[Congressional Record Volume 143, Number 37 (Thursday, March 20, 1997)]
[Senate]
[Pages S2736-S2739]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




         ESTATE TAX RELIEF FOR THE AMERICAN FAMILY ACT OF 1997

  Mr. SANTORUM. Mr. President, I ask unanimous consent that the text of 
S. 479, the Estate Tax Relief for the American Family Act of 1997, be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 479

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Estate Tax 
     Relief for the American Family Act of 1997''.
       (b) Amendment of  1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.

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

       (a) Estate Tax Credit.--
       (1) In general.--Section 2010(a) (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 caseThe applicable
                                                   decedents dexclusion
                                                    gifts madamount is:
      1997....................................................$700,000 
      1998....................................................$800,000 
      1999....................................................$850,000 
      2000....................................................$900,000 
      2001....................................................$950,000 
      2002 or thereafter..................................$1,000,000.''

       (3) Conforming amendments.--
       (A) Section 6018(a)(1) 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) Section 2001(c)(2) is amended by striking 
     ``$21,040,000'' and inserting ``the amount at which the 
     average tax rate under this section is 55 percent''.

[[Page S2737]]

       (C) Section 2102(c)(3)(A) 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.--Section 2505(a)(1) (relating 
     to unified credit against gift tax) 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 section 
     shall apply to the estates of decedents dying, and gifts 
     made, after the date of the enactment of this Act.

     SEC. 3. FAMILY-OWNED BUSINESS EXCLUSION.

       (a) In General.--Part III of subchapter A of chapter 11 
     (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) the sum of--
       ``(A) $1,500,000, plus
       ``(B) 50 percent of the excess (if any) of the adjusted 
     value of such interests over $1,500,000, but not over 
     $10,000,000.
       ``(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 
     and files the agreement referred to in subsection (h),
       ``(C) 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
       ``(D) 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 subparagraph (A) or 
     (B), 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)),

[[Page S2738]]

       ``(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 folThe applicable
                                                material 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) 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 subsection (f) with respect to such property.
       ``(i) 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) Paragraphs (1) and (3) of section 2032A(d) (relating 
     to election; agreement).
       ``(I) Section 2032A(e)(10) (relating to community 
     property).
       ``(J) Section 2032A(e)(14) (relating to treatment of 
     replacement property acquired in section 1031 or 1033 
     transactions).
       ``(K) Section 2032A(f) (relating to statute of 
     limitations).
       ``(L) Section 6166(b)(3) (relating to farmhouses and 
     certain other structures taken into account).
       ``(M) Subparagraphs (B), (C), and (D) of section 6166(g)(1) 
     (relating to acceleration of payment).
       ``(N) 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, 
     1997.

     SEC. 4. EXTENSION OF TREATMENT OF CERTAIN RENTS UNDER SECTION 
                   2032A TO LINEAL DESCENDANTS.

       (a) General Rule.--Paragraph (7) of section 2032A(c) 
     (relating to special rules for tax treatment of dispositions 
     and failures to use for qualified use) is amended by adding 
     at the end the following new subparagraph:
       ``(E) Certain rents treated as qualified use.--For purposes 
     of this subsection, a surviving spouse or lineal descendant 
     of the decedent shall not be treated as failing to use 
     qualified real property in a qualified use solely because 
     such spouse or descendant rents such property to a member of 
     the family of such spouse or descendant on a net cash basis. 
     For purposes of the preceding sentence, a legally adopted 
     child of an individual shall be treated as the child of such 
     individual by blood.''
       (b) Conforming Amendment.--Section 2032A(b)(5)(A) is 
     amended by striking out the last sentence.
       (c) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendment made by 
     section 6151 of the Technical and Miscellaneous Revenue Act 
     of 1988.

     SEC. 5. INCREASE IN MAXIMUM REDUCTION IN VALUE FOR SPECIAL 
                   USE VALUATION.

       (a) In General.--Section 2032A(a)(2) (relating to 
     limitation on aggregate reduction in fair market value) is 
     amended by striking ``$750,000'' and inserting 
     ``$1,000,000''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after December 31, 
     1996.

     SEC. 6. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER SECTION 
                   2032A.

       (a) General Rule.--Paragraph (3) of section 2032A(d) 
     (relating to modification of election and agreement to be 
     permitted) is amended to read as follows:
       ``(3) Modification of election and agreement to be 
     permitted.--The Secretary shall prescribe procedures which 
     provide that in any case in which the executor makes an 
     election under paragraph (1) (and submits the agreement 
     referred to in paragraph (2)) within the time prescribed 
     therefor, but--
       ``(A) the notice of election, as filed, does not contain 
     all required information, or
       ``(B) signatures of 1 or more persons required to enter 
     into the agreement described in paragraph (2) are not 
     included on the agreement as filed, or the agreement does not 
     contain all required information,

     the executor will have a reasonable period of time (not 
     exceeding 90 days) after notification of such failures to 
     provide such information or signatures.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to the estates of decedents dying after the date 
     of the enactment of this Act.

     SEC. 7. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE CONSISTS 
                   LARGELY OF INTEREST IN CLOSELY HELD BUSINESS.

       (a) In General.--Section 6166(a) (relating to extension of 
     time for payment of estate tax where estate consists largely 
     of interest in closely held business) is amended by striking 
     ``10'' in paragraph (1) and the heading thereof and inserting 
     ``20''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after December 31, 
     1996.

     SEC. 8. NO INTEREST ON CERTAIN PORTION OF ESTATE TAX EXTENDED 
                   UNDER 6166.

       (a) In General.--Section 6601(j) (relating to 4-percent 
     rate on certain portion of estate tax extended under section 
     6166) is amended--
       (1) by striking the first sentence of paragraph (1) and 
     inserting the following new sentence: ``If the time for 
     payment of an amount of tax imposed by chapter 11 is extended 
     as provided in section 6166, no interest on the no-interest 
     portion of such amount shall (in lieu of the annual rate 
     provided by subsection (a)) be paid.'',
       (2) by striking ``4-percent'' each place it appears in 
     paragraphs (2) and (3) and inserting ``no-interest'',
       (3) by striking subparagraph (A) of paragraph (2) and 
     inserting the following new subparagraph:
       ``(A) $153,000, or'',
       (4) by striking ``4-percent'' in the heading of paragraph 
     (2) and inserting ``No interest'', and
       (5) by striking ``4-Percent Rate'' in the heading thereof 
     and inserting ``No Interest''.
       (b) Conforming Amendments.--
       (1) Section 6166(b)(7)(A)(iii) is amended by striking ``4-
     percent rate of interest'' and inserting ``no-interest 
     portion''.
       (2) Section 6166(b)(8)(A)(iii) is amended to read as 
     follows:
       ``(iii) No-interest portion not to apply.--Section 6601(j) 
     (relating to no-interest portion) shall not apply.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after December 31, 
     1996.

     SEC. 9. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX PURPOSES 
                   AFTER EXPIRATION OF STATUTE OF LIMITATIONS.

       (a) In General.--Section 2001 (relating to imposition and 
     rate of estate tax) is amended by adding at the end the 
     following new subsection:
       ``(f) Valuation of Gifts.--If--
       ``(1) the time has expired within which a tax may be 
     assessed under chapter 12 (or under corresponding provisions 
     of prior laws) on the transfer of property by gift made 
     during a preceding calendar period (as defined in section 
     2502(b)), and
       ``(2) the value of such gift is shown on the return for 
     such preceding calendar period or

[[Page S2739]]

     is disclosed in such return, or in a statement attached to 
     the return, in a manner adequate to apprise the Secretary of 
     the nature of such gift,

     the value of such gift shall, for purposes of computing the 
     tax under this chapter, be the value of such gift as finally 
     determined for purposes of chapter 12.''
       (b) Modification of Application of Statute of 
     Limitations.--Paragraph (9) of section 6501(c) is amended to 
     read as follows:
       ``(9) Gift tax on certain gifts not shown on return.--If 
     any gift of property the value of which (or any increase in 
     taxable gifts required under section 2701(d)) is required to 
     be shown on a return of tax imposed by chapter 12 (without 
     regard to section 2503(b)), and is not shown on such return, 
     any tax imposed by chapter 12 on such gift may be assessed, 
     or a proceeding in court for the collection of such tax may 
     be begun without assessment, at any time. The preceding 
     sentence shall not apply to any item which is disclosed in 
     such return, or in a statement attached to the return, in a 
     manner adequate to apprise the Secretary of the nature of 
     such item. The value of any item which is so disclosed may 
     not be redetermined by the Secretary after the expiration of 
     the period under subsection (a).''
       (c) Declaratory Judgment Procedure for Determining Value of 
     Gift.--
       (1) In general.--Part IV of subchapter C of chapter 76 is 
     amended by inserting after section 7476 the following new 
     section:

     ``SEC. 7477. DECLARATORY JUDGMENTS RELATING TO VALUE OF 
                   CERTAIN GIFTS.

       ``(a) Creation of Remedy.--In a case of an actual 
     controversy involving a determination by the Secretary of the 
     value of any gift shown on the return of tax imposed by 
     chapter 12 or disclosed on such return or in any statement 
     attached to such return, upon the filing of an appropriate 
     pleading, the Tax Court may make a declaration of the value 
     of such gift. Any such declaration shall have the force and 
     effect of a decision of the Tax Court and shall be reviewable 
     as such.
       ``(b) Limitations.--
       ``(1) Petitioner.--A pleading may be filed under this 
     section only by the donor.
       ``(2) Exhaustion of administrative remedies.--The court 
     shall not issue a declaratory judgment or decree under this 
     section in any proceeding unless it determines that the 
     petitioner has exhausted all available administrative 
     remedies within the Internal Revenue Service.
       ``(3) Time for bringing action.--If the Secretary sends by 
     certified or registered mail notice of his determination as 
     described in subsection (a) to the petitioner, no proceeding 
     may be initiated under this section unless the pleading is 
     filed before the 91st day after the date of such mailing.''
       (2) Clerical amendment.--The table of sections for such 
     part IV is amended by inserting after the item relating to 
     section 7476 the following new item:

``Sec. 7477. Declaratory judgments relating to value of certain 
              gifts.''

       (d) Conforming Amendment.--Subsection (c) of section 2504 
     is amended by striking ``, and if a tax under this chapter or 
     under corresponding provisions of prior laws has been 
     assessed or paid for such preceding calendar period''.
       (e) Effective Dates.--
       (1) In general.--The amendments made by subsections (a) and 
     (c) shall apply to gifts made after the date of the enactment 
     of this Act.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall apply to gifts made in calendar years ending after the 
     date of the enactment of this Act.

     SEC. 10. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING 
                   TRANSFER TAX FOR TRANSFERS TO INDIVIDUALS WITH 
                   DECEASED PARENTS.

       (a) In General.--Section 2651 (relating to generation 
     assignment) is amended by redesignating subsection (e) as 
     subsection (f), and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Special Rule for Persons With a Deceased Parent.--
       ``(1) In general.--For purposes of determining whether any 
     transfer is a generation-skipping transfer, if--
       ``(A) an individual is a descendant of a parent of the 
     transferor (or the transferor's spouse or former spouse), and
       ``(B) such individual's parent who is a lineal descendant 
     of the parent of the transferor (or the transferor's spouse 
     or former spouse) is dead at the time the transfer (from 
     which an interest of such individual is established or 
     derived) is subject to a tax imposed by chapter 11 or 12 upon 
     the transferor (and if there shall be more than 1 such time, 
     then at the earliest such time),

     such individual shall be treated as if such individual were a 
     member of the generation which is 1 generation below the 
     lower of the transferor's generation or the generation 
     assignment of the youngest living ancestor of such individual 
     who is also a descendant of the parent of the transferor (or 
     the transferor's spouse or former spouse), and the generation 
     assignment of any descendant of such individual shall be 
     adjusted accordingly.
       ``(2) Limited application of subsection to collateral 
     heirs.--This subsection shall not apply with respect to a 
     transfer to any individual who is not a lineal descendant of 
     the transferor (or the transferor's spouse or former spouse) 
     if, at the time of the transfer, such transferor has any 
     living lineal descendant.''
       (b) Conforming Amendments.--
       (1) Section 2612(c) (defining direct skip) is amended by 
     striking paragraph (2) and by redesignating paragraph (3) as 
     paragraph (2).
       (2) Section 2612(c)(2) (as so redesignated) is amended by 
     striking ``section 2651(e)(2)'' and inserting ``section 
     2651(f)(2)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to terminations, distributions, and transfers 
     occurring after December 31, 1997.

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