior years. They do not carry over if you did not claim them.

You would have claimed your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you chose to treat the cutting of timber as a sale or exchange.

You would have needed to complete and attach Form T (Timber) to your income tax return if you claimed a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber.

The exceptions to rules may be applied if you were to ask for a ruling on your specific reasons.

A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s represented set of facts. A PLR is issued in response to a written request submitted by a taxpayer.

There is a fee.

I would suggest you have your tax professional make the request for you.

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Tax Professional: Robin D., Senior Tax Advisor 4 replied 2 years ago

Accounting changes are requested on From 3115 but it is unclear how you accounted for the timber and land when the distribution first occurred.

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