II

106TH CONGRESS

1ST SESSION S. 963

To amend the Internal Revenue Code of 1986 to preserve family-held forest

lands, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MAY 5, 1999

Mr. GREGG introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to preserve

family-held forest lands, and for other purposes.

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; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Family Forest Land Preservation Tax Act of 1999’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 TITLE I—ESTATE TAX

4 PROVISIONS

5 SEC. 101. EXCLUSION FOR LAND SUBJECT TO A QUALIFIED

6 CONSERVATION EASEMENT.

7 (a) IN GENERAL.—Section 2031(c) (relating to es8 tate tax with respect to land subject to a qualified con9 servation easement) is amended to read as follows:

10 ‘‘(c) ESTATE TAX WITH RESPECT TO LAND SUB11 JECT TO A QUALIFIED CONSERVATION EASEMENT.—

12 ‘‘(1) IN GENERAL.—If the executor makes the

13 election described in paragraph (4), then, except as

14 otherwise provided in this subsection, there shall be

15 excluded from the gross estate the value of land sub16 ject to a qualified conservation easement, reduced by

17 the amount of any deduction under section 2055(f)

18 with respect to such land.

19 ‘‘(2) TREATMENT OF CERTAIN INDEBTED20 NESS.—

21 ‘‘(A) IN GENERAL.—The exclusion pro22 vided under paragraph (1) shall not apply to

23 the extent that the land is debt-financed prop24 erty.
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1 ‘‘(B) DEFINITIONS.—For purposes of this

2 paragraph—

3 ‘‘(i) DEBT-FINANCED PROPERTY.—

4 The term ‘debt-financed property’ means

5 any property with respect to which there is

6 acquisition indebtedness (as defined in

7 clause (ii)) on the date of the decedent’s

8 death.

9 ‘‘(ii) ACQUISITION INDEBTEDNESS.—

10 The term ‘acquisition indebtedness’ means,

11 with respect to any property, the unpaid

12 amount of—

13 ‘‘(I) any indebtedness incurred by

14 the donor in acquiring such property,

15 ‘‘(II) any indebtedness incurred

16 before the acquisition of such property

17 if such indebtedness would not have

18 been incurred but for such acquisition,

19 ‘‘(III) any indebtedness incurred

20 after the acquisition of such property

21 if such indebtedness would not have

22 been incurred but for such acquisition

23 and the incurrence of such indebted24 ness was reasonably foreseeable at the

25 time of such acquisition, and
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1 ‘‘(IV) any indebtedness which

2 constitutes an extension, renewal, or

3 refinancing of other indebtedness de4 scribed in this clause.

5 ‘‘(3) TREATMENT OF RETAINED DEVELOPMENT

6 RIGHT.—

7 ‘‘(A) IN GENERAL.—Paragraph (1) shall

8 not apply to the value of any development right

9 retained by the donor in the conveyance of a

10 qualified conservation easement.

11 ‘‘(B) TERMINATION OF RETAINED DEVEL12 OPMENT RIGHT.—If every person in being who

13 has an interest (whether or not in possession)

14 in the land executes an agreement to extinguish

15 permanently some or all of any development

16 rights retained by the donor on or before the

17 date for filing the return of the tax imposed by

18 section 2001, then any tax imposed by section

19 2001 shall be reduced accordingly. Such agree20 ment shall be filed with the return of the tax

21 imposed by section 2001. The agreement shall

22 be in such form as the Secretary shall pre23 scribe.
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1 ‘‘(C) ADDITIONAL TAX.—Any failure to

2 implement the agreement described in subpara3 graph (B) not later than the earlier of—

4 ‘‘(i) the date which is 2 years after

5 the date of the decedent’s death, or

6 ‘‘(ii) the date of the sale of such land

7 subject to the qualified conservation ease8 ment,

9 shall result in the imposition of an additional

10 tax in the amount of the tax which would have

11 been due on the retained development rights

12 subject to such agreement. Such additional tax

13 shall be due and payable on the last day of the

14 6th month following such earlier date.

15 ‘‘(D) DEVELOPMENT RIGHT DEFINED.—

16 For purposes of this paragraph, the term ‘de17 velopment right’ means any right to use the

18 land subject to the qualified conservation ease19 ment in which such right is retained for any

20 commercial purpose which is not subordinate to

21 and directly supportive of the use of such land

22 as a farm for farming purposes (within the

23 meaning of section 2032A(e)(5)).

24 ‘‘(4) ELECTION.—The election under this sub25 section shall be made on or before the due date (in-
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1 cluding extensions) for filing the return of tax im2 posed by section 2001 and shall be made on such re3 turn.

4 ‘‘(5) CALCULATION OF ESTATE TAX DUE.—An

5 executor making the election described in paragraph

6 (4) shall, for purposes of calculating the amount of

7 tax imposed by section 2001, include the value of

8 any development right (as defined in paragraph (3))

9 retained by the donor in the conveyance of such

10 qualified conservation easement. The computation of

11 tax on any retained development right prescribed in

12 this paragraph shall be done in such manner and on

13 such forms as the Secretary shall prescribe.

14 ‘‘(6) DEFINITIONS.—For purposes of this

15 subsection—

16 ‘‘(A) LAND SUBJECT TO A QUALIFIED

17 CONSERVATION EASEMENT.—The term ‘land

18 subject to a qualified conservation easement’

19 means land—

20 ‘‘(i) which was owned by the decedent

21 or a member of the decedent’s family at all

22 times during the 3-year period ending on

23 the date of the decedent’s death, and

24 ‘‘(ii) with respect to which a qualified

25 conservation easement has been made by
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1 an individual described in subparagraph

2 (C) as of the date of the election described

3 in paragraph (4).

4 ‘‘(B) QUALIFIED CONSERVATION EASE5 MENT.—The term ‘qualified conservation ease6 ment’ means a qualified conservation contribu7 tion (as defined in section 170(h)(1)) of a quali8 fied real property interest (as defined in section

9 170(h)(2)(C)), except that clause (iv) of section

10 170(h)(4)(A) shall not apply.

11 ‘‘(C) INDIVIDUAL DESCRIBED.—An indi12 vidual is described in this subparagraph if such

13 individual is—

14 ‘‘(i) the decedent,

15 ‘‘(ii) a member of the decedent’s fam16 ily,

17 ‘‘(iii) the executor of the decedent’s

18 estate, or

19 ‘‘(iv) the trustee of a trust the corpus

20 of which includes the land to be subject to

21 the qualified conservation easement.

22 ‘‘(D) MEMBER OF THE DECEDENT’S FAM23 ILY.—The term ‘member of the decedent’s fam24 ily’ means any member of the family (as defined

25 in section 2032A(e)(2)) of the decedent.
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1 ‘‘(7) TREATMENT OF EASEMENTS GRANTED

2 AFTER DEATH.—In any case in which the qualified

3 conservation easement is granted after the date of

4 the decedent’s death and on or before the due date

5 (including extensions) for filing the return of tax im6 posed by section 2001, the deduction under section

7 2055(f) with respect to such easement shall be al8 lowed to the estate but only if no charitable deduc9 tion is allowed under chapter 1 to any person with

10 respect to the grant of such easement.

11 ‘‘(8) APPLICATION OF THIS SECTION TO INTER12 ESTS IN PARTNERSHIPS, CORPORATIONS, AND

13 TRUSTS.—This subsection shall apply to an interest

14 in a partnership, corporation, or trust if at least 30

15 percent of the entity is owned (directly or indirectly)

16 by the decedent, as determined under the rules de17 scribed in section 2057(e)(3).’’

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

19 this section shall apply to estates of decedents dying after

20 December 31, 1999.

21 SEC. 102. INCREASE IN SPECIAL ESTATE TAX VALUATION;

22 SPECIAL RULES FOR FOREST LANDS.

23 (a) INCREASE IN LIMIT.—

24 (1) IN GENERAL.—Paragraphs (2) and (3) of

25 section 2032A(a) (relating to value based on use
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1 under which property qualifies) are each amended by

2 striking ‘‘$750,000’’ each place it appears and in3 serting ‘‘$1,000,000’’.

4 (2) INFLATION ADJUSTMENT.—Section

5 2032A(a)(3) is amended—

6 (A) by striking ‘‘1998’’ and inserting

7 ‘‘2000’’, and

8 (B) by striking ‘‘calendar year 1997’’ and

9 inserting ‘‘calendar year 1999’’.

10 (b) FOREST LAND TREATED AS QUALIFIED REAL

11 PROPERTY.—Section 2032A(b) (defining qualified real

12 property) is amended by adding at the end the following

13 new paragraph:

14 ‘‘(6) SPECIAL RULE FOR QUALIFIED WOOD15 LANDS.—In the case of qualified woodland, para16 graph (1) shall be applied without regard to sub17 paragraph (A) or (C)(ii) thereof.’’

18 (c) DEFINITIONS AND FAILURES TO USE FOR

19 QUALIFIED USE.—Section 2032A(c) (relating to tax

20 treatment of definitions and failures to use for qualified

21 use) is amended by adding at the end the following new

22 paragraph:

23 ‘‘(9) SPECIAL RULES FOR QUALIFIED WOOD24 LAND.—In the case of qualified woodland—
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1 ‘‘(A) this subsection shall be applied by

2 substituting ‘25 years’ for ‘10 years’ in para3 graph (1) and by substituting ‘25-year period’

4 for ‘10-year period’ in paragraph (7)(A)(ii) and

5 subsection (h)(2)(A),

6 ‘‘(B) the qualified heir shall not be treated

7 as disposing of the property or ceasing to use

8 the property for a qualified use if—

9 ‘‘(i) the qualified heir transfers the

10 property to another person, and

11 ‘‘(ii) such other person (or their quali12 fied heir) agrees to continue to use the

13 property for a qualified use and files an

14 agreement described in subsection (d)(2)

15 with respect to the property,

16 ‘‘(C) the qualified heir shall be treated as

17 ceasing to use the property for a qualified use

18 if any depreciable improvements are made to

19 the property (other than improvements required

20 for the qualified use), and

21 ‘‘(D) a qualified heir or transferee de22 scribed in subparagraph (B) shall not be treat23 ed as disposing of timber if the disposal is done

24 in accordance with any program described in

25 subsection (e)(13)(E).’’
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1 (d) QUALIFIED WOODLAND.—Section 2032A(e)(13)

2 is amended by adding at the end the following new sub3 paragraph:

4 ‘‘(E) OTHER REQUIREMENTS.—Real prop5 erty shall not be treated as qualified woodland

6 unless such property—

7 ‘‘(i) qualifies for a differential use

8 value assessment program for forest land

9 in the State in which the property is lo10 cated, or

11 ‘‘(ii) if a State has no differential use

12 value assessment program—

13 ‘‘(I) is forest land,

14 ‘‘(II) is a minimum of 10 acres,

15 exclusive of a dwelling unit or other

16 non-forest related structure and its

17 curtilage, and

18 ‘‘(III) is subject to a forest man19 agement plan.’’

20 (e) VALUATION.—

21 (1) IN GENERAL.—Section 2032A(e) is amend22 ed by adding at the end the following new para23 graph:

24 ‘‘(15) SPECIAL RULES FOR VALUING FOREST

25 LAND.—The value of forest land shall be determined
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1 according to whichever of the following methods re2 sults in the least value:

3 ‘‘(A) Assessed land values in a State which

4 provides a differential or use value assessment

5 for forest land.

6 ‘‘(B) Comparable sales of other forest land

7 which is in the same geographical area and

8 which is far enough removed from a metropoli9 tan or resort area so that nonforest use is not

10 a significant factor in the sales price.

11 ‘‘(C) The capitalization of income which

12 the property can be expected to yield for timber

13 operations over a reasonable period of time

14 under prudent management, determined by

15 using traditional forest management for the

16 area, and taking into account soil capacity, ter17 rain configuration, and similar factors.

18 ‘‘(D) Any other factor which fairly values

19 the timber value of the property.’’

20 (2) CONFORMING AMENDMENT.—Section

21 2032A(e)(8) is amended by striking ‘‘paragraph

22 (7)(A)’’ and inserting ‘‘paragraph (7)(A) or (15)’’.

23 (f) EFFECTIVE DATE.—The amendments made by

24 this section shall apply to estates of decedents dying after

25 December 31, 1999.
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1 TITLE II—INCOME TAX

2 TREATMENT

3 SEC. 201. PARTIAL INFLATION ADJUSTMENT FOR TIMBER.

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

5 1 (relating to treatment of capital gains) is amended by

6 adding at the end the following new section:

7 ‘‘SEC. 1203. PARTIAL INFLATION ADJUSTMENT FOR TIM8 BER.

9 ‘‘(a) IN GENERAL.—At the election of any taxpayer

10 who has qualified timber gain for any taxable year, there

11 shall be allowed as a deduction from gross income an

12 amount equal to the applicable percentage of such gain.

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

14 this section, the term ‘qualified timber gain’ means the

15 lesser of—

16 ‘‘(1) the net capital gain for the taxable year,

17 or

18 ‘‘(2) the net capital gain for the taxable year

19 determined by taking into account only gains and

20 losses from the sale or exchange of—

21 ‘‘(A) any standing timber (or the right to

22 sever any standing timber), or

23 ‘‘(B) any qualified woodland (as defined in

24 section 2032A(e)(13)(B)) or any interest there25 in.
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1 Such term shall not include any gain excludable from

2 gross income under section 139.

3 ‘‘(c) APPLICABLE PERCENTAGE.—For purposes of

4 this section, the term ‘applicable percentage’ means the

5 percentage (not exceeding 50 percent) determined by

6 multiplying—

7 ‘‘(1) 3 percent, by

8 ‘‘(2) the number of years in the holding period

9 of the taxpayer with respect to the timber.

10 ‘‘(d) ESTATES AND TRUSTS.—In the case of an es11 tate or trust, the deduction under subsection (a) shall be

12 computed by excluding the portion (if any) of the gains

13 for the taxable year from sales or exchanges of capital as14 sets which, under sections 652 and 662 (relating to inclu15 sions of amounts in gross income of beneficiaries of

16 trusts), is includible by the income beneficiaries as gain

17 derived from the sale or exchange of capital assets.’’

18 (b) COORDINATION WITH EXISTING LIMITATIONS.—

19 (1) Subsection (h) of section 1 (relating to max20 imum capital gains rate) is amended by adding at

21 the end the following new paragraph:

22 ‘‘(14) QUALIFIED TIMBER GAIN.—For purposes

23 of this subsection, net capital gain shall be deter24 mined without regard to qualified timber gain with
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1 respect to which an election is made under section

2 1203.’’

3 (2) Subsection (a) of section 1201 (relating to

4 alternative tax for corporations) is amended by add5 ing at the end the following flush sentence:

6 ‘‘For purposes of this section, net capital gain shall be

7 determined without regard to qualified timber gain with

8 respect to which an election is made under section 1203.’’

9 (c) ALLOWANCE OF DEDUCTION IN COMPUTING AD10 JUSTED GROSS INCOME.—Subsection (a) of section 62

11 (relating to definition of adjusted gross income) is amend12 ed by inserting after paragraph (17) the following new

13 paragraph:

14 ‘‘(18) PARTIAL INFLATION ADJUSTMENT FOR

15 TIMBER.—The deduction allowed by section 1203.’’

16 (d) CLERICAL AMENDMENT.—The table of sections

17 for part I of subchapter P of chapter 1 is amended by

18 adding at the end the following new item:

‘‘Sec. 1203. Partial inflation adjustment for timber.’’

19 (e) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to sales or exchanges after Decem21 ber 31, 1999.
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1 SEC. 202. EXCLUSION OF GAIN FROM SALES OF INTERESTS

2 IN FOREST LAND FOR CONSERVATION PUR3 POSES.

4 (a) IN GENERAL.—Part III of subchapter B of chap5 ter 1 (relating to items specifically excluded from gross

6 income) is amended by redesignating section 139 as sec7 tion 140 and by inserting after section 138 the following

8 new section:

9 ‘‘SEC. 139. SALES OF INTERESTS IN CERTAIN FOREST LAND

10 FOR CONSERVATION PURPOSES.

11 ‘‘(a) EXCLUSION.—

12 ‘‘(1) IN GENERAL.—Gross income shall not in13 clude the applicable percentage of any gain from a

14 qualified timber sale.

15 ‘‘(2) APPLICABLE PERCENTAGE.—For purposes

16 of paragraph (1), the term ‘applicable percentage’

17 means—

18 ‘‘(A) 35 percent, or

19 ‘‘(B) in the case of a qualified timber sale

20 of a qualified real property interest described in

21 section 170(h)(2)(C), 100 percent.

22 ‘‘(b) LIMITATION.—

23 ‘‘(1) IN GENERAL.—The total amount of gain

24 which may be excluded from gross income under

25 subsection (a) for any taxable year shall not exceed

26 the sum of—
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1 ‘‘(A) the amount of gain from a qualified

2 timber sale described in subsection (a)(2)(B),

3 plus

4 ‘‘(B) $800,000 ($400,000 in the case of a

5 married individual filing a separate return).

6 ‘‘(2) AGGREGATION RULE.—For purposes of

7 paragraph (1)(B), all persons treated as a single em8 ployer under subsection (a) or (b) of section 52 shall

9 be treated as one taxpayer.

10 ‘‘(c) QUALIFIED TIMBER SALE.—For purposes of

11 this section—

12 ‘‘(1) IN GENERAL.—The term ‘qualified timber

13 sale’ means the sale or exchange of a qualified real

14 property interest in real property which is used in

15 timber operations to a governmental unit described

16 in section 170(c)(1) for conservation purposes.

17 ‘‘(2) SPECIAL RULE FOR SALES TO NON18 GOVERNMENTAL ENTITIES.—

19 ‘‘(A) IN GENERAL.—The term ‘qualified

20 timber sale’ shall include a sale or exchange to

21 a qualified organization described in section

22 170(h)(3) if such interest is transferred to a

23 governmental unit described in section

24 170(c)(1) during the 2-year period beginning on

25 the date of the sale or exchange.
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1 ‘‘(B) TIME FOR EXCLUSION.—If the trans2 fer to which paragraph (1) applies occurs in a

3 taxable year after the taxable year in which the

4 sale or exchange occurred—

5 ‘‘(i) no exclusion shall be allowed

6 under subsection (a) for the taxable year

7 of the sale or exchange, but

8 ‘‘(ii) the taxpayer’s tax for the taxable

9 year of the transfer shall be reduced by the

10 amount of the reduction in the taxpayer’s

11 tax for the taxable year of the sale or ex12 change which would have occurred if sub13 paragraph (A) had not applied.

14 ‘‘(d) OTHER DEFINITIONS.—For purposes of this

15 section—

16 ‘‘(1) QUALIFIED REAL PROPERTY INTEREST.—

17 The term ‘qualified real property interest’ has the

18 meaning given such term by section 170(h)(2).

19 ‘‘(2) TIMBER OPERATIONS.—The term ‘timber

20 operations’ has the meaning given such term by sec21 tion 2032A(e)(13)(C).

22 ‘‘(3) CONSERVATION PURPOSES.—The term

23 ‘conservation purposes’ has the meaning given such

24 term by section 170(h)(4)(A) (without regard to

25 clause (iv) thereof).’’
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1 (b) CLERICAL AMENDMENT.—The table of sections

2 for part III of subchapter B of chapter 1 is amended by

3 striking the item relating to section 139 and inserting the

4 following new items:

‘‘Sec. 139. Sales of interests in certain forest land for conservation purposes.

‘‘Sec. 140. Cross references to other Acts.’’

5 (c) EFFECTIVE DATE.—The amendments made by

6 this section shall apply to taxable years beginning after

7 December 31, 1999.

8 SEC. 203. APPLICATION OF PASSIVE LOSS LIMITATIONS TO

9 TIMBER ACTIVITIES.

10 (a) IN GENERAL.—Treasury regulations sections

11 1.469–5T(b)(2) (ii) and (iii) shall not apply to any closely

12 held timber activity if the nature of such activity is such

13 that the aggregate hours devoted to management of the

14 activity for any year is generally less than 100 hours.

15 (b) DEFINITIONS.—For purposes of subsection (a)—

16 (1) CLOSELY HELD ACTIVITY.—An activity

17 shall be treated as closely held if at least 80 percent

18 of the ownership interests in the activity is held—

19 (A) by 5 or fewer individuals, or

20 (B) by individuals who are members of the

21 same family (within the meaning of section

22 2032A(e)(2) of the Internal Revenue Code of

23 1986).
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1 An interest in a limited partnership shall in no event

2 be treated as a closely held activity for purposes of

3 this section.

4 (2) TIMBER ACTIVITY.—The term ‘‘timber ac5 tivity’’ means the planting, cultivating, caring, cut6 ting, or preparation (other than milling) for market,

7 of trees.

8 (c) EFFECTIVE DATE.—This section shall apply to

9 taxable years beginning after December 31, 1999.

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