February 11, 2015
Tax Reform and the Timber Industry
Practice Groups:
By: Mary Burke Baker, Tim L. Peckinpaugh, Charles H. Purcell, C. Kent Carlson, Andrew H.
Zuccotti, Sarah M. Beason
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This alert provides an overview of various timber tax issues in play as part of the tax reform
debate. The alert is drawn from several sources, including former House Ways and Means
Committee Chairman David Camp’s tax reform proposal, the President’s FY 2016 budget
proposal, and several tax reform plans introduced by members of Congress.
Many of the proposals pose similar risks, whether a timber company is privately held or
publicly traded. Some of the proposals are aimed at particular business structures, like real
estate investment trusts (REITs); others would specifically affect family-owned businesses.
To the extent that the various proposals change the definition of capital gain or alter the
capital gain tax rate, these proposals may be insignificant to C corporations, whose capital
gains are taxed at the same rate as ordinary income.
Here is a list identifying many of the issues under discussion that could affect timber
companies, followed by a somewhat more detailed discussion of some of them.
A. Raise capital gains and dividend tax rates;
B. Recharacterize timber income as ordinary income, instead of capital gains;
C. Disqualify timber as real property for REIT qualification purposes;
D. Eliminate expensing of reforestation expenditures and limit seven-year depreciation to
ornamentals;
E. Eliminate the uniform capitalization (UNICAP) inventory exception for timber; i.e., timber
subject to UNICAP inventory rules;
F. Potentially longer depletion and depreciation periods for cost recovery;
G. Consistent basis for estate tax and beneficiary; and
H. Tax built-in capital gains on gifts and bequests of interests in timber property.
A. Several Congressional proposals, along with the President’s FY 2016 budget proposal,
would increase the capital gains tax generally; i.e., not just on timber. To the extent that
capital gains characterization continues to apply to sales of timber (see paragraph B), this
increase would have an adverse effect.
B. Former Chairman Camp’s proposal would alter section 631 of the Internal Revenue Code
so that gains from cutting timber would be considered ordinary income, not capital gains.
Specifically, section 3132 of his proposal would treat gains from timber cut as part of a trade
of business, as well as gains from the disposal of timber that was cut more than a year ago,
as ordinary income instead of capital gains. Consumption tax proposals, floated by Sens.
Ben Cardin and John Isakson and Rep. Devin Nunes, also would appear to tax timber
income as ordinary income.
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Tax Reform and the Timber Industry
C. Section 3634 of Mr. Camp’s proposal would redefine “real property” for the purposes of
REIT rules to exclude timber, effectively denying the benefit of REIT status to the timber
industry. Corporations that elected REIT status would be subject to two levels of taxation, at
the corporate and shareholder levels. The section would also repeal “other temporary special
rules for timber sales and timber REITs that have expired.”
D, F. Section 3118 of Rep. Camp’s bill would eliminate taxpayers’ ability to elect to deduct up
to $10,000 for reforestation expenditures. It also would limit the definition of “qualifying timber
property” to ornamental trees for the purposes of the 84-month amortization election,
effectively lengthening the cost recovery period of timber assets and increasing the cost of
capital investment. Further, proposals by former Chairman Camp and former Senate Finance
Committee Chairman Max Baucus would substantially increase the current conventional
depreciable periods. Reforestation expenditures are also addressed in Rep. Nunes’
“American Business Competiveness Act,” which would allow full expensing and eliminate
provisions such as Section 194 of the Code on reforestation expenditures.
G. Section 1422 of Rep. Camp’s proposal, as well as the President’s FY 2016 budget,
require the same valuation of property for purposes of estate taxes and the basis to the
beneficiary. Currently, there is not a requirement that the values used by the estate and its
beneficiary be the same, i.e., different taxpayers can take different positions on the value of
the decedent’s property at death.
H. President Obama’s FY 2016 budget proposes to reform the taxation of capital income
including an end to the so-called “trust fund” loophole, calling for taxation of built-in capital
gains on bequests and gifts. His proposal provides for exceptions for small family-owned
businesses and farms, allowing recognition of the gain over a 15-year period. Taxation of
built-in capital gains would appear to apply even if the estate fell below estate tax thresholds.
His proposal would exempt the first $200,000 of capital gains for a couple and $500,000 for
personal residences. This provision, like paragraph A above, is generally applicable to all
property, not just timber.
Authors:
Mary Burke Baker
C. Kent Carlson
mary.baker@klgates.com
+1.202.778.9223
kent.carlson@klgates.com
+1.206.370.6679
Tim L. Peckinpaugh
Andrew H. Zuccotti
tim.peckinpaugh@klgates.com
+1.202.661.6265
andrew.zuccotti@klgates.com
+1.206.370.6680
Charles H. Purcell
Sarah M. Beason
charles.purcell@klgates.com
+1.206.370.8369
sarah.beason@klgates.com
+1.202.778.9019
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Tax Reform and the Timber Industry
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