## Facts

- Willamette Industries, Inc. operated a vertically integrated forest-products business, owning substantial timberland and supplying a significant portion of its timber needs from its own lands.
- From 1992 to 1995, casualty events (including wind, ice storms, wildfires, and insect infestations) damaged portions of Willamette’s standing timber before its intended harvest dates.
- Willamette did not sell the damaged timber “in place” or otherwise dispose of it as timber; instead, it salvaged the timber and processed it through its usual manufacturing operations.
- Willamette realized income when it sold finished products made from the salvaged timber in the ordinary course of business.
- Willamette elected nonrecognition under I.R.C. § 1033 but sought to defer only the gain it attributed to the timber’s fair market value at the time salvage began (net of basis), not any gain it attributed to later milling or finishing.
- The Commissioner determined deficiencies for 1992–1995 on the ground that Willamette improperly deferred gain tied to sales of finished products.

## Issues

1. Whether casualty-damaged timber is “compulsorily or involuntarily converted” under I.R.C. § 1033 when the taxpayer retains ownership, salvages the timber, and processes it into finished goods later sold in ordinary business.
2. Whether § 1033 permits deferral of only a reconstructed “pre-processing timber value” component of gain from sales of finished products.

## Decision

- The Tax Court granted the Commissioner’s motion and denied Willamette’s requested § 1033 deferral.
- The court held that Willamette’s salvage and internal processing did not constitute an involuntary conversion of the timber into money or other property within § 1033.
- The court rejected Willamette’s attempt to split the profit from finished-product sales into a deferable “timber-value” component and a nondeferable “processing” component.

## Legal Principles

- Section 1033 nonrecognition applies only when qualifying property is compulsorily or involuntarily converted into money or other property through a disposition tied to the involuntary event (e.g., destruction followed by an actual conversion into proceeds).
- Continued ownership and internal use of casualty-damaged property as input to the taxpayer’s manufacturing operations, followed by ordinary-course sales of finished goods, is not a § 1033 conversion of the damaged property.
- Section 1033 is transaction-based; it does not authorize deferral based on hypothetical or reconstructed transactions (such as a notional sale of damaged timber at the start of salvage).
- Profit realized from ordinary business sales is not transformed into § 1033 proceeds merely because the underlying raw material was damaged by casualty.

## Conclusion

The Tax Court held that § 1033 did not apply because Willamette did not dispose of the damaged timber as timber; it retained and processed the timber in its ordinary operations, and gains from selling the resulting finished products were not proceeds of an involuntary conversion eligible for deferral.


Willamette Industries, Inc. v. Commissioner, 118 T.C. 126 (2002)