Rlc Industries Co. And Subsidiaries, Successor to Roseburg Lumber Co. And Subsidiaries v. Commissioner of Internal Revenue Service

Section 611(a) of the Internal Revenue Code (I.R.C.) provides:

I.R.C. § 611(a). For purposes of calculating the depletion allowance, the regulations require grouping the taxpayer’s timber into accounting units called “blocks.” See Treas. Reg. § 1.611-8 (d). Generally, the depletion allowance is then calculated individually for each “block” based on the adjusted basis of the harvested timber. See Treas.Reg. § 1.611-3(b)(2).

The regulations do not define the term “block” with any precision. ■ Treas.Reg. § 1.611-3(d), “Aggregating timber and land for purposes of valuation and accounting,” states:

Treas.Reg. § 1.611-3(d)(l), (5) (emphasis in original).

During the tax years 1980-83, RLC Industries included in a single block all its timber located in Oregon and California, which allowed it to average the disparate cost bases of the timber in the two states. Because the more recently acquired California timber had a cost basis 20 times greater than the Oregon timber, RLC was able to claim an aggregate depletion allowance of $34.8 million for the 1980-83 tax years even though the aggregate cost basis of all of RLC’s Oregon timber was only $10.9 million and the Oregon timber comprised…