[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 2173 Introduced in Senate (IS)]
104th CONGRESS
2d Session
S. 2173
To amend the Internal Revenue Code of 1986 to allow a family-owned
business exclusion from the gross estate subject to estate tax, and for
other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
September 30, 1996
Mr. Dorgan 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 allow a family-owned
business exclusion from the gross estate subject to estate tax, and for
other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Family Business Estate Tax Relief
Act of 1996''.
SEC. 2. FAMILY-OWNED BUSINESS EXCLUSION.
(a) In General.--Part III of subchapter A of chapter 11 of the
Internal Revenue Code of 1986 (relating to gross estate) is amended by
inserting after section 2033 the following new section:
``SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.
``(a) In General.--In the case of an estate of a decedent to which
this section applies, the value of the gross estate shall not include
the lesser of--
``(1) the adjusted value of the qualified family-owned
business interests of the decedent otherwise includible in the
estate, or
``(2) $900,000, reduced by the amount of any exclusion
allowed under this section with respect to the estate of a
previously deceased spouse of the decedent.
``(b) Estates to Which Section Applies.--
``(1) In general.--This section shall apply to an estate
if--
``(A) the decedent was (at the date of the
decedent's death) a citizen or resident of the United
States,
``(B) the sum of--
``(i) the adjusted value of the qualified
family-owned business interests described in
paragraph (2), plus
``(ii) the amount of the gifts of such
interests determined under paragraph (3),
exceeds 50 percent of the adjusted gross estate, and
``(C) during the 8-year period ending on the date
of the decedent's death there have been periods
aggregating 5 years or more during which--
``(i) such interests were owned by the
decedent or a member of the decedent's family,
and
``(ii) there was material participation
(within the meaning of section 2032A(e)(6)) by
the decedent or a member of the decedent's
family in the operation of the business to
which such interests relate.
``(2) Includible qualified family-owned business
interests.--The qualified family-owned business interests
described in this paragraph are the interests which--
``(A) are included in determining the value of the
gross estate (without regard to this section), and
``(B) are acquired by any qualified heir from, or
passed to any qualified heir from, the decedent (within
the meaning of section 2032A(e)(9)).
``(3) Includible gifts of interests.--The amount of the
gifts of qualified family-owned business interests determined
under this paragraph is the excess of--
``(A) the sum of--
``(i) the amount of such gifts from the
decedent to members of the decedent's family
taken into account under subsection
2001(b)(1)(B), plus
``(ii) the amount of such gifts otherwise
excluded under section 2503(b),
to the extent such interests are continuously held by
members of such family (other than the decedent's
spouse) between the date of the gift and the date of
the decedent's death, over
``(B) the amount of such gifts from the decedent to
members of the decedent's family otherwise included in
the gross estate.
``(c) Adjusted Gross Estate.--For purposes of this section, the
term `adjusted gross estate' means the value of the gross estate
(determined without regard to this section)--
``(1) reduced by any amount deductible under paragraph (3)
or (4) of section 2053(a), and
``(2) increased by the excess of--
``(A) the sum of--
``(i) the amount of gifts determined under
subsection (b)(3), plus
``(ii) the amount (if more than de minimis)
of other transfers from the decedent to the
decedent's spouse (at the time of the transfer)
within 10 years of the date of the decedent's
death, plus
``(iii) the amount of other gifts (not
included under clause (i) or (ii)) from the
decedent within 3 years of such date, other
than gifts to members of the decedent's family
otherwise excluded under section 2503(b), over
``(B) the sum of the amounts described in clauses
(i), (ii), and (iii) of subparagraph (A) which are
otherwise includible in the gross estate.
For purposes of the preceding sentence, the Secretary may provide that
de minimis gifts to persons other than members of the decedent's family
shall not be taken into account.
``(d) Adjusted Value of the Qualified Family-Owned Business
Interests.--For purposes of this section, the adjusted value of any
qualified family-owned business interest is the value of such interest
for purposes of this chapter (determined without regard to this
section), reduced by the excess of--
``(1) any amount deductible under paragraph (3) or (4) of
section 2053(a), over
``(2) the sum of--
``(A) any indebtedness on any qualified residence
of the decedent the interest on which is deductible
under section 163(h)(3), plus
``(B) any indebtedness to the extent the taxpayer
establishes that the proceeds of such indebtedness were
used for the payment of educational and medical
expenses of the decedent, the decedent's spouse, or the
decedent's dependents (within the meaning of section
152), plus
``(C) any indebtedness not described in clause (i)
or (ii), to the extent such indebtedness does not
exceed $10,000.
``(e) Qualified Family-Owned Business Interest.--
``(1) In general.--For purposes of this section, the term
`qualified family-owned business interest' means--
``(A) an interest as a proprietor in a trade or
business carried on as a proprietorship, or
``(B) an interest in an entity carrying on a trade
or business, if--
``(i) at least--
``(I) 50 percent of such entity is
owned (directly or indirectly) by the
decedent and members of the decedent's
family,
``(II) 70 percent of such entity is
so owned by members of 2 families, or
``(III) 90 percent of such entity
is so owned by members of 3 families,
and
``(ii) for purposes of subclause (II) or
(III) of clause (i), at least 30 percent of
such entity is so owned by the decedent and
members of the decedent's family.
``(2) Limitation.--Such term shall not include--
``(A) any interest in a trade or business the
principal place of business of which is not located in
the United States,
``(B) any interest in an entity, if the stock or
debt of such entity or a controlled group (as defined
in section 267(f)(1)) of which such entity was a member
was readily tradable on an established securities
market or secondary market (as defined by the
Secretary) at any time within 3 years of the date of
the decedent's death,
``(C) any interest in a trade or business not
described in section 542(c)(2), if more than 35 percent
of the adjusted ordinary gross income of such trade or
business for the taxable year which includes the date
of the decedent's death would qualify as personal
holding company income (as defined in section 543(a)),
``(D) that portion of an interest in a trade or
business that is attributable to--
``(i) cash or marketable securities, or
both, in excess of the reasonably expected day-
to-day working capital needs of such trade or
business, and
``(ii) any other assets of the trade or
business (other than assets used in the active
conduct of a trade or business described in
section 542(c)(2)), the income of which is
described in section 543(a) or in subparagraph
(B), (C), (D), or (E) of section 954(c)(1)
(determined by substituting `trade or business'
for `controlled foreign corporation').
``(3) Rules regarding ownership.--
``(A) Ownership of entities.--For purposes of
paragraph (1)(B)--
``(i) Corporations.--Ownership of a
corporation shall be determined by the holding
of stock possessing the appropriate percentage
of the total combined voting power of all
classes of stock entitled to vote and the
appropriate percentage of the total value of
shares of all classes of stock.
``(ii) Partnerships.--Ownership of a
partnership shall be determined by the owning
of the appropriate percentage of the capital
interest in such partnership.
``(B) Ownership of tiered entities.--For purposes
of this section, if by reason of holding an interest in
a trade or business, a decedent, any member of the
decedent's family, any qualified heir, or any member of
any qualified heir's family is treated as holding an
interest in any other trade or business--
``(i) such ownership interest in the other
trade or business shall be disregarded in
determining if the ownership interest in the
first trade or business is a qualified family-
owned business interest, and
``(ii) this section shall be applied
separately in determining if such interest in
any other trade or business is a qualified
family-owned business interest.
``(C) Individual ownership rules.--For purposes of
this section, an interest owned, directly or
indirectly, by or for an entity described in paragraph
(1)(B) shall be considered as being owned
proportionately by or for the entity's shareholders,
partners, or beneficiaries. A person shall be treated
as a beneficiary of any trust only if such person has a
present interest in such trust.
``(f) Tax Treatment of Failure To Materially Participate in
Business or Dispositions of Interests.--
``(1) In general.--There is imposed an additional estate
tax if, within 10 years after the date of the decedent's death
and before the date of the qualified heir's death--
``(A) the material participation requirements
described in section 2032A(c)(6)(B) are not met with
respect to the qualified family-owned business interest
which was acquired (or passed) from the decedent,
``(B) the qualified heir disposes of any portion of
a qualified family-owned business interest (other than
by a disposition to a member of the qualified heir's
family or through a qualified conservation contribution
under section 170(h)),
``(C) the qualified heir loses United States
citizenship (within the meaning of section 877) or with
respect to whom an event described in subparagraph (A)
or (B) of section 877(e)(1) occurs, and such heir does
not comply with the requirements of subsection (g), or
``(D) the principal place of business of a trade or
business of the qualified family-owned business
interest ceases to be located in the United States.
``(2) Additional estate tax.--
``(A) In general.--The amount of the additional
estate tax imposed by paragraph (1) shall be equal to--
``(i) the applicable percentage of the
adjusted tax difference attributable to the
qualified family-owned business interest (as
determined under rules similar to the rules of
section 2032A(c)(2)(B)), plus
``(ii) interest on the amount determined
under clause (i) at the underpayment rate
established under section 6621 for the period
beginning on the date the estate tax liability
was due under this chapter and ending on the
date such additional estate tax is due.
``(B) Applicable percentage.--For purposes of this
paragraph, the applicable percentage shall be
determined under the following table:
``If the event described in
paragraph (1) occurs in
the following year of
The applicable
material participation:
percentage is:
1 through 6................................... 100
7............................................. 80
8............................................. 60
9............................................. 40
10............................................ 20.
``(g) Security Requirements for Noncitizen Qualified Heirs.--
``(1) In general.--Except upon the application of
subparagraph (F) or (M) of subsection (h)(3), if a qualified
heir is not a citizen of the United States, any interest under
this section passing to or acquired by such heir (including any
interest held by such heir at a time described in subsection
(f)(1)(C)) shall be treated as a qualified family-owned
business interest only if the interest passes or is acquired
(or is held) in a qualified trust.
``(2) Qualified trust.--The term `qualified trust' means a
trust--
``(A) which is organized under, and governed by,
the laws of the United States or a State, and
``(B) except as otherwise provided in regulations,
with respect to which the trust instrument requires
that at least 1 trustee of the trust be an individual
citizen of the United States or a domestic corporation.
``(h) Other Definitions and Applicable Rules.--For purposes of this
section--
``(1) Qualified heir.--The term `qualified heir'--
``(A) has the meaning given to such term by section
2032A(e)(1), and
``(B) includes any active employee of the trade or
business to which the qualified family-owned business
interest relates if such employee has been employed by
such trade or business for a period of at least 10 years before the
date of the decedent's death.
``(2) Member of the family.--The term `member of the
family' has the meaning given to such term by section
2032A(e)(2).
``(3) Applicable rules.--Rules similar to the following
rules shall apply:
``(A) Section 2032A(b)(4) (relating to decedents
who are retired or disabled).
``(B) Section 2032A(b)(5) (relating to special
rules for surviving spouses).
``(C) Section 2032A(c)(2)(D) (relating to partial
dispositions).
``(D) Section 2032A(c)(3) (relating to only 1
additional tax imposed with respect to any 1 portion).
``(E) Section 2032A(c)(4) (relating to due date).
``(F) Section 2032A(c)(5) (relating to liability
for tax; furnishing of bond).
``(G) Section 2032A(c)(7) (relating to no tax if
use begins within 2 years; active management by
eligible qualified heir treated as material
participation).
``(H) Section 2032A(e)(10) (relating to community
property).
``(I) Section 2032A(e)(14) (relating to treatment
of replacement property acquired in section 1031 or
1033 transactions).
``(J) Section 2032A(f) (relating to statute of
limitations).
``(K) Section 6166(b)(3) (relating to farmhouses
and certain other structures taken into account).
``(L) Subparagraphs (B), (C), and (D) of section
6166(g)(1) (relating to acceleration of payment).
``(M) Section 6324B (relating to special lien for
additional estate tax).''.
(b) Clerical Amendment.--The table of sections for part III of
subchapter A of chapter 11 is amended by inserting after the item
relating to section 2033 the following new item:
``Sec. 2033A. Family-owned business
exclusion.''.
(c) Effective Date.--The amendments made by this section shall
apply to estates of decedents dying after December 31, 1996.
SEC. 3. PORTION OF ESTATE TAX SUBJECT TO 4-PERCENT INTEREST RATE
INCREASED TO $1,600,000.
(a) In General.--Subparagraph (B) of section 6601(j)(2) of the
Internal Revenue Code of 1986 (defining 4-percent portion) is amended
by striking ``$345,800'' and inserting ``$600,800''.
(b) Effective Date.--The amendment made by this section shall apply
to estates of decedents dying after December 31, 1996.
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