Practice Areas & Industries: Sutherland Asbill & Brennan LLP

Practice/Industry Group Overview

The timber and forest products practice at Sutherland dates to the 1930s, when our founding partner, Bill Sutherland, was engaged by many of the major Southern timberland owners and investors to respond to the emerging rules of the federal Internal Revenue Code. Our representation of private and institutional timber owners and forest products companies with timber holdings throughout the country developed into a major practice area as the firm expanded to its present size of more than 350 lawyers. The national Timber and Forest Products Group was formed in the early 1990s in response to client demands for comprehensive legal services in support of this industry.

The creation of significant depletion planning opportunities that Sutherland tax and litigation lawyers established in major Tax Court cases for Oregon and California timber owners, the dramatic appreciation of timber prices as federal lands were removed from the market, the emergence of pass-through entities as dominant financing vehicles, and the undervaluation by Wall Street of timber inventories are all among the factors that have created enormous opportunities for our clients and for our firm. In response, and in a distinct departure from the organizational structure traditionally used by law firms, we enlisted into our Timber and Forest Products Group lawyers from the varied disciplines of tax, real estate, corporate finance, environmental and litigation.

The client-driven nature of our Group's organizational structure has contributed substantially to our rapid success and continued growth. We regularly hear from the clients that we serve - including integrated forest product companies, private and public owners, and financial service companies - that our inter-disciplinary team approach provides unique value.

In the following sections, we provide detail on the Sutherland approach and the recent transactions in which the Group has participated.

Services Available

Our Approach

We believe that a thorough understanding of our client operations and long-term strategies is essential to effective representation. We are committed to investing our time and effort to learn about the varied approaches followed by our clients in acquiring, managing and exploiting timber holdings. Members of our Group are active in major industry organizations. This brings us into contact with a wide range of industry participants and with forestry consultants throughout the country and the world. We regularly speak at seminars and other programs held by major university schools of forestry, the World Forestry Center, the Forest Landowners Association and the American Bar Association. We have found this industry background and knowledge to be invaluable in serving the needs of our clients.

Over the past few years, we have successfully represented clients in scores of timberland transactions, involving millions of acres, and with aggregate consideration of more than $6 billion. These transactions have included acquisitions, sales, exchanges, joint ventures, complex cutting contracts and management agreements, leases of timber properties, acquisition of foreign timber rights, traditional mortgage financings, specialized installment note financings, private and public securitizations, debt financings and sale/leasebacks. Our documents and databases allow us to take a "fast-track" approach. A number of the acquisition transactions have used an indirect means to acquire control of timber properties, such as the acquisition of a controlling interest in a partnership or limited liability company which in turn holds the timberland.

Both our client base and the geographic range of our transactional experience reflect our commitment to provide a national center in this industry. We represent major publicly-held forest products companies, closely-held forest products companies and timber operators, investment partnerships, large tax-exempt investors (including both pension funds and the endowment funds of several national universities), individual landowners and bank and other institutional lenders. Our work has involved large properties in all the major timber-growing regions in the United States, including the Southeast (with transactional experience stretching from Virginia to Texas); the Pacific Northwest (with major transactions centered in Oregon, Washington, Idaho and California); the Upper Atlantic States (including Pennsylvania, New York and New England); and the Upper Midwest.

Foreign Experience

As timber investors have expanded their investment horizons overseas, we are called upon regularly by clients to assist them in investments in Central and South America. We have assisted the largest timberland concession holder in Guyana in connection with a dispute with the government over the payment of royalties and other fees. We have also advised clients with respect to timberland investments in Brazil, Panama, Venezuela and Bolivia. Most recently, we assisted a Brazilian forest products company in the disposition of timber rights to a U.S. university endowment.

Capturing the Tax Advantages of Timber Investments

An essential part of our approach to major timber transactions is the recognition that timber is a tax-favored asset (because routine disposition of timber is taxed as capital gain), and that, in most cases, sellers of timberlands have a very low tax basis in their properties in relation to current values. As a part of our work in representing buyers and sellers of timber properties, we have found creative solutions to assure that gains from dispositions of timber will be offset by the maximum allowance for depletion, that taxable investors will receive the benefit of taxation at capital gains rates, and that gains to tax-exempt investors will not be treated as unrelated business taxable income. We have also worked with sellers of timber properties to devise methods to defer recognition of capital gain. Frequently, these assignments are undertaken in a situation where the forest products company that will use the timber resource in its conversion facilities wants to be certain that the asset will not be reflected on its balance sheet.

Depletion Issues

Our work in the depletion area reflects our success in litigating, in the United States Tax Court and the Ninth Circuit Court of Appeals, the precedent-setting case of RLC Industries Co. v. Commissioner (discussed below). This decision established, for the first time, the substantial latitude timber owners have in establishing blocks for depletion in order to derive the greatest tax benefit. In RLC, the company used that latitude to combine newly-purchased, high-cost timber into a single pool with long-held, low-cost timber that it was preparing to harvest. The averaging which is inherent in the single pool approach substantially raised the depletion rate on the lower cost timber. In other instances, the acquirer of a timber property may find it advantageous to subdivide the property into multiple blocks, in order to enhance the depletion allowance on early harvests. We have found that careful study of this issue, done at the time of acquisition and in conjunction with the on-the-ground forest managers, can produce substantial benefits.

Cutting Contracts

We have pioneered the use of a variety of timber cutting agreements, some extending for as long as three rotations (a total of 79 years), to provide continued capital gain treatment to the timber owner, with assured access (but off-balance sheet treatment) to the forest products company buyer. We have devised other cutting agreements that can provide either immediate cash to the timber owner or an assured cash flow over a period of years, with the contract still being treated as a disposition of timber with a retained economic interest in the hands of the timber owner, thereby avoiding the "dealer" issue and producing capital gain.

Planning For Exempt Investors

In the early 1980s, we secured the first of what has become a series of private letter rulings from the Internal Revenue Service which recognize that dispositions of timber by an exempt organization (or by a partnership composed of exempt organizations) pursuant to a cutting agreement in which the timber owner has a retained economic interest, does not produce unrelated business taxable income to the selling exempt organization. The initial rulings, which were limited to dispositions of timber where the owner met the holding period for capital gaines, was an essential step in paving the way for widespread timber investments by pension funds, university endowments and other such organizations. In 2001, we obtained the first ruling issued for a major university by the IRS confirming our opinion that dispositions of timber held for less than one year does not generate UBTI where the exempt owner has a retained economic interest.

"Pass-Through" Vehicles

In the current tax environment - with historically low capital gains rates applicable to individual investors, but with corporate taxpayers receiving no preferential capital gains treatment - much of our work has been to devise acceptable "pass-through" vehicles which can provide the benefit of capital gains treatment (or no UBTI) to the investor without burdening the investment with a corporate level tax. As noted above, many of the transactions in which we've participated involve partnerships, joint ventures and limited liability companies. These vehicles may be either private or publicly traded.

In addition, a change to the Internal Revenue Code made by the 1997 Tax Act makes it feasible for the first time for a Real Estate Investment Trust (a "REIT") to concentrate on timber investment and exploitation. In 1998 and 1999, we served as issuer's counsel to a client for which we obtained the first private letter ruling from the Internal Revenue Service which confirmed our analysis that timber properties are appropriate assets for a REIT, and that regular dispositions of standing timber produce qualifying REIT income. We represented this client through the full process of registering with the SEC, and although IPO market conditions caused the client to withdraw its public offering, we continue to believe that the Timber REIT concept will be accepted by the public markets as the preferred approach for securitizing investments in timber properties. We expect to be in the forefront of the development of these vehicles.

Deferral Opportunities

We have also assisted owners of timber properties to defer the recognition of taxable gain on disposition of these properties. These approaches have taken the form of exchange transactions, installment notes (including an approach which permits immediate monetization of the note), extended cutting agreements and partnership transactions.

Timber Taxation Controversies

Our firm includes one of the largest tax practices in the country - with approximately 60 of our lawyers concentrating their practice on tax issues. We have found that this broad base of experience has been an essential resource in the development of our practice in more narrow areas such as timber taxation. Bill Sutherland, our founding partner and one of the founders of the Tax Section of the American Bar Association, began our practice in timber taxation in the 1930s, and it has continued to expand. Our work has encompassed every area of timber taxation, including, in recent years:

• valuation of timber for purposes of section 631(a)
• valuation of timberland for purposes of gift tax and for charitable contributions
• qualification of timber cutting contracts under section 631(b)
• depletion issues, including the proper composition of a timber "block"
• allocation of basis of purchased land and timber
• like-kind exchange issues
• losses of mature timber from pine beetle and other natural causes
• losses of timber seedlings from drought.

While most of the timber tax controversies we have handled have been satisfactorily resolved without litigation, we have been called upon from time to time to litigate in this area, and we have handled a series of important cases. Recent examples include:

RLC Industries Co. v. Commissioner, 98 T.C. No. 33 (1992), aff'd, 58 F.3d 413 (9th Cir. 1995). In an important case of first impression, the Tax Court determined the extent of a taxpayer's ability to include newly purchased timber in an existing timber block for purposes of depletion. The taxpayer had owned Oregon timber, which carried a low basis, and sought to include newly-purchased California timber in the same depletion block. The Tax Court, after a two-week trial, permitted the pooling approach sought by the taxpayer, and held that the Commissioner had abused her discretion in seeking to force the taxpayer to hold the timber in two separate blocks. The United States Court of Appeals for the Ninth Circuit affirmed the decision in 1995, invalidating the regulation relied upon by the Commissioner.

Glynn Land Co. v. United States, 602 F. Supp. 346 (Feb. 12, 1985), a District Court case of first impression, in which the court held that dispositions of timber pursuant to a 79-year, three-rotation timber cutting agreement, which our firm had designed, qualified for capital gain treatment pursuant to section 631(b). To the best of our knowledge, this is the only long-term agreement which has been held to qualify for section 631(b) treatment.

Georgia Kraft v. United States, a Court of Claims case involving the application of a systematic approach to valuation of timber for section 631(a). The case was settled prior to trial, with a complete concession by the government on the valuation approach adopted by the taxpayer, and a rejection of the "end use" theory urged by the Revenue Agents.

Saunders v. United States, 81-2 U.S.T.C. 13,419 (U.S.D.C. M.D. Ga. 1981), a United States District Court case involving the value of timber and timberland subject to a long-term lease. The taxpayer's valuation was accepted by the court in its entirety.

Agribusiness and Timber Litigation, Environmental and Energy

Our litigation group includes approximately 100 lawyers. We have a demonstrated capability to handle complicated cases, and, of particular interest to forest products companies and timber owners, we are experienced in agribusiness matters, in environmental issues and in litigation involving scientific and technical issues.

Of particular interest is our defense of a forest products company in 1995 in a major lawsuit brought by the landowner (represented by nationally known individual in breaking long-term leases) to terminate long-term timberland management and timber purchase agreements, and to recover $25-$30 million in damages for alleged mismanagement, breach of contract, fraud, professional malpractice and other claims. In a hard fought, three-week jury trial, we were able to convince the jury to rule in our clients' favor on a critical threshold issue. The case settled (on confidential terms) immediately after this jury victory. In preparing for the case, we dealt with a wide variety of issues relevant to the landowner/forest products company relationship, worked with a range of timber experts to develop expert studies pertaining to the case, and cross-examined numerous experts who have testified in recent years in support of lawsuits to break long-term timber leases.

We have also successfully represented forest products company clients in arbitrations rising out of contracts to supply wood chips at a formula price to paper manufacturers, in OSHA cases involving noise controls in pulp and paper manufacturing, in energy cases involving a proposed mandatory conversion of large power boilers from oil and gas firing to coal firing, and in environmental and endangered species matters. These matters required us to develop extensive expert testimony on issues ranging from wood chip values in particular market areas to engineering and environmental issues.