Repeal of estate tax on family-owned businesses and farms

(a)

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:

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, (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.

(b)

Carryover basis rules for carryover business interests

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:

1023.

Treatment of carryover business interests

(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 the carryover business interests of the decedent with respect to which an election is made under section 2059(b)(1)(B). (c)

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. (d)

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. (e)

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. (f)

Regulations

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

(c)

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 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.

(d)

Effective dates

The amendments made by this section shall apply to estates of decedents dying, and gifts made— (1)after the date of the enactment of this Act, and before January 1, 2010, and (2)after December 31, 2010.