[Congressional Record Volume 145, Number 93 (Monday, June 28, 1999)]
[Senate]
[Pages S7718-S7719]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SESSIONS (for himself and Mr. Coverdell):
  S. 1289. A bill to amend the Internal Revenue Code of 1986 to provide 
that the capital gain treatment under section 631(b) of such Code shall 
apply to outright sales of timber held for more than 1 year; to the 
Committee on Finance.


                 timber tax simplification act of 1999

  Mr. SESSIONS. Mr. President, I rise today to introduce legislation 
which will simplify and update a provision of the Tax Code that affects 
the sale of timber. It is both a simplification measure and a fairness 
measure. We call it the Timber Tax Simplification Act of 1999.
  Under the current law, landowners who are occasional sellers of 
timber are often classified by the Internal Revenue Service as 
``dealers.'' As a result, the small landowner is forced to choose, 
because of the Tax Code, a method of selling timber that they

[[Page S7719]]

may not prefer. Fundamentally, there are two methods of selling timber. 
The first method is known as ``lump sum'' sales, and it is the most 
popular, but it is subject to a higher tax rate. The second method, 
pay-as-cut sales, allows for lower capital gains treatment but results 
in the landowner having to accept unnecessary risks throughout the 
timber selling process.
  Why, one might ask, do these conflicting incentives exist for our 
Nation's timber growers? Earlier in the century, outright, or ``lump 
sum,'' sales on a cash advance basis were associated with a ``cut-and-
run'' mentality that did not promote good forest management. ``Pay-as-
cut'' sales, in which a timber owner is only paid for timber as it is 
actually harvested and taken to the mill, were associated with 
``enlightened'' resource management. Consequently, Congress, in 1943, 
in an effort to provide an incentive for this preferred method, passed 
legislation that allowed capital gains treatment under section 631(b) 
of the IRS Code for ``pay-as-cut'' plan sales, leaving the ``lump sum'' 
sales to pay a much higher rate of tax. It is said that President 
Roosevelt was not in favor of the bill and almost vetoed it. 
Ultimately, however, he signed it into law.
  Today, however, section 631(b), along with many other provisions of 
the IRS Code, is completely outdated. Forest management practices are 
much different from what they were in 1943, and ``lump sum'' sales are 
no longer associated with poor forest management. Indeed, there is very 
little poor forest management today. People recognize the value of 
timberland, and timber is almost never cut without being properly 
replanted. While there are occasional special situations when other 
methods may be more appropriate, most timber owners prefer the ``lump 
sum'' method, over the ``pay-as-cut'' method.
  The reasons are simple. When a timber sale is entered into, the title 
to the timber is transferred on the closing of the sale. Once a 
contract is assigned, the buyer, who is often a corporation, a sawmill, 
or a corporate timber company, assumes the risk of any physical loss to 
the timber due to fire, insects, disease, or storms. Furthermore, the 
price to be paid for the timber is determined and received by the 
landowner at the time of the sale.
  In addition, such a ``lump sum'' sale best protects the rights of the 
landowner, by preventing delays not only in the actual cutting and 
harvesting of the timber, but in the receiving of payments.
  Unfortunately, in order for timber owners to qualify for the 
favorable capital gains treatment, they are virtually forced to market 
their timber on a ``pay-as-cut'' basis under section 631(b), which 
requires landowners to sell their timber with a ``retained economic 
interest.'' This means that the landowner, not the buyer, must bear the 
risk of any physical loss during the time period contracted with the 
buyer to harvest the timber. Furthermore, the buyer pays for only the 
timber that is actually harvested. As a result, this type of sale can 
be subject to fraud and abuse by the timber buyer.
  Since the buyer pays only for the timber that is removed and scaled, 
there is an incentive to waste poor quality timber--by breaking the 
tree during the logging process--underscale the timber, or remove the 
timber without scaling.
  Many different valuation methods can be utilized by sophisticated 
buyers against a landowner; the landowner may not fully realize how the 
timber is being priced, and even then he is paid only when the timber 
is delivered to the mill at a certain complicated rate.
  But because 631(b) provides for the favorable tax treatment, many 
landowners are forced into exposing themselves to unnecessary risk of 
loss and complications by having to market their timber in this manner 
instead of the more preferred ``lump-sum'' method.
  Like many of the provisions in the Tax Code, section 631(b) is 
outdated and prevents good forestry management. Timber farmers, that 
have usually spent decades producing their crop, should be able to 
receive equal tax treatment regardless of the method used for marketing 
their timber.
  The IRS has no business--and, in effect, it does--stepping in and 
dictating the kind of sales contract a landowner must choose.
  The legislation I have introduced will provide greater consistency by 
removing the exclusive ``retained economic interest'' requirement in 
the Internal Revenue Code section 631(b). This change has been 
supported or suggested by a number of groups for tax simplification 
purposes, including positive comments from Internal Revenue Service 
officials who have indicated they see no reason for this present law.
  The Joint Committee on Taxation has studied this legislation to 
consider what impact it might have on the Treasury and found that it 
would have no real cost--only a ``negligible impact'' according to 
their analysis.
  Reform of 631(b) is important to our Nation's nonindustrial, private 
landowners because it will improve the economic viability of their 
forestry investments and protect the taxpayer from unnecessary exposure 
to risk of loss. This in turn will benefit the entire forest products 
industry, the U.S. economy, and especially the small landowners.
  So I urge my colleagues to join me and Senator Paul Coverdell, of 
Georgia, who is a cosponsor of this legislation, in this effort to 
simplify the Tax Code and to promote good forestry management.
  There is simply no longer any need for this bizarre, complex tax 
regulation that is driving individual landowners to make choices they 
would not otherwise make. Choices that cost them money and 
unnecessarily shift risk in a way that ought to be decided among the 
parties--the buyer and the seller--and not the Internal Revenue 
Service.
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