[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 34 Introduced in Senate (IS)]







108th CONGRESS
  1st Session
                                 S. 34

To amend the Internal Revenue Code of 1986 to provide for the immediate 
 and permanent repeal of the estate tax on family-owned businesses and 
                     farms, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 7, 2003

 Mrs. Lincoln 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 for the immediate 
 and permanent repeal of the estate tax on family-owned businesses and 
                     farms, 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 ``Estate Tax Repeal Acceleration 
(ExTRA) for Family-Owned Businesses and Farms Act''.

SEC. 2. REPEAL OF ESTATE TAX ON FAMILY-OWNED BUSINESSES AND FARMS.

    (a) Repeal of Qualified Family-Owned Business Interest.--Part IV of 
subchapter A of chapter 11 of the Internal Revenue Code of 1986 
(relating to taxable estate) is amended by striking section 2057.
    (b) Carryover Business Interest Exclusion.--Part IV of subchapter A 
of chapter 11 of the Internal Revenue Code of 1986 (relating to taxable 
estate) is amended by inserting after section 2058 the following new 
section:

``SEC. 2059. CARRYOVER BUSINESS INTERESTS.

    ``(a) General Rules.--
            ``(1) Allowance of deduction.--For purposes of the tax 
        imposed by section 2001, in the case of an estate of a decedent 
        to which this section applies, the value of the taxable estate 
        shall be determined by deducting from the value of the gross 
        estate the adjusted value of the carryover business interests 
        of the decedent which are described in subsection (b)(2).
            ``(2) Application of carryover basis rules.--With respect 
        to the adjusted value of the carryover business interests of 
        the decedent which are described in subsection (b)(2), the 
        rules of section 1023 shall apply.
    ``(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 executor elects the application of this 
                section under rules similar to the rules of paragraphs 
                (1) and (3) of section 2032A(d) and files the agreement 
                referred to in subsection (e), 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) the carryover business interests 
                        described in paragraph (2) 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, a member of the decedent's 
                        family, or a qualified heir in the operation of 
                        the business to which such interests relate.
            ``(2) Includible carryover business interests.--The 
        carryover business interests described in this paragraph are 
        the interests which--
                    ``(A) are included in determining the value of the 
                gross estate (other than qualified spousal property 
                with respect to which an aggregate spousal property 
                basis increase is allocated under section 1023(c)),
                    ``(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)), and
                    ``(C) are subject to the election under paragraph 
                (1)(B).
            ``(3) Rules regarding material participation.--For purposes 
        of paragraph (1)(C)(ii)--
                    ``(A) in the case a surviving spouse, material 
                participation by such spouse may be satisfied under 
                rules similar to the rules under section 2032A(b)(5),
                    ``(B) in the case of a carryover business interest 
                in an entity carrying on multiple trades or businesses, 
                material participation in each trade or business is 
                satisfied by material participation in the entity or in 
                1 or more of the multiple trades or businesses, and
                    ``(C) in the case of a lending and finance business 
                (as defined in section 6166(b)(10)(B)(ii)), material 
                participation is satisfied under the rules under 
                subclause (I) or (II) of section 6166(b)(10)(B)(i).
    ``(c) Adjusted Value of the Carryover Business Interests.--For 
purposes of this section--
            ``(1) In general.--The adjusted value of any carryover 
        business interest is the value of such interest for purposes of 
        this chapter (determined without regard to this section), as 
        adjusted under paragraph (2).
            ``(2) Adjustment for previous transfers.--The Secretary may 
        increase the value of any carryover business interest by that 
        portion of those assets transferred from such carryover 
        business interest to the decedent's taxable estate within 3 
        years before the date of the decedent's death.
    ``(d) Carryover Business Interest.--
            ``(1) In general.--For purposes of this section, the term 
        `carryover 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.
        For purposes of the preceding sentence, a decedent shall be 
        treated as engaged in a trade or business if any member of the 
        decedent's family is engaged in such trade or business.
            ``(2) Lending and finance business.--For purposes of this 
        section, any asset used in a lending and finance business (as 
        defined in section 6166(b)(10)(B)(ii)) shall be treated as an 
        asset which is used in carrying on a trade or business.
            ``(3) 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,
                    ``(C) that portion of an interest in an entity 
                transferred by gift to such interest within 3 years 
                before the date of the decedent's death, and
                    ``(D) that portion of an interest in an entity 
                which is attributable to cash or marketable securities, 
                or both, in any amount in excess of the reasonably 
                anticipated business needs of such entity.
        In any proceeding before the United States Tax Court involving 
        a notice of deficiency based in whole or in part on the 
        allegation that cash or marketable securities, or both, are 
        accumulated in an amount in excess of the reasonably 
        anticipated business needs of such entity, the burden of proof 
        with respect to such allegation shall be on the Secretary to 
        the extent such cash or marketable securities are less than 35 
        percent of the value of the interest in such entity.
            ``(4) 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 carryover business 
                        interest, and
                            ``(ii) this section shall be applied 
                        separately in determining if such interest in 
                        any other trade or business is a carryover 
                        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.
    ``(e) Agreement.--The agreement referred to in this subsection is a 
written agreement signed by each person in being who has an interest 
(whether or not in possession) in any property designated in such 
agreement consenting to the application of this section with respect to 
such property.
    ``(f) Other Definitions and Applicable Rules.--For purposes of this 
section--
            ``(1) Qualified heir.--The term `qualified heir' means a 
        United States citizen who is--
                    ``(A) described in section 2032A(e)(1), or
                    ``(B) an active employee of the trade or business 
                to which the carryover 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(e)(10) (relating to community 
                property).
                    ``(C) Section 2032A(e)(14) (relating to treatment 
                of replacement property acquired in section 1031 or 
                1033 transactions).
                    ``(D) Section 2032A(g) (relating to application to 
                interests in partnerships, corporations, and trusts).
            ``(4) Safe harbor for active entities held by entity 
        carrying on a trade or business.--For purposes of this section, 
        if--
                    ``(A) an entity carrying on a trade or business 
                owns 20 percent or more in value of the voting 
                interests of another entity, or such other entity has 
                15 or fewer owners, and
                    ``(B) 80 percent or more of the value of the assets 
                of each such entity is attributable to assets used in 
                an active business operation,
        then the requirements under subsections (b)(1)(C)(ii) and 
        (d)(3)(D) shall be met with respect to an interest in such an 
        entity.''.
    (c) Modification of Treatment of Marital Deduction; Limitation on 
Step-Up in Basis.--Section 2056 of the Internal Revenue Code of 1986 
(relating to bequests, etc., to surviving spouses) is amended by adding 
at the end the following new subsection:
    ``(e) Application of Carryover Basis Rules.--With respect to the 
value of the interests of the decedent which are described in 
subsection (a), the rules of section 1023 shall apply.''.
    (d) Carryover Basis Rules for Carryover Business Interests and 
Spousal Property.--Part II of subchapter O of chapter 1 of the Internal 
Revenue Code of 1986 (relating to basis rules of general application) 
is amended by inserting after section 1022 the following new section:

``SEC. 1023. TREATMENT OF CARRYOVER BUSINESS INTERESTS AND SPOUSAL 
              PROPERTY.

    ``(a) In General.--Except as otherwise provided in this section--
            ``(1) qualified property acquired from a decedent shall be 
        treated for purposes of this subtitle as transferred by gift, 
        and
            ``(2) the basis of the person acquiring qualified property 
        from such a decedent shall be the lesser of--
                    ``(A) the adjusted basis of the decedent, or
                    ``(B) the fair market value of the property at the 
                date of the decedent's death.
    ``(b) Qualified Property.--For purposes of this section, the term 
`qualified property' means--
            ``(1) the carryover business interests of the decedent with 
        respect to which an election is made under section 
        2059(b)(1)(B), and
            ``(2) the qualified spousal property.
    ``(c) Additional Basis Increase for Property Acquired by Surviving 
Spouse.--
            ``(1) In general.--In the case of property to which this 
        subsection applies and which is qualified spousal property, the 
        basis of such property under subsection (a) shall be increased 
        by its spousal property basis increase.
            ``(2) Spousal property basis increase.--For purposes of 
        this subsection--
                    ``(A) In general.--The spousal property basis 
                increase for property referred to in paragraph (1) is 
                the portion of the aggregate spousal property basis 
                increase which is allocated to the property pursuant to 
                this section.
                    ``(B) Aggregate spousal property basis increase.--
                In the case of any estate, the aggregate spousal 
                property basis increase is $3,000,000.
            ``(3) Qualified spousal property.--For purposes of this 
        section, the term `qualified spousal property' means any 
        interest in property which passes or has passed from the 
        decedent to the decedent's surviving spouse with respect to 
        which a deduction is allowed under section 2056.
            ``(4) Definitions and special rules.--
                    ``(A) Property to which subsection applies.--The 
                basis of property acquired from a decedent may be 
                increased under this subsection only if the property 
                was owned by the decedent at the time of death.
                    ``(B) Rules relating to ownership.--
                            ``(i) Jointly held property.--In the case 
                        of property which was owned by the decedent and 
                        another person as joint tenants with right of 
                        survivorship or tenants by the entirety--
                                    ``(I) if the only such other person 
                                is the surviving spouse, the decedent 
                                shall be treated as the owner of only 
                                50 percent of the property,
                                    ``(II) in any case (to which 
                                subclause (I) does not apply) in which 
                                the decedent furnished consideration 
                                for the acquisition of the property, 
                                the decedent shall be treated as the 
                                owner to the extent of the portion of 
                                the property which is proportionate to 
                                such consideration, and
                                    ``(III) in any case (to which 
                                subclause (I) does not apply) in which 
                                the property has been acquired by gift, 
bequest, devise, or inheritance by the decedent and any other person as 
joint tenants with right of survivorship and their interests are not 
otherwise specified or fixed by law, the decedent shall be treated as 
the owner to the extent of the value of a fractional part to be 
determined by dividing the value of the property by the number of joint 
tenants with right of survivorship.
                            ``(ii) Revocable trusts.--The decedent 
                        shall be treated as owning property transferred 
                        by the decedent during life to a qualified 
                        revocable trust (as defined in section 
                        645(b)(1)).
                            ``(iii) Powers of appointment.--The 
                        decedent shall not be treated as owning any 
                        property by reason of holding a power of 
                        appointment with respect to such property.
                            ``(iv) Community property.--Property which 
                        represents the surviving spouse's one-half 
                        share of community property held by the 
                        decedent and the surviving spouse under the 
                        community property laws of any State or 
                        possession of the United States or any foreign 
                        country shall be treated for purposes of this 
                        section as owned by, and acquired from, the 
                        decedent if at least one-half of the whole of 
                        the community interest in such property is 
                        treated as owned by, and acquired from, the 
                        decedent without regard to this clause.
                    ``(C) Property acquired by decedent by gift within 
                3 years of death.--
                            ``(i) In general.--This subsection shall 
                        not apply to property acquired by the decedent 
                        by gift or by inter vivos transfer for less 
                        than adequate and full consideration in money 
                        or money's worth during the 3-year period 
                        ending on the date of the decedent's death.
                            ``(ii) Exception for certain gifts from 
                        spouse.--Clause (i) shall not apply to property 
                        acquired by the decedent from the decedent's 
                        spouse unless, during such 3-year period, such 
                        spouse acquired the property in whole or in 
                        part by gift or by inter vivos transfer for 
                        less than adequate and full consideration in 
                        money or money's worth.
                    ``(D) Stock of certain entities.--This subsection 
                shall not apply to--
                            ``(i) stock or securities of a foreign 
                        personal holding company,
                            ``(ii) stock of a DISC or former DISC,
                            ``(iii) stock of a foreign investment 
                        company, or
                            ``(iv) stock of a passive foreign 
                        investment company unless such company is a 
                        qualified electing fund (as defined in section 
                        1295) with respect to the decedent.
                    ``(E) Fair market value limitation.--The 
                adjustments under this subsection shall not increase 
                the basis of any interest in property acquired from the 
                decedent above its fair market value in the hands of 
                the decedent as of the date of the decedent's death.
    ``(d) Property Acquired From the Decedent.--For purposes of this 
section, the following property shall be considered to have been 
acquired from the decedent:
            ``(1) Property acquired by bequest, devise, or inheritance, 
        or by the decedent's estate from the decedent.
            ``(2) Property transferred by the decedent during his 
        lifetime--
                    ``(A) to a qualified revocable trust (as defined in 
                section 645(b)(1)), or
                    ``(B) to any other trust with respect to which the 
                decedent reserved the right to make any change in the 
                enjoyment thereof through the exercise of a power to 
                alter, amend, or terminate the trust.
            ``(3) Any other property passing from the decedent by 
        reason of death to the extent that such property passed without 
        consideration.
    ``(e) Coordination With Section 691.--This section shall not apply 
to property which constitutes a right to receive an item of income in 
respect of a decedent under section 691.
    ``(f) Certain Liabilities Disregarded.--
            ``(1) In general.--In determining whether gain is 
        recognized on the acquisition of property--
                    ``(A) from a decedent by a decedent's estate or any 
                beneficiary other than a tax-exempt beneficiary, and
                    ``(B) from the decedent's estate by any beneficiary 
                other than a tax-exempt beneficiary,
        and in determining the adjusted basis of such property, 
        liabilities in excess of basis shall be disregarded.
            ``(2) Tax-exempt beneficiary.--For purposes of paragraph 
        (1), the term `tax-exempt beneficiary' means--
                    ``(A) the United States, any State or political 
                subdivision thereof, any possession of the United 
                States, any Indian tribal government (within the 
                meaning of section 7871), or any agency or 
                instrumentality of any of the foregoing,
                    ``(B) an organization (other than a cooperative 
                described in section 521) which is exempt from tax 
                imposed by chapter 1,
                    ``(C) any foreign person or entity (within the 
                meaning of section 168(h)(2)), and
                    ``(D) to the extent provided in regulations, any 
                person to whom property is transferred for the 
                principal purpose of tax avoidance.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary to carry out the purposes of this section.''.
    (e) Clerical Amendments.--
            (1) The table of sections for part IV of subchapter A of 
        chapter 11 of the Internal Revenue Code of 1986 is amended by 
        striking the item relating to section 2057 and by inserting 
        after the item relating to section 2058 the following new item:

                              ``Sec. 2059. Carryover business 
                                        exclusion.''.
            (2) The table of sections for part II of subchapter O of 
        chapter 1 of such Code is amended by inserting after the item 
        relating to section 1022 the following new item:

                              ``Sec. 1023. Treatment of carryover 
                                        business interests and spousal 
                                        property.''.
    (f) Effective Dates.--The amendments made by this section shall 
apply to estates of decedents dying, and gifts made--
            (1) after December 31, 2003, and before January 1, 2010, 
        and
            (2) after December 31, 2011.
                                 <all>