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

Summary: Reforestation Tax Act of 2003 - Amends the Internal Revenue Code to allow a deduction to a taxpayer who has a qualified timber gain in an amount equal to the qualified percentage of such gain. Allows a deduction, for qualified timber property, for reforestation expenditures and terminates current provisions allowing for the amortization of such expenditures. Provides for the application of passive activity loss limitations to timber activity of an individual who is a member of a closely held entity if management of such activity is less than 100 hours annually.

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.