I 

110TH CONGRESS 

1ST SESSION H. R. 1937 

To amend the Internal Revenue Code of 1986 to allow a deduction for 

qualified timber gains and to modernize certain provisions applicable 

to timber real estate investment trusts. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 19, 2007 

Mr. DAVIS of Alabama (for himself, Mr. BRADY of Texas, Mr. MCDERMOTT, 

Mr. GINGREY, Mr. BONNER, Mr. CRENSHAW, Mr. BOYD of Florida, Mr. 

REICHERT, Mr. BAIRD, Mrs. MCMORRIS RODGERS, Mr. SCOTT of Georgia, Mr. HASTINGS of Washington, Mr. JONES of North Carolina, and 

Mr. WALDEN of Oregon) introduced the following bill; which was referred 

to the Committee on Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 to allow a 

deduction for qualified timber gains and to modernize 

certain provisions applicable to timber real estate investment trusts. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Timber Revitalization 

5 and Economic Enhancement (TREE) Act of 2007’’. 


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1 TITLE I—QUALIFIED TIMBER 

2 GAIN 

3 SEC. 101. DEDUCTION FOR QUALIFIED TIMBER GAIN. 

4 (a) IN GENERAL.—Part I of subchapter P of chapter 

5 1 of the Internal Revenue Code of 1986 is amended by 

6 adding at the end the following new section: 

7 ‘‘SEC. 1203. DEDUCTION FOR QUALIFIED TIMBER GAIN. 

8 ‘‘(a) IN GENERAL.—In the case of a taxpayer which 

9 elects the application of this section for a taxable year, 

10 there shall be allowed a deduction against gross income 

11 in an amount equal to 60 percent of the lesser of— 

12 ‘‘(1) the taxpayer’s qualified timber gain for 

13 such year, or 

14 ‘‘(2) the taxpayer’s net capital gain for such 

15 year. 

16 ‘‘(b) QUALIFIED TIMBER GAIN.—For purposes of 

17 this section, the term ‘qualified timber gain’ means, with 

18 respect to any taxpayer for any taxable year, the excess 

19 (if any) of— 

20 ‘‘(1) the sum of the taxpayer’s gains described 

21 in subsections (a) and (b) of section 631 for such 

22 year, over 

23 ‘‘(2) the sum of the taxpayer’s losses described 

24 in such subsections for such year. 

25 ‘‘(c) SPECIAL RULES FOR PASS-THRU ENTITIES.— 


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1 ‘‘(1) In the case of any qualified timber gain of 

2 a pass-thru entity (as defined in section 1(h)(10)) 

3 other than a real estate investment trust, the elec4 tion under this section shall be made separately by 

5 each taxpayer subject to tax on such gain. 

6 ‘‘(2) In the case of any qualified timber gain of 

7 a real estate investment trust, the election under 

8 this section shall be made by the real estate invest9 ment trust.’’. 

10 (b) COORDINATION WITH MAXIMUM CAPITAL GAINS

11 RATES.— 

12 (1) TAXPAYERS OTHER THAN CORPORA13 TIONS.—Paragraph (2) of section 1(h) of the Inter14 nal Revenue Code of 1986 is amended to read as fol15 lows: 

16 ‘‘(2) REDUCTION OF NET CAPITAL GAIN.—For 

17 purposes of this subsection, the net capital gain for 

18 any taxable year shall be reduced (but not below 

19 zero) by the sum of— 

20 ‘‘(A) the amount which the taxpayer takes 

21 into account as investment income under sec22 tion 163(d)(4)(B)(iii), and 

23 ‘‘(B) in the case of a taxable year with re24 spect to which an election is in effect under sec25 tion 1203, the lesser of— 


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1 ‘‘(i) the amount described in para2 graph (1) of section 1203(a), or 

3 ‘‘(ii) the amount described in para4 graph (2) of such section.’’. 

5 (2) CORPORATIONS.—Section 1201 of such 

6 Code is amended by redesignating subsection (b) as 

7 subsection (c) and inserting after subsection (a) the 

8 following new subsection: 

9 ‘‘(b) QUALIFIED TIMBER GAIN NOT TAKEN INTO

10 ACCOUNT.—For purposes of this section, in the case of 

11 a corporation with respect to which an election is in effect 

12 under section 1203, the net capital gain for any taxable 

13 year shall be reduced (but not below zero) by the corpora14 tion’s qualified timber gain (as defined in section 

15 1203(b)).’’. 

16 (c) DEDUCTION ALLOWED WHETHER OR NOT INDI17 VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a) 

18 of section 62 of the Internal Revenue Code of 1986 is 

19 amended by inserting before the last sentence the fol20 lowing new paragraph: 

21 ‘‘(22) QUALIFIED TIMBER GAINS.—The deduc22 tion allowed by section 1203.’’. 

23 (d) DEDUCTION ALLOWED IN COMPUTING AD24 JUSTED CURRENT EARNINGS.—Subparagraph (C) of secVerDate Aug 31 2005 18:51 Apr 22, 2007 Jkt 059200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H1937.IH H1937

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1 tion 56(g)(4) of the Internal Revenue Code of 1986 is 

2 amended by adding at the end the following new clause: 

3 ‘‘(vii) DEDUCTION FOR QUALIFIED

4 TIMBER GAIN.—Clause (i) shall not apply 

5 to any deduction allowed under section 

6 1203.’’. 

7 (e) DEDUCTION ALLOWED IN COMPUTING TAXABLE

8 INCOME OF ELECTING SMALL BUSINESS TRUSTS.—Sub9 paragraph (C) of section 641(c)(2) of the Internal Rev10 enue Code of 1986 is amended by inserting after clause 

11 (iii) the following new clause: 

12 ‘‘(iv) The deduction allowed under 

13 section 1203.’’. 

14 (f) TREATMENT OF QUALIFIED TIMBER GAIN OF

15 REAL ESTATE INVESTMENT TRUSTS.—Paragraph (3) of 

16 section 857(b) of the Internal Revenue Code of 1986 is 

17 amended by inserting after subparagraph (F) the fol18 lowing new subparagraph: 

19 ‘‘(G) TREATMENT OF QUALIFIED TIMBER

20 GAIN.—For purposes of this part, in the case of 

21 a real estate investment trust with respect to 

22 which an election is in effect under section 

23 1203— 

24 ‘‘(i) REDUCTION OF NET CAPITAL

25 GAIN.—The net capital gain of the real esVerDate Aug 31 2005 18:51 Apr 22, 2007 Jkt 059200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H1937.IH H1937

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1 tate investment trust for any taxable year 

2 shall be reduced (but not below zero) by 

3 the real estate investment trust’s qualified 

4 timber gain (as defined in section 

5 1203(b)). 

6 ‘‘(ii) ADJUSTMENT TO SHARE7 HOLDER’S BASIS ATTRIBUTABLE TO DE8 DUCTION FOR QUALIFIED TIMBER

9 GAINS.— 

10 ‘‘(I) IN GENERAL.—The adjusted 

11 basis of shares in the hands of the 

12 shareholder shall be increased by the 

13 amount of the deduction allowable 

14 under section 1203(a) as provided in 

15 subclauses (II) and (III). 

16 ‘‘(II) ALLOCATION OF BASIS IN17 CREASE FOR DISTRIBUTIONS MADE

18 DURING TAXABLE YEAR.—For any 

19 taxable year of a real estate invest20 ment trust for which an election is in 

21 effect under section 1203, in the case 

22 of a distribution made with respect to 

23 shares during such taxable year of 

24 amounts attributable to the deduction 

25 allowable under section 1203(a), the 


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1 adjusted basis of such shares shall be 

2 increased by the amount of such dis3 tributions. 

4 ‘‘(III) ALLOCATION OF EX5 CESS.—If the deduction allowable 

6 under section 1203(a) for a taxable 

7 year exceeds the amount of distribu8 tions described in subclause (II), the 

9 excess shall be allocated to every 

10 shareholder of the real estate invest11 ment trust at the close of the trust’s 

12 taxable year in the same manner as if 

13 a distribution of such excess were 

14 made with respect to such shares. 

15 ‘‘(IV) DESIGNATIONS.—To the 

16 extent provided in regulations, a real 

17 estate investment trust shall designate 

18 the amounts described in subclauses 

19 (II) and (III) in a manner similar to 

20 the designations provided with respect 

21 to capital gains described in subpara22 graphs (C) and (D). 

23 ‘‘(V) DEFINITIONS.—As used in 

24 this subparagraph, the terms ‘share’ 

25 and ‘shareholder’ shall include beneVerDate Aug 31 2005 18:51 Apr 22, 2007 Jkt 059200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H1937.IH H1937

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1 ficial interests and holders of bene2 ficial interests, respectively. 

3 ‘‘(iii) EARNINGS AND PROFITS DEDUC4 TION FOR QUALIFIED TIMBER GAINS.—The 

5 deduction allowable under section 1203(a) 

6 for a taxable year shall be allowed as a de7 duction in computing the earnings and 

8 profits of the real estate investment trust 

9 for such taxable year. The earnings and 

10 profits of any such shareholder which is a 

11 corporation shall be appropriately adjusted 

12 in accordance with regulations prescribed 

13 by the Secretary.’’. 

14 (g) LOSS ATTRIBUTABLE TO BASIS ADJUSTMENT

15 FOR DEDUCTION FOR QUALIFIED TIMBER GAIN OF REAL

16 ESTATE INVESTMENT TRUSTS.— 

17 (1) Section 857(b)(8) of the Internal Revenue 

18 Code of 1986 is amended by redesignating subpara19 graphs (B) and (C) as subparagraphs (C) and (D), 

20 respectively, and by inserting after subparagraph 

21 (A) the following new subparagraph: 

22 ‘‘(B) LOSS ATTRIBUTABLE TO BASIS AD23 JUSTMENT FOR DEDUCTION FOR QUALIFIED

24 TIMBER GAIN.—If— 


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1 ‘‘(i) a shareholder of a real estate in2 vestment trust receives a basis adjustment 

3 provided under subsection (b)(3)(G)(ii), 

4 and 

5 ‘‘(ii) the taxpayer has held such share 

6 or interest for 6 months or less, 

7 then any loss on the sale or exchange of such 

8 share or interest shall, to the extent of the 

9 amount described in clause (i), be disallowed.’’. 

10 (2) Subparagraph (D) of section 857(b)(8) of 

11 such Code, as redesignated by paragraph (1), is 

12 amended by striking ‘‘subparagraph (A)’’ and insert13 ing ‘‘subparagraphs (A) and (B)’’. 

14 (h) CONFORMING AMENDMENTS.— 

15 (1) Subparagraph (B) of section 172(d)(2) of 

16 the Internal Revenue Code of 1986 is amended to 

17 read as follows: 

18 ‘‘(B) the exclusion under section 1202, and 

19 the deduction under section 1203, shall not be 

20 allowed.’’. 

21 (2) Paragraph (4) of section 642(c) of such 

22 Code is amended by striking the first sentence and 

23 inserting ‘‘To the extent that the amount otherwise 

24 allowable as a deduction under this subsection con25 sists of gain described in section 1202(a) or qualiVerDate Aug 31 2005 18:51 Apr 22, 2007 Jkt 059200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H1937.IH H1937

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1 fied timber gain (as defined in section 1203(b)), 

2 proper adjustment shall be made for any exclusion 

3 allowable to the estate or trust under section 1202 

4 and for any deduction allowable to the estate or 

5 trust under section 1203.’’ 

6 (3) Paragraph (3) of section 643(a) of such 

7 Code is amended by striking the last sentence and 

8 inserting ‘‘The exclusion under section 1202 and the 

9 deduction under section 1203 shall not be taken into 

10 account.’’. 

11 (4) Subparagraph (C) of section 643(a)(6) of 

12 such Code is amended to read as follows: 

13 ‘‘(C) Paragraph (3) shall not apply to a 

14 foreign trust. In the case of such a trust— 

15 ‘‘(i) there shall be included gains from 

16 the sale or exchange of capital assets, re17 duced by losses from such sales or ex18 changes to the extent such losses do not 

19 exceed gains from such sales or exchanges, 

20 and 

21 ‘‘(ii) the deduction under section 1203 

22 shall not be taken into account.’’. 

23 (5) Paragraph (4) of section 691(c) of such 

24 Code is amended by inserting ‘‘1203,’’ after 

25 ‘‘1202,’’. 


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1 (6) Paragraph (2) of section 871(a) of such 

2 Code is amended by inserting ‘‘or 1203,’’ after 

3 ‘‘1202,’’. 

4 (7) The table of sections for part I of sub5 chapter P of chapter 1 of such Code is amended by 

6 adding at the end the following new item: 

‘‘Sec. 1203. Deduction for qualified timber gain.’’. 

7 (i) EFFECTIVE DATE.— 

8 (1) IN GENERAL.—The amendments made by 

9 this section shall apply to taxable years ending after 

10 the date of the enactment of this Act. 

11 (2) TAXABLE YEARS WHICH INCLUDE DATE OF

12 ENACTMENT.—In the case of any taxable year which 

13 includes the date of the enactment of this Act, for 

14 purposes of the Internal Revenue Code of 1986, the 

15 taxpayer’s qualified timber gain shall not exceed the 

16 excess that would be described in section 1203(b) of 

17 such Code, as added by this section, if only disposi18 tions of timber after such date were taken into ac19 count. 

20 SEC. 102. EXCISE TAX NOT APPLICABLE TO SECTION 1203 

21 DEDUCTION OF REAL ESTATE INVESTMENT 

22 TRUSTS. 

23 (a) IN GENERAL.—Subparagraphs (A) and (B) of 

24 section 4981(b)(1) of the Internal Revenue Code of 1986 

25 are amended to read as follows: 


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1 ‘‘(A) 85 percent of the real estate invest2 ment trust’s ordinary income, without regard to 

3 any deduction allowable under section 1203, for 

4 such calendar year, plus 

5 ‘‘(B) 95 percent of the real estate invest6 ment trust’s capital gain net income, reduced 

7 for any deduction allowable under section 1203, 

8 for such calendar year.’’. 

9 (b) EFFECTIVE DATE.— 

10 (1) IN GENERAL.—The amendments made by 

11 this section shall apply to taxable years ending after 

12 the date of the enactment of this Act. 

13 (2) TAXABLE YEARS WHICH INCLUDE DATE OF

14 ENACTMENT.—In the case of any taxable year which 

15 includes the date of the enactment of this Act, for 

16 purposes of the Internal Revenue Code of 1986, the 

17 taxpayer’s qualified timber gain shall not exceed the 

18 excess that would be described in section 1203(b) of 

19 such Code, as added by this Act, if only dispositions 

20 of timber after such date were taken into account. 


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1 TITLE II—TIMBER REIT 

2 MODERNIZATION 

3 SEC. 201. TIMBER GAIN QUALIFYING INCOME FOR REITS. 

4 (a) IN GENERAL.—Section 856(c)(5) of the Internal 

5 Revenue Code of 1986 is amended by adding after sub6 paragraph (G) the following new subparagraph: 

7 ‘‘(H) TREATMENT OF TIMBER GAINS.— 

8 ‘‘(i) IN GENERAL.—For purposes of 

9 this part, gain from the sale of real prop10 erty described in paragraph (2)(D) and 

11 (3)(C) shall include gain which is— 

12 ‘‘(I) recognized by an election 

13 under section 631(a) from timber 

14 owned by the real estate investment 

15 trust, the cutting of which is provided 

16 by a taxable REIT subsidiary of the 

17 real estate investment trust; 

18 ‘‘(II) recognized under section 

19 631(b); or 

20 ‘‘(III) income which would con21 stitute gain under subclause (I) or 

22 (II) but for the failure to meet the 1- 

23 year holding period requirement. 

24 ‘‘(ii) SPECIAL RULES.— 


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1 ‘‘(I) For purposes of this subtitle, 

2 cut timber, the gain of which is recog3 nized by a real estate investment trust 

4 pursuant to an election under section 

5 631(a) described in clause (i)(I) or so 

6 much of clause (i)(III) as relates to 

7 clause (i)(I), shall be deemed to be 

8 sold to the taxable REIT subsidiary of 

9 the real estate investment trust on the 

10 first day of the taxable year. 

11 ‘‘(II) For purposes of this sub12 title, income described in this sub13 paragraph shall not be treated as gain 

14 from the sale of property described in 

15 section 1221(a)(1).’’. 

16 (b) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to dispositions after the date of 

18 the enactment of this Act. 

19 SEC. 202. MINERAL ROYALTY INCOME QUALIFYING INCOME 

20 FOR TIMBER REITS. 

21 (a) IN GENERAL.—Section 856(c)(2) of the Internal 

22 Revenue Code of 1986 is amended by adding after sub23 paragraph (H) the following new subparagraph: 

24 ‘‘(I) mineral royalty income from real 

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1 ment trust (as defined in paragraph (5)(I)) 

2 held, or once held, in connection with the trade 

3 or business of producing timber by such real es4 tate investment trust;’’. 

5 (b) TIMBER REAL ESTATE INVESTMENT TRUST.— 

6 Section 856(c)(5) of the Internal Revenue Code of 1986 

7 is amended by adding after subparagraph (H) the fol8 lowing new subparagraph: 

9 ‘‘(I) TIMBER REAL ESTATE INVESTMENT

10 TRUST.—The term ‘timber real estate invest11 ment trust’ means a real estate investment 

12 trust in which more than 50 percent in value of 

13 its total assets consists of real property held in 

14 connection with the trade or business of pro15 ducing timber.’’. 

16 (c) EFFECTIVE DATES.— 

17 (1) SUBSECTION (a).—The amendment made 

18 by subsection (a) shall apply to income earned after 

19 the date of the enactment of this Act. 

20 (2) SUBSECTION (b).—The amendments made 

21 by subsection (b) shall apply to taxable years ending 

22 after the date of the enactment of this Act. 


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1 SEC. 203. CONFORMING TAXABLE REIT SUBSIDIARY ASSET 

2 TEST FOR TIMBER REITS. 

3 (a) IN GENERAL.—Section 856(c)(4)(B)(ii) of the In4 ternal Revenue Code of 1986 is amended by inserting ‘‘(25 

5 percent in the case of a timber real estate investment 

6 trust)’’ after ‘‘not more than 20 percent of the value of 

7 its total assets is represented by securities of one or more 

8 taxable REIT subsidiaries’’. 

9 (b) EFFECTIVE DATE.—The amendment made by 

10 this section shall be effective after the date of the enact11 ment of this Act. 

12 SEC. 204. SAFE HARBOR FOR TIMBER PROPERTY. 

13 (a) IN GENERAL.—Section 857(b)(6) of the Internal 

14 Revenue Code of 1986 (relating to income from prohibited 

15 transactions) is amended— 

16 (1) by striking ‘‘4 years’’ in subparagraph 

17 (D)(i) and inserting ‘‘2 years’’, and 

18 (2) by striking ‘‘4-year period’’ in subpara19 graphs (D)(ii) and (D)(iii) and inserting ‘‘2-year pe20 riod’’. 

21 (b) PROHIBITED TRANSACTIONS.—Section 

22 857(b)(6)(D)(v) of such Code is amended by inserting ‘‘or 

23 a taxable REIT subsidiary’’ after ‘‘independent contractor 

24 (as defined in section 856(d)(3)) from whom the trust 

25 itself does not derive or receive any income’’. 


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1 (c) SALES THAT ARE NOT PROHIBITED TRANS2 ACTIONS.—Section 857(b)(6) of such Code is amended by 

3 adding at the end the following new subparagraph: 

4 ‘‘(G) SALES OF PROPERTY THAT ARE NOT

5 A PROHIBITED TRANSACTION.—The sale of 

6 property which is not a prohibited transaction 

7 through application of subparagraph (D) shall 

8 be considered property held for investment or 

9 for use in a trade or business and not property 

10 described in section 1221(a)(1) for all purposes 

11 of this subtitle.’’. 

12 (d) EFFECTIVE DATE.—The amendments made by 

13 this section shall be effective for dispositions after the date 

14 of the enactment of this Act. 

Æ 


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