[Congressional Record Volume 142, Number 138 (Monday, September 30, 1996)]
[Senate]
[Pages S11986-S11987]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DORGAN:

  S. 2173. 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; to the Committee on Finance.


           The Family Business Estate Tax Relief Act of 1996

 Mr. DORGAN. Mr. President, I introduce the Family Business 
Estate Tax Relief Act of 1996, which would help preserve our Nation's 
most important economic assets. I am referring, of course, to our 
farms, ranches and other family-owned small businesses which are the 
major creators of new wealth and jobs in this country.
  Farms, ranches and other closely held family businesses that operate 
in this country face a number of obstacles to succeeding, ranging from 
price gouging by tough international competitors to excessive U.S. 
regulations. That is why it is not surprising to find, for example, 
that we have lost some 377,000 family farms since 1980, a decline of 
some 23,500 family farms every year.
  Since 1980, we have lost some 9,000 of our family farms in North 
Dakota. At the same time, we see that only a small fraction of other 
family-run businesses survive beyond the second generation.
  When family farms are sold or family-run businesses on Main Street 
are boarded up, those families lose their very livelihood. Moreover, 
our country loses the jobs and services those families provide to our 
communities.
  I have been approached on a number of occasions at town meetings by 
North Dakotans who say it is virtually impossible for them to pass 
along their farm or business--which has been the family's major asset 
for decades--to their children because of the exorbitant estate taxes 
they would pay. They think it is unfair, and I agree.
  Unfortunately, our estate tax laws force many family members who 
inherit a modestly sized farm, ranch or other family business to sell 
it, or a large part of it, out of the family in order to pay off estate 
taxes. This is especially onerous when the inheriting family members 
have already been participating in the business for years and depend 
upon it to earn a living.

[[Page S11987]]

  I think that we must take immediate steps to breathe new economic 
life and opportunities into our family businesses and the communities 
in which they operate. It seems to me that a good first step is 
correcting our estate tax laws so they do not unfairly penalize those 
working families who are now prevented from passing along a small farm 
or business to their kids or grandkids because they would have to pay 
exorbitant estate taxes.
  There are a few provisions included in our estate tax laws that are 
intended to help a family's effort to keep the family business running 
long after the death of its original owner. But, for the most part, 
these provisions are either too modest or too narrowly drawn to do much 
good.
  Now I also understand that there are some complicated estate tax 
planning techniques available for those wealthy enough to hire 
sophisticated and costly tax advisors. Clearly some estate planning 
devices may reduce the estate tax burden imposed on some family 
businesses upon the death of a principal owner. But for those less 
affluent families inheriting a family business--where such estate 
planning tools were unavailable for whatever reason--the estate taxes 
will ultimately force them to amass a pile of debt, or to sell off all 
or a large part of a family business, just to pay off their estate 
taxes. I think that this is wrong, and it runs counter to the kinds of 
policies that we ought to be pursuing in support of our family-owned 
businesses.
  That is why I am introducing the Family Business Estate Tax Relief 
Act to rectify this matter, and I urge you consider joining me in this 
endeavor.
  The Family Business Estate Tax Relief Act would provide two 
significant measures of estate tax relief to those families hoping to 
pass along their businesses to the next generation.
  First, my bill allows a decedent's estate to exclude up to the first 
$900,000 of value of the family business from estate taxes so long as 
the heirs continue to materially participate in the business for many 
years after the death of the owner. Together, this proposal, when 
coupled with the existing $600,000 benefit from unified estate and gift 
tax credit, will eliminate estate tax liability on qualifying family 
business assets valued up to $1.5 million. In addition, the full 
benefit of this new $900,000 exclusion is available to couples trying 
to pass along the family business without the complicated tax planning 
tailored to one spouse or the other that is sometimes used today.
  Second, my bill would allow the executor of a qualifying estate who 
chooses to pay estate taxes in installments to benefit from a special 4 
percent rate on the estate taxes attributable to a family business 
worth between $1.5 and $2.5 million. In other words, my bill would also 
lighten the estate tax burden on the next $1 million of estate assets.
  My proposals expand upon the well-tested approaches found in Sections 
2032A and 6601(j) of the Tax Code.
  For example, we currently provide a ``special-use'' calculation for 
valuing real estate used in a farm or other trade or business for 
estate tax purposes, where a qualifying business is passed along to 
another family member after the death of the owner. To benefit from the 
``special-use'' formula under Section 2032A, the inheriting family 
member must continue to actively participate in the business operation. 
If the heir ceases to participate in the business, he or she may face a 
substantial recapture of the estate taxes which would have been paid at 
the time of the original owner's death.

  In enacting this provision, Congress embraced the goal of keeping 
farms and other closely held business in the family after the death of 
the owner. However, in the case of family farms, special-use valuation 
primarily helps those farms adjacent to urban areas, where the value of 
the land for non-farm uses is often much higher. But Section 2032A does 
not help many farms located in truly rural areas of the country where 
farming is the land's best use. This provision also provides little 
help for families transferring other non-farm small businesses under 
similar circumstances. My legislation would correct these glaring 
shortfalls in current law.
  In addition, my bill would increase the benefit of the existing 
preferential interest rates under Section 6601(j) that apply to farms 
and other closely held businesses. The benefits of the current 
provision have been significantly reduced by inflation over the past 
several decades, and my bill simply increases the amount of estate 
taxes that qualify for a special 4 percent interest rate if paid to the 
IRS in installment payments over time.
  Moreover, my bill includes several safeguards to ensure that its tax 
benefits are truly targeted at the preservation of most family 
businesses.
  Finally, I plan to offset any estimated revenue losses from this bill 
by offering another legislative package to close a number of outdated 
or unnecessary tax loopholes for large multinational corporations doing 
business in the United States. As a result, passing my estate tax 
relief proposals will not increase the Federal deficit. But passing the 
Family Business Estate Tax Relief Act will help to preserve the 
economic backbone of this country.
  I urge my colleagues to join me in supporting this much-needed 
legislation.
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