Montana Viewpoint


August 4, 2008

As you may well know, Plum Creek Timber REIT is going to sell about 320,000 acres of their land holdings in Montana to two conservation groups and the U. S. Government. The money will come from a federal financing provision that Senator Baucus had inserted in the Farm Bill. Most of the land in question was a part of the Northern Pacific Railroad land grant of 1864 in which the United States government gave the railroad some 40 million acres of federal land to finance construction. The terms of the grant required the Northern Pacific to sell the land to settlers if they didn’t meet certain performance standards—like building a railroad—and despite the fact that they defaulted on the terms of the grant twice, the land stayed in Northern Pacific  ownership.

I think basically that the land sale is good news for Montana, but I hope the parties involved have remembered to discount the asking price because of Plum Creek REIT’s special income tax status, which is basically that they don’t pay any. Let me put that into context; if you or I were selling that same land and made a profit over what we paid for it we would be first, happy campers; and second, looking at a staggering capital gains tax bill.

Plum Creek Timber is that strange corporate animal called a Real Estate Investment Trust (REIT). In the 1960s they got congress to give them immunity from paying taxes on their profits. REITs were established, so the REITs say, as a way to let the small investor into the real estate market, which is good of them, but I look at it from a slightly different perspective, because it also gave REITs access to money from the small investor.
To qualify as a REIT the company must distribute at least 90% of its taxable earnings to the shareholders. Because a REIT does not have to pay taxes on its earnings from its real estate holdings, such as timber management, REITs are able to yield a higher return. But the shareholder does have to pay tax to the IRS and to whatever state they live in, so taxes due on REIT profits are paid by investors in New York, California, and everywhere in between to their respective states. If Plum Creek were required to pay income taxes, Montana would get millions in tax revenue that is now going to other states. True, if a shareholder lives in Montana they pay the tax to Montana, but only a small proportion of Plum Creek investors live in Montana. One notable exception is Montana investor Ian B. Davidson, who as a director of Plum Creek Timber REIT holds around 33,000 shares on which he presumably would pay Montana income tax.
I cannot tell you what amount of tax Plum Creek would pay to Montana if they were taxed like other corporations, or even like you and me, but I can tell you it would be a chunk o’ change. Montana’s Corporate Income Tax rate is 6.75%. The amount of money changing hands is touted at $510,000,000; yep, that’s half a billion dollars. When you take a capital gain, you’re taxed on the amount of money you made, not the whole amount, so you’re allowed to deduct the initial cost of the land from the gross sales price. That would still leave an outstandingly large capital gain on which Plum Creek would pay tens of millions of dollars in Federal and Montana income tax.

But the fact of the matter is that Plum Creek is not going to pay any tax on the profit, and that needs to be taken into consideration in setting the price of the land. I am assuming that Plum Creek is determining the value of the land they will sell at its actual market value. That’s their prerogative; but purchasers of the land need to discount the purchase price to the extent that Plum Creek’s tax-free status gives them an economic advantage.
I would imagine that a guy willing to pay half a billion bucks would have some negotiating leverage, but on the other hand it’s only taxpayer financed, so what the heck; let the good times roll.


Jim Elliott