Accounting transition taxing for timber firm

WASHINGTON – Herbert Haynes Inc. could owe $2.5 million because the Internal Revenue Service changed the Maine timber company’s method of accounting.

That’s how much the IRS demanded that the company pay in additional 1995-97 taxes after changing the firm from a cash method to an accrual method of accounting. Haynes Inc., which is based in the tiny Penobscot County town of Winn, has filed a petition asking the U.S. Tax Court in Washington to overturn the IRS ruling.

Fred R. Becker, a Boston tax attorney for the firm that with its affiliates owns 150,000 acres of timberland and leases thousands more acres, said Monday the changes increased the company’s taxable income.

“It’s hard for me to understand,” he said in a telephone interview. “If you harvest timber, you’re entitled to use the cash method. For some reason, the local IRS doesn’t seem to understand timber.”

By switching the company to the accrual method, he said, the IRS “artificially increased their [taxable] income. … I think and the Haynes think this is just a mistake on the IRS’s part.”

Under the cash method, income is reported as it is received. Under the accrued income method, income is reported as the service is provided regardless of when payment is received.

“The IRS ruled that they had to use the accrual method of accounting rather than the cash method that is available to all companies,” Becker said.

In another slap at the family-owned business, the IRS ruled the firm was not entitled to take tax deductions for stock awarded as bonuses to the firm’s key personnel – all family members – even though their base pay is relatively low.

“They’re all family members who work in the company very significantly, and this is an effort to give them increased stock,” Becker said.

An IRS spokesman said the agency does not comment on pending tax cases.

The company’s petition noted that its common stock is owned by Herbert C. Haynes Sr., 70, his wife and three children, all of whom are among the firm’s 70-75 employees.

The petition said that Haynes Sr.’s son, Herbert C. Haynes Jr. is vice president. The junior Haynes has a degree in forestry and has worked for the company for 30 years. The petition said the son receives $23,400 in annual base pay.

Daughter Ginger Maxwell, who has a business degree, also has worked at the company for 30 years and, as the firm’s chief financial officer has a base salary of $18,200.

Daughter Barbara French, who also has a business degree, has been with the company for 20 years and has a base salary of $21,787 for overseeing accounts receivable and wood contracts.

Beyond the base salaries the family members were also given stock bonuses plus additional cash to cover taxes on the bonuses, bringing their total compensation in 1994 to $206,400 for the son; $201,200 for Ginger Maxwell, and $204,787 for Barbara French.

“Although other means of shifting control within families may be less costly, petitioners should not be penalized for having chosen a common business method of providing key employees an equity stake,” the petition argued.

For the three-year period, the petition said, the IRS erroneously denied the company more than $1.2 million in deductions for the stock bonuses and cash supplements to pay taxes to the three.

The IRS notice of deficiency was issued June 11, and the IRS has 60 days to answer the company’s Sept. 10 petition. If the IRS and company fail to negotiate a settlement, the case could go to trial before a tax court judge.