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‘‘(ii) ADJUSTMENT TO SHAREHOLDER’S
BASIS ATTRIBUTABLE TO DEDUCTION FOR
QUALIFIED TIMBER GAINS.—
‘‘(I) IN GENERAL.—The adjusted
basis of shares in the hands of the
shareholder shall be increased by the
amount of the deduction allowable
under section 1203(a) as provided in
subclauses (II) and (III).
‘‘(II) ALLOCATION
OF
BASIS
IN-
CREASE
FOR
DISTRIBUTIONS
MADE
DURING TAXABLE YEAR.—For any tax-
able year of a real estate investment
trust for which an election is in effect
under section 1203, in the case of a
distribution made with respect to
shares during such taxable year of
amounts attributable to the deduction
allowable under section 1203(a), the
adjusted basis of such shares shall be
increased by the amount of such dis-
tributions.
‘‘(III) ALLOCATION OF EXCESS.—
If the deduction allowable under sec-
tion 1203(a) for a taxable year exceeds
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the amount of distributions described
in subclause (II), the excess shall be al-
located to every shareholder of the real
estate investment trust at the close of
the trust’s taxable year in the same
manner as if a distribution of such ex-
cess were made with respect to such
shares.
‘‘(IV) DESIGNATIONS.—To the ex-
tent provided in regulations, a real es-
tate investment trust shall designate
the amounts described in subclauses
(II) and (III) in a manner similar to
the designations provided with respect
to capital gains described in subpara-
graphs (C) and (D).
‘‘(V) DEFINITIONS.—As used in
this subparagraph, the terms ‘share’
and ‘shareholder’ shall include bene-
ficial interests and holders of beneficial
interests, respectively.
‘‘(iii) EARNINGS AND PROFITS DEDUC-
TION FOR QUALIFIED TIMBER GAINS.—The
deduction allowable under section 1203(a)
for a taxable year shall be allowed as a de-
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duction in computing the earnings and
profits of the real estate investment trust for
such taxable year. The earnings and profits
of any such shareholder which is a corpora-
tion shall be appropriately adjusted in ac-
cordance with regulations prescribed by the
Secretary.’’.
(g) LOSS ATTRIBUTABLE TO BASIS ADJUSTMENT FOR
DEDUCTION FOR QUALIFIED TIMBER GAIN OF REAL ES-
TATE INVESTMENT TRUSTS.—
(1) Section 857(b)(8) is amended by redesig-
nating subparagraphs (B) and (C) as subparagraphs
(C) and (D), respectively, and by inserting after sub-
paragraph (A) the following new subparagraph:
‘‘(B) LOSS
ATTRIBUTABLE
TO
BASIS
AD-
JUSTMENT FOR DEDUCTION FOR QUALIFIED TIM-
BER GAIN.—If—
‘‘(i) a shareholder of a real estate in-
vestment trust receives a basis adjustment
provided under subsection (b)(3)(G)(ii), and
‘‘(ii) the taxpayer has held such share
or interest for 6 months or less,
then any loss on the sale or exchange of such
share or interest shall, to the extent of the
amount described in clause (i), be disallowed.’’.
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(2) Subparagraph (D) of section 857(b)(8), as
redesignated by paragraph (1), is amended by strik-
ing ‘‘subparagraph (A)’’ and inserting ‘‘subpara-
graphs (A) and (B)’’.
(h) CONFORMING AMENDMENTS.—
(1) Subparagraph (B) of section 172(d)(2) is
amended to read as follows:
‘‘(B) the exclusion under section 1202, and
the deduction under section 1203, shall not be al-
lowed.’’.
(2) Paragraph (4) of section 642(c) is amended
by striking the first sentence and inserting ‘‘To the
extent that the amount otherwise allowable as a de-
duction under this subsection consists of gain de-
scribed in section 1202(a) or qualified timber gain
(as defined in section 1203(b)), proper adjustment
shall be made for any exclusion allowable to the estate
or trust under section 1202 and for any deduction al-
lowable to the estate or trust under section 1203.’’
(3) Paragraph (3) of section 643(a) is amended
by striking the last sentence and inserting ‘‘The exclu-
sion under section 1202 and the deduction under sec-
tion 1203 shall not be taken into account.’’.
(4) Subparagraph (C) of section 643(a)(6) is
amended to read as follows:
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‘‘(C) Paragraph (3) shall not apply to a
foreign trust. In the case of such a trust—
‘‘(i) there shall be included gains from
the sale or exchange of capital assets, re-
duced by losses from such sales or exchanges
to the extent such losses do not exceed gains
from such sales or exchanges, and
‘‘(ii) the deduction under section 1203
shall not be taken into account.’’.
(5) Paragraph (4) of section 691(c) is amended
by inserting ‘‘1203,’’ after ‘‘1202,’’.
(6) Paragraph (2) of section 871(a) is amended
by inserting ‘‘or 1203,’’ after ‘‘1202,’’.
(7) 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. Deduction for qualified timber gain.’’.
(i) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
SEC. 12213. EXCISE TAX NOT APPLICABLE TO SECTION 1203
DEDUCTION OF REAL ESTATE INVESTMENT
TRUSTS.
(a) IN GENERAL.—
(1) ORDINARY
INCOME.—Subparagraph (B) of
section 4981(e)(1) is amended to read as follows: