[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 288 Introduced in Senate (IS)]







105th CONGRESS
  1st Session
                                 S. 288

  To amend the Internal Revenue Code of 1986 to provide families with 
               estate tax relief, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            February 6, 1997

  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 provide families with 
               estate tax relief, 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 Estate Tax Relief Act of 
1997''.

SEC. 2. INCREASE IN UNIFIED ESTATE AND GIFT TAX CREDIT.

    (a) Estate Tax Credit.--
            (1) In general.--Subsection (a) of section 2010 (relating 
        to unified credit against estate tax) is amended by striking 
        ``$192,800'' and inserting ``the applicable credit amount''.
            (2) Applicable credit amount.--Section 2010 is amended by 
        redesignating subsection (c) as subsection (d) and by inserting 
        after subsection (b) the following new subsection:
    ``(c) Applicable Credit Amount.--For purposes of this section the 
applicable credit amount is the amount of the tentative tax which would 
be determined under the rate schedule set forth in section 2001(c) if 
the amount with respect to which such tentative tax is to be computed 
were the applicable exclusion amount determined in accordance with the 
following table:

        ``In the case of estates of decedents
                                                         The applicable
          dying, and gifts made, during:
                                                   exclusion amount is:
                  1997...............................         $675,000 
                  1998...............................          750,000 
                  1999...............................          825,000 
                  2000...............................          860,000 
                  2001...............................          895,000 
                  2002...............................          930,000 
                  2003...............................          965,000 
                  2004 or thereafter.................     $1,000,000.''
            (3) Conforming amendments.--
                    (A) Paragraph (1) of section 6018(a) is amended by 
                striking ``$600,000'' and inserting ``the applicable 
                exclusion amount in effect under section 2010(c) for 
                the calendar year which includes the date of death''.
                    (B) Paragraph (2) of section 2001(c) is amended by 
                striking ``$21,040,000'' and inserting ``the amount at 
                which the average tax rate under this section is 55 
                percent''.
                    (C) Subparagraph (A) of section 2102(c)(3) is 
                amended by striking ``$192,800'' and inserting ``the 
                applicable credit amount in effect under section 
                2010(c) for the calendar year which includes the date 
                of death''.
    (b) Unified Gift Tax Credit.--Paragraph (1) of section 2505(a) is 
amended by striking ``$192,800'' and inserting ``the applicable credit 
amount in effect under section 2010(c) for such calendar year''.
    (c) Effective Date.--The amendments made by this subsection shall 
apply to the estates of decedents dying, and gifts made, after December 
31, 1996.

SEC. 3. 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) $1,000,000, 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. 4. PORTION OF ESTATE TAX SUBJECT TO 4-PERCENT INTEREST RATE 
              INCREASED TO TAX ATTRIBUTABLE TO FIRST $1,000,000 IN 
              EXCESS OF THE CREDIT AMOUNT.

    (a) In General.--Section 6601(j)(2) (defining 4-percent portion) is 
amended to read as follows:
            ``(2) 4-percent portion.--For purposes of this subsection, 
        the term `4-percent portion' means the lesser of--
                    ``(A) so much of the tax imposed by chapter 11 
                which is extended as provided in section 6166 as is in 
                excess of the amount of the credit allowable under 
                section 2010(a), or
                    ``(B) the amount of the tentative tax which would 
                be determined under the rate schedule set forth in 
                section 2001(c) if the amount with respect to which 
                such tentative tax is to be computed were $1,000,000.''
    (b) Effective Date.--The amendment made by this section shall apply 
to estates of decedents dying after December 31, 1996.
                                 <all>