[Congressional Record Volume 149, Number 64 (Thursday, May 1, 2003)]
[Senate]
[Page S5655]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SESSIONS:
  S. 968. A bill to amend the Internal Revenue Code of 1986 to provide 
capital gain treatment under section 631(b) of such Code for outright 
sales of timber by landowners; to the Committee on Finance.
  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. I call it the Timber Tax Simplification Act.
  Under current law, landowners that are occasional sellers of timer 
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, between two different methods of selling their timber. The first 
method, ``lump sum sales provides for good business practice but is 
subjected to a high income tax. The second method ``pay-as-cut'' sales, 
allows for lower capital gains tax treatment, but often results in an 
underrealization of the fair value of the contract. Why, one might ask, 
do these conflicting incentives exist for our Nation's timber growers?
  Ealier in this century, outright, or ``lump sum,'' sales on a cash in 
advance, sealed basis, were associated with a ``cut and run'' mentality 
that did not promote good forest management. ``Pay-as-cut sales,'' 
however, in which a timber owner is only paid for timber that is 
harvested, were associated with ``enlighted'' resource management. 
Consequently, in 1943, Congress, in an effect to provide an incentive 
for improved forest management, passed legislation that allowed capital 
gains treatment under 631(b) of the IRS Code for pay-as-cut sales, 
leaving lump-sum sales to pay the much higher rate of income tax. It is 
said that President Roosevelt opposed the bill and almost vetoed it.
  Today, however, Section 631(b) like so many provisions in the IRS 
Code, is outdated.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. And while there are occasional special 
situations where other methods may be more appropriate, most timber 
owners prefer this method over the ``pay-as-cut'' method. The reasons 
are simple: title to the timber is transferred upon the closing of the 
sale and the buyer assumes the risk of any physical loss of timber to 
fire, insects, disease, storms, etc. Furthermore, the price to be paid 
for the timber is determined and received at the time of the sale.

  Unfortunately, in order for timber owners to qualify for the 
favorable capital gains treatment, they must market their timber on a 
``pay-as-cut'' basis under Section 631(b) which requires timber owners 
to sell their timber with a ``retained economic interest.'' This means 
that the timber owner, not the buyer, must bear the risk of any 
physical loss during the timber sale contract period and must be paid 
only for 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, underscaling the timber, or removing the timber 
without scaling. But because 631(b) provides for the favorable tax 
treatment, many timber owners are forced into exposing themselves to 
unnecessary risk of loss by having to market their timber in this 
disadvantageous way instead of the more preferable lump-sum method.
  Like many of the provisions in the tax code, Section 631(b) is 
outdated and prevents good forestry business management. Timber 
farmers, who have usually spent decades producing their timber 
``crop,'' should be able to receive equal tax treatment regardless of 
the method used for marketing their timber.
  In the past, 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 change'' 
according to their analysis.
  The IRS has no business stepping in and dictating the kind of sales 
contract a landowner must choose. My legislation will provide greater 
consistency by removing the exclusive ``retained economic interest'' 
requirement in the IRC Section 631(b). Reform of 631(b) is important to 
our Nation's non-industrial, 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 small landowners.
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