[Congressional Record Volume 148, Number 122 (Tuesday, September 24, 2002)]
[Senate]
[Pages S9117-S9123]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. KYL (for himself and Mr. McCain):
  S. 2992. A bill to provide for adjustments to the Central Arizona 
Project in Arizona, to authorize the Gila River Indian Community water 
rights settlement to reauthorize and amend the Southern Arizona Water 
Rights Settlement Act of 1982, and for other purposes; to the Committee 
on Energy and Natural Resources.
  Mr. KYL. Mr. President, on behalf of Senator McCain and myself I am 
introducing legislation today that would codify the largest water 
claims settlement in the history of Arizona. This bill represents the 
tremendous efforts of literally hundreds of people in Arizona and here 
in Washington over a period of five years. Looking ahead, this bill 
could ultimately be nearly as important to Arizona's future as was the 
authorization of the Central Arizona Project, CAP, itself.
  Since Arizona began receiving CAP water from the Colorado River, 
litigation has divided water users over how the CAP water should be 
allocated and exactly how much Arizona was required to repay the 
Federal Government. This bill will, among other things, codify the 
settlement reached between the United States and the Central Arizona 
Water Conservation District over the State's repayment obligation for 
costs incurred by the United States in constructing the Central Arizona 
Project. It will also resolve, once and for all, the allocation of all 
remaining CAP water. This final allocation will provide the stability 
necessary for State water authorities to plan for Arizona's future 
water needs. In addition, approximately 200,000 acre-feet of CAP water 
will be made available to settle various Indian water claims in the 
State. The bill would also authorize the use of the Lower Colorado 
River Basin Development Fund, which is funded solely from revenues paid 
by Arizona entities, to construct irrigation works necessary for tribes 
with congressionally approved water settlements to use CAP water.
  Title II of this bill settles the water rights claims of the Gila 
River Indian Community. It allocates nearly 100,000 acre-feet of CAP 
water to the Community, and provides funds to subsidize

[[Page S9118]]

the costs of delivering CAP water and to construct the facilities 
necessary to allow the Community to fully utilize the water allocated 
to it in this settlement. Title III provides for long-needed amendments 
to the 1982 Southern Arizona Water Settlement Act for the Tohono 
O'odham Nation, which has never been fully implemented.
  This bill will allow Arizona cities to plan for the future, knowing 
how much water they can count on. The Indian tribes will finally get 
``wet'' water, as opposed to the paper rights to water they have now, 
and projects to use the water. In addition, mining companies, farmers, 
and irrigation delivery districts can continue to receive water without 
the fear that they will be stopped by Indian litigation.
  While some minor issues remain, we have every confidence that these 
issues will be resolved before a hearing is scheduled. In addition, 
before the next Congress begins its work we hope that negotiations with 
the San Carlos Apache Tribe, the only party not yet included in the 
settlement, will move forward so that all claims can be resolved by 
this bill.
  In summary, this bill is vital to the citizens of Arizona and will 
provide the certainty needed to move forward with water use decisions. 
Furthermore, the United States can avoid litigating water rights and 
damage claims and satisfy its trust responsibilities to the Tribes. The 
parties have worked many years to reach consensus rather than litigate, 
and I believe this bill represents the best opportunity to achieve a 
fair result for all the people of Arizona.
  Mr. McCAIN. Mr. President, I am pleased to join my colleague, Senator 
Kyl, as a co-sponsor of this important legislation, the Arizona Water 
Settlements Act of 2002, which would ratify negotiated settlements for 
Central Arizona Project, CAP, water allocations to municipalities, 
agricultural districts and Indian tribes, state CAP repayment 
obligations, and final adjudication of long-standing Indian water 
rights claims.
  These settlements reflect five years of intensive negotiations by 
State, Federal, tribal, municipal, and private parties. I commend all 
those involved in these negotiations for their extraordinary commitment 
and diligence to reach this final stage in the settlement process. I 
also praise my colleague, Senator Jon Kyl, and Interior Secretary Gale 
Norton, for their leadership in facilitating these settlements. From my 
experience in legislating past agreements, I recognize the enormous 
challenge of these negotiations, and I appreciate their personal 
dedication to this settlement process.
  This legislation is vitally important to Arizona's future because 
these settlements will bring greater certainty and stability to 
Arizona's water supply by completing the allocation of CAP water 
supplies. Pending water rights claims by various Indian tribes and non-
Indian users will be permanently settled as well as the repayment 
obligations of the state of Arizona for construction of the CAP.
  I join with Senator Kyl today to express support for the agreements 
embodied in this bill and to encourage conclusion of this settlement 
process in the near future. Significant progress has been made in 
resolving key issues since we last sponsored a bill to facilitate this 
agreement in the 106th Congress. Some of these key issues pertain to 
the final apportionment of CAP water supplies, cost-sharing of CAP 
construction and water delivery systems, amendment of the 1982 
settlement agreement with the Tohono O'odham Nation, mitigation 
measures necessitated by sustained drought conditions, and equitable 
apportionment of drought shortages.
  While this bill reflects agreements reached on a host of issues after 
an intensive and extended effort by the numerous parties involved, it 
is important to emphasize that this bill does not represent the final 
settlement. All parties recognize that a very limited number of the 
provisions of this bill may be modified as the negotiations continue. 
We fully expect that the legislative process will culminate with a 
final agreement early in the next congressional session.
  We introduce this bill today as an expression of our strong support 
of the various parties to successfully achieve conclusion to this 
process. The Arizona Water Settlements Act will be a historic 
accomplishment that will benefit all citizens of Arizona, the tribal 
communities, and the United States.
                                 ______
                                 
      By Ms. LANDRIEU:
  S. 2993. A bill to amend the Higher Education Act of 1965 to require 
institutions of higher education to preserve the educational status and 
financial resources of military personnel called to active duty; to the 
Committee on Health, Education, Labor, and Pensions.
  Ms. LANDRIEU. Mr. President, when the President gives the order to 
activate Reservists and National Guardsmen, the lives of those men and 
women are put on hold. Businesses, careers, and families are left 
behind so that America's interests may be served. Students make up a 
substantial part of our National Guard and Reserve forces. When these 
students are activated, it jeopardizes their academic standing, as well 
as their scholarships and grants. This bill would preserve their 
academic standing for the duration of their service as well as a 1-year 
period that follows that service. It would also preserve their 
scholarships and grants, as well as entitle them to a refund of unused 
tuition and fees. Federal laws already safeguards the employment status 
of activated Reservists and Guardsmen. It is time that we extend the 
same guarantee to students.
  This legislation would require colleges, universities, and community 
colleges to grant National Guardsmen and Reservists a leave of military 
absence when they are called to active duty. This leave of absence 
would last while the student is serving on active duty and a 1-year 
period at the conclusion of active service. This bill would preserve 
the academic credits that the student had earned before being 
activated. It would also preserve the scholarships and grants awarded 
to the student before being activated. Under this legislation, students 
would be entitled to receive a refund of tuition and fees or credit the 
tuition and fees to the next period of enrollment after the student 
returns from military leave. If a student elects to receive a refund, 
it would allow them to receive a full refund, minus the percentage of 
time the student spent enrolled in classes.
  The protections that are already afforded our Reservists and 
Guardsmen are appropriate considering the hardships they endure on the 
Nation's behalf. We need to acknowledge the many college students who 
are in the ranks of the Guard and Reserve and extend to them the 
protections they deserve. In this day of uncertainty on the world 
stage, our Reservists must be prepared to be called up at a moments 
notice. Once they get to their duty station, they need to focus all of 
their attention on the mission. This legislation provides our student 
Reservists with the proper safeguards on their academic career which 
will allow them to accomplish their mission.
                                 ______
                                 
      By Mrs. LINCOLN:
  S. 2994. 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; to the Committee on 
Finance
  Mrs. LINCOLN. Mr. President, just over one year ago, when budget 
surpluses reached over $5 trillion, Congress passed a tax cut bill 
that, in part, began the process providing estate and gift tax relief. 
Now, in 2002, the surpluses have disappeared, and Congress is making no 
progress on further estate tax relief. The reason for the stalemate is 
that some will vote only for complete repeal, while others offer 
targeted proposals based on prior tax laws that proved to be too 
complex and intrusive. In this environment, we are losing ground on 
coming to a fair resolution of this issue, and in the meantime, the 
current state of the law places many family-owned businesses in an 
uncertain and precarious position.
  These are the same American-owned businesses that Congress initially 
sought to help when this effort began in the mid-1990's. Given these 
circumstances, I believe we must explore new ways to immediately and 
permanently target relief for these businesses, which are so important 
to our American economy. My bill does not seek to change current law to 
repeal the estate tax. It would leave in place

[[Page S9119]]

the increases in the unified credit, the decreases in rates, and the 
repeal of the estate tax in 2010. My bill would only seek to rectify 
the special circumstances of family-owned businesses and farms, in an 
attempt, not to inflame the issue further, but to resolve this issue 
now and forever for those this effort was originally intended to help.
  A serious problem for family-owned businesses is the rollercoaster-
ride that current law places them on. Under the 2001 estate tax cut, 
family-owned businesses pay the estate tax until 2010 with modest 
reductions, and then the tax is completely repealed for one year. Then, 
in 2011, these businesses resume paying the tax at the high pre-2001 
rates. Such a disparity in tax, depending on when one dies, causes 
great uncertainty for a business that must meet payroll, hire new 
people, make new capital investments, and service debt. Under this tax 
regime, we have made business planning virtually impossible. These 
family-owned businesses deserve better.
  In fashioning a targeted approach for family-owned businesses, it is 
important to learn from the important lessons of the past. The Lincoln 
bill recognizes these lessons and seeks to reflect a thoughtful 
approach, which includes the good lessons learned and avoids the bad 
ones.
  In 1995, Senator Dole and Senator Pryor introduced the Family 
Business Estate Relief Act, S. 1086. The government budget faced 
deficits, so the sponsors took a targeted approach to estate tax relief 
for family-owned businesses. Many in this body, on both sides of the 
aisle, supported Senators Dole and Pryor in this effort. The bill was 
an instant hit with overwhelming bipartisan support, and the support of 
most every small business trade association.
  In 1997, the Qualified Family-Owned Business rules, in IRC Section 
2057, were enacted into law. During the debate on these new rules, 
sponsors of the bill stated their concern that family farms and 
businesses are too often forced out of business at the death of a key 
family member. While this liquidity concern was all too real, it 
spawned an inadequate solution.
  Over the years since enactment, the Family-Owned Business rules were 
roundly and rightly criticized for their unnecessary complexity, 
intrusiveness into family decisions, and paltry tax benefit. Finally, 
in 2001, Congress threw in the towel on the targeted approach of 
Section 2057, and repealed it after 2004. This experience, in many 
ways, poisoned the waters for estate tax relief for family-owned 
businesses, but I am confident we can do better.

  So, I would like to propose an immediate and permanent plan for 
family-owned businesses. It is a targeted approach in times of budget 
deficits, and it is a conceptual approach, which, in the past, has 
garnered bipartisan support in times of political division. But given 
the hard lessons learned by Section 2057, my bill is not complex or 
intrusive. For those who don't believe a targeted approach can work, I 
urge you to take a look and study the Lincoln bill to immediately and 
permanently repeal the estate tax for family owned farms and 
businesses.
  Maybe one of the most important lessons learned is that the original 
goal was too limiting. So we have broadened our focus and we make clear 
our new goal. Simply put, the goal of the Lincoln bill that no family-
owned farm or business will ever pay the estate tax, the same as 
publicly held businesses, which face no estate tax liability. If we 
focus merely on the liquidity of a family's estate, then we stop well 
short of treating American family farms and businesses the same as the 
GE's, Citigroups, and Ciscos of the world. We can do better. We must do 
better. And we must do better sooner than 2010. And we cannot afford to 
revert to pre-2001 law down the road. It is simply unacceptable.
  With a new goal in mind, the Lincoln bill greatly simplifies the 
rules and delivers immediate and permanent repeal of the estate tax on 
family-owned businesses and farms. In doing so, the Lincoln bill throws 
away several troubling and burdensome provisions of Section 2057, 
including the 50-percent liquidity test, material participation rules 
for heirs, the passive income test, and recapture tax provisions. 
Further, the bill provides sensible working capital rules, to encourage 
family-owned businesses to grow, add new jobs, and make new capital 
investments.
  I ask unanimous consent that the text of the bill in the Record along 
with a detailed description of ``What's Not in the Lincoln Bill'' which 
contrasts this new proposal to Section 2057.
  It is my hope that Americans who own family businesses will seriously 
consider my bill and not dismiss it out of hand because of past 
failures to target estate tax relief. I urge them to read my bill and 
consider the possibility for estate tax relief for them that can be 
done immediately and permanently.
  There being no objection, the additional material was ordered to be 
printed in the Record, as follows:

                                S. 2994

       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.

[[Page S9120]]

       ``(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

[[Page S9121]]

     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, 2002, and before January 1, 2010, 
     and
       (2) after December 31, 2011.
                                  ____


COBI v. QFOBI--What's Not in the Lincoln Bill to Repeal the Estate Tax 
                      for Family-Owned Businesses

       The Qualified Family-Owned Business rules, enacted in 1997, 
     have been roundly, and rightly, criticized for their 
     complexity and paltry tax benefit. Even more troubling, the 
     rules have been criticized for their intrusiveness into a 
     business owner's activities, and for their subjectivity, 
     which allow for large areas of disagreement with the IRS. 
     What went wrong with this effort to free family-owned 
     businesses from the estate tax?
       In 1997, the primary concern expressed by proponents of 
     these rules was that family-owned farms and businesses are 
     ``too often forced out of businesses upon the death of a key 
     owner.'' While this concern was, and is, all to real, it does 
     not translate into a worthy goal on how we should treat 
     American family-owned farms and businesses.
       Sure, the government should not force these businesses to 
     shut down, but the real point is that we must not stop there, 
     we must encourage them to grow, add new jobs, and make new 
     capital investments. In short, the 1997 qualified family-
     owned business rules were well intentioned, but they yielded 
     a solution that is too limited and unworkable. So, we went 
     back to the drawing board, taking with us the lessons learned 
     from the qualified family-owned business rules.
       The first task was to restate our concern and our goal. 
     Simply put, the reformulated goal of the Lincoln bill is that 
     no family-owned farm and business will ever pay the estate 
     tax. It is often stated that family-owned businesses are 
     subject to an estate tax that can reach over one-half the 
     value of the business. This is true, but on top of this 
     liability, a family-owned business is subject to estate tax 
     liability each time that one generation passes the business 
     to another generation. So, a family-owned business can pay 
     the estate tax more than once over its lifetime.
       In contrast, publicly held companies are never impacted by 
     the estate tax. At the very least, we should treat family-
     owned businesses the same as publicly owned businesses life 
     GE, IBM, and Cisco, which face no estate tax liability. Thus, 
     our goal should be that no family-owned farm or business will 
     ever pay the estate tax.
       In pursuit of this goal, the Lincoln bill sheds many of the 
     unnecessary and complex provisions under current law, and in 
     doing so, it provides our best chance to enact immediate and 
     permanent repeal of the estate tax for America's family owned 
     farms and businesses.
       The Lincoln bill includes the following improvements to 
     current law:
       1. Elimination of the Dollar Limitation on the Tax Benefit. 
     Since the goal of the Lincoln bill is that no family-owned 
     business will ever pay the estate tax, it places no arbitrary 
     dollar or size limit on family-owned businesses. A deceased 
     taxpayer's estate may elect to treat an unlimited portion of 
     the decendent's estate as Carryover Business Interest, COBI. 
     A COBI remains subject to all income and capital gain taxes 
     with no basis adjustment.
       Family-owned businesses, regardless of size, will be 
     treated the same as their publicly held competitors, and 
     thus, the economic disadvantage and distortion created by the 
     estate tax on family-owned businesses would be eliminated.
       2. Elimination of the 50-Percent Qualification Requirement. 
     The principal argument in the past for repeal of the estate 
     tax is its potential for forcing liquidation of a family-
     owned farm or business. Pursuant to this concern, the law, 
     passed in 1997, created an extremely complex requirement that 
     the value of the business must be at least 50 percent of the 
     decedent's gross estate. Under this theory, it was presumed 
     that a decedent's estate could afford to pay the tax if the 
     business makes up 49 percent of the estate, but not if it is 
     50 percent of the estate. This example highlights the folly 
     of this requirement, but it also demonstrates the importance 
     of estate tax planning techniques in order to comply and 
     receive the tax benefit. In the end, such a rule creates 
     inequities among similarly situated taxpayers and benefits 
     those with the best tax planning advise. Such incentives 
     should be reduced whenever possible.
       Under the Lincoln bill, this arbitrary requirement is 
     eliminated, so that no family-owned farm or business would 
     ever pay the estate tax, regardless of the portion of the 
     estate that is comprised of the family-owned business. All 
     family-owned businesses will no longer be required to shut 
     down or plan to pay the estate tax. Instead, these businesses 
     can increase working capital for expansion. The elimination 
     of this requirement will also dramatically reduce complexity 
     in the tax code and the subjectivity associated with the 
     administration of the provision by the IRS.
       3. Elimination of the Material Participation Requirements 
     for Heirs. The material participation standard requires the 
     IRS to measure a family member's activities on an hour-to-
     hour basis. This qualified family-owned business rules use 
     this standard such that the IRS is required to monitor the 
     activities of the heir for 10 years. This standard has been 
     widely criticized as too intrusive. This may be the 
     understatement of the year, and on top of that, it is an 
     outrageous requirement the IRS could never effectively carry 
     out if we wanted them to do so. Under the Lincoln bill, an 
     heir is not required to participate in the business. Still, 
     if he or she decides to sell or dispose of the COBI, capital 
     gains and income taxes will continue to be payable and 
     calculated using the decedent's carryover basis. But the 
     estate tax will never put them out of business.
       4. Elimination of the Recapture Provisions. Since the 
     Lincoln bill does not require heirs to participate, recapture 
     provisions are not necessary and therefore eliminated. The 
     absence of these complex, arbitrary, and intrusive provisions 
     eliminates the need for the IRS to monitor the daily 
     activities of an heir for 10 years, a clearly intrusive 
     requirement under current law.

[[Page S9122]]

       5. Elimination of Passive Income Test. Under current law, a 
     family owned business does not qualify for the tax benefit if 
     more than 35 percent of its adjusted gross income is passive 
     income in the tax year, which includes the decedent's date of 
     death. This chance one-year arbitrary measurement of passive 
     income is an insufficient and unreliable test of whether a 
     family owned business has active business income. Further, 
     the test is unnecessary in the face of a reasonable and 
     workable passive asset test, as included in the Lincoln bill. 
     See 6 below.
       6. Modification of the Working Capital Rules. Under current 
     law, a qualified family owned business may not hold cash or 
     marketable securities in excess of the day-to-day working 
     capital needs of the business. This rule does not recognize 
     that family-owned businesses must retain liquid funds to 
     expand by incurring debt or acquiring another business.
       The Lincoln bill provides a standard that allows family 
     owned businesses to retire debt and expand without facing the 
     burden of the imposition of the estate tax. The standard 
     under the Lincoln bill would allow the family owned business 
     to own cash and securities ``reasonably anticipated business 
     needs.'' This standard is well established under current law, 
     regulations, and IRS audit guidelines.
       In any event, in order to prevent any pre-death 
     ``stuffing,'' cash or marketplace securities shall be treated 
     as passive assets if such cash or marketplace securities are 
     transferred to the entity with 3 years of the decedent's date 
     of death in any event. On the flip side, the IRS shall have 
     the authority to increase the value of the COBI by that 
     portion of those assets transferred from the COBI to the 
     taxable estate within 3 years before the decedent's death.
                                 ______
                                 
      By Mr. HOLLINGS (for himself and Mr. Cleland):
  S. 2995. A bill to improve economic opportunity and development in 
communities that are dependent on tobacco production, and for other 
purposes, to the Committee on Agriculture, Nutrition, and Forestry.
  Mr HOLLINGS. Mr. President, I rise to introduce a bill that the 
distinguished Senator from Georgia, Mr. Cleland, and I are sponsoring 
to assist rural farming communities that have become dependent on 
tobacco in finding ways to diversify.
  Right to the point: The tobacco program as we know it today is not 
sustainable for tobacco producers or the communities that have become 
dependent on tobacco for their standard of living. For too many years, 
too many people in this Chamber ignored the problem of the tobacco 
program, while addressing every other farm issue under the sun, and we 
now run the risk of putting tobacco farmers out of business with no 
concern for the impacts on rural communities. It is in the best 
interest of not only tobacco farmers and their communities, but of the 
future health of Americans, to pass this legislation
  South Carolina has about 2,000 honest, hard-working tobacco farmers 
who, of late, can't make ends meet because the demand for tobacco is 
down so far. It's not that everyone in the world has all of a sudden 
stopped using tobacco. It's that American companies are using foreign-
grown tobacco. It's cheaper for corporations to go to Brazil, or China, 
or Vietnam, than to buy tobacco from South Carolina or Georgia. The 
same thing that happened to textile workers in this country is now 
happening to our farmers, who have bills to pay, and children to send 
to college, and everything else like that.
  In addition to low demand, farmers are in trouble because of past 
Federal policies intended to encourage farmers to get out of this 
business, which have instead led them to totally rely on tobacco. At 
the recommendation of the President's Tobacco Commission, we need to 
kick the habit of quota subsidies for tobacco farmers or this charade 
will never end.
  Any legislation that fails to focus on the tobacco problem as a 
community, is not dealing with the problem as a whole. We have to help 
tobacco communities diversify their economic base, or they will plummet 
into further economic distress. This legislation provides these 
communities with the tools to attract new industries and, thus, new and 
different kinds of jobs for the area. We can't expect to buy farmers 
out, try to take care of them with a short-term fix, and not take care 
of the communities' long-term future.
  This legislation does just that by making quota buy outs for farmers 
mandatory, offering special incentives for growers who transition their 
land from tobacco production and providing meaningful community 
assistance to bring economic development and diversify the rural 
economy.
  Obviously, every one in this Chamber will want to know: how will we 
pay for it? What will these buyouts cost a government that this year is 
running a $412 billion budget deficit? It will not cost the American 
taxpayer a single dime. I will be paid for by fees assessed on 
manufacturers based on market share. We used a similar funding 
mechanism in the LEAF Act that had the full support of tobacco growing 
states.
  When you come right down to it, this is a balancing act to fix a 
broken farm program without decimating rural communities and without 
cost to the American taxpayer. This is as balanced a way as Senator 
Cleland and I know how to deal with this. The legislation has the 
support of the health care community and the tobacco growers alike. We 
have received letters of support from the Alliance for Health Economic 
and Agriculture Development, the Campaign for Tobacco Free Kids, the 
South Carolina Tobacco Growers Association, the South Carolina Farm 
Bureau, Flue-Cured Tobacco Cooperative Stabilization Corporation, and 
the Burley Tobacco Growers Cooperative Association. We urge your 
support.
                                 ______
                                 
      By Mr. KOHL (for himself, Mr. Sessions, and Mrs. Feinstein):
  S. 2996. A bill to amend title 11, United States Code, to limit the 
value of certain real and personal property that a debtor may elect to 
exempt under State or local law, and for other purposes; to the 
Committee on the Judiciary.
  Mr. KOHL. Mr. President, I rise today to introduce the Bankruptcy 
Abuse Reform Act of 2002. The Senate is very familiar with the issue of 
the homestead exemption. We have voted to close the homestead loophole 
in each of the past three Congresses. Each and every time, the Senate 
strongly supported our proposal to close the homestead loophole and 
prohibit wealthy debtors from moving to Florida or Texas to shield 
their multi-million dollar mansions from their creditors.
  In practical terms, the unlimited homestead exemption means that a 
person can declare bankruptcy in Houston, for example, wipe out most of 
their debts, but shield from creditors a house worth an infinite 
amount. Our amendment will generously cap the homestead exemption at 
$125,000, that is, it permits a debtor to keep $125,000 of equity in 
his or her home after declaring bankruptcy.
  This provision should be law by now. Unfortunately, the politics of 
the bankruptcy bill generally and this provision specifically have 
prevented the homestead loophole from being closed once and for all. 
During the course of this debate, we accepted a compromise that was 
weaker than we would have wanted, but would get at the worst abusers. 
It was not all that we wanted, nor was it that is needed, but is was a 
good first step.
  To those that argue that the compromise that we agreed to is enough, 
we say it only got at some of the abusers who will use this provision 
in the law. Certainly, no matter how well we draft it, we will not be 
able to anticipate everything that some clever lawyer or devious debtor 
will think of to find a way around it. The only way to ensure that no 
debtor will be able to take advantage of this loophole is for the 
Congress to pass a hard cap. Only then can we be certain that the 
loophole would be closed once and for all.
  It appears now, however, that the bankruptcy reform bill has stalled 
and may not be considered before the Congress adjourns for the year. It 
would be a miscarriage of justice to permit the year to end without 
addressing the most scandalous abuse of the bankruptcy laws in an era 
when numerous corporate executives will surely use the homestead 
exemption to protect millions of dollars from their creditors.
  The country has been stunned recently by stories of corporate 
malfeasance, insider dealing, and fraud. And, not by fly-by-night 
companies, but rather the worst wrongdoing went on in companies that 
were entrusted with the nest eggs of millions of Americans in pension 
plans and mutant funds. Those investments have been lost. And, yet 
there is every chance that the people who caused these nightmares may 
walk away from their misdeeds and seek shelter in their luxury homes.

[[Page S9123]]

  Whether we are discussing Ken Lay's $7.1 million, 13,000 square foot 
condominium or Andrew Fastow's newly built multi-million dollar home in 
one of Houston's swankiest neighborhoods, or Scott Sullivan's $15 
million estate in Boca Raton, one thing is clear; these former 
executives must not be permitted to continue to live like kings in 
bankruptcy while their former employees are looking for their next 
paycheck.
  Debtors should not be able to avoid their creditors through luck of 
geography or through strategic bankruptcy planning. The bottom line is 
that bankruptcy must be a refuge of last resort, not a financial 
planning tool for Ken Lay, Scott Sullivan or a host of others. It would 
be a shame if this Congress were not able to close the most egregious 
abuse of all in the bankruptcy laws. It is time to close the homestead 
exemption loophole once and for all.
  I ask unanimous consent that the text of the Bankruptcy Abuse Reform 
Act of 2002 be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2996

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Bankruptcy Abuse Reform Act 
     of 2002''.

     SEC. 2. LIMITATION.

       Section 522 of title 11, United States Code, is amended--
       (1) in subsection (b)(2)(A), by inserting ``subject to 
     subsection (n),'' before ``any property''; and
       (2) by adding at the end the following new subsection:
       ``(n)(1) As a result of electing under subsection (b)(2)(A) 
     to exempt property under State or local law, a debtor may not 
     exempt any amount of interest that exceeds, in the aggregate, 
     $125,000 in value in--
       ``(A) real or personal property that the debtor or a 
     dependent of the debtor uses as a residence;
       ``(B) a cooperative that owns property that the debtor or a 
     dependent of the debtor uses as a residence; or
       ``(C) a burial plot for the debtor or a dependent of the 
     debtor.
       ``(2) The limitation under paragraph (1) shall not apply to 
     an exemption claimed under subsection (b)(3)(A) by a family 
     farmer for the principal residence of that farmer.''.

                          ____________________