II 109th CONGRESS 1st Session S. 1791 IN THE SENATE OF THE UNITED STATES September 29, 2005 Mr. Smith (for himself and Mrs. Lincoln) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to allow a deduction for qualified timber gains.

1.

Short title

This Act may be cited as the Timber Tax Act of 2005.

2.

Deduction for qualified timber gain

(a)

In general

Part I of subchapter P of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

1203.

Deduction for qualified timber gain

(a)

In general

In the case of a taxpayer which elects the application of this section for a taxable year, there shall be allowed a deduction against gross income equal to 60 percent of the lesser of— (1)the taxpayer’s qualified timber gain for such year, or (2)the taxpayer’s net capital gain for such year. (b)

Qualified timber gain

For purposes of this section, the term qualified timber gain means, with respect to any taxpayer for any taxable year, the excess (if any) of— (1)the sum of the taxpayer’s gains described in subsections (a) and (b) of section 631 for such year, over (2)the sum of the taxpayer’s losses described in such subsections for such year. (c)

Special rules for pass-thru entities

In the case of any qualified timber gain of a pass-thru entity (as defined in section 1(h)(10)), the election under this section shall be made separately by each taxpayer subject to tax on such gain.

. (b)

Coordination with maximum capital gains rates

(1)

Taxpayers other than corporations

Paragraph (2) of section 1(h) of the Internal Revenue Code of 1986 is amended to read as follows: (2)

Reduction of net capital gain

For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the sum of— (A)the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii), and (B)the lesser of— (i)the amount described in paragraph (1) of section 1203(a), or (ii)the amount described in paragraph (2) of such section. . (2)

Corporations

Section 1201 of such Code is amended by redesignating subsection (b) as subsection (c) and inserting after subsection (a) the following new subsection: (b)

Qualified timber gain not taken into account

For purposes of this section, in the case of a corporation with respect to which an election is in effect under section 1203, the net capital gain for any any taxable year shall be reduced (but not below zero) by the corporation’s qualified timber gain (as defined in section 1203(b)). . (c)

Deduction allowed whether or not individual itemizes other deductions

Subsection (a) of section 62 of the Internal Revenue Code of 1986 is amended by inserting before the last sentence the following new paragraph: (21)

Qualified timber gains

The deduction allowed by section 1203. . (d)

Deduction allowed in computing adjusted current earnings

Subparagraph (C) of section 56(g)(4) of the Internal Revenue Code of 1986 is amended by adding at the end the following new clause: (vii)

Deduction for qualified timber gain

Clause (i) shall not apply to any deduction allowed under section 1203. . (e)

Deduction allowed in computing taxable income of electing small business trusts

Subparagraph (C) of section 641(c)(2) of the Internal Revenue Code of 1986 is amended by inserting after clause (iii) the following new clause: (iv)The deduction allowed under section 1203. . (f)

Conforming amendments

(1)Subparagraph (B) of section 172(d)(2) of the Internal Revenue Code of 1986 is amended to read as follows: (B)the exclusion under section 1202 and the deduction under section 1203 shall not be allowed. . (2)Paragraph (4) of section 642(c) of such Code is amended by striking the first sentence and inserting the following: 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 to the estate or trust under section 1202 and for any deduction allowable to the estate or trust under section 1203. (3)Paragraph (3) of section 643(a) of such Code is amended by striking the last sentence and inserting the following: The exclusion under section 1202 and the deduction under section 1203 shall not be taken into account. (4)Subparagraph (C) of section 643(a)(6) of such Code is amended to read as follows: (C)Paragraph (3) shall not apply to a foreign trust. In the case of such a trust— (i)there shall be included gains from the sale or exchange of capital assets, reduced by losses from such sales or exchanges to the extent such losses do not exceed gains from such sales or exchanges, and (ii)the deduction under section 1203 shall not be taken into account. . (5)Paragraph (4) of section 691(c) of such Code is amended by inserting 1203, after 1202,. (6)Paragraph (2) of section 871(a) of such Code is amended by inserting and 1203 after section 1202. (7)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. Deduction for qualified timber gain. . (g)

Effective date

(1)

In general

The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act. (2)

Taxable years which include date of enactment

In the case of any taxable year which includes the date of the enactment of this Act, for purposes of the Internal Revenue Code of 1986, the taxpayer’s qualified timber gain shall not exceed the excess that would be described in section 1203(b) of such Code, as added by this section, if only dispositions of timber after such date were taken into account.