[Congressional Record Volume 148, Number 122 (Tuesday, September 24, 2002)]
[Senate]
[Pages S9118-S9122]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      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reductions, and then the tax is completely repealed for one year.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.

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       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.
                                 ______