SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Domestic Timber Production and 
Manufacturing Incentives Act''.

SEC. 2. INVESTMENT INCENTIVE FOR DOMESTIC TIMBER PRODUCTION.

    (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. 1202. INVESTMENT INCENTIVE FOR DOMESTIC TIMBER PRODUCTION.

    ``(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--
            ``(1) In general.--The term `qualified timber gain' means 
        the lesser of--
                    ``(A) the net capital gain for the taxable year, or
                    ``(B) the net capital gain for the taxable year 
                determined by taking into account only gains and losses 
                from qualified timber.
            ``(2) Qualified timber.--The term `qualified timber' means 
        any timber with respect to which the taxpayer has provided 
        assurances (which are satisfactory to the Secretary) that 
        substantially all of the processing of the timber will occur 
        within the United States.
    ``(c) Qualified Percentage.--For purposes of this section, the term 
`qualified percentage' means the percentage (not exceeding 50 percent) 
determined by multiplying--
            ``(1) 2 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 of such Code (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 1202)''.
            (2) Subsection (a) of section 1201 of such Code (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 1202)''.
    (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 adding at the end the following 
new paragraph:
            ``(14) Investment incentive for domestic timber 
        production.--The deduction allowed by section 1202.''
    (d) Conforming 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. 1202. Investment incentive for 
                                        domestic timber production.''
    (e) Effective Date.--The amendments made by this section shall 
apply to sales or exchanges after the date of the enactment of this 
Act.

SEC. 3. APPLICATION OF PASSIVE LOSS LIMITATIONS TO TIMBER ACTIVITIES.

    (a) Determination of Material Participation.--Subsection (h) of 
section 469 of the Internal Revenue Code of 1986 (defining material 
participation) is amended by adding at the end the following new 
paragraph:
            ``(6) Treatment of timber activities.--
                    ``(A) In general.--A taxpayer shall be treated as 
                materially participating in any timber activity for a 
                taxable year if--
                            ``(i) the taxpayer's participation in the 
                        activity for such year constitutes 
                        substantially all of the participation in the 
                        activity of all individuals for such year, 
                        other than individuals--
                                    ``(I) who are not owners of 
                                interests in the activity,
                                    ``(II) who are retained and 
                                compensated directly by the taxpayer, 
                                and
                                    ``(III) whose activities are 
                                subject to the oversight, supervision, 
                                and control of the taxpayer, or
                            ``(ii) based on all of the facts and 
                        circumstances, the taxpayer participates in the 
                        activity on a regular, continuous, and 
                        substantial basis during such year, except that 
                        for purposes of this clause--
                                    ``(I) the taxpayer shall not be 
                                required to participate in the activity 
                                for any minimum period of time during 
                                such year, and
                                    ``(II) the performance of services 
                                by individuals who are not owners of 
                                interests in the activity shall not be 
                                considered if the services are 
                                routinely provided by individuals 
                                specializing in such services and such 
                                services are subject to the oversight, 
                                supervision, and control of the 
                                taxpayer.
                    ``(B) Partners and s corporation shareholders.--
                Subject to paragraph (2), the determination of whether 
                a partner or S corporation shareholder shall be treated 
                as materially participating in any timber activity of 
                the partnership or S corporation shall be based upon 
                the combined participation of all of the partners or 
                shareholders in the activity.
                    ``(C) Timber activity.--For purposes of this 
                paragraph, the term `timber activity' means the 
                planting, cultivating, caring, cutting, or preparation 
                (other than milling) for market, of trees.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.
Domestic Timber Production and Manufacturing Incentives Act - Amends the Internal Revenue Code to provide taxpayers a deduction from gross income for qualified timber gain as an investment incentive. Allows such deduction in computing adjusted gross income. 
Provides for applying passive loss limitations to timber activities.
Domestic Timber Production and Manufacturing Incentives Act