1. CASUALTY LOSS "BEFORE AND AFTER" APPRAISALS

2. 2 Casualty Loss Safe Harbor Approach for Larger SIPs 1. The IRS is concerned about the proper approach to taxpayer valuation of timber SIPs damaged or destroyed by a casualty. 2. In an April 16, 2004 memorandum to the field, it was pointed out that many taxpayers use an additive approach whereby they determine the volume of timber damaged or destroyed, multiply that quantity by current unit rates, and then subtract the result from the "before" value of the SIP to determine the "after" value.

3. 3 Casualty Loss Safe Harbor Approach for Larger SIPs 3. The memorandum states that by using the additive approach, taxpayers frequently place a value on the loss that is much greater than the diminution in value of the entire SIP on a before and after basis because larger properties often sell for less per unit value than smaller properties. 4. The memorandum then recommends "safe harbor" percentage reductions for SIPs of various sizes.

4. 4 Casualty Loss Smaller Timber SIPs 1. In September 2005, the IRS issued a 45 page timber casualty loss audit techniques guide. Many parts of the guide apply to smaller timber SIPS as well to large ones. The guide emphasizes that Form T should be filed whenever a taxpayer claims a depletion deduction from a casualty loss. 2. In determining the correct SIP for a timber casualty loss claim, the examiner must inspect the taxpayer's records to determine how the timber depletion accounts are maintained. These should have been set out in Part II of Form T.

5. 5 Casualty Loss Smaller Timber SIPs 3. The guide points out that there is a significant cost associated with the "before and after" valuation of an entire SIP, and taxpayers do not typically perform such valuations but instead utilize a variety of short-cut methods which are often flawed. Small value losses may reflect little loss in overall value when the required "after" valuation is properly performed. 4. "After" appraisals must take salvage values into account.