To amend the Internal Revenue Code of 1986 to modify certain provisions relating to the treatment of forestry activities.

July 9, 2003

Ms. SNOWE (for herself, Mrs. LINCOLN, Mr. SMITH, Mr. BREAUX, Mr. MILLER, Mr. CHAMBLISS, Mr. PRYOR, Ms. COLLINS, Ms. LANDRIEU, Mr. SHELBY, and Mr. CRAIG) introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to modify certain provisions relating to the treatment of forestry activities.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Reforestation Tax Act of 2003'.

SEC. 2. PARTIAL INFLATION ADJUSTMENT FOR TIMBER.

(a) IN GENERAL- Part I of subchapter P of chapter 1 of the Internal Revenue Code of 1986 (relating to treatment of capital gains) is amended by adding at the end the following new section:

`SEC. 1203. PARTIAL INFLATION ADJUSTMENT FOR TIMBER.

`(a) IN GENERAL- At the election of any taxpayer who has qualified timber gain for any taxable year, there shall be allowed as a deduction from gross income an amount equal to the qualified percentage of such gain.

`(b) QUALIFIED TIMBER GAIN- For purposes of this section, the term `qualified timber gain' means long-term capital gain from the sale or exchange of timber.

`(c) QUALIFIED PERCENTAGE- For purposes of this section, the term `qualified percentage' means the percentage (not exceeding 50 percent) determined by multiplying--

`(1) 3 percent, by

`(2) the number of years in the holding period of the taxpayer with respect to the timber.

`(d) ESTATES AND TRUSTS- In the case of an estate or trust, the deduction under subsection (a) shall be computed by excluding the portion (if any) of the gains for the taxable year from sales or exchanges of capital assets which, under sections 652 and 662 (relating to inclusions of amounts in gross income of beneficiaries of trusts), is includible by the income beneficiaries as gain derived from the sale or exchange of capital assets.'.

(b) COORDINATION WITH MAXIMUM RATES OF TAX ON NET CAPITAL GAINS-

(1) Subsection (h)(3)(A) of section 1 of such Code (relating to maximum capital gains rate) is amended by striking `and' at the end of clause (i), by striking `plus' at the end of clause (ii) and inserting `and', and by adding at the end the following new clause:

`(iii) qualified timber gain with respect to which an election is in effect under section 1203, plus'.

(2) Subsection (a) of section 1201 of such Code (relating to the alternative tax for corporations) is amended by inserting at the end thereof the following new sentence:

`For purposes of this section, net capital gain shall be determined without regard to qualified timber gain (as defined in section 1203) with respect to which an election is in effect under section 1203.'.

(c) ALLOWANCE OF DEDUCTION IN COMPUTING ADJUSTED GROSS INCOME- Subsection (a) of section 62 of such Code (relating to definition of adjusted gross income) is amended by inserting after paragraph (18) the following new paragraph:

`(19) PARTIAL INFLATION ADJUSTMENT FOR TIMBER- The deduction allowed by section 1203.'.

(d) TECHNICAL AMENDMENTS-

(1) Subparagraph (B) of section 172(d)(2) of such Code is amended to read as follows:

`(B) the exclusion under section 1202 and the deduction under section 1203 shall not be allowed.'.

(2) The last sentence of section 453A(c)(3) of such Code is amended by striking `(whichever is appropriate)' and inserting `or the deduction under section 1203 (whichever is appropriate)'.

(3) Section 641(c)(2)(C) of such Code is amended by inserting after clause (iii) the following new clause:

`(iv) The deduction under section 1203.'.

(4) The first sentence of section 642(c)(4) of such Code is amended to read as follows: `To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain described in section 1202(a) or qualified timber gain (as defined in section 1203(b)), proper adjustment

shall be made for any exclusion allowable under section 1202, and any deduction allowable under section 1203, to the estate or trust.'.

(5) The last sentence of section 643(a)(3) of such Code is amended to read as follows: `The exclusion under section 1202 and the deduction under section 1203 shall not be taken into account.'.

(6) Subparagraph (C) of section 643(a)(6) of such Code is amended by inserting `(i)' before `there shall' and by inserting before the period `, and (ii) the deduction under section 1203 (relating to partial inflation adjustment for timber) shall not be taken into account'.

(7) Paragraph (4) of section 691(c) of such Code is amended by inserting `1203,' after `1202,'.

(8) The second sentence of paragraph (2) of section 871(a) of such Code is amended by striking `section 1202' and inserting `sections 1202 and 1203'.

(e) CLERICAL AMENDMENT- The table of sections for part I of subchapter P of chapter 1 of such Code is amended by adding at the end the following new item:

`Sec. 1203. Partial inflation adjustment for timber.'.

(f) EFFECTIVE DATE- The amendments made by this section shall apply to sales or exchanges after December 31, 2002.

SEC. 3. 100 PERCENT DEDUCTION FOR REFORESTATION EXPENDITURES TO REPLACE AMORTIZATION.

(a) IN GENERAL- Part VI of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to

itemized deductions for individuals and corporations) is amended by adding at the end the following new section:

`SEC. 199. REFORESTATION EXPENDITURES.

`(a) ALLOWANCE OF DEDUCTION- In the case of any qualified timber property with respect to which the taxpayer has made (in accordance with regulations prescribed by the Secretary) an election under this subsection, there shall be allowed as a deduction for the taxable year an amount equal to the reforestation expenditures paid or incurred by the taxpayer during such year with respect to such property.

`(b) QUALIFIED TIMBER PROPERTY- The term `qualified timber property' means a woodlot or other site located in the United States which will contain trees in significant commercial quantities and which is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products.

`(c) REFORESTATION EXPENDITURES-

`(1) IN GENERAL- For purposes of this section, the term `reforestation expenditures' means direct costs incurred in connection with forestation or reforestation by planting or artificial or natural seeding, including costs--

`(A) for the preparation of the site,

`(B) of seeds or seedlings, and

`(C) for labor and tools, including depreciation of equipment such as tractors, trucks, tree planters, and similar machines used in planting or seeding.

`(2) COST-SHARING PROGRAMS- Reforestation expenditures shall not include any expenditures for which the taxpayer has been reimbursed under any governmental reforestation cost-sharing program unless the amounts reimbursed have been included in the gross income of the taxpayer.

`(d) LIFE TENANT AND REMAINDERMAN- In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.'.

(b) TERMINATION OF AMORTIZATION OF REFORESTATION EXPENDITURES- Section 194 of such Code (relating to amortization of reforestation expenditures) is amended by adding at the end the following new subsection:

`(e) TERMINATION- This section shall not apply to any amount paid or incurred after the date of the enactment of this subsection.'.

(c) CLERICAL AMENDMENT- The table of sections for part VI of subchapter B of chapter 1 of such Code is amended by inserting at the end the following new item:

`Sec. 199. Reforestation expenditures.'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to amounts paid or incurred after the date of the enactment of this Act.

SEC. 4. APPLICATION OF PASSIVE ACTIVITY LOSS LIMITATIONS TO TIMBER ACTIVITIES.

(a) IN GENERAL- Clauses (ii) and (iii) of Treasury Regulation Sec. 1.469-5T(b)(2) shall not apply to any individual who is a member of a closely held entity participating in a timber activity if the nature of such activity is such that the aggregate hours devoted to management of the activity for any year is customarily less than 100 hours.

(b) DEFINITIONS- For purposes of subsection (a)--

(1) TIMBER ACTIVITY- The term `timber activity' means the planting, cultivating, caring, cutting, or preparation (other than milling) for market, of trees.

(2) CLOSELY HELD ENTITY- An entity shall be treated as closely held if at least 80 percent of the ownership interests in the entity is held--

(A) by 5 or fewer individuals, or

(B) by individuals who are members of the same family (within the meaning of section 2032A(e)(2) of the Internal Revenue Code of 1986).

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2002.

END