102
‘‘(1) the election under this section shall be 
made separately by each taxpayer subject to tax on 
such gain, and 
‘‘(2) the Secretary may prescribe such regula-
tions as are appropriate to apply this section to such 
gain. 
‘‘(d) TERMINATION.—No disposition of timber after 
December 31, 2007, shall be taken into account under 
subsection (b).’’. 
(b) COORDINATION WITH MAXIMUM CAPITAL GAINS 
RATES.—
(1) 
TAXPAYERS
OTHER
THAN
CORPORA-
TIONS.—Paragraph (2) of section 1(h) is amended 
to read as follows: 
‘‘(2) REDUCTION OF NET CAPITAL GAIN.—For 
purposes of this subsection, the net capital gain for 
any taxable year shall be reduced (but not below 
zero) by the sum of—
‘‘(A) the amount which the taxpayer takes 
into account as investment income under sec-
tion 163(d)(4)(B)(iii), and 
‘‘(B) in the case of a taxable year with re-
spect to which an election is in effect under sec-
tion 1203, the lesser of—
103
‘‘(i) the amount described in para-
graph (1) of section 1203(a), or 
‘‘(ii) the amount described in para-
graph (2) of such section.’’. 
(2) CORPORATIONS.—Section 1201 is amended 
by redesignating subsection (b) as subsection (c) and 
inserting after subsection (a) the following new sub-
section: 
‘‘(b) QUALIFIED TIMBER GAIN NOT TAKEN INTO 
ACCOUNT.—For purposes of this section, in the case of 
a corporation with respect to which an election is in effect 
under section 1203, the net capital gain for any taxable 
year shall be reduced (but not below zero) by the corpora-
tion’s qualified timber gain (as defined in section 
1203(b)).’’. 
(c) DEDUCTION ALLOWED WHETHER OR NOT INDI-
VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a) 
of section 62, as amended by this Act, is amended by in-
serting before the last sentence the following new para-
graph: 
‘‘(22) QUALIFIED TIMBER GAINS.—The deduc-
tion allowed by section 1203.’’. 
(d) DEDUCTION
ALLOWED
IN
COMPUTING
AD-
JUSTED CURRENT EARNINGS.—Subparagraph (C) of sec-
104
tion 56(g)(4) is amended by adding at the end the fol-
lowing new clause: 
‘‘(vii) DEDUCTION
FOR
QUALIFIED 
TIMBER GAIN.—Clause (i) shall not apply 
to any deduction allowed under section 
1203.’’. 
(e) DEDUCTION ALLOWED IN COMPUTING TAXABLE 
INCOME OF ELECTING SMALL BUSINESS TRUSTS.—Sub-
paragraph (C) of section 641(c)(2) is amended by insert-
ing after clause (iii) the following new clause: 
‘‘(iv) The deduction allowed under 
section 1203.’’. 
(f) 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 
allowed.’’. 
(2) Paragraph (4) of section 642(c) is amended 
by striking the first sentence and inserting the fol-
lowing: ‘‘To the extent that the amount otherwise al-
lowable as a deduction under this subsection consists 
of gain described in section 1202(a) or qualified tim-
ber gain (as defined in section 1203(b)), proper ad-
justment shall be made for any exclusion allowable
105
to the estate or trust under section 1202 and for 
any deduction allowable 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 fol-
lowing: ‘‘The exclusion under section 1202 and the 
deduction under section 1203 shall not be taken into 
account.’’. 
(4) Subparagraph (C) of section 643(a)(6) is 
amended to read as follows: 
‘‘(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 ex-
changes 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 striking ‘‘section 1202’’ and inserting ‘‘sections 
1202 and 1203’’.