Family Forest and Preservation Tax Act of 1994

Summary: TABLE OF CONTENTS: 
     Title I:  Estate Tax Provisions 
     Title II:  Income Tax Treatment 
Family Forestland Preservation Tax Act of 1994 - 
Title I:  Estate Tax Provisions
 - Amends the Internal Revenue Code to exclude from a gross estate the value of real property:  (1) which is used in timber operations; and (2) which is subject to a qualified conservation easement. 
Increases the recapture period for the special estate tax valuation of forest lands. 
Title II:  Income Tax Treatment
 - Provides taxpayers a partial inflation adjustment for the deduction from gross income for qualified timber gain.  Allows such deduction in computing adjusted gross income. 
Exclude from gross income the applicable percentage of qualified timber gain from the sale or exchange of property used in timber operations to a governmental unit for conservation purposes. 
Excludes from conditions of the material participation rules, for purposes of the passive loss limitations, closely held timber activity if the aggregate hours devoted to management of the activity for any year is generally fewer than 100 hours.

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Family Forestland 
Preservation Tax Act of 1994''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

                     TITLE I--ESTATE TAX PROVISIONS

SEC. 101. ESTATE TAX TREATMENT OF LAND SUBJECT TO QUALIFIED 
              CONSERVATION EASEMENT.

    (a) In General.--Section 2031 (relating to the definition of gross 
estate) is amended by redesignating subsection (c) as subsection (d) 
and by inserting after subsection (b) the following new subsection:
    ``(c) Exclusion of Land Subject to a Conservation Easement.--
            ``(1) In general.--If an executor elects the application of 
        this subsection, there shall be excluded from the gross estate 
        the value of any real property--
                    ``(A) which is used in timber operations (as 
                defined in section 2032A(e)(13)(C)), and
                    ``(B) which is subject to a qualified conservation 
                easement (reduced by the amount of any indebtedness to 
                which such land is subject).
            ``(2) Real property subject to qualified conservation 
        easement.--For purposes of this subsection:
                    ``(A) In general.--Real property shall be treated 
                as subject to a qualified conservation easement if the 
                decedent or a member of the decedent's family has made 
                a qualified conservation contribution (as defined in 
                section 170(h)(1)) of a qualified real property 
                interest described in section 170(h)(2)(C) in such real 
                property.
                    ``(B) Certain contributions not included.--For 
                purposes of subparagraph (A), section 170(h)(4)(A) 
                shall be applied without regard to clause (iv) thereof 
                in determining whether there is a qualified 
                conservation contribution.
                    ``(C) Family member.--For purposes of subparagraph 
                (A), the term `member of the decedent's family' has the 
                same meaning given such term by section 2032A(e)(2).
            ``(3) Election.--An election under paragraph (1) shall be 
        made on the return of tax imposed by section 2001. Such an 
        election, once made, shall be irrevocable.''
    (b) Carryover Basis.--Section 1014(a) (relating to basis of 
property acquired from a decedent) is amended by striking the period at 
the end of paragraph (3) and inserting ``, or'', and by inserting at 
the end the following new paragraph:
            ``(4) in the case of property excluded from the gross 
        estate of the decedent under section 2031(c), the basis of the 
        property in the hands of the decedent.''
    (c) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying after December 31, 1994, which 
include land subject to qualified conservation easements granted after 
December 31, 1994.

SEC. 102. INCREASE IN RECAPTURE PERIOD FOR SPECIAL ESTATE TAX VALUATION 
              OF FOREST LANDS.

    (a) In General.--Section 2032A(c)(7) is amended by adding at the 
end the following new subparagraph:
                    ``(E) Longer period for woodlands.--In the case of 
                any real property which is used in timber operations 
                (as defined in subsection (e)(13)(C)), paragraph (1) 
                shall be applied by substituting `25 years' for `10 
                years'.''
    (b) Effective Date.--The amendment made by this section shall apply 
to estates of decedents dying after December 31, 1994.

                     TITLE II--INCOME TAX TREATMENT

SEC. 201. PARTIAL INFLATION ADJUSTMENT FOR TIMBER.

    (a) In General.--Part I of subchapter P of chapter 1 (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 the lesser of--
            ``(1) the net capital gain for the taxable year, or
            ``(2) the net capital gain for the taxable year determined 
        by taking into account only gains and losses from 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 Existing Limitations.--
            (1) Subsection (h) of section 1 (relating to maximum 
        capital gains rate) is amended by inserting after ``net capital 
        gain'' each place it appears the following: ``(other than 
        qualified timber gain with respect to which an election is made 
        under section 1203)''.
            (2) Subsection (a) of section 1201 (relating to alternative 
        tax for corporations) is amended by inserting after ``net 
        capital gain'' each place it appears the following: ``(other 
        than qualified timber gain with respect to which an election is 
        made under section 1203)''.
    (c) Allowance of Deduction in Computing Adjusted Gross Income.--
Subsection (a) of section 62 (relating to definition of adjusted gross 
income) is amended by adding after paragraph (15) the following new 
paragraph:
            ``(16) Partial inflation adjustment for timber.--The 
        deduction allowed by section 1203.''
    (d) Conforming Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 1203. Partial inflation adjustment 
                                        for timber.''
    (e) Effective Date.--The amendments made by this section shall 
apply to sales or exchanges after December 31, 1994.

SEC. 202. EXCLUSION OF GAIN FROM SALE OF INTERESTS IN FOREST LANDS.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by 
redesignating section 137 as section 138 and by inserting after section 
136 the following new section:

``SEC. 137. SALES OF INTERESTS IN CERTAIN FOREST LANDS.

    ``(a) Exclusion.--
            ``(1) In general.--Gross income shall not include the 
        applicable percentage of any qualified timber gain.
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the term `applicable percentage' means--
                    ``(A) 35 percent, or
                    ``(B) in the case of qualified timber gain from the 
                sale of a qualified real property interest described in 
                section 170(h)(2)(C), 100 percent.
    ``(b) Limitation.--The total amount of gain which may be excluded 
from gross income under subsection (a) for any taxable year shall not 
exceed the sum of--
            ``(1) the amount of qualified timber gain described in 
        subsection (a)(2)(B), plus
            ``(2) $800,000.
    ``(c) Qualified Timber Gain.--For purposes of this section:
            ``(1) In general.--The term `qualified timber gain' means 
        gain from the sale or exchange of a qualified real property 
        interest in real property which is used in timber operations to 
        a governmental unit described in section 170(c)(1) for 
        conservation purposes.
            ``(2) Qualified real property interest.--The term 
        `qualified real property interest' has the meaning given such 
        term by section 170(h)(2).
            ``(3) Timber operations.--The term `timber operations' has 
        the meaning given such term by section 2032A(e)(13)(C).
            ``(4) Conservation purposes.--The term `conservation 
        purposes' has the meaning given such term by section 
        170(h)(4)(A) (without regard to clause (iv) thereof).
    ``(d) Special Rule for Sales to Nongovernmental Entities.--
            ``(1) In general.--Subsection (a) shall apply to the sale 
        or exchange to a qualified organization described in section 
        170(h)(3) if such interest is transferred during the 2-year 
        period beginning on the date of the sale or exchange to a 
        governmental unit described in section 170(c)(1).
            ``(2) Time for exclusion.--If the transfer to which 
        paragraph (1) applies occurs in a taxable year after the 
        taxable year in which the sale or exchange occurred--
                    ``(A) no exclusion shall be allowed under 
                subsection (a) for the taxable year of the sale or 
                exchange, but
                    ``(B) the taxpayer's tax for the taxable year of 
                the transfer shall be reduced by the amount of the 
                reduction in the taxpayer's tax for the taxable year of 
                the sale or exchange which would have occurred if 
                subparagraph (A) had not applied.''
    (b) Conforming Amendment.--The table of sections for part III of 
subchapter B of chapter 1 is amended by striking the item relating to 
section 137 and by inserting the following new items after the item 
relating to section 136:

``Sec. 137. Sales of interests in certain forest lands.
``Sec. 138. Cross references to other Acts.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 203. APPLICATION OF PASSIVE LOSS LIMITATIONS TO TIMBER ACTIVITIES.

    (a) In General.--Treasury regulations sections 1.469-5T(b)(2) (ii) 
and (iii) shall not apply to any closely held timber activity if the 
nature of such activity is such that the aggregate hours devoted to 
management of the activity for any year is generally less than 100 
hours.
    (b) Definitions.--For purposes of subsection (a):
            (1) Closely held activity.--An activity shall be treated as 
        closely held if at least 80 percent of the ownership interests 
        in the activity 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).
        An interest in a limited partnership shall in no event be 
        treated as a closely held activity for purposes of this 
        section.
            (2) Timber activity.--The term ``timber activity'' means 
        the planting, cultivating, caring, cutting, or preparation 
        (other than milling) for market, of trees.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.