[House Report 107-37]
[From the U.S. Government Publishing Office]
107th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 107-37
======================================================================
DEATH TAX ELIMINATION ACT OF 2001
_______
April 3, 2001.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Thomas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 8]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 8) to amend the Internal Revenue Code of 1986 to
phaseout the estate and gift taxes over a 10-year period, and
for other purposes, having considered the same, report
favorably thereon with an amendment and recommend that the bill
as amended do pass.
CONTENTS
Page
I. Summary and Background..........................................17
A. Purpose and Summary................................. 17
B. Background and Need for Legislation................. 19
C. Legislative History................................. 19
II. Explanation of the Bill.........................................19
A. Phase in Repeal of Estate, Gift, and Generation-
Skipping Transfer Taxes (secs. 101-402)............ 19
B. Expand Estate Tax Rule for Conservation Easements
(sec. 501)......................................... 32
C. Modify Generation-Skipping Transfer Tax Rules (secs.
601-604)........................................... 33
D. Expand Availability of Installment Payment of Estate
Tax for Closely-Held Businesses (sec. 701)......... 41
III. Votes of the Committee..........................................42
IV. Budget Effects of the Bill......................................44
A. Committee Estimates of Budgetary Effects............ 44
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 46
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 46
V. Other Matters To Be Discussed Under the Rules of the House......47
A. Committee Oversight Findings and Recommendations.... 47
B. Statement of General Performance Goals and
Objectives......................................... 48
C. Constitutional Authority Statement.................. 48
D. Information Relating to Unfunded Mandates........... 48
E. Applicability of House Rule XXI 5(b)................ 48
F. Tax Complexity Analysis............................. 48
VI. Changes in Existing Law Made by the Bill as Reported............49
VII. Dissenting Views...............................................194
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Death Tax
Elimination Act of 2001''.
(b) Amendment of 1986 Code.--Except as otherwise expressly provided,
whenever in this Act an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
(c) Table of Contents.--
Sec. 1. Short title; etc.
TITLE I--REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING TAXES
Sec. 101. Repeal of estate, gift, and generation-skipping taxes.
TITLE II--REDUCTIONS OF ESTATE AND GIFT TAX RATES PRIOR TO REPEAL
Sec. 201. Additional reductions of estate and gift tax rates.
TITLE III--UNIFIED CREDIT REPLACED WITH UNIFIED EXEMPTION AMOUNT
Sec. 301. Unified credit against estate and gift taxes replaced with
unified exemption amount.
TITLE IV--CARRYOVER BASIS AT DEATH; OTHER CHANGES TAKING EFFECT WITH
REPEAL
Sec. 401. Termination of step-up in basis at death.
Sec. 402. Treatment of property acquired from a decedent dying after
December 31, 2010.
TITLE V--CONSERVATION EASEMENTS
Sec. 501. Expansion of estate tax rule for conservation easements.
TITLE VI--MODIFICATIONS OF GENERATION-SKIPPING TRANSFER TAX
Sec. 601. Deemed allocation of GST exemption to lifetime transfers to
trusts; retroactive allocations.
Sec. 602. Severing of trusts.
Sec. 603. Modification of certain valuation rules.
Sec. 604. Relief provisions.
TITLE VII--EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX
Sec. 701. Increase in number of allowable partners and shareholders in
closely held businesses.
TITLE I--REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING TAXES
SEC. 101. REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING TAXES.
(a) In General.--Subtitle B is hereby repealed.
(b) Effective Date.--The repeal made by subsection (a) shall apply to
the estates of decedents dying, and gifts and generation-skipping
transfers made, after December 31, 2010.
TITLE II--REDUCTIONS OF ESTATE AND GIFT TAX RATES PRIOR TO REPEAL
SEC. 201. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.
(a) Maximum Rate of Tax Reduced to 50 Percent.--
(1) In general.--The table contained in section 2001(c)(1) is
amended by striking the two highest brackets and inserting the
following:
``Over $2,500,000
$1,025,800, plus 50% of the
excess over
$2,500,000.''.
(2) Phase-in of reduced rate.--Subsection (c) of section 2001
is amended by adding at the end the following new paragraph:
``(3) Phase-in of reduced rate.--In the case of decedents
dying, and gifts made, during 2002, the last item in the table
contained in paragraph (1) shall be applied by substituting
`53%' for `50%'.''.
(b) Repeal of Phaseout of Graduated Rates.--Subsection (c) of section
2001 is amended by striking paragraph (2) and redesignating paragraph
(3), as added by subsection (a), as paragraph (2).
(c) Additional Reductions of Rates of Tax.--Subsection (c) of section
2001, as so amended, is amended by adding at the end the following new
paragraph:
``(3) Phasedown of tax.--In the case of estates of decedents
dying, and gifts made, during any calendar year after 2003 and
before 2011--
``(A) In general.--Except as provided in subparagraph
(C), the tentative tax under this subsection shall be
determined by using a table prescribed by the Secretary
(in lieu of using the table contained in paragraph (1))
which is the same as such table; except that--
``(i) each of the rates of tax shall be
reduced by the number of percentage points
determined under subparagraph (B), and
``(ii) the amounts setting forth the tax
shall be adjusted to the extent necessary to
reflect the adjustments under clause (i).
``(B) Percentage points of reduction.--
The number of
``For calendar year:
percentage points is:
2004..................................... 1.0
2005..................................... 2.0
2006..................................... 3.0
2007..................................... 5.0
2008..................................... 7.0
2009..................................... 9.0
2010..................................... 11.0.
``(C) Coordination with income tax rates.--The
reductions under subparagraph (A)--
``(i) shall not reduce any rate under
paragraph (1) below the lowest rate in section
1(c) applicable to the taxable year which
includes the date of death (or, in the case of
a gift, the date of the gift), and
``(ii) shall not reduce the highest rate
under paragraph (1) below the highest rate in
section 1(c) for such taxable year.
``(D) Coordination with credit for state death
taxes.--Rules similar to the rules of subparagraph (A)
shall apply to the table contained in section 2011(b)
except that the Secretary shall prescribe percentage
point reductions which maintain the proportionate
relationship (as in effect before any reduction under
this paragraph) between the credit under section 2011
and the tax rates under subsection (c).''.
(d) Effective Dates.--
(1) Subsections (a) and (b).--The amendments made by
subsections (a) and (b) shall apply to estates of decedents
dying, and gifts made, after December 31, 2001.
(2) Subsection (c).--The amendment made by subsection (c)
shall apply to estates of decedents dying, and gifts made,
after December 31, 2003.
TITLE III--UNIFIED CREDIT REPLACED WITH UNIFIED EXEMPTION AMOUNT
SEC. 301. UNIFIED CREDIT AGAINST ESTATE AND GIFT TAXES REPLACED WITH
UNIFIED EXEMPTION AMOUNT.
(a) In General.--
(1) Estate tax.--Subsection (b) of section 2001 (relating to
computation of tax) is amended to read as follows:
``(b) Computation of Tax.--
``(1) In general.--The tax imposed by this section shall be
the amount equal to the excess (if any) of--
``(A) the tentative tax determined under paragraph
(2), over
``(B) the aggregate amount of tax which would have
been payable under chapter 12 with respect to gifts
made by the decedent after December 31, 1976, if the
provisions of subsection (c) (as in effect at the
decedent's death) had been applicable at the time of
such gifts.
``(2) Tentative tax.--For purposes of paragraph (1), the
tentative tax determined under this paragraph is a tax computed
under subsection (c) on the excess of--
``(A) the sum of--
``(i) the amount of the taxable estate, and
``(ii) the amount of the adjusted taxable
gifts, over
``(B) the exemption amount for the calendar year in
which the decedent died.
``(3) Exemption amount.--For purposes of paragraph (2), the
term `exemption amount' means the amount determined in
accordance with the following table:
``In the case of
The exemption
calendar year:
amount is:
2002 and 2003........................ $700,000
2004................................. $850,000
2005................................. $950,000
2006 or thereafter................... $1,000,000.
``(4) Adjusted taxable gifts.--For purposes of paragraph (2),
the term `adjusted taxable gifts' means the total amount of the
taxable gifts (within the meaning of section 2503) made by the
decedent after December 31, 1976, other than gifts which are
includible in the gross estate of the decedent.''.
(2) Gift tax.--Subsection (a) of section 2502 (relating to
computation of tax) is amended to read as follows:
``(a) Computation of Tax.--
``(1) In general.--The tax imposed by section 2501 for each
calendar year shall be the amount equal to the excess (if any)
of--
``(A) the tentative tax determined under paragraph
(2) for such calendar year, over
``(B) the aggregate amount of tax that would have
been payable under this chapter with respect to gifts
made by the donor in preceding calendar periods if the
tax had been computed under the provisions of section
2001(c) as in effect for such calendar year.
``(2) Tentative tax.--For purposes of paragraph (1), the
tentative tax determined under this paragraph for a calendar
year is a tax computed under section 2001(c) on the excess of--
``(A) the aggregate sum of the taxable gifts for such
calendar year and for each of the preceding calendar
periods, over
``(B) the exemption amount under section 2001(b)(3)
for such calendar year.''.
(b) Repeal of Unified Credits.--
(1) Section 2010 (relating to unified credit against estate
tax) is hereby repealed.
(2) Section 2505 (relating to unified credit against gift
tax) is hereby repealed.
(c) Conforming Amendments.--
(1)(A) Subsection (b) of section 2011 is amended--
(i) by striking ``adjusted'' in the table; and
(ii) by striking the last sentence.
(B) Subsection (f) of section 2011 is amended by striking ``,
reduced by the amount of the unified credit provided by section
2010''.
(2) Subsection (a) of section 2012 is amended by striking
``and the unified credit provided by section 2010''.
(3) Subparagraph (A) of section 2013(c)(1) is amended by
striking ``2010,''.
(4) Paragraph (2) of section 2014(b) is amended by striking
``2010, 2011,'' and inserting ``2011''.
(5) Clause (ii) of section 2056A(b)(12)(C) is amended to read
as follows:
``(ii) to treat any reduction in the tax
imposed by paragraph (1)(A) by reason of the
credit allowable under section 2010 (as in
effect on the day before the date of the
enactment of the Death Tax Elimination Act of
2001) or the exemption amount allowable under
section 2001(b) with respect to the decedent as
a credit under section 2505 (as so in effect)
or exemption under section 2501 (as the case
may be) allowable to such surviving spouse for
purposes of determining the amount of the
exemption allowable under section 2501 with
respect to taxable gifts made by the surviving
spouse during the year in which the spouse
becomes a citizen or any subsequent year,''.
(6) Subsection (a) of section 2057 is amended by striking
paragraphs (2) and (3) and inserting the following new
paragraph:
``(2) Maximum deduction.--The deduction allowed by this
section shall not exceed the excess of $1,300,000 over the
exemption amount (as defined in section 2001(b)(3)).''.
(7) Subsection (b) of section 2101 is amended to read as
follows:
``(b) Computation of Tax.--
``(1) In general.--The tax imposed by this section shall be
the amount equal to the excess (if any) of--
``(A) the tentative tax determined under paragraph
(2), over
``(B) a tentative tax computed under section 2001(c)
on the amount of the adjusted taxable gifts.
``(2) Tentative tax.--For purposes of paragraph (1), the
tentative tax determined under this paragraph is a tax computed
under section 2001(c) on the excess of--
``(A) the sum of--
``(i) the amount of the taxable estate, and
``(ii) the amount of the adjusted taxable
gifts, over
``(B) the exemption amount for the calendar year in
which the decedent died.
``(3) Exemption amount.--
``(A) In general.--The term `exemption amount' means
$60,000.
``(B) Residents of possessions of the united
states.--In the case of a decedent who is considered to
be a nonresident not a citizen of the United States
under section 2209, the exemption amount under this
paragraph shall be the greater of--
``(i) $60,000, or
``(ii) that proportion of $175,000 which the
value of that part of the decedent's gross
estate which at the time of his death is
situated in the United States bears to the
value of his entire gross estate wherever
situated.
``(C) Special rules.--
``(i) Coordination with treaties.--To the
extent required under any treaty obligation of
the United States, the exemption amountallowed
under this paragraph shall be equal to the amount which bears the same
ratio to the exemption amount under section 2001(b)(3) (for the
calendar year in which the decedent died) as the value of the part of
the decedent's gross estate which at the time of his death is situated
in the United States bears to the value of his entire gross estate
wherever situated. For purposes of the preceding sentence, property
shall not be treated as situated in the United States if such property
is exempt from the tax imposed by this subchapter under any treaty
obligation of the United States.
``(ii) Coordination with gift tax exemption
and unified credit.--If an exemption has been
allowed under section 2501 (or a credit has
been allowed under section 2505 as in effect on
the day before the date of the enactment of the
Death Tax Elimination Act of 2001) with respect
to any gift made by the decedent, each dollar
amount contained in subparagraph (A) or (B) or
the exemption amount applicable under clause
(i) of this subparagraph (whichever applies)
shall be reduced by the exemption so allowed
under section 2501 (or, in the case of such a
credit, by the amount of the gift for which the
credit was so allowed).''.
(8) Section 2102 is amended by striking subsection (c).
(9)(A) Paragraph (1) of section 2107(a) is amended by
striking ``the table contained in''.
(B) Paragraph (1) of section 2107(c) is amended to read as
follows:
``(1) Exemption amount.--For purposes of subsection (a), the
exemption amount under section 2001 shall be $60,000.''
(C) Paragraph (3) of section 2107(c) is amended by striking
the second sentence.
(D) The heading of subsection (c) of section 2107 is amended
to read as follows:
``(c) Exemption Amount and Credits.--''.
(10) Paragraph (1) of section 6018(a) is amended by striking
``the applicable exclusion amount in effect under section
2010(c)'' and inserting ``the exemption amount under section
2001(b)(3)''.
(11) Subparagraph (A) of section 6601(j)(2) is amended to
read as follows:
``(A) the amount of the tentative tax which would be
determined under the rate schedule set forth in section
2001(c) if the amount with respect to which such
tentative tax is to be computed were $1,000,000, or''.
(12) The table of sections for part II of subchapter A of
chapter 11 is amended by striking the item relating to section
2010.
(13) The table of sections for subchapter A of chapter 12 is
amended by striking the item relating to section 2505.
(d) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying and gifts made after December 31, 2001.
TITLE IV--CARRYOVER BASIS AT DEATH; OTHER CHANGES TAKING EFFECT WITH
REPEAL
SEC. 401. TERMINATION OF STEP-UP IN BASIS AT DEATH.
Section 1014 (relating to basis of property acquired from a decedent)
is amended by adding at the end the following new subsection:
``(f) Termination.--This section shall not apply with respect to
decedents dying after December 31, 2010.''.
SEC. 402. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER
DECEMBER 31, 2010.
(a) General Rule.--Part II of subchapter O of chapter 1 (relating to
basis rules of general application) is amended by inserting after
section 1021 the following new section:
``SEC. 1022. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER
DECEMBER 31, 2010.
``(a) In General.--Except as otherwise provided in this section--
``(1) property acquired from a decedent dying after December
31, 2010, shall be treated for purposes of this subtitle as
transferred by gift, and
``(2) the basis of the person acquiring 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) Basis Increase for Certain Property.--
``(1) In general.--In the case of property to which this
subsection applies, the basis of such property under subsection
(a) shall be increased by its basis increase under this
subsection.
``(2) Basis increase.--For purposes of this subsection--
``(A) In general.--The basis increase under this
subsection for any property is the portion of the
aggregate basis increase which is allocated to the
property pursuant to this section.
``(B) Aggregate basis increase.--In the case of any
estate, the aggregate basis increase under this
subsection is $1,300,000.
``(C) Limit increased by unused built-in losses and
loss carryovers.--The limitation under subparagraph (B)
shall be increased by--
``(i) the sum of the amount of any capital
loss carryover under section 1212(b), and the
amount of any net operating loss carryover
under section 172, which would (but for the
decedent's death) be carried from the
decedent's last taxable year to a later taxable
year of the decedent, plus
``(ii) the sum of the amount of any losses
that would have been allowable under section
165 if the property acquired from the decedent
had been sold at fair market value immediately
before the decedent's death.
``(3) Decedent nonresidents who are not citizens of the
united states.--In the case of a decedent nonresident not a
citizen of the United States--
``(A) paragraph (2)(B) shall be applied by
substituting `$60,000' for `$1,300,000', and
``(B) paragraph (2)(C) shall not apply.
``(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) (as increased, if
any, under subsection (b)) 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
subsection, the term `qualified spousal property' means--
``(A) outright transfer property, and
``(B) qualified terminable interest property.
``(4) Outright transfer property.--For purposes of this
subsection--
``(A) In general.--The term `outright transfer
property' means any interest in property acquired from
the decedent by the decedent's surviving spouse.
``(B) Exception.--Subparagraph (A) shall not apply
where, on the lapse of time, on the occurrence of an
event or contingency, or on the failure of an event or
contingency to occur, an interest passing to the
surviving spouse will terminate or fail--
``(i)(I) if an interest in such property
passes or has passed (for less than an adequate
and full consideration in money or money's
worth) from the decedent to any person other
than such surviving spouse (or the estate of
such spouse), and
``(II) if by reason of such passing such
person (or his heirs or assigns) may possess or
enjoy any part of such property after such
termination or failure of the interest so
passing to the surviving spouse, or
``(ii) if such interest is to be acquired for
the surviving spouse, pursuant to directions of
the decedent, by his executor or by the trustee
of a trust.
For purposes of this subparagraph, an interest shall
not be considered as an interest which will terminate
or fail merely because it is the ownership of a bond,
note, or similar contractual obligation, the discharge
of which would not have the effect of an annuity for
life or for a term.
``(C) Interest of spouse conditional on survival for
limited period.--For purposes of this paragraph, an
interest passing to the surviving spouse shall not be
considered as an interest which will terminate or fail
on the death of such spouse if--
``(i) such death will cause a termination or
failure of such interest only if it occurs
within a period not exceeding 6 months after
the decedent's death, or only if it occurs as a
result of a common disaster resulting in the
death of the decedent and the surviving spouse,
or only if it occurs in the case of either such
event; and
``(ii) such termination or failure does not
in fact occur.
``(5) Qualified terminable interest property.--For purposes
of this subsection--
``(A) In general.--The term `qualified terminable
interest property' means property--
``(i) which passes from the decedent, and
``(ii) in which the surviving spouse has a
qualifying income interest for life.
``(B) Qualifying income interest for life.--The
surviving spouse has a qualifying income interest for
life if--
``(i) the surviving spouse is entitled to all
the income from the property, payable annually
or at more frequent intervals, or has a
usufruct interest for life in the property, and
``(ii) no person has a power to appoint any
part of the property to any person other than
the surviving spouse.
Clause (ii) shall not apply to a power exercisable only
at or after the death of the surviving spouse. To the
extent provided in regulations, an annuity shall be
treated in a manner similar to an income interest in
property (regardless of whether the property from which
the annuity is payable can be separately identified).
``(C) Property includes interest therein.--The term
`property' includes an interest in property.
``(D) Specific portion treated as separate
property.--A specific portion of property shall be
treated as separate property. For purposes of the
preceding sentence, the term `specific portion' only
includes a portion determined on a fractional or
percentage basis.
``(d) Definitions and Special Rules for Application of Subsections
(b) and (c).--
``(1) Property to which subsections (b) and (c) apply.--
``(A) In general.--The basis of property acquired
from a decedent may be increased under subsection (b)
or (c) 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 revocable trust
to pay all of the income during the decedent's
life to the decedent or at the direction of the
decedent.
``(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 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.--Subsections (b) and (c)
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.--Subsections (b) and
(c) shall not apply to--
``(i) stock or securities 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.
``(2) Fair market value limitation.--The adjustments under
subsection (b) and (c) 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.
``(3) Allocation rules.--
``(A) In general.--The executor shall allocate the
adjustments under subsections (b) and (c) on the return
required by section 6018.
``(B) Changes in allocation.--Any allocation made
pursuant to subparagraph (A) may be changed only as
provided by the Secretary.
``(4) Inflation adjustment of basis adjustment amounts.--
``(A) In general.--In the case of decedents dying in
a calendar year after 2011, the $1,300,000, $60,000,
and $3,000,000 dollar amounts in subsections (b) and
(c)(2)(B) shall each be increased by an amount equal to
the product of--
``(i) such dollar amount, and
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year, determined by substituting
`2010' for `1992' in subparagraph (B) thereof.
``(B) Rounding.--If any increase determined under
subparagraph (A) is not a multiple of--
``(i) $100,000 in the case of the $1,300,000
amount,
``(ii) $5,000 in the case of the $60,000
amount, and
``(iii) $250,000 in the case of the
$3,000,000 amount,
such increase shall be rounded to the next lowest
multiple thereof.
``(e) 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 in trust to pay the income for life to or on the order
or direction of the decedent, with the right reserved to the
decedent at all times before his death--
``(A) to revoke the trust, or
``(B) 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.
``(f) 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.
``(g) Certain Liabilities Disregarded.--In determining whether gain
is recognized on the acquisition of property--
``(1) from a decedent by a decedent's estate or any
beneficiary, and
``(2) from the decedent's estate by any beneficiary,
and in determining the adjusted basis of such property, liabilities in
excess of basis shall be disregarded.
``(h) Regulations.--The Secretary shall prescribe such regulations as
may be necessary to carry out the purposes of this section.''.
(b) Information Returns, Etc.--
(1) In general.--Subpart C of part II of subchapter A of
chapter 61 is amended to read as follows:
``Subpart C--Returns Relating to Transfers During Life or at Death
``Sec. 6018. Returns relating to large
transfers at death.
``Sec. 6019. Returns relating to large
lifetime gifts.
``SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.
``(a) In General.--If this section applies to property acquired from
a decedent, the executor of the estate of such decedent shall make a
return containing the information specified in subsection (c) with
respect to such property.
``(b) Property to Which Section Applies.--
``(1) Large transfers.--This section shall apply to all
property (other than cash) acquired from a decedent if the fair
market value of such property acquired from the decedent
exceeds the dollar amount applicable under section
1022(b)(2)(B) (without regard to section 1022(b)(2)(C)).
``(2) Transfers of certain gifts received by decedent within
3 years of death.--This section shall apply to any appreciated
property acquired from the decedent if--
``(A) subsections (b) and (c) of section 1022 do not
apply to such property by reason of section
1022(d)(1)(C), and
``(B) such property was required to be included on a
return required to be filed under section 6019.
``(3) Nonresidents not citizens of the united states.--In the
case of a decedent who is a nonresident not a citizen of the
United States, paragraphs (1) and (2) shall be applied--
``(A) by taking into account only--
``(i) tangible property situated in the
United States, and
``(ii) other property acquired from the
decedent by a United States person, and
``(B) by substituting the dollar amount applicable
under section 1022(b)(3) for the dollar amount referred
to in paragraph (1).
``(4) Returns by trustees or beneficiaries.--If the executor
is unable to make a complete return as to any property acquired
from or passing from the decedent, the executor shall include
in the return a description of such property and the name of
every person holding a legal or beneficial interest therein.
Upon notice from the Secretary such person shall in like manner
make a return as to such property.
``(c) Information Required To Be Furnished.--The information
specified in this subsection with respect to any property acquired from
the decedent is--
``(1) the name and TIN of the recipient of such property,
``(2) an accurate description of such property,
``(3) the adjusted basis of such property in the hands of the
decedent and its fair market value at the time of death,
``(4) the decedent's holding period for such property,
``(5) sufficient information to determine whether any gain on
the sale of the property would be treated as ordinary income,
``(6) the amount of basis increase allocated to the property
under subsection (b) or (c) of section 1022, and
``(7) such other information as the Secretary may by
regulations prescribe.
``(d) Property Acquired From Decedent.--For purposes of this section,
section 1022 shall apply for purposes of determining the property
acquired from a decedent.
``(e) Statements To Be Furnished to Certain Persons.--Every person
required to make a return under subsection (a) shall furnish to each
person whose name is required to be set forth in such return (other
than the person required to make such return) a written statement
showing--
``(1) the name, address, and phone number of the person
required to make such return, and
``(2) the information specified in subsection (c) with
respect to property acquired from, or passing from, the
decedent to the person required to receive such statement.
The written statement required under the preceding sentence shall be
furnished not later than 30 days after the date that the return
required by subsection (a) is filed.
``SEC. 6019. RETURNS RELATING TO LARGE LIFETIME GIFTS.
``(a) In General.--If the value of the aggregate gifts of property
made by an individual to any United States person during a calendar
year exceeds $25,000, such individual shall make a return for such year
setting forth--
``(1) the name and TIN of the donee,
``(2) an accurate description of such property,
``(3) the adjusted basis of such property in the hands of the
donor at the time of the gift,
``(4) the donor's holding period for such property,
``(5) sufficient information to determine whether any gain on
the sale of the property would be treated as ordinary income,
and
``(6) such other information as the Secretary may by
regulations prescribe.
``(b) Exceptions.--Subsection (a) shall not apply to--
``(1) Cash.--Any gift of cash.
``(2) Gifts to charity.--Any gift to an organization
described in section 501(c) and exempt from tax under section
501(a) but only if no interest in the property is held for the
benefit of any person other than such an organization.
``(3) Waiver of certain pension rights individual waives,
before the death of a participant, any survivor benefit, or
right to such benefit, under section 401(a)(11) or 417,
subsection (a) shall not apply to such waiver.
``(4) Reporting elsewhere.--Any gift required to be reported
to the Secretary under any other provision of this title.
``(c) Statements To Be Furnished to Certain Persons.--Every person
required to make a return under subsection (a) shall furnish to each
person whose name is required to be set forth in such return a written
statement showing--
``(1) the name, address, and phone number of the person
required to make such return, and
``(2) the information specified in subsection (a) with
respect to property received by the person required to receive
such statement.
The written statement required under the preceding sentence shall be
furnished on or before January 31 of the year following the calendar
year for which the return under subsection (a) was required to be
made.''
(2) Time for filing section 6018 returns.--
(A) Returns relating to large transfers at death.--
Subsection (a) of section 6075 is amended to read as
follows:
``(a) Returns Relating to Large Transfers at Death.--The return
required by section 6018 with respect to a decedent shall be filed with
the return of the tax imposed by chapter 1 for the decedent's last
taxable year or such later date specified in regulations prescribed by
the Secretary.''
(B) Returns relating to large lifetime gifts.--
(i) The heading for section 6075(b) is
amended to read as follows:
``(b) Returns Relating to Large Lifetime Gifts.--''.
(ii) Paragraph (1) of section 6075(b) is
amended by striking ``(relating to gift
taxes)'' and inserting ``(relating to returns
relating to large lifetime gifts)''.
(iii) Paragraph (3) of section 6075(b) is
amended--
(I) by striking ``estate tax return''
and inserting ``section 6018 return'',
and
(II) by striking ``(relating to
estate tax returns)'' and inserting
``(relating to returns relating to
large transfers at death)''.
(3) Penalties.--Part I of subchapter B of chapter 68
(relating to assessable penalties) is amended by adding at the
end the following new section:
``SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN
TRANSFERS AT DEATH AND GIFTS.
``(a) Information Required To Be Furnished to the Secretary.--Any
person required to furnish any information under section 6018 or 6019
who fails to furnish such information on the date prescribed therefor
(determined with regard to any extension of time for filing) shall pay
a penalty of $10,000 ($500 in the case of information required to be
furnished under section 6018(b)(2) or 6019) for each such failure.
``(b) Information Required To Be Furnished to Beneficiaries.--Any
person required to furnish in writing to each person described in
section 6018(e) or 6019(c) the information required under such section
who fails to furnish such information shall pay a penalty of $50 for
each such failure.
``(c) Reasonable Cause Exception.--No penalty shall be imposed under
subsection (a) or (b) with respect to any failure if it is shown that
such failure is due to reasonable cause.
``(d) Intentional Disregard.--If any failure under subsection (a) or
(b) is due to intentional disregard of the requirements under sections
6018 and 6019, the penalty under such subsection shall be 5 percent of
the fair market value (as of the date of death or, in the case of
section 6019, the date of the gift) of the property with respect to
which the information is required.
``(e) Deficiency Procedures Not To Apply.--Subchapter B of chapter 63
(relating to deficiency procedures for income, estate, gift, and
certain excise taxes) shall not apply in respect of the assessment or
collection of any penalty imposed by this section.''
(4) Clerical amendments.--
(A) The table of sections for part I of subchapter B
of chapter 68 is amended by adding at the end the
following new item:
``Sec. 6716. Failure to file information
with respect to certain
transfers at death and gifts.''
(B) The item relating to subpart C in the table of
subparts for part II of subchapter A of chapter 61 is
amended to read as follows:
``Subpart C. Returns relating to
transfers during life or at
death.''
(c) Exclusion of Gain on Sale of Principal Residence Made Available
to Heir of Decedent in Certain Cases.--Subsection (d) of section 121
(relating to exclusion of gain from sale of principal residence) is
amended by adding at the end the following new paragraph:
``(9) Property acquired from a decedent.--The exclusion under
this section shall apply to property sold by--
``(A) the estate of a decedent, and
``(B) any individual who acquired such property from
the decedent (within the meaning of section 1022),
determined by taking into account the ownership and use by the
decedent.''
(d) Transfers of Appreciated Carryover Basis Property To Satisfy
Pecuniary Bequest.--
(1) In general.--Section 1040 (relating to transfer of
certain farm, etc., real property) is amended to read as
follows:
``SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY
PECUNIARY BEQUEST.
``(a) In General.--If the executor of the estate of any decedent
satisfies the right of any person to receive a pecuniary bequest with
appreciated property, then gain on such exchange shall be recognized to
the estate only to the extent that, on the date of such exchange, the
fair market value of such property exceeds such value on the date of
death.
``(b) Similar Rule for Certain Trusts.--To the extent provided in
regulations prescribed by the Secretary, a rule similar to the rule
provided in subsection (a) shall apply where--
``(1) by reason of the death of the decedent, a person has a
right to receive from a trust a specific dollar amount which is
the equivalent of a pecuniary bequest, and
``(2) the trustee of a trust satisfies such right with
property.
``(c) Basis of Property Acquired in Exchange Described in Subsection
(a) or (b).--The basis of property acquired in an exchange with respect
to which gain realized is not recognized by reason of subsection (a) or
(b) shall be the basis of such property immediately before the exchange
increased by the amount of the gain recognized to the estate or trust
on the exchange.''
(2) The item relating to section 1040 in the table of
sections for part III of subchapter O of chapter 1 is amended
to read as follows:
``Sec. 1040. Use of appreciated carryover
basis property to satisfy
pecuniary bequest.''
(e) Anti-Abuse Rules.--Section 7701 is amended by redesignating
subsection (n) as subsection (o) and by inserting after subsection (m)
the following new subsection:
``(n) Purported Gifts May Be Disregarded.--For purposes of subtitle
A, the Secretary may treat a transfer which purports to be a gift as
having never been transferred if, in connection with such transfer--
``(1)(A) the transferor (or any person related to or
designated by the transferor or such person) has received
anything of value in connection with such transfer from the
transferee directly or indirectly, or
``(B) there is an understanding or expectation that the
transferor (or such person) will receive anything of value in
connection with such transfer from the transferee directly or
indirectly, and
``(2) the Secretary determines that such treatment is
appropriate to prevent avoidance of tax imposed by subtitle
A.''
(f) Miscellaneous Amendments Related to Carryover Basis.--
(1) Recognition of gain on transfers to nonresidents.--
(A) Subsection (a) of section 684 is amended by
inserting ``or to a nonresident not a citizen of the
United States'' after ``or trust''.
``(B) Subsection (b) of section 684 is amended by
striking ``any person'' and inserting ``any United
States person''.
(C) The section heading for section 684 is amended by
inserting ``and nonresident
aliens'' after ``estates''.
(D) The item relating to section 684 in the table of
sections for subpart F of part I of subchapter J of
chapter 1 is amended by inserting ``and nonresident
aliens'' after ``estates''.
(2) Capital gain treatment for inherited art work or similar
property.--
(A) In general.--Subparagraph (C) of section
1221(a)(3) (defining capital asset) is amended by
inserting ``(other than by reason of section 1022)''
after ``is determined''.
(B) Coordination with section 170.--Paragraph (1) of
section 170(e) (relating to certain contributions of
ordinary income and capital gain property) is amended
by adding at the end the following: ``For purposes of
this paragraph, the determination of whether property
is a capital asset shall be made without regard to the
exception contained in section 1221(a)(3)(C) for basis
determined under section 1022.''.
(3) Definition of executor.--Section 7701(a) (relating to
definitions) is amended by adding at the end the following:
``(47) Executor.--The term `executor' means the executor or
administrator of the decedent, or, if there is no executor or
administrator appointed, qualified, and acting within the
United States, then any person in actual or constructive
possession of any property of the decedent.''.
(4) Certain trusts.--Subparagraph (A) of section 4947(a)(2)
is amended by inserting ``642(c),'' after ``170(f)(2)(B),''.
(5) Other amendments.--
(A) Section 1246 is amended by striking subsection
(e).
(B) Subsection (e) of section 1291 is amended--
(i) by striking ``(e),'', and
(ii) by striking ``; except that'' and all
that follows and inserting a period.
(C) Section 1296 is amended by striking subsection
(i).
(6) Clerical amendment.--The table of sections for part II of
subchapter O of chapter 1 is amended by inserting after the
item relating to section 1021 the following new item:
``Sec. 1022. Treatment of property
acquired from a decedent dying
after December 31, 2010.''.
(g) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to estates of
decedents dying after December 31, 2010.
(2) Purported gifts, etc.--The amendments made by subsections
(e) and (f)(1) shall apply to transfers after December 31,
2010.
(3) Section 4947.--The amendment made by subsection (f)(4)
shall apply to deductions for taxable years beginning after
December 31, 2010.
(h) Study.--The Secretary of the Treasury or the Secretary's delegate
shall conduct a study of--
(1) opportunities for avoidance of the income tax, if any,
and
(2) potential increases in income tax revenues,
by reason of the enactment of this Act. The study shall be submitted to
the Committee on Ways and Means of the House of Representatives and the
Committee on Finance of the Senate not later than December 31, 2002.
TITLE V--CONSERVATION EASEMENTS
SEC. 501. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION EASEMENTS.
(a) Where Land Is Located.--Clause (i) of section 2031(c)(8)(A)
(defining land subject to a conservation easement) is amended--
(1) by striking ``25 miles'' each place it appears and
inserting ``50 miles''; and
(2) striking ``10 miles'' and inserting ``25 miles''.
(b) Clarification of Date for Determining Value of Land and
Easement.--Section 2031(c)(2) (defining applicable percentage) is
amended by adding at the end the following new sentence: ``The values
taken into account under the preceding sentence shall be such values as
of the date of the contribution referred to in paragraph (8)(B).''.
(c) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying after December 31, 2000.
TITLE VI--MODIFICATIONS OF GENERATION-SKIPPING TRANSFER TAX
SEC. 601. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO
TRUSTS; RETROACTIVE ALLOCATIONS.
(a) In General.--Section 2632 (relating to special rules for
allocation of GST exemption) is amended by redesignating subsection (c)
as subsection (e) and by inserting after subsection (b) the following
new subsections:
``(c) Deemed Allocation to Certain Lifetime Transfers to GST
Trusts.--
``(1) In general.--If any individual makes an indirect skip
during such individual's lifetime, any unused portion of such
individual's GST exemption shall be allocated to the property
transferred to the extent necessary to make the inclusion ratio
for such property zero. If the amount of the indirect skip
exceeds such unused portion, the entire unused portion shall be
allocated to the property transferred.
``(2) Unused portion.--For purposes of paragraph (1), the
unused portion of an individual's GST exemption is that portion
of such exemption which has not previously been--
``(A) allocated by such individual,
``(B) treated as allocated under subsection (b) with
respect to a direct skip occurring during or before the
calendar year in which the indirect skip is made, or
``(C) treated as allocated under paragraph (1) with
respect to a prior indirect skip.
``(3) Definitions.--
``(A) Indirect skip.--For purposes of this
subsection, the term `indirect skip' means any transfer
of property (other than a direct skip) subject to the
tax imposed by chapter 12 made to a GST trust.
``(B) GST trust.--The term `GST trust' means a trust
that could have a generation-skipping transfer with
respect to the transferor unless--
``(i) the trust instrument provides that more
than 25 percent of the trust corpus must be
distributed to or may be withdrawn by one or
more individuals who are non-skip persons--
``(I) before the date that the
individual attains age 46,
``(II) on or before one or more dates
specified in the trust instrument that
will occur before the date that such
individual attains age 46, or
``(III) upon the occurrence of an
event that, in accordance with
regulations prescribed by the
Secretary, may reasonably be expected
to occur before the date that such
individual attains age 46;
``(ii) the trust instrument provides that
more than 25 percent of the trust corpus must
be distributed to or may be withdrawn by one or
more individuals who are non-skip persons and
who are living on the date of death of another
person identified in the instrument (by name or
by class) who is more than 10 years older than
such individuals;
``(iii) the trust instrument provides that,
if one or more individuals who are non-skip
persons die on or before a date or event
described in clause (i) or (ii), more than 25
percent of the trust corpus either must be
distributed to the estate or estates of one or
more of such individuals or is subject to a
general power of appointment exercisable by one
or more of such individuals;
``(iv) the trust is a trust any portion of
which would be included in the gross estate of
a non-skip person (other than the transferor)
if such person died immediately after the
transfer;
``(v) the trust is a charitable lead annuity
trust (within the meaning of section
2642(e)(3)(A)) or a charitable remainder
annuity trust or a charitable remainder
unitrust (within the meaning of section
664(d)); or
``(vi) the trust is a trust with respect to
which a deduction was allowed under section
2522 for the amount of an interest in the form
of the right to receive annual payments of a
fixed percentage of the net fair market value
of the trust property (determined yearly) and
which is required to pay principal to a non-
skip person if such person is alive when the
yearly payments for which the deduction was
allowed terminate.
For purposes of this subparagraph, the value of
transferred property shall not be considered to be
includible in the gross estate of a non-skip person or
subject to a right of withdrawal by reason of such
person holding a right to withdraw so much of such
property as does not exceed the amount referred to in
section 2503(b) with respect to any transferor, and it
shall be assumed that powers of appointment held by
non-skip persons will not be exercised.
``(4) Automatic allocations to certain gst trusts.--For
purposes of this subsection, an indirect skip to which section
2642(f) applies shall be deemed to have been made only at the
close of the estate tax inclusion period. The fair market value
of such transfer shall be the fair market value of the trust
property at the close of the estate tax inclusion period.
``(5) Applicability and effect.--
``(A) In general.--An individual--
``(i) may elect to have this subsection not
apply to--
``(I) an indirect skip, or
``(II) any or all transfers made by
such individual to a particular trust,
and
``(ii) may elect to treat any trust as a GST
trust for purposes of this subsection with
respect to any or all transfers made by such
individual to such trust.
``(B) Elections.--
``(i) Elections with respect to indirect
skips.--An election under subparagraph
(A)(i)(I) shall be deemed to be timely if filed
on a timely filed gift tax return for the
calendar year in which the transfer was made or
deemed to have been made pursuant to paragraph
(4) or on such later date or dates as may be
prescribed by the Secretary.
``(ii) Other elections.--An election under
clause (i)(II) or (ii) of subparagraph (A) may
be made on a timely filed gift tax return for
the calendar year for which the election is to
become effective.
``(d) Retroactive Allocations.--
``(1) In general.--If--
``(A) a non-skip person has an interest or a future
interest in a trust to which any transfer has been
made,
``(B) such person--
``(i) is a lineal descendant of a grandparent
of the transferor or of a grandparent of the
transferor's spouse or former spouse, and
``(ii) is assigned to a generation below the
generation assignment of the transferor, and
``(C) such person predeceases the transferor,
then the transferor may make an allocation of any of such
transferor's unused GST exemption to any previous transfer or
transfers to the trust on a chronological basis.
``(2) Special rules.--If the allocation under paragraph (1)
by the transferor is made on a gift tax return filed on or
before the date prescribed by section 6075(b) for gifts made
within the calendar year within which the non-skip person's
death occurred--
``(A) the value of such transfer or transfers for
purposes of section 2642(a) shall be determined as if
such allocation had been made on a timely filed gift
tax return for each calendar year within which each
transfer was made,
``(B) such allocation shall be effective immediately
before such death, and
``(C) the amount of the transferor's unused GST
exemption available to be allocated shall be determined
immediately before such death.
``(3) Future interest.--For purposes of this subsection, a
person has a future interest in a trust if the trust may permit
income or corpus to be paid to such person on a date or dates
in the future.''.
(b) Conforming Amendment.--Paragraph (2) of section 2632(b) is
amended by striking ``with respect to a prior direct skip'' and
inserting ``or subsection (c)(1)''.
(c) Effective Dates.--
(1) Deemed allocation.--Section 2632(c) of the Internal
Revenue Code of 1986 (as added by subsection (a)), and the
amendment made by subsection (b), shall apply to transfers
subject to chapter 11 or 12 made after December 31, 2000, and
to estate tax inclusion periods ending after December 31, 2000.
(2) Retroactive allocations.--Section 2632(d) of the Internal
Revenue Code of 1986 (as added by subsection (a)) shall apply
to deaths of non-skip persons occurring after December 31,
2000.
SEC. 602. SEVERING OF TRUSTS.
(a) In General.--Subsection (a) of section 2642 (relating to
inclusion ratio) is amended by adding at the end the following new
paragraph:
``(3) Severing of trusts.--
``(A) In general.--If a trust is severed in a
qualified severance, the trusts resulting from such
severance shall be treated as separate trusts
thereafter for purposes of this chapter.
``(B) Qualified severance.--For purposes of
subparagraph (A)--
``(i) In general.--The term `qualified
severance' means the division of a single trust
and the creation (by any means available under
the governing instrument or under local law) of
two or more trusts if--
``(I) the single trust was divided on
a fractional basis, and
``(II) the terms of the new trusts,
in the aggregate, provide for the same
succession of interests of
beneficiaries as are provided in the
original trust.
``(ii) Trusts with inclusion ratio greater
than zero.--If a trust has an inclusion ratio
of greater than zero and less than 1, a
severance is a qualified severance only if the
single trust is divided into two trusts, one of
which receives a fractional share of the total
value of all trust assets equal to the
applicable fraction of the single trust
immediately before the severance. In such case,
the trust receiving such fractional share shall
have an inclusion ratio of zero and the other
trust shall have an inclusion ratio of 1.
``(iii) Regulations.--The term `qualified
severance' includes any other severance
permitted under regulations prescribed by the
Secretary.
``(C) Timing and manner of severances.--A severance
pursuant to this paragraph may be made at any time. The
Secretary shall prescribe by forms or regulations the
manner in which the qualified severance shall be
reported to the Secretary.''.
(b) Effective Date.--The amendment made by this section shall apply
to severances after December 31, 2000.
SEC. 603. MODIFICATION OF CERTAIN VALUATION RULES.
(a) Gifts for Which Gift Tax Return Filed or Deemed Allocation
Made.--Paragraph (1) of section 2642(b) (relating to valuation rules,
etc.) is amended to read as follows:
``(1) Gifts for which gift tax return filed or deemed
allocation made.--If the allocation of the GST exemption to any
transfers of property is made on a gift tax return filed on or
before the date prescribed by section 6075(b) for such transfer
or is deemed to be made under section 2632 (b)(1) or (c)(1)--
``(A) the value of such property for purposes of
subsection (a) shall be its value as finally determined
for purposes of chapter 12 (within the meaning of
section 2001(f)(2)), or, in the case of an allocation
deemed to have been made at the close of an estate tax
inclusion period, its value at the time of the close of
the estate tax inclusion period, and
``(B) such allocation shall be effective on and after
the date of such transfer, or, in the case of an
allocation deemed to have been made at the close of an
estate tax inclusion period, on and after the close of
such estate tax inclusion period.''.
(b) Transfers at Death.--Subparagraph (A) of section 2642(b)(2) is
amended to read as follows:
``(A) Transfers at death.--If property is transferred
as a result of the death of the transferor, the value
of such property for purposes of subsection (a) shall
be its value as finally determined for purposes of
chapter 11; except that, if the requirements prescribed
by the Secretary respecting allocation of post-death
changes in value are not met, the value of such
property shall be determined as of the time of the
distribution concerned.''.
(c) Effective Date.--The amendments made by this section shall apply
to transfers subject to chapter 11 or 12 of the Internal Revenue Code
of 1986 made after December 31, 2000.
SEC. 604. RELIEF PROVISIONS.
(a) In General.--Section 2642 is amended by adding at the end the
following new subsection:
``(g) Relief Provisions.--
``(1) Relief from late elections.--
``(A) In general.--The Secretary shall by regulation
prescribe such circumstances and procedures under which
extensions of time will be granted to make--
``(i) an allocation of GST exemption
described in paragraph (1) or (2) of subsection
(b), and
``(ii) an election under subsection (b)(3) or
(c)(5) of section 2632.
Such regulations shall include procedures for
requesting comparable relief with respect to transfers
made before the date of the enactment of this
paragraph.
``(B) Basis for determinations.--In determining
whether to grant relief under this paragraph, the
Secretary shall take into account all relevant
circumstances, including evidence of intent contained
in the trust instrument or instrument of transfer and
such other factors as the Secretary deems relevant. For
purposes of determining whether to grant relief under
this paragraph, the time for making the allocation (or
election) shall be treated as if not expressly
prescribed by statute.
``(2) Substantial compliance.--An allocation of GST exemption
under section 2632 that demonstrates an intent to have the
lowest possible inclusion ratio with respect to a transfer or a
trust shall be deemed to be an allocation of so much of the
transferor's unused GST exemption as produces the lowest
possible inclusion ratio. In determining whether there has been
substantial compliance, all relevant circumstances shall be
taken into account, including evidence of intent contained in
the trust instrument or instrument of transfer and such other
factors as the Secretary deems relevant.''.
(b) Effective Dates.--
(1) Relief from late elections.--Section 2642(g)(1) of the
Internal Revenue Code of 1986 (as added by subsection (a))
shall apply to requests pending on, or filed after, December
31, 2000.
(2) Substantial compliance.--Section 2642(g)(2) of such Code
(as so added) shall apply to transfers subject to chapter 11 or
12 of the Internal Revenue Code of 1986 made after December 31,
2000. No implication is intended with respect to the
availability of relief from late elections or the application
of a rule of substantial compliance on or before such date.
TITLE VII--EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX
SEC. 701. INCREASE IN NUMBER OF ALLOWABLE PARTNERS AND SHAREHOLDERS IN
CLOSELY HELD BUSINESSES.
(a) In General.--Paragraphs (1)(B)(ii), (1)(C)(ii), and
(9)(B)(iii)(I) of section 6166(b) (relating to definitions and special
rules) are each amended by striking ``15'' and inserting ``45''.
(b) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying after December 31, 2001.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
Purpose
The bill, H.R. 8, as amended (the ``Death Tax Elimination
Act of 2001''), repeals the estate, gift, and generation-
skipping transfer taxes.
Summary
Phaseout and repeal of estate, gift, and generation-skipping transfer
taxes
Phaseout and repeal of estate, gift, and generation-
skipping transfer taxes
The estate and gift tax rates above 53 percent and the 5-
percent surtax, which phases out the benefit of the graduated
rates, are repealed for decedents dying and gifts and
generation-skipping transfers made after December 31, 2001. The
rates in excess of 50 percent are repealed for decedents dying
and gifts and generation-skipping transfers made after December
31, 2002. Each estate and gift tax rate is reduced by one
percentage point in each year 2004 through 2006 and by two
percentage points in each year 2007 through 2010. The estate,
gift, and generation-skipping transfer taxes are repealed, and
a carryover basis regime takes effect for decedents dying and
gifts and generation-skipping transfers made after December 31,
2010.
Replace unified credit with unified exemption
The bill replaces the unified credit with a unified
exemption for decedents dying and gifts made after December 31,
2001.
Basis of property acquired from a decedent
In general.--After repeal, the basis of assets received
from a decedent generally will be the basis in the hands of the
decedent (i.e., a carryover basis). However, an executor is
permitted to increase (i.e., step up) the basis of assets
transferred by up to a total of $1.3 million. In addition, the
basis of property transferred to a surviving spouse can be
increased (i.e., stepped up) by an additional $3 million. For
these purposes, an executor will elect which and to what extent
assets receive an increase in basis.
Reporting requirements.--A donor is required to report to
the Internal Revenue Service (``IRS'') and beneficiaries the
basis, character, and other information regarding the transfer
of non-cash assets with a value in excess of $25,000. In
addition, for transfers at death of non-cash assets in excess
of $1.3 million and for appreciated property in excess of
$25,000 received by a decedent within three years of death, the
executor is required to report to the IRS and beneficiaries the
basis, character, and other information regarding the transfer
of such property. Penalties will apply for the failure to
report to the IRS and beneficiaries the required information.
Modify generation-skipping transfer tax rules
The bill deems there to have been generation-skipping
transfer tax exemption allocated to transfers made during life
that are ``indirect skips,'' which are transfers to generation-
skipping transfer trusts that are not direct skips. The bill
also allows the retroactive allocation of generation-skipping
transfer tax exemption when there is an unnatural order of
death. Moreover, the bill allows a trust holding property with
an inclusion ratio greater than zero to be severed at any time
in a ``qualified severance.'' In addition, the valuation rules
are modified such that, for timely and automatic allocations of
generation-skipping transfer tax exemption, the value of the
property for purposes of determining the inclusion ratio is its
finally determined gift tax value or estate tax value depending
on the circumstances of the transfer. The bill also authorizes
and directs the Treasury Secretary to grant extensions of time
to make the election to allocate generation-skipping transfer
tax exemption and to grant exceptions to the time requirement.
Finally, the bill provides that substantial compliance with the
statutory and regulatory requirements for allocating
generation-skipping transfer tax exemption was allocated to a
particular transfer or trust. The generation-skipping transfer
tax provisions are effective after December 31, 2000.
Expand estate tax rule for conservation easements
The bill expands the availability of qualified conservation
easements by modifying the distance requirements. Under the
bill, the distance within which the land must be situated from
a metropolitan area, national park, or wilderness area is
increased from 25 to 50 miles, and the distance from which the
land must be situated from an Urban National Forest is
increased from 10 to 25 miles. The bill also clarifies that the
date for determining easement compliance is the date on which
the donation was made. The provisions are effective for estates
of decedents dying after December 31, 2000.
Expand availability of installment payment of estate tax for estates of
decedents with an interest in a closely-held business
The bill expands availability of installment payment of
estate tax for decedents with an interest in a closely-held
business by expanding the definition of a closely-held
business. The bill increases from 15 to 45 the number of
partners in a partnership and shareholders in a corporation
that is considered a closely-held business in which a decedent
held an interest, and thus will qualify the estate for
installment payment of estate tax. The provision is effective
for estates of decedent dying after December 31, 2001.
B. Background and Need for Legislation
The provisions approved by the Committee reflect the need
for tax relief for all decedents' estates, decedents' heirs,
and businesses, including small businesses, family-owned
businesses, and farming businesses. This will provide needed
tax relief for these taxpayers from the unduly burdensome
estate, gift, and generation-skipping transfer taxes. The
estimated revenue effects of the provisions comply with the
most recent Congressional Budget Office revisions of budget
surplus projections.
C. Legislative History
Committee Action
The bill, H.R. 8, was introduced by Ms. Dunn on March 14,
2001. The Committee on Ways and Means marked up the bill on
March 29, 2001, and approved the bill with a Chairman's
amendment in the nature of a substitute, by a roll call vote of
24 yeas and 14 nays, with a quorum present.
II. EXPLANATION OF THE BILL
A. Phase in Repeal of Estate, Gift, and Generation-Skipping Transfer
Taxes (Secs. 101, 201, 301, and 401-402 of the Bill, Secs. 121, 684,
1014, 1040, 1221, 2001-2704, 4947, and 7701 of the Code, and New Secs.
1022, 6018, 6019, and 6716 of the Code)
Present Law
Estate and gift tax rules
In general
Under present law, a gift tax is imposed on lifetime
transfers and an estate tax is imposed on transfers at death.
The gift tax and the estate tax are unified so that a single
graduated rate schedule applies to cumulative taxable transfers
made by a taxpayer during his or her lifetime and at death. The
unified estate and gift tax rates begin at 18 percent on the
first $10,000 in cumulative taxable transfers and reach 55
percent on cumulative taxable transfers over $3 million. In
addition, a 5-percent surtax is imposed on cumulative taxable
transfers between $10 million and $17,184,000, which has the
effect of phasing out the benefit of the graduated rates. Thus,
these estates are subject to a top marginal rate of 60 percent.
Estates over $17,184,000 are subject to a flat rate of 55
percent, as the benefit of the graduated rates has been phased
out.
Gift tax annual exclusion
Donors of lifetime gifts are provided an annual exclusion
of $10,000 (indexed for inflation occurring after 1997) of
transfers of present interests in property to any one donee
during the taxable year. If the non-donor spouse consents to
split the gift with the donor spouse, then the annual exclusion
is $20,000. Unlimited transfers between spouses are permitted
without imposition of a gift tax.
Unified credit
A unified credit is available with respect to taxable
transfers by gift and at death. The unified credit amount
effectively exempts from tax transfers totaling $675,000 in
2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in
2005, and $1 million in 2006 and thereafter. The benefit of the
unified credit applies at the lowest estate and gift tax rates.
For example, in 2001, the unified credit applies between the
18-percent and 37-percent estate and gift tax rates. Thus, in
2001, taxable transfers, after application of the unified
credit, are effectively subject to estate and gift tax rates
beginning at 37 percent.
Transfers to a surviving spouse
A 100-percent marital deduction generally is permitted for
the value of property transferred between spouses. In addition,
transfers of a ``qualified terminable interest'' also are
eligible for the marital deduction. A ``qualified terminable
interest'' is property: (1) which passes from the decedent, (2)
in which the surviving spouse has a ``qualifying income
interest for life,'' and (3) to which an election under these
rules applies. A ``qualifying income interest for life'' exists
if: (1) the surviving spouse is entitled to all the income from
the property (payable annually or at more frequent intervals)
or the right to use property during the spouse's life, and (2)
no person has the power to appoint any part of the property to
any person other than the surviving spouse.
Expenses, indebtedness, and taxes
An estate tax deduction is allowed for funeral expenses and
administration expenses of an estate. An estate tax deduction
also is allowed for claims against the estate and unpaid
mortgages on, or any indebtedness in respect of, property for
which the value of the decedent's interest therein,
undiminished by the debt, is included in the value of the gross
estate.
If the total amount of claims and debts against the estate
exceeds the value of the property to which the claims relate,
an estate tax deduction for the excess is allowed, provided
such excess is paid before the due date of the estate tax
return. A deduction for claims against the estate generally is
permitted only if allowable by the law of the jurisdiction
under which the estate is being administered.
A deduction also is allowed for the full unpaid amount of
any mortgage upon, or of any other indebtedness in respect of,
any property of the gross estate (including interest which has
accrued thereon to the date of the decedent's death), provided
that the full value of the underlying property is included in
the decedent's gross estate.
Basis of property received
In general.--A taxpayer who receives property from a
decedent's estate or from a donor of a lifetime gift may want
to sell or otherwise dispose of the property. Gain or loss, if
any, on the disposition of the property is measured by the
taxpayer's amount realized (e.g., gross proceeds received) on
the disposition, less the taxpayer's basis in such property.
Basis generally represents a taxpayer's investment in
property with certain adjustments required after acquisition.
For example, basis is increased by the cost of capital
improvements made to the property and decreased by depreciation
deductions taken with respect to the property.
Property received from a donor of a lifetime gift takes a
carryover basis. ``Carryover basis'' means that the basis in
the hands of the donee is the same as it was in the hands of
the donor plus any gift tax paid on any unrealized
appreciation. The basis of a lifetime gift, however, generally
cannot exceed the property's fair market value on the date of
the gift.
Property passing from a decedent's estate generally takes a
stepped-up basis. ``Stepped-up basis'' for estate tax purposes
means that the basis of property passing from a decedent's
estate generally is the fair market value on the date of the
decedent's death (or, if the alternatevaluation date is
elected, the earlier of six months or the date the property is sold or
distributed by the estate). This step up (or step down) in basis
eliminates the recognition of any income on the appreciation of the
property that occurred prior to the decedent's death, and has the
effect of eliminating the tax benefit from any unrealized loss.
In community property states, a 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, U.S. possession, or foreign country) generally is
treated as having passed from the decedent, and thus is
eligible for stepped-up basis. This rule applies if at least
one-half of the whole of the community interest is includible
in the decedent's gross estate.
Special rules for interests in certain foreign entities.--
Stepped-up basis treatment generally is denied to certain
interests in foreign entities. Under present law, stock or
securities in a foreign personal holding company takes a
carryover basis. Stock in a foreign investment company takes a
stepped up basis reduced by the decedent's ratable share of
accumulated earnings and profits. In addition, stock in a
passive foreign investment company (including those for which a
mark-to-market election has been made) generally takes a
carryover basis, except that a passive foreign investment
company for which a decedent shareholder had made a qualified
electing fund election is allowed a stepped up basis. Stock
owned by a decedent in a domestic international sales
corporation (or former domestic international sales
corporation) takes a stepped up basis reduced by the amount (if
any) which would have been included in gross income under
section 995(c) as a dividend if the decedent had lived and sold
the stock at its fair market value on the estate tax valuation
date (i.e., generally the date of the decedent's death unless
an alternate valuation date is elected).
Provisions affecting small and family-owned businesses and
farms
Special-use valuation.--An executor can elect for estate
tax purposes to value certain ``qualified real property'' used
in farming or another qualifying closely-held trade or business
at its current-use value, rather than its fair market value.
The maximum reduction in value for such real property is
$750,000 (adjusted for inflation occurring after 1997). Real
property generally can qualify for special-use valuation if at
least 50 percent of the adjusted value of the decedent's gross
estate consists of a farm or closely-held business assets in
the decedent's estate (including both real and personal
property) and at least 25 percent of the adjusted value of the
gross estate consists of farm or closely-held business
property. In addition, the property must be used in a qualified
use (e.g., farming) by the decedent or a member of the
decedent's family for five of the eight years before the
decedent's death.
If, after a special-use valuation election is made, the
heir who acquired the real property ceases to use it in its
qualified use within 10 years of the decedent's death, an
additional estate tax is imposed in order to recapture the
entire estate-tax benefit of the special-use valuation.
Family-owned business deduction.--An estate is permitted to
deduct the adjusted value of a qualified-family owned business
interest of the decedent, up to $675,000.\1\ A qualified
family-owned business interest is defined as any interest in a
trade or business (regardless of the form in which it is held)
with a principal place of business in the United States if the
decedent's family owns at least 50 percent of the trade or
business, two families own 70 percent, or three families own 90
percent, as long as the decedent's family owns at least 30
percent of the trade or business. An interest in a trade or
business does not qualify if any interest in the business (or a
related entity) was publicly-traded at any time within three
years of the decedent's death. An interest in a trade or
business also does not qualify if more than 35 percent of the
adjusted ordinary gross income of the business for the year of
the decedent's death was personal holding company income. In
the case of a trade or business that owns an interest in
another trade or business (i.e., ``tiered entities''), special
look-through rules apply. The value of a trade or business
qualifying as a family-owned business interest is reduced to
the extent the business holds passive assets or excess cash or
marketable securities.
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\1\ The qualified family-owned business deduction and the unified
credit effective exemption amount are coordinated. If the maximum
deduction amount of $675,000 is elected then the unified credit
effective exemption amount if $625,000, for a total of $1.3 million. If
the qualified family-owned business deduction is less than $675,000
then the unified credit effective exemption amount is equal to
$625,000, increased by the difference between $675,000 and the amount
of the qualified family-owned business deduction. However, the unified
credit effective exemption amount cannot be increased above the
generally applicable exemption amount in effect for the taxable year.
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To qualify for the exclusion, the decedent (or a member of
the decedent's family) must have owned and materially
participated in the trade or business for at least five of the
eight years preceding the decedent's date of death. In
addition, at least one qualified heir (or member of the
qualified heir's family) is required to materially participate
in the trade or business for at least 10 years following the
decedent's death.
The qualified family-owned business rules provide a
graduated recapture based on the number of years after the
decedent's death in which the disqualifying event occurred.
Under the provision, if the disqualifying event occurred within
six years of the decedent's death, then 100 percent of the tax
is recaptured. The remaining percentage of recapture based on
the year after the decedent's death in which a disqualifying
event occurs is as follows: the disqualifying event occurs
during the seventh year after the decedent's death, 80 percent;
during the eighth year after the decedent's death, 60 percent;
during the ninth year after the decedent's death, 40 percent;
and during the tenth year after the decedent's death, 20
percent. For purposes of the qualified family-owned business
deduction, the contribution of a qualified conservation
easement is not considered a disposition that would trigger
recapture of estate tax.
In general, there is no requirement that the qualified heir
(or members of his or her family) continue to hold or
participate in the trade or business more than 10 years after
the decedent's death. However, the 10-year recapture period can
be extended for a period of up to two years if the qualified
heir does not begin to use the property for a period of up to
two years after the decedent's death.
An estate can claim the benefits of both the qualified
family-owned business deduction and special-use valuation. For
purposes of determining whether the value of the trade
orbusiness exceeds 50 percent of the decedent's gross estate, if the
estate claimed special-use valuation, then the property's special-use
value is used.
State death tax credit
A credit is allowed against the Federal estate tax for any
estate, inheritance, legacy, or succession taxes actually paid
to any State or the District of Columbia with respect to any
property included in the decedent's gross estate. The maximum
amount of credit allowable for State death taxes is determined
under a graduated rate table, based on the size of the
decedent's adjusted taxable estate. Most States impose a
``pick-up'' or ``soak-up'' estate tax, which applies when the
State death tax liability is less than the maximum Federal
death tax credit. This provides States with the maximum amount
of death tax for which the State death tax credit provides.
Estate and gift taxation of nonresident noncitizens
Nonresident noncitizens are subject to gift tax with
respect to certain transfers by gift of U.S.-situated property.
Such property includes real estate and tangible property
located within the United States. Nonresident noncitizens
generally are not subject to U.S. gift tax on the transfer of
intangibles, such as stock or securities, regardless of where
such property is situated.
Estates of nonresident noncitizens generally are taxed at
the same estate tax rates applicable to U.S. citizens, but the
taxable estate includes only property situated within the
United States that is owned by the decedent at death. This
includes the value at death of all property, real or personal,
tangible or intangible, situated in the United States. Special
rules apply which treat certain property as being situated
within and without the United States for these purposes.
Unless modified by a treaty, a nonresident who is not a
U.S. citizen generally is allowed a unified credit of $13,000,
which effectively exempts $60,000 in assets from estate tax.
Generation-skipping transfer tax
A generation-skipping transfer tax generally is imposed on
transfers, either directly or through a trust or similar
arrangement, to a ``skip person'' (i.e., a beneficiary in a
generation more than one generation below that of the
transferor). Transfers subject to the generation-skipping
transfer tax include direct skips, taxable terminations, and
taxable distributions. The generation-skipping transfer tax is
imposed at a flat rate of 55 percent (i.e., the top estate and
gift tax rate) on cumulative generation-skipping transfers in
excess of $1 million (indexed for inflation occurring after
1997).
Selected income tax provisions
Transfers to certain foreign trusts and estates
Transfers by a U.S. person to a foreign trust or estate
generally is treated as a sale or exchange of the property for
an amount equal to the fair market value of the transferred
property. The amount of gain that must be recognized by the
transferor is equal to the excess of the fair market value of
the property transferred over the adjusted basis (for purposes
of determining gain) of such property in the hands of the
transferor.
Net operating loss and capital loss carryovers
Under present law, a capital loss and net operating loss
from business operations sustained by a decedent during his
last taxable year are deductible only on the final return filed
in his or her behalf. Such losses are not deductible by his or
her estate.
Transfers of property in satisfaction of a pecuniary
bequest
Under present law, gain or loss is recognized on the
transfer of property in satisfaction of a pecuniary bequest
(i.e., a bequest of a specific dollar amount) to the extent
that the fair market value of the property at the time of the
transfer exceeds the basis of the property, which generally is
the basis stepped up to fair market value on the date of the
decedent's death.
Income tax exclusion for the gain on the sale of a
principal residence
A taxpayer generally can exclude up to $250,000 ($500,000
if married filing a joint return) of gain realized on the sale
or exchange of a principal residence. The exclusion is allowed
each time a taxpayer selling or exchanging a principal
residence meets the eligibility requirements, but generally no
more frequently than once every two years.
To be eligible, a taxpayer must have owned the residence
and occupied it as a principal residence for at least two of
the five years prior to the sale or exchange. A taxpayer who
fails to meet these requirements by reason of a change of place
of employment, health, or other unforeseen circumstances is
able to exclude the fraction of the $250,000 ($500,000 if
married filing a joint return) equal to the fraction of two
years that these requirements are met.
Excise tax on nonexempt trusts
Under present law, split-interest trusts are subject to
certain restrictions that are applicable to private foundations
if an income, estate, or gift tax charitable deduction was
allowed with respect to the trust. A split-interest trust
subject to these rules would be prohibited from engaging in
self-dealing, retaining any excess business holdings, and from
making certain investments or taxable expenditures. Failure to
comply with the restrictions would subject the split-interest
trust to certain excise taxes imposed on private foundations,
which include excise taxes on self-dealing, excess business
holdings, investments which jeopardize charitable purposes, and
certain taxable expenditures.
Reasons for Change
The Committee finds that the estate, gift, and generation-
skipping transfer taxes are unduly burdensome on all taxpayers,
and particularly decedents' estates, decedents' heirs, and
businesses, such as small business, family-owned businesses,
and farming businesses. The Committee further believes it is
inappropriate to impose a tax by reason of the death of a
taxpayer.
explanation of provision
Overview of the bill
Beginning in 2011, the estate, gift, and generation-
skipping transfers taxes are repealed. After repeal, the basis
of assets received from a decedent generally will equal the
basis of the decedent (i.e., carryover basis) at death.
However, a decedent's estate is permitted to increase the basis
of assets transferred by up to a total of $1.3 million. The
basis of property transferred to a surviving spouse can be
increased (i.e., stepped up) by an additional $3 million. Thus,
the basis of property transferred to a surviving spouse can be
increased (i.e., stepped up) by a total of $4.3 million. In no
case can the basis of an asset be adjusted above its fair
market value. For these purposes, the executor will determine
which assets and to what extent each asset receives a basis
increase. The $1.3 million and $3 million amounts are adjusted
annually for inflation occurring after 2010.
In 2002, the unified credit is replaced with a unified
exemption, the 5-percent surtax (which phases out the benefit
of the graduated rates) and the rates in excess of 53 percent
are repealed. Beginning in 2003, the estate, gift, and
generation-skipping transfer tax rates are further reduced each
year until the estate, gift, and generation-skipping transfer
taxes are repealed in 2011.
Phaseout and repeal of estate, gift, and generation-skipping transfer
taxes
In general
In 2002, the top estate and gift tax rates above 53 percent
are repealed, as are the 5-percent surtax, which phases out the
benefit of the graduated rates. In 2003, all rates in excess of
50 percent are repealed. In each year 2004 through 2006, each
of the rates of tax is reduced by one percentage point. In each
year 2007 through 2010, each of the rates of tax is reduced by
two percentage points. The generation-skipping transfer tax
rate in effect for a given year is the highest estate and gift
tax rate in effect for that year. The reduction in estate and
gift tax rates is coordinated with the income tax rates such
that the highest estate and gift tax rate (and, thus, the
generation-skipping transfer tax rate) will not be reduced
below the top individual rate, and the lower estate and gift
tax rates will not be reduced below the lowest individual tax
rate. For each year 2002 through 2010, the State death tax
credit rates are reduced in proportion to the reduction in the
estate and gift tax rates.
Beginning in 2011, the estate, gift, and generation-
skipping transfer taxes are repealed.
Replace unified credit with unified exemption
Beginning in 2002, the unified credit is replaced with a
unified exemption amount. The unified exemption amount, which
will follow the dollar amounts of the present-law unified
credit effective exemption amounts, will be determined as
follows: in 2002 and 2003, $700,000; in 2004, $850,000; in
2005, $950,000; and in 2006 and thereafter (until repeal in
2011), $1 million. For decedents who are not residents and not
citizens of the United States, the exemption is $60,000.
Basis of property acquired from a decedent
In general
Beginning in 2011, after the estate, gift, and generation-
skipping transfer taxes have been repealed, the present-law
rules providing for a fair market value basis for property
acquired from a decedent are repealed. Instead, a modified
carryover basis regime generally takes effect. Recipients of
property transferred at the decedent's death will receive a
basis equal the lesser of the adjusted basis of the decedent or
the fair market value of the property on the date of the
decedent's death.
The modified carryover basis rules apply to property
acquired by bequest, devise, or inheritance, or by the
decedent's estate from the decedent, property passing from the
decedent to the extent such property passed without
consideration, and certain other property to which the present
law rules apply.\2\
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\2\ Sec. 1014(b)(2) and (3).
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Property acquired from a decedent is treated as if the
property had been acquired by gift. Thus, the character of gain
on the sale of property received from a decedent's estate is
carried over to the heir. For example, real estate that has
been depreciated and would be subject to recapture if sold by
the decedent will be subject to recapture if sold by the heir.
Property to which the modified carryover basis rules apply
The modified carryover basis rules apply to property
acquired from the decedent. Property acquired from the decedent
is (1) property acquired by bequest, devise, or inheritance,
(2) property acquired by the decedent's estate from the
decedent, (3) property transferred by the decedent during his
or her lifetime in trust to pay the income for life to or on
the order or direction of the decedent, with the right reserved
to the decedent at all times before his death to revoke the
trust,\3\ (4) property transferred by the decedent during his
lifetime in trust to pay the income for life to or on the order
or direction of the decedent with the right reserved to the
decedent at all times before his death to make any change to
the enjoyment thereof through the exercise of a power to alter,
amend, or terminate the trust,\4\ (5) property passing from the
decedent by reason of the decedent's death to the extent such
property passed without consideration (e.g., property held as
joint tenants with right of survivorship or as tenants by the
entireties), and (6) the surviving spouse's one-half share of
certain community property held by the decedent and the
surviving spouse as community property.
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\3\ This is the same property the basis of which is stepped up to
date of death fair market value under present law sec. 1014(b)(2).
\4\ This is the same property the basis of which is stepped up to
date of death fair market value under present law sec. 1014(b)(3).
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Basis increase for certain property
Amount of basis increase.--The bill allows an executor to
increase (i.e., step up) the basis in assets owned by the
decedent and acquired by the beneficiaries at death. Under this
rule, each decedent's estate generally is permitted to increase
(i.e., step up) the basis of assets transferred by up to a
total of $1.3 million. The $1.3 million is increased by the
amount of unused capital losses, net operating losses, and
certain ``built-in'' losses of the decedent. In addition, the
basis of property transferred to a surviving spouse can be
increased by an additional $3 million. Thus, the basis of
property transferred to surviving spouses can be increased by a
total of $4.3 million. Nonresidents who are not U.S. citizens
will be allowed to increase the basis of property by up to
$60,000. The $60,000, $1.3 million, and $3 million amounts are
adjusted annually for inflation occurring after 2010.
Property eligible for basis increase.--In general, the
basis of property may be increased above the decedent's
adjusted basis in that property only if the property is owned,
or is treated as owned, by the decedent at the time of the
decedent's death. In the case of property held as joint tenants
or tenants by the entireties with the surviving spouse, one-
half of the property is treated having been owned by the
decedent and is thus eligible for the basis increase. In the
case of property held jointly with a person other than the
surviving spouse, the portion of the property attributable to
the decedent's consideration furnished is treated as having
been owned by the decedent and will be eligible for a basis
increase. The decedent also is treated as the owner of property
(which will be eligible for a basis increase) if the property
was transferred by the decedent during his lifetime to a
revocable trust that pays all of its income during the
decedent's life to the decedent or at the direction of the
decedent. The decedent also is treated as having owned the
surviving spouse's one-half share of community property (which
will be eligible for a basis increase) if at least one-half of
the property was owned by, and acquired from, the decedent.\5\
The decedent shall not, however, be treated as owning any
property solely by reason of holding a power of appointment
with respect to such property.
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\5\ Thus, similar to the present law rule in sec. 1014(b)(6), both
the decedent's and the surviving spouse's share of community property
could be eligible for a basis increase.
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Certain property is not eligible for a basis increase. This
includes: (1) property that was acquired by the decedent by
gift (other than from his or her spouse) during the three-year
period ending on the date of the decedent's death; (2) property
that constitutes a right to receive income in respect of a
decedent; (3) stock or securities of a foreign personal holding
company; (4) stock of a domestic international sales
corporation (or former domestic international sales
corporation); (5) stock of a foreign investment company; and
(6) stock of a passive foreign investment company (except for
which a decedent shareholder had made a qualified electing fund
election).
Rules applicable to basis increase.--Basis increase will be
allocable on an asset-by-asset basis (e.g., basis increase can
be allocated to a share of stock or a block of stock). However,
in no case can the basis of an asset be adjusted above its fair
market value. If the amount of basis increase is less than the
fair market value of assets whose bases are eligible to be
increased under these rules, the executor will determine which
assets and to what extent each asset receives a basis increase.
Reporting requirements
Lifetime gifts
A donor is required to report to the Internal Revenue
Service (``IRS'') the basis and character of any non-cash
property transferred by gift with a value in excess of $25,000
(except for gifts to charitable organizations). The donor is
required to report to the IRS:
The name and taxpayer identification number of the
donee,
An accurate description of the property,
The adjusted basis of the property in the hands of
the donor at the time of gift,
The donor's holding period for such property,
Sufficient information to determine whether any gain
on the sale of the property would be treated as
ordinary income,
And any other information as the Treasury Secretary
may prescribe.
Similar information (including the name, address, and phone
number of the person making the return) is required to be
provided to recipients of such property.
Transfers at death
For transfers at death of non-cash assets in excess of $1.3
million and for appreciated property the value of which exceeds
$25,000 received by a decedent within three years of death, the
executor of the estate (or the trustee of a revocable trust)
would report to the IRS:
The name and taxpayer identification number of the
recipient of the property,
An accurate description of the property,
The adjusted basis of the property in the hands of
the decedent and its fair market value at the time of
death,
The decedent's holding period for the property,
Sufficient information to determine whether any gain
on the sale of the property would be treated as
ordinary income,
The amount of basis increase allocated to the
property, and
Any other information as the Treasury Secretary may
prescribe.
Penalties for failure to file required information
Any donor required to report the basis and character of any
non-cash property with a value in excess of $25,000 who fails
to do so is liable for a penalty of $500 for each failure to
report such information to the IRS and $50 for each failure to
report such information to a beneficiary.
Any person required to report to the IRS transfers at death
of non-cash assets in excess of $1.3 million in value who fails
to do so is liable for a penalty of $10,000 for the failure to
report such information. Any person required to report to the
IRS the receipt by a decedent of appreciated property valued in
excess of $25,000 within three years of death who fails to do
so is liable for a penalty of $500 for the failure to report
such information to the IRS. There also is a penalty of $50 for
each failure to report such information to a beneficiary.
No penalty is imposed with respect to any failure that is
due to reasonable cause. If any failure to report to the IRS or
a beneficiary under the bill is due to intentional disregard of
the rules, then the penalty is five percent of the fair market
value of the property for which reporting was required,
determined at the date of the decedent's death (for property
passing at death) or determined at the time of gift (for a
lifetime gift).
Certain tax benefits extending past the date for repeal of the estate
tax
Prior to repeal of the estate tax, many estates may have
claimed certain estate tax benefits which, upon certain events,
may trigger a recapture tax. Because repeal of the estate tax
is effective for decedents dying after December 31, 2010, these
estate tax recapture provisions will continue to apply to
estates of decedents dying before January 1, 2011.
Qualified conservation easements
A donor may have retained a development right in the
conveyance of a conservation easement that qualified for the
estate tax exclusion. Those with an interest in the land may
later execute an agreement to extinguish the right. If an
agreement to extinguish development rights is not entered into
within the earlier of (1) two years after the date of the
decedent's death or (2) the date of the sale of such land
subject to the conservation easement, then those with an
interest in the land are personally liable for an additional
tax. This provision is retained after repeal of the estate tax,
which will ensure that those persons with an interest in the
land who fail to execute the agreement remain liable for any
additional tax which may be due after repeal.
Special-use valuation
Property may have qualified for special-use valuation prior
to repeal of the estate tax. If such property ceases to qualify
for special-use valuation, for example, because an heir ceases
to use the property in its qualified use within 10 years of the
decedent's death, then the estate tax benefit is required to be
recaptured. The recapture provision is retained after repeal of
the estate tax, which will ensure that those estates that
claimed this benefit prior to repeal of the estate tax will be
subject to recapture if a disqualifying event occurs after
repeal.
Qualified family-owned business deduction
Property may have qualified for the family-owned business
deduction prior to repeal of the estate tax. If such property
ceases to qualify for the family-owned business deduction, for
example, because an heir ceases to use the property in its
qualified use within 10 years of the decedent's death, then the
estate-tax benefit is required to be recaptured. The recapture
provision is retained after repeal of the estate tax, which
will ensure that those estates that claimed this benefit prior
to repeal of the estate tax would be subject to recapture if a
disqualifying event occurs after repeal.
Installment payment of estate tax for estates with an
interest in a closely-held business
The present-law installment payment rules are retained so
that those estates that entered into an installment payment
arrangement prior to repeal of the estate tax will continue to
make their payments past the date for repeal.
If more than 50 percent of the value of the closely-held
business is distributed, sold, exchanged, or otherwise disposed
of, the unpaid portion of the tax payable in installments must
be paid upon notice and demand from the Treasury Secretary.
This rule is retained after repeal of the estate tax, which
will ensure that such dispositions that occur after repeal of
the estate tax will continue to subject the estate to the
unpaid portion of the tax upon notice and demand.
Transfers to foreign trusts, estates, and nonresidents who are not U.S.
citizens
The present-law rule providing that transfers by a U.S.
person to a foreign trust or estate generally is treated as a
sale or exchange is expanded. Under the bill, transfers by a
U.S. person to a nonresident who is not a U.S. citizen is
treated as a sale or exchange of the property for an amount
equal to the fair market value of the transferred property. The
amount of gain that must be recognized by the transferor is
equal to the excess of the fair market value of the property
transferred over the adjusted basis of such property in the
hands of the transferor.
Transfers of property in satisfaction of a pecuniary bequest
Under the bill, gain or loss on the transfer of property in
satisfaction of a pecuniary bequest is recognized only to the
extent that the fair market value of the property at the time
of the transfer exceeds the fair market value of the property
on the date of the decedent's death (not the property's
carryover basis).
Transfer of property subject to a liability
The bill clarifies that gain is not recognized at the time
of death when the estate or heir acquires from the decedent
property subject to a liability that is greater than the
decedent's basis in the property. Similarly, no gain is
recognized by the estate on the distribution of such property
to a beneficiary of the estate by reason of the liability.
Income tax exclusion for the gain on the sale of a principal residence
The income tax exclusion of up to $250,000 of gain on the
sale of a principal residence is extended to estates and heirs.
Under the bill, if the decedent's estate or an heir sells
thedecedent's principal residence, $250,000 of gain can be excluded on
the sale of the residence, provided the decedent used the property as a
principal residence for two or more years during the five-year period
prior to the sale. In addition, if an heir occupies the property as a
principal residence, the decedent's period of ownership and occupancy
of the property as a principal residence can be added to the heir's
subsequent ownership and occupancy in determining whether the property
was owned and occupied for two years as a principal residence.
Excise tax on nonexempt trusts
Under the bill, split-interest trusts are subject to
certain restrictions that are applicable to private foundations
if an income tax charitable deduction, including an income tax
charitable deduction by an estate or trust, was allowed with
respect to transfers to the trust.
Anti-abuse rules
The Treasury Secretary is given authority to treat a
transfer that purports to be a gift as having never been
transferred, if, in connection with such transfer, such
treatment is appropriate to prevent income tax avoidance and
(1) the transferor (or any person related to or designated by
the transferor or such person) has received anything of value
in connection with the transfer from the transferee directly or
indirectly or (2) there is an understanding or expectation that
the transferor (or any person related to or designated by the
transferor or such person) will receive anything of value in
connection with the transfer from the transferee directly or
indirectly.
Study mandated by the bill
The bill requires the Treasury Secretary to conduct a study
of opportunities for avoidance of the income tax, if any, and
potential increases in income tax revenues by reason of
enactment of the bill. The results of such study are required
to be submitted to the House Committee on Ways and Means and
the Senate Committee on Finance no later than December 31,
2002.
Interaction of the bill with death tax treaties
The Committee expects that, where applicable, references in
U.S. tax treaties to the unified credit under section 2010 (as
in effect prior to January 1, 2002) will be construed as
applying, in a similar manner, to the unified exemption amount
(as in effect for decedents dying and gifts made after December
31, 2001).\6\
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\6\ See, e.g., Article 3, Protocol Amending the Convention Between
the United States of America and the Federal Republic of Germany for
the Avoidance of Double Taxation with Respect to Taxes on Estates,
Inheritances, and Gifts (Senate Treaty Doc. 106-13, September 21,
1999.) Under the protocol, a pro rata unified credit is provided to the
estate of an individual domiciled in Germany (who is not a U.S.
citizen) for purposes of computing U.S. estate tax. Such an individual
domiciled in Germany is entitled to a credit against U.S. estate tax
based on the extent to which the assets of the estate are situated in
the United States.
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Effective Date
The unified credit is replaced with a unified exemption,
the 5-percent surtax is repealed, and the rates in excess of 53
percent are repealed for estates of decedents dying and gifts
and generation-skipping transfers made after December 31, 2001.
The estate and gift tax rates in excess of 50 percent is
repealed for estates of decedents dying and gifts and
generation-skipping transfers made after December 31, 2002.
The additional reductions in estate and gift tax rates and
of the State death tax credit occur for decedents dying and
gifts and generation-skipping transfers made in 2004 through
2010.
The estate, gift, and generation-skipping transfer taxes
are repealed and the carryover basis regime takes effect for
estates of decedents dying and gifts and generation-skipping
transfers made after December 31, 2010.
The provisions relating to purported gifts and recognition
of gain on transfers to nonresidents who are not U.S. citizens
are effective for transfers made after December 31, 2010.
B. Expand Estate Tax Rule for Conservation Easements (Sec. 501 of the
Bill and Sec. 2031 of the Code)
Present Law
In general
An executor can elect to exclude from the taxable estate 40
percent of the value of any land subject to a qualified
conservation easement, up to a maximum exclusion of $100,000 in
1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and
$500,000 in 2002 and thereafter (sec. 2031(c)). The exclusion
percentage is reduced by 2 percentage points for each
percentage point (or fraction thereof) by which the value of
the qualified conservation easement is less than 30 percent of
the value of the land (determined without regard to the value
of such easement and reduced by the value of any retained
development right).
A qualified conservation easement is one that meets the
following requirements: (1) the land is located within 25 miles
of a metropolitan area (as defined by the Office of Management
and Budget) or a national park or wilderness area, or within 10
miles of an Urban National Forest (as designated by the Forest
Service of the U.S. Department of Agriculture); (2) the land
has been owned by the decedent or a member of the decedent's
family at all times during the three-year period ending on the
date of the decedent's death; and (3) a qualified conservation
contribution (within the meaning of sec. 170(h)) of a qualified
real property interest (as generally defined in sec.
170(h)(2)(C)) was granted by the decedent or a member of his or
her family. For purposes of the provision, preservation of a
historically important land area or a certified historic
structure does not qualify as a conservation purpose.
In order to qualify for the exclusion, a qualifying
easement must have been granted by the decedent, a member of
the decedent's family, the executor of the decedent's estate,
or the trustee of a trust holding the land, no later than the
date of the election. To the extent that the value of such land
is excluded from the taxable estate, the basis of such land
acquired at death is a carryover basis (i.e., the basis is not
stepped-up to its fair market value at death). Propertyfinanced
with acquisition indebtedness is eligible for this provision only to
the extent of the net equity in the property.
Retained development rights
The exclusion for land subject to a conservation easement
does not apply to any development right retained by the donor
in the conveyance of the conservation easement. An example of
such a development right would be the right to extract minerals
from the land. If such development rights exist, then the value
of the conservation easement must be reduced by the value of
any retained development right.
If the donor or holders of the development rights agree in
writing to extinguish the development rights in the land, then
the value of the easement need not be reduced by the
development rights. In such case, those persons with an
interest in the land must execute the agreement no later than
the earlier of (1) two years after the date of the decedent's
death or (2) the date of the sale of such land subject to the
conservation easement. If such agreement is not entered into
within this time, then those with an interest in the land are
personally liable for an additional tax, which is the amount of
tax which would have been due on the retained development
rights subject to the termination agreement.
Reasons for Change
The Committee believes that expanding the availability of
qualified conservation easements will further ease existing
pressures to develop or sell environmentally significant land
in order to raise funds to pay estate taxes and would, thereby,
advance the preservation of such land. The Committee also
believes it appropriate to clarify the date for determining
easement compliance.
Explanation of Provision
The bill expands the availability of qualified conservation
easements by modifying the distance requirements. Under the
bill, the distance within which the land must be situated from
a metropolitan area, national park, or wilderness area is
increased from 25 to 50 miles, and the distance from which the
land must be situated from an Urban National Forest is
increased from 10 to 25 miles. The bill also clarifies that the
date for determining easement compliance is the date on which
the donation was made.
Effective Date
The provisions are effective for estates of decedents dying
after December 31, 2000.
C. Modify Generation-Skipping Transfer Tax Rules
1. Deemed allocation of the generation-skipping transfer tax exemption
to lifetime transfers to trusts that are not direct skips (sec.
601 of the bill and sec. 2632 of the Code)
Present Law
A generation-skipping transfer tax generally is imposed on
transfers, either directly or through a trust or similar
arrangement, to a ``skip person'' (i.e., a beneficiary in a
generation more than one generation below that of the
transferor). Transfers subject to the generation-skipping
transfer tax include direct skips, taxable terminations, and
taxable distributions. An exemption of $1 million (indexed
beginning in 1999) is provided for each person making
generation-skipping transfers. The exemption can be allocated
by a transferor (or his or her executor) to transferred
property.
A direct skip is any transfer subject to estate or gift tax
of an interest in property to a skip person. A skip person may
be a natural person or certain trusts. All persons assigned to
the second or more remote generation below the transferor are
skip persons (e.g., grandchildren and great-grandchildren).
Trusts are skip persons if (1) all interests in the trust are
held by skip persons, or (2) no person holds an interest in the
trust and at no time after the transfer may a distribution
(including distributions and terminations) be made to a non-
skip person.
A taxable termination is a termination (by death, lapse of
time, release of power, or otherwise) of an interest in
property held in trust unless, immediately after such
termination, a non-skip person has an interest in the property,
or unless at no time after the termination may a distribution
(including a distribution upon termination) be made from the
trust to a skip person. A taxable distribution is a
distribution from a trust to a skip person (other than a
taxable termination or direct skip).
The tax rate on generation-skipping transfers is a flat
rate of tax equal to the maximum estate and gift tax rate in
effect at the time of the transfer (55 percent under present
law) multiplied by the ``inclusion ratio.'' The inclusion ratio
with respect to any property transferred in a generation-
skipping transfer indicates the amount of ``generation-skipping
transfer tax exemption'' allocated to a trust. The allocation
of generation-skipping transfer tax exemption reduces the 55-
percent tax rate on a generation-skipping transfer.
If an individual makes a direct skip during his or her
lifetime, any unused generation-skipping transfer tax exemption
is automatically allocated to a direct skip to the extent
necessary to make the inclusion ratio for such property equal
to zero. An individual can elect out of the automatic
allocation for lifetime direct skips.
For lifetime transfers made to a trust that are not direct
skips, the transferor must allocate generation-skipping
transfer tax exemption--the allocation is not automatic. If
generation-skipping transfer tax exemption is allocated on a
timely-filed gift tax return, then the portion of the trust
which is exempt from generation-skipping transfer tax is based
on the value of the property at the time of the transfer. If,
however, the allocation is not made on a timely-filed gift tax
return, then the portion of the trust which is exempt from
generation-skipping transfer tax is based on the value of the
property at the time the allocation of generation-skipping
transfer tax exemption was made.
Treas. Reg. sec. 26.2632-1(d) further provides that any
unused generation-skipping transfer tax exemption, which has
not been allocated to transfers made during an individual's
life, is automatically allocated on the due date for filing the
decedent's estate tax return. Unused generation-skipping
transfer tax exemption is allocated pro rata on the basis of
the value of theproperty as finally determined for estate tax
purposes, first to direct skips treated as occurring at the
transferor's death. The balance, if any, of unused generation-skipping
transfer tax exemption is allocated pro rata, on the basis of the
estate tax value of the nonexempt portion of the trust property (or in
the case of trusts that are not included in the gross estate, on the
basis of the date of death value of the trust) to trusts with respect
to which a taxable termination may occur or from which a taxable
distribution may be made.
Reasons for Change
The Committee recognizes that there are situations where a
taxpayer would desire allocation of generation-skipping
transfer tax exemption, yet the taxpayer had missed allocating
generation-skipping transfer tax exemption to an indirect skip,
e.g., because the taxpayer or the taxpayer's advisor
inadvertently omitted making the election on a timely-filed
gift tax return or the taxpayer submitted a defective election.
Thus, the Committee believes that automatic allocation is
appropriate for transfers to a trust from which generation-
skipping transfers are likely to occur.
Explanation of Provision
Under the bill, generation-skipping transfer tax exemption
will be automatically allocated to transfers made during life
that are ``indirect skips.'' An indirect skip is any transfer
of property (that is not a direct skip) subject to the gift tax
that is made to a generation-skipping transfer trust.
A generation-skipping transfer trust is defined as a trust
that could have a generation-skipping transfer with respect to
the transferor (e.g., a taxable termination or taxable
distribution), unless:
The trust instrument provides that more than 25
percent of the trust corpus must be distributed to or
may be withdrawn by 1 or more individuals who are non-
skip persons (a) before the date that the individual
attains age 46, (b) on or before 1 or more dates
specified in the trust instrument that will occur
before the date that such individual attains age 46, or
(c) upon the occurrence of an event that, in accordance
with regulations prescribed by the Treasury Secretary,
may reasonably be expected to occur before the date
that such individual attains age 46;
The trust instrument provides that more than 25
percent of the trust corpus must be distributed to or
may be withdrawn by 1 or more individuals who are non-
skip persons and who are living on the date of death of
another person identified in the instrument (by name or
by class) who is more than 10 years older than such
individuals;
The trust instrument provides that, if 1 or more
individuals who are non-skip persons die on or before a
date or event described in clause (1) or (2), more than
25 percent of the trust corpus either must be
distributed to the estate or estates of 1 or more of
such individuals or is subject to a general power of
appointment exercisable by 1 or more of such
individuals;
The trust is a trust any portion of which would be
included in the gross estate of a non-skip person
(other than the transferor) if such person died
immediately after the transfer;
The trust is a charitable lead annuity trust or a
charitable remainder annuity trust or a charitable
unitrust; or
The trust is a trust with respect to which a
deduction was allowed under section 2522 for the amount
of an interest in the form of the right to receive
annual payments of a fixed percentage of the net fair
market value of the trust property (determined yearly)
and which is required to pay principal to a non-skip
person if such person is alive when the yearly payments
for which the deduction was allowed terminate.
If any individual makes an indirect skip during the
individual's lifetime, then any unused portion of such
individual's generation-skipping transfer tax exemption is
allocated to the property transferred to the extent necessary
to produce the lowest possible inclusion ratio for such
property.
An individual can elect not to have the automatic
allocation rules apply to an indirect skip, and such elections
will be deemed timely if filed on a timely-filed gift tax
return for the calendar year in which the transfer was made or
deemed to have been made or on such later date or dates as may
be prescribed by the Treasury Secretary. An individual can
elect not to have the automatic allocation rules apply to any
or all transfers made by such individual to a particular trust
and can elect to treat any trust as a generation-skipping
transfer trust with respect to any or all transfers made by the
individual to such trust, and such election can be made on a
timely-filed gift tax return for the calendar year for which
the election is to become effective.
Effective Date
The provision applies to transfers subject to estate or
gift tax made after December 31, 2000, and to estate tax
inclusion periods ending after December 31, 2000.
2. Retroactive allocation of the generation-skipping transfer tax
exemption (sec. 601 of the bill and sec. 2632 of the Code)
Present Law
A taxable termination is a termination (by death, lapse of
time, release of power, or otherwise) of an interest in
property held in trust unless, immediately after such
termination, a non-skip person has an interest in the property,
or unless at no time after the termination may a distribution
(including a distribution upon termination) be made from the
trust to a skip person. A taxable distribution is a
distribution from a trust to a skip person (other than a
taxable termination or direct skip). If a transferor allocates
generation-skipping transfer tax exemption to a trust prior to
the taxable termination or taxable distribution, generation-
skipping transfer tax may be avoided.
A transferor likely will not allocate generation-skipping
transfer tax exemption to a trust that the transferor expects
will benefit only non-skip persons. However, if a taxable
termination occurs because, for example, the transferor's child
unexpectedly dies such that the trust terminates in favor of
the transferor's grandchild, and generation-skipping transfer
tax exemption had not been allocated to the trust, then
generation-skipping transfer tax would be due even if the
transferor had unused generation-skipping transfer tax
exemption.
Reasons for Change
The Committee recognizes that when a transferor does not
expect the second generation (e.g., the transferor's child) to
die before the termination of a trust, the transferor likely
will not allocate generation-skipping transfer tax exemption to
the transfer to the trust. If a transferor knew, however, that
the transferor's child might predecease the transferor and that
there could be a taxable termination as a result thereof, the
transferor likely would have allocated generation-skipping
transfer tax exemption at the time of the transfer to the
trust. The Committee believes it is appropriate to provide that
when there is an unnatural order of death (e.g., when the
second generation dies before the first generation transferor),
the transferor can allocate generation-skipping transfer tax
exemption retroactively to the date of the respective transfer
to trust.
Explanation of Provision
Under the bill, generation-skipping transfer tax exemption
can be allocated retroactively when there is an unnatural order
of death. If a lineal descendant of the transferor predeceases
the transferor, then the transferor can allocate any unused
generation-skipping transfer exemption to any previous transfer
or transfers to the trust on a chronological basis. The
provision allows a transferor to retroactively allocate
generation-skipping transfer exemption to a trust where a
beneficiary (a) is a non-skip person, (b) is a lineal
descendant of the transferor's grandparent or a grandparent of
the transferor's spouse, (c) is a generation younger than the
generation of the transferor, and (d) dies before the
transferor. Exemption is allocated under this rule
retroactively, and the applicable fraction and inclusion ratio
would be determined based on the value of the property on the
date that the property was transferred to trust.
Effective Date
The provision applies to deaths of non-skip persons
occurring after December 31, 2000.
3. Severing of trusts holding property having an inclusion ratio of
greater than zero (sec. 602 of the bill and sec. 2642 of the
Code)
Present Law
A generation-skipping transfer tax generally is imposed on
transfers, either directly or through a trust or similar
arrangement, to a ``skip person'' (i.e., a beneficiary in a
generation more than one generation below that of the
transferor). Transfers subject to the generation-skipping
transfer tax include direct skips, taxable terminations, and
taxable distributions. An exemption of $1 million (indexed
beginning in 1999) is provided for each person making
generation-skipping transfers. The exemption can be allocated
by a transferor (or his or her executor) to transferred
property.
If the value of transferred property exceeds the amount of
the generation-skipping transfer tax exemption allocated to
that property, then the generation-skipping transfer tax
generally is determined by multiplying a flat tax rate equal to
the highest estate tax rate (which is currently 55 percent) by
the ``inclusion ratio'' and the value of the taxable property
at the time of the taxable event. The ``inclusion ratio'' is
the number one minus the ``applicable fraction.'' The
applicable fraction is a fraction calculated by dividing the
amount of the generation-skipping transfer tax exemption
allocated to the property by the value of the property.
Under Treas. Reg. 26.2654-1(b), a trust may be severed into
two or more trusts (e.g., one with an inclusion ratio of zero
and one with an inclusion ratio of one) only if (1) the trust
is severed according to a direction in the governing instrument
or (2) the trust is severed pursuant to the trustee's
discretionary powers, but only if certain other conditions are
satisfied (e.g., the severance occurs or a reformation
proceeding begins before the estate tax return is due). Under
current Treasury regulations, however, a trustee cannot
establish inclusion ratios of zero and one by severing a trust
that is subject to the generation-skipping transfer tax after
the trust has been created.
Reasons for Change
Complexity can be reduced if a generation-skipping transfer
trust is treated as two separate trusts for generation-skipping
transfer tax purposes--one with an inclusion ratio of zero and
one with an inclusion ratio of one. This result can be achieved
by drafting complex documents in order to meet the specific
requirements of severance. The Committee believes it is
appropriate to make the rules regarding severance less
burdensome and less complex.
Explanation of Provision
Under the bill, a trust can be severed in a ``qualified
severance.'' A qualified severance is defined as the division
of a single trust and the creation of two or more trusts if (1)
the single trust was divided on a fractional basis, and (2) the
terms of the new trusts, in the aggregate, provide for the same
succession of interests of beneficiaries as are provided in the
original trust. If a trust has an inclusion ratio of greater
than zero and less than one, a severance is a qualified
severance only if the single trust is divided into two trusts,
one of which receives a fractional share of the total value of
all trust assets equal to the applicable fraction of the single
trust immediately before the severance. In such case, the trust
receiving such fractional share shall have an inclusion ratio
of zero and the other trust shall have an inclusion ratio of
one. Under the provision, a trustee may elect to sever a trust
in a qualified severance at any time.
Effective Date
The provision is effective for severances of trusts
occurring after December 31, 2000.
4. Modification of certain valuation rules (sec. 603 of the bill and
sec. 2642 of the Code)
present law
Under present law, the inclusion ratio is determined using
gift tax values for allocations of generation-skipping transfer
tax exemption made on timely filed gift tax returns.
Theinclusion ratio generally is determined using estate tax values for
allocations of generation-skipping transfer tax exemption made to
transfers at death. Treas. Reg. 26.2642-5(b) provides that, with
respect to taxable terminations and taxable distributions, the
inclusion ratio becomes final on the later of the period of assessment
with respect to the first transfer using the inclusion ratio or the
period for assessing the estate tax with respect to the transferor's
estate.
Reasons for Change
The Committee believes it is appropriate to clarify the
valuation rules relating to timely and automatic allocations of
generation-skipping transfer tax exemption.
Explanation of Provision
Under the bill, in connection with timely and automatic
allocations of generation-skipping transfer tax exemption, the
value of the property for purposes of determining the inclusion
ratio shall be its finally determined gift tax value or estate
tax value depending on the circumstances of the transfer. In
the case of a generation-skipping transfer tax exemption
allocation deemed to be made at the conclusion of an estate tax
inclusion period, the value for purposes of determining the
inclusion ratio shall be its value at that time.
Effective Date
The provision is effective for transfers subject to estate
or gift tax made after December 31, 2000.
5. Relief from late elections (sec. 604 of the bill and sec. 2642 of
the Code)
Present Law
Under present law, an election to allocate generation-
skipping transfer tax exemption to a specific transfer may be
made at any time up to the time for filing the transferor's
estate tax return. If an allocation is made on a gift tax
return filed timely with respect to the transfer to trust, then
the value on the date of transfer to the trust is used for
determining generation-skipping transfer tax exemption
allocation. However, if the allocation relating to a specific
transfer is not made on a timely-filed gift tax return, then
the value on the date of allocation must be used. There is no
statutory provision allowing relief for an inadvertent failure
to make an election on a timely-filed gift tax return to
allocate generation-skipping transfer tax exemption.
Reasons for Change
The Committee believes it is appropriate for the Treasury
Secretary to grant extensions of time to make an election to
allocate generation-skipping transfer tax exemption and to
grant exceptions to the statutory time requirement in
appropriate circumstances, e.g., when the taxpayer intended to
allocate generation-skipping transfer tax exemption and the
failure to timely allocate generation-skipping transfer tax
exemption was inadvertent.
Explanation of Provision
Under the bill, the Treasury Secretary is authorized and
directed to grant extensions of time to make the election to
allocate generation-skipping transfer tax exemption and to
grant exceptions to the time requirement. If such relief is
granted, then the value on the date of transfer to trust would
be used for determining generation-skipping transfer tax
exemption allocation.
In determining whether to grant relief for late elections,
the Treasury Secretary is directed to consider all relevant
circumstances, including evidence of intent contained in the
trust instrument or instrument of transfer and such other
factors as the Treasury Secretary deems relevant. For purposes
of determining whether to grant relief, the time for making the
allocation (or election) is treated as if not expressly
prescribed by statute.
Effective Date
The provision applies to requests pending on, or filed
after, December 31, 2000. No inference is intended with respect
to the availability of relief from late elections prior to the
effective date of the provision.
6. Substantial compliance (sec. 604 of the bill and sec. 2642 of the
Code)
Present Law
Under present law, there is no statutory rule which
provides that substantial compliance with the statutory and
regulatory requirements for allocating generation-skipping
transfer tax exemption will suffice to establish that
generation-skipping transfer tax exemption was allocated to a
particular transfer or trust.
Reasons for Change
The Committee recognizes that the rules and regulations
regarding the allocation of generation-skipping transfer tax
exemption are complex. Thus, it is often difficult for
taxpayers to comply with the technical requirements for making
a proper election to allocate generation-skipping transfer tax
exemption. The Committee therefore believes it is appropriate
to provide that generation-skipping transfer tax exemption will
be allocated when a taxpayer substantially complies with the
rules and regulations for allocating generation-skipping
transfer tax exemption.
Explanation of Provision
Under the bill, substantial compliance with the statutory
and regulatory requirements for allocating generation-skipping
transfer tax exemption will suffice to establish that
generation-skipping transfer tax exemption was allocated to a
particular transfer or a particular trust. If a taxpayer
demonstrates substantial compliance, then so much of the
transferor's unused generation-skipping transfer tax exemption
will be allocated to the extent it produces the lowest possible
inclusion ratio. In determining whether there has been
substantial compliance, all relevant circumstances will be
considered, including evidence of intent contained in the trust
instrument or instrument of transfer and such other factors as
the Treasury Secretary deems appropriate.
Effective Date
The provision applies to transfers subject to estate or
gift tax made after December 31, 2000. No inference is intended
with respect to the availability of a rule of substantial
compliance prior to the effective date of the provision.
D. Expand Availability of Installment Payment of Estate Tax for
Closely-Held Businesses (Sec. 701 of the Bill and Sec. 6166 of the
Code)
Present Law
Under present law, the estate tax generally is due within
nine months of a decedent's death. However, an executor
generally may elect to pay estate tax attributable to an
interest in a closely-held business in two or more installments
(but no more than 10). If the election is made, the estate pays
only interest for the first five years, followed by up to 10
annual installments of principal and interest. This provision
effectively extends the time for paying estate tax by 14 years
from the original due date of the estate tax.\7\ A special
two-percent interest rate applies to the amount of deferred
estate tax attributable to the first $1 million (adjusted
annually for inflation occurring after 1998) in taxable value
of a closely-held business. The interest rate applicable to the
amount of estate tax attributable to the taxable value of the
closely-held business in excess of $1 million is equal to 45
percent of the rate applicable to underpayments of tax under
section 6621 (i.e., 45 percent of the Federal short-term rate
plus 3 percentage points). Interest paid on deferred estate
taxes is not deductible for estate or income tax purposes.
---------------------------------------------------------------------------
\7\ For example, assume estate tax is due in 2001. If interest only
is paid each year for the first five years (2001 through 2005), and if
10 installments of both principal and interest are paid for the 10
years thereafter (2006 through 2015), then payment of estate tax would
be extended by 14 years from the original due date of 2001.
---------------------------------------------------------------------------
For purposes of these rules, an interest in a closely-held
business is: (1) an interest as a proprietor in a sole
proprietorship, (2) an interest as a partner in a partnership
carrying on a trade or business if 20 percent or more of the
total capital interest of such partnership is included in the
decedent's gross estate or the partnership had 15 or fewer
partners, and (3) stock in a corporation carrying on a trade or
business if 20 percent or more of the value of the voting stock
of the corporation is included in the decedent's gross estate
or such corporation had 15 or fewer shareholders.
If more than 50 percent of the value of the closely-held
business is distributed, sold, exchanged, or otherwise disposed
of, then, in general, the extension of time for the payment of
tax no longer applies, and the unpaid portion of the tax
payable in installments must be paid upon notice and demand
from the Treasury Secretary. An exception to this rule is
provided for transfers of property to a person entitled to
receive the decedent's property under the decedent's will, the
applicable State law, or a trust created by the decedent.
Moreover, a similar exception applies in the case of a series
of subsequent transfers of the property by reason of death so
long as each transfer is to a member of the decedent's family,
which includes the decedent's brothers and sisters (whether by
the whole or half blood), spouse, ancestors, and lineal
descendants.
Reasons for Change
The Committee finds that the present-law 15 partner
limitation on partnerships and 15 shareholder limitation on
corporations is restrictive and keeps estates of decedents who
otherwise held an interest in a closely-held business at death
from claiming the benefits of installment payment of estate
tax. Thus, the Committee wishes to expand the definition of
partnerships and corporations to enable more estates of
decedents with an interest in a closely-held business to claim
the benefits of installment payment of estate tax.
Explanation of Provision
Under the bill, the definition of a closely-held business
is expanded. The bill increases from 15 to 45 the number of
partners in a partnership and shareholders in a corporation
that is considered a closely-held business in which a decedent
held an interest, and thus will qualify the estate for
installment payment of estate tax.
Effective Date
The provision is effective for decedents dying after
December 31, 2001.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statements are made
concerning the votes of the Committee on Ways and Means in its
consideration of the bill, H.R. 8.
MOTION TO REPORT THE BILL
The bill, H.R. 8, as amended, was ordered favorably
reported by a roll call vote of 24 yeas to 14 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Representatives Yea Nay
----------------------------------------------------------------------------------------------------------------
Mr. Thomas............................. X ........ Mr. Rangel..................... ........ X
Mr. Crane.............................. X ........ Mr. Stark...................... ........ X
Mr. Shaw............................... X ........ Mr. Matsui..................... ........ X
Mrs. Johnson........................... X ........ Mr. Coyne...................... ........ X
Mr. Houghton........................... ........ X Mr. Levin...................... ........ X
Mr. Herger............................. X ........ Mr. Cardin..................... ........ X
Mr. McCrery............................ X ........ Mr. McDermott.................. ........ X
Mr. Camp............................... X ........ Mr. Kleczka.................... ........ X
Mr. Ramstad............................ X ........ Mr. Lewis (GA)................. ........ ........
Mr. Nussle............................. X ........ Mr. Neal....................... ........ X
Mr. Johnson............................ X ........ Mr. McNulty.................... ........ ........
Ms. Dunn............................... X ........ Mr. Jefferson.................. ........ X
Mr. Collins............................ X ........ Mr. Tanner..................... X ........
Mr. Portman............................ X ........ Mr. Becerra.................... ........ ........
Mr. English............................ X ........ Mrs. Thurman................... ........ X
Mr. Watkins............................ X ........ Mr. Doggett.................... ........ X
Mr. Hayworth........................... X ........ Mr. Pomeroy.................... ........ X
Mr. Weller............................. X
Mr. Hulshof............................ X
Mr. McInnis............................ X
Mr. Lewis (KY)......................... X
Mr. Foley.............................. X
Mr. Brady.............................. X
Mr. Ryan............................... X
----------------------------------------------------------------------------------------------------------------
VOTES ON AMENDMENTS
A roll call vote was conducted on the following amendment
to the Chairman's amendment in the nature of a substitute.
An amendment by Mr. Matsui, to change the effective date
and title of the bill, was defeated by a roll call vote of 7
yeas to 31 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Representatives Yea Nay
----------------------------------------------------------------------------------------------------------------
Mr. Thomas............................. ........ X Mr. Rangel..................... ........ X
Mr. Crane.............................. ........ X Mr. Stark...................... X ........
Mr. Shaw............................... ........ X Mr. Matsui..................... X ........
Mrs. Johnson........................... ........ X Mr. Coyne...................... X ........
Mr. Houghton........................... ........ X Mr. Levin...................... ........ X
Mr. Herger............................. ........ X Mr. Cardin..................... X ........
Mr. McCrery............................ ........ X Mr. McDermott.................. ........ X
Mr. Camp............................... ........ X Mr. Kleczka.................... ........ X
Mr. Ramstad............................ ........ X Mr. Lewis (GA)................. ........ ........
Mr. Nussle............................. ........ X Mr. Neal....................... X ........
Mr. Johnson............................ ........ X Mr. McNulty.................... ........ ........
Ms. Dunn............................... ........ X Mr. Jefferson.................. X ........
Mr. Collins............................ ........ X Mr. Tanner..................... ........ X
Mr. Portman............................ ........ X Mr. Becerra.................... ........ ........
Mr. English............................ ........ X Mrs. Thurman................... ........ X
Mr. Watkins............................ ........ X Mr. Doggett.................... ........ X
Mr. Hayworth........................... ........ X Mr. Pomeroy.................... X ........
Mr. Weller............................. ........ X
Mr. Hulshof............................ ........ X
Mr. McInnis............................ ........ X
Mr. Lewis (KY)......................... ........ X
Mr. Foley.............................. ........ X
Mr. Brady.............................. ........ X
Mr. Ryan............................... ........ X
----------------------------------------------------------------------------------------------------------------
A roll call vote was conducted on the following amendment
to the Chairman's amendment in the nature of a substitute.
A substitute amendment by Mr. Rangel was defeated by a roll
call vote of 14 yeas to 24 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Representatives Yea Nay
----------------------------------------------------------------------------------------------------------------
Mr. Thomas............................. ........ X Mr. Rangel..................... X ........
Mr. Crane.............................. ........ X Mr. Stark...................... X ........
Mr. Shaw............................... ........ X Mr. Matsui..................... X ........
Mrs. Johnson........................... ........ X Mr. Coyne...................... X ........
Mr. Houghton........................... ........ X Mr. Levin...................... X ........
Mr. Herger............................. ........ X Mr. Cardin..................... X ........
Mr. McCrery............................ ........ X Mr. McDermott.................. X ........
Mr. Camp............................... ........ X Mr. Kleczka.................... X ........
Mr. Ramstad............................ ........ X Mr. Lewis (GA)................. ........
Mr. Nussle............................. ........ X Mr. Neal....................... X
Mr. Johnson............................ ........ X Mr. McNulty.................... ........
Ms. Dunn............................... ........ X Mr. Jefferson.................. X ........
Mr. Collins............................ ........ X Mr. Tanner..................... X ........
Mr. Portman............................ ........ X Mr. Becerra.................... ........
Mr. English............................ ........ X Mrs. Thurman................... X ........
Mr. Watkins............................ ........ X Mr. Doggett.................... X ........
Mr. Hayworth........................... ........ X Mr. Pomeroy.................... X ........
Mr. Weller............................. ........ X
Mr. Hulshof............................ ........ X
Mr. McInnis............................ ........ X
Mr. Lewis (KY)......................... ........ X
Mr. Foley.............................. ........ X
Mr. Brady.............................. ........ X
Mr. Ryan............................... ........ X
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d)(2) of the rule XIII of the
Rules of the House of Representatives, the following statement
is made concerning the effects on the budget of the revenue
provisions of the bill, H.R. 8 as reported.
The bill is estimated to have the following effects on
budget receipts for fiscal years 2001-2006:
ESTIMATED REVENUE EFFECTS OF H.R. 8, THE ``DEATH TAX ELIMINATION ACT OF 2001'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS; FISCAL YEARS 2002-2006
[In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2002 2003 2004 2005 2006 2002-06
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Phase In Repeal of Estate, Gift, and dda & gma 12/31/01.................. ......... -6,724 -8,774 -10,964 -12,720 -39,183
Generation-Skipping Transfer Taxes--beginning
in 2002, convert the unified credit into a true
exemption, repeal the 5% ``bubble'' (which
phases out the lower rates); repeal rates in
excess of 53%; in 2003, repeal rates in excess
of 50%; in 2004 through 2006, reduce all rates
by 1 percentage point a year; in 2007 through
2010 reduce all rates by 2 percentage points a
year; proportionately reduce State tax credit
rates; beginning in 2011, repeal all of these
taxes, carryover basis applies to transfers at
death after 12/31/10 of assets fully owned by
decedents except: (1) $1.3 million of
additional basis and certain loss carryforwards
of the decedent are allowed to be added to
carryover basis, and (2) an additional $3
million of basis is allowed to be added to
carryover basis of assets going to surviving
spouse; certain reporting requirements on large
gifts and bequests..
2. Expand Availability of Estate Tax Exclusion dda 12/31/00........................ -2 -13 -19 -20 -20 -74
for Conservation Easements--increase the 25-
mile limit to 50 miles; increase 10-mile limit
to 25 miles, and clarify the date for
determining easement compliance.
3. Modifications to Generation-Skipping Transfer
Tax Rules:
a. Deemed allocation of the generation- ta 12/31/00......................... -1 -3 -4 -4 -4 -16
skipping transfer tax exemption to lifetime
transfers to trusts that are not direct
skips.
b. Retroactive allocation of the generation- generally 12/31/00.................. -1 -4 -6 -6 -6 -23
skipping tax exemption.
c. Serving of trusts holding property having .................................... Included in Item 3.b.
an inclusion ratio of greater than zero.
d. Modification of certain valuation rules.. .................................... Included in Item 3.b.
e. Relief from late elections............... .................................... Included in Item 3.b.
f. Substantial compliance................... .................................... Included in Item 3.b.
4. Modifications to Section 6166--increase from dda 12/31/01........................ ......... -285 -297 -330 -364 -1,276
15 to 45 the number of partners of a
partnership or shareholders in a corporation
eligible for installment payments of estate tax
under section 6166.
-----------------------------------------------------------------
Net total................................. .................................... -4 7,029 -9,100 -11,324 -13,114 -40,572
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note. Details may not add to totals due to rounding.
Legend for ``Effective column: dda = decedents dying after; gma = gifts made after; ta = transfers after.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority (as detailed
in the statement by the Congressional Budget Office (``CBO'');
see Part IV.C., below). The Committee further states that the
revenue reducing tax provisions of the bill do not involve
increased tax expenditures. (See amounts in table in Part
IV.A., above.)
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 2, 2001.
Hon. Bill Thomas,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 8, the Death Tax
Elimination Act of 2001.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Erin
Whitaker.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
H.R. 8--Death Tax Elimination Act of 2001
Summary: H.R. 8 would phase out estate, gift, and
generation-skipping taxes over a nine-year period beginning in
fiscal year 2002. The bill would modify the provisions of
current law that allow property passed from a decedent's estate
to take a stepped-up basis. The bill also would modify the
rules governing generation-skipping transfer taxes and expand
the estate tax rule for conservation easements. H.R. 8 would
expand the availability of the installment method of payment of
the estate tax for the estates of decedents with an interest in
a closely-held business. In addition, the bill would require
the executor of the estate to furnish additional information to
the Internal Revenue Service (IRS) with respect to certain
transfers at death and gifts. The Congressional Budget Office
and the Joint Committee on Taxation (JCT) estimate that the
bill would reduce revenues by $4 million in fiscal year 2002,
by about $41 billion over the 2002-2006 period, and by about
$186 billion over the 2002-2011 period. Because the bill would
affect receipts, pay-as-you-go procedures would apply.
H.R. 8 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would not affect the budgets of state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 8 is shown in the following table.
----------------------------------------------------------------------------------------------------------------
By fiscal year in millions of dollars--
------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 006
------------------------------------------------------------------------------------------------------
Changes in revenues
Estimated revenues -4 -7,029 -9,100 -11,324 -13,114
----------------------------------------------------------------------------------------------------------------
Basis of estimate: With the exception of the following, all
estimates of the revenue effects of H.R. 8 were provided by
JCT.
H.R. 8 would require the executor of an estate, or the
trustee of a revocable trust, to report certain information to
the IRS and to the recipients of property from the estate or
trust. An individual who fails to provide the information would
be subject to certain penalties. Based on information from the
IRS, CBO estimates that such penalties would be negligible.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. The net
changes in outlays and governmental receipts that are subject
to pay-as-you-go procedures are shown in the following tables.
For the purposes of enforcing pay-as-you-go procedures, only
the effects in the current year, the budget year, and the
succeeding four years are counted.
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars-- --------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays Not applicable
Changes in receipts 0 -4 -7,029 -9,100 -11,324 -13,114 -14,869 -19,823 -27,383 -33,690 -49,228
--------------------------------------------------------------------------------------------------------------------------------------------------------
Intergovernmental and private-sector impact: H.R. 8
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Estimate prepared by: Federal costs: Erin Whitaker;
intergovernmental mandates: Leo Lex; private-sector mandates:
Paige Piper/Bach.
Estimate approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was a result of the Committee's
oversight review concerning the tax burden on individual
taxpayers that the Committee concluded that it is appropriate
and timely to enact the revenue provisions included in the bill
as reported.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Constitutional Authority Statement
With respect to clause 3(d)(1) of the rule XIII of the
Rules of the House of Representatives (relating to
Constitutional Authority), the Committee states that the
Committee's action in reporting this bill is derived from
Article I of the Constitution, Section 8 (``The Congress shall
have Power To lay and collect Taxes, Duties, Imposts and
Excises . . . ``), and from the 16th Amendment to the
Constitution.
D. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
E. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the provisions of the bill, and states that
the provisions of the bill do not involve any Federal income
tax rate increases within the meaning of the rule.
F. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the House Committee on Ways and
Means, the Senate Committee on Finance, or any committee of
conference if the legislation includes a provision that
directly or indirectly amends the Internal Revenue Code and has
widespread applicability to individuals or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small
businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter O--Gain or Loss on Disposition of Property
* * * * * * *
PART II--BASIS RULES OF GENERAL APPLICATION
* * * * * * *
SEC. 1014. BASIS OF PROPERTY ACQUIRED FROM A DECEDENT.
(a) * * *
* * * * * * *
(f) Termination.--This section shall not apply with respect
to decedents dying after December 31, 2010.
* * * * * * *
THE FOLLOWING AMENDMENTS TO SUBTITLE B ARE EFFECTIVE DECEMBER 31, 2001.
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter A--Estates of Citizens or Residents
* * * * * * *
PART I--TAX IMPOSED
* * * * * * *
SEC. 2001. IMPOSITION AND RATE OF TAX.
(a) Imposition.--A tax is hereby imposed on the transfer of
the taxable estate of every decedent who is a citizen
orresident of the United States.
[(b) Computation of Tax.--The tax imposed by this section
shall be the amount equal to the excess (if any) of--
[(1) a tentative tax computed under subsection (c) on
the sum of--
[(A) the amount of the taxable estate, and
[(B) the amount of the adjusted taxable
gifts, over
[(2) the aggregate amount of tax which would have
been payable under chapter 12 with respect to gifts
made by the decedent after December 31, 1976, if the
provisions of subsection (c) (as in effect at the
decedent's death) had been applicable at the time of
such gifts.
For purposes of paragraph (1)(B), the term ``adjusted taxable
gifts'' means the total amount of the taxable gifts (within the
meaning of section 2503) made by the decedent after December
31, 1976, other than gifts which are includible in the gross
estate of the decedent.]
(b) Computation of Tax.--
(1) In general.--The tax imposed by this section
shall be the amount equal to the excess (if any) of--
(A) the tentative tax determined under
paragraph (2), over
(B) the aggregate amount of tax which would
have been payable under chapter 12 with respect
to gifts made by the decedent after December
31, 1976, if the provisions of subsection (c)
(as in effect at the decedent's death) had been
applicable at the time of such gifts.
(2) Tentative tax.--For purposes of paragraph (1),
the tentative tax determined under this paragraph is a
tax computed under subsection (c) on the excess of--
(A) the sum of--
(i) the amount of the taxable estate,
and
(ii) the amount of the adjusted
taxable gifts, over
(B) the exemption amount for the calendar
year in which the decedent died.
(3) Exemption amount.--For purposes of paragraph (2),
the term ``exemption amount'' means the amount
determined in accordance with the following table:
In the case of The exemption
calendar year: amount is:
2002 and 2003................................... $700,000
2004............................................ $850,000
2005............................................ $950,000
2006 or thereafter.............................. $1,000,000.
(4) Adjusted taxable gifts.--For purposes of
paragraph (2), the term ``adjusted taxable gifts''
means the total amount of the taxable gifts (within the
meaning of section 2503) made by the decedent after
December 31, 1976, other than gifts which are
includible in the gross estate of the decedent.
(c) Rate Schedule.--
(1) In general.--
If the amount with respect to which the
tentative tax to be computed is: The tentative tax is:
Not over $10,000........................ 18 percent of such amount.
Over $10,000 but not over $20,000....... $1,800, plus 20 percent of
the excess of such amount
over $10,000.
* * * * * * *
[Over $2,500,000 but not over $3,000,000 $1,025,800, plus 53% of the
excess over $2,500,000.
[Over $3,000,000........................ $1,290,800, plus 55% of the
excessover $3,000,000.]
Over $2,500,000......................... $1,025,800, plus 50% of the
excess over $2,500,000.
[(2) Phaseout of graduated rates and unified
credit.--The tentative tax determined under paragraph
(1) shall be increased by an amount equal to 5 percent
of so much of the amount (with respect to which the
tentative tax is to be computed) asexceeds $10,000,000
but does not exceed the amount at which the average tax
rate under this section is 55 percent.]
(2) Phase-in of reduced rate.--In the case of
decedents dying, and gifts made, during 2002, the last
item in the table contained in paragraph (1) shall be
applied by substituting ``53%'' for ``50%''.
(3) Phasedown of tax.--In the case of estates of
decedents dying, and gifts made, during any calendar
year after 2003 and before 2011--
(A) In general.--Except as provided in
subparagraph (C), the tentative tax under this
subsection shall be determined by using a table
prescribed by the Secretary (in lieu of using
the table contained in paragraph (1)) which is
the same as such table; except that--
(i) each of the rates of tax shall be
reduced by the number of percentage
points determined under subparagraph
(B), and
(ii) the amounts setting forth the
tax shall be adjusted to the extent
necessary to reflect the adjustments
under clause (i).
(B) Percentage points of reduction.--
The number of
For calendar year: percentage points is:
2004................................................ 1.0
2005................................................ 2.0
2006................................................ 3.0
2007................................................ 5.0
2008................................................ 7.0
2009................................................ 9.0
2010................................................ 11.0.
(C) Coordination with income tax rates.--The
reductions under subparagraph (A)--
(i) shall not reduce any rate under
paragraph (1) below the lowest rate in
section 1(c) applicable to the taxable
year which includes the date of death
(or, in the case of a gift, the date of
the gift), and
(ii) shall not reduce the highest
rate under paragraph (1) below the
highest rate in section 1(c) for such
taxable year.
(D) Coordination with credit for state death
taxes.--Rules similar to the rules of
subparagraph (A) shall apply to the table
contained in section 2011(b) except that the
Secretary shall prescribe percentage point
reductions which maintain the proportionate
relationship (as in effect before any reduction
under this paragraph) between the credit under
section 2011 and the tax rates under subsection
(c).
* * * * * * *
PART II--CREDIT AGAINST TAX
[Sec. 2010. Unified credit against estate tax.]
* * * * * * *
[SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.
[(a) General Rule.--A credit of the applicable credit amout
shall be allowed to the estate of every decedent against the
tax imposed by section 2001.
[(b) Adjustment to Credit for Certain Gifts Made Before
1977.--The amount of the credit allowable under subsection (a)
shall be reduced by an amount equal to 20 percent of the
aggregate amount allowed as a specific exemption under section
2521 (as in effect before its repeal by the Tax Reform Act of
1976) with respect to gifts made by the decedent after
September 8, 1976.
[(c) Applicable Credit Amount.--For purposes of this section,
the applicable credit amount is the amount of the tentative tax
which would be determined under the rate schedule set forth in
section 2001(c) if the amount with respect to which such
tentative tax is to be computed were the applicable exclusion
amount determined in accordance with the following table:
[In the case of estates of decedents
The applicable
dying, and gifts made, during:
exclusion amount is:
1998.................................................. $625,000
1999.................................................. $650,000
2000 and 2001......................................... $675,000
2002 and 2003......................................... $700,000
2004.................................................. $850,000
2005.................................................. $950,000
2006 or thereafter.................................... $1,000,000
[(d) Limitation Based on Amount of Tax.--The amount of the
credit allowed by subsection (a) shall not exceed the amount of
the tax imposed by section 2001.]
SEC. 2011. CREDIT FOR STATE DEATH TAXES.
(a) * * *
(b) Amount of Credit.--The credit allowed by this section
shall not exceed the appropriate amount stated in the following
table:
If the [adjusted] taxable estate is: The maximum tax credit shall
be:
Not over $90,000........................ 8/10ths of 1% of the
amountby which the adjusted
taxable estate exceeds
$40,000.
Over $90,000 but not over $140,000...... $400 plus 1.6% of the excess
over $90,000.
* * * * * * *
[For purposes of this section, the term ``adjusted taxable
estate'' means the taxable estate reduced by $60,000.]
(f) Limitation Based on Amount of Tax.--The credit provided
by this section shall not exceed the amount of the tax imposed
by section 2001[, reduced by the amount of the unified credit
provided by section 2010].
SEC. 2012. CREDIT FOR GIFT TAX.
(a) In General.--If a tax on a gift has been paid under
chapter 12 (sec. 2501 and following), or under corresponding
provisions of prior laws, and thereafter on the death of the
donor any amount in respect of such gift is required to be
included in the value of the gross estate of the decedent for
purposes of this chapter, then there shall be credited against
the tax imposed by section 2001 the amount of the tax paid on a
gift under chapter 12, or under corresponding provisions of
prior laws, with respect to so much of the property which
constituted the gift as is included in the gross estate, except
that the amount of such credit shall not exceed an amount which
bears the same ratio to the tax imposed by section 2001 (after
deducting from such tax the credit for State death taxes
provided by section 2011 [and the unified credit provided by
section 2010]) as the value (at the time of the gift or at the
time of the death, whichever is lower) of so much of the
property which constituted the gift as is included in the gross
estate bears to the value of the entire gross estate reduced by
the aggregate amount of the charitable and marital deductions
allowed under sections 2055, 2056, and 2106(a)(2).
* * * * * * *
SEC. 2013. CREDIT FOR TAX ON PRIOR TRANSFERS.
(a) * * *
* * * * * * *
(c) Limitation on Credit.--
(1) In general.--The credit provided in this section
shall not exceed the amount by which--
(A) the estate tax imposed by section 2001 or
section 2101 (after deducting the credits
provided for in sections [2010,] 2011, 2012,
and 2014) computed without regard to this
section, exceeds
* * * * * * *
SEC. 2014. CREDIT FOR FOREIGN DEATH TAXES.
(a) * * *
(b) Limitations on Credit.--The credit provided in this
section with respect to such taxes paid to any foreign
country--
(1) * * *
(2) shall not, with respect to all such taxes, exceed
an amount which bears the same ratio to the tax imposed
by section 2001 (after deducting from such tax the
credits provided by sections[2010, 2011,] 2011 and
2012) as the value of property which is--
(A) * * *
* * * * * * *
PART III--GROSS ESTATE
* * * * * * *
SEC. 2031. DEFINITION OF GROSS ESTATE.
(a) * * *
* * * * * * *
(c) Estate Tax with Respect to Land Subject to a Qualified
Conservation Easement.--
(1) * * *
(2) Applicable percentage.--For purposes of paragraph
(1), the term ``applicable percentage'' means 40
percent reduced (butnot below zero) by 2 percentage
points for each percentage point (or fraction thereof)
by which the value of the qualified conservation
easement is less than 30 percent of the value of the
land (determined without regard to the value of such
easement and reduced by the value of any retained
development right (as defined in paragraph (5)). The
values taken into account under the preceding sentence
shall be such values as of the date of the contribution
referred to in paragraph (8)(B).
* * * * * * *
(8) Definitions.--For purposes of this subsection--
(A) Land subject to a qualified conservation
easement.--The term ``land subject to a
qualified conservation easement'' means land--
(i) which is located--
(I) in or within [25 miles]
50 miles of an area which, on
the date of the decedent's
death, is a metropolitan area
(as defined by the Office of
Management and Budget),
(II) in or within [25 miles]
50 miles of an area which, on
the date of the decedent's
death, is a national park or
wilderness area designated as
part of the National Wilderness
Preservation System (unless it
is determined by the Secretary
that land in or within [25
miles] 50 miles of such a park
or wilderness area is not under
significant development
pressure), or
(III) in or within [10 miles]
25 miles of an area which, on
the date of the decedent's
death, is an Urban National
Forest (as designated by the
Forest Service),
* * * * * * *
PART IV--TAXABLE ESTATE
* * * * * * *
SEC. 2056A. QUALIFIED DOMESTIC TRUST.
(a) * * *
(b) Tax Treatment of Trust.--
(1) * * *
* * * * * * *
(12) Special rule where spouse becomes citizen.--If
the surviving spouse of the decedent becomes a citizen
of the United States and if--
(A) * * *
* * * * * * *
(C) such spouse elects--
(i) * * *
[(ii) to treat any reduction in the
tax imposed by paragraph (1)(A) by
reason of the credit allowable under
section 2010 with respect to the
decedent as a credit allowable to such
surviving spouse under section 2505 for
purposes of determining the amount of
the credit allowable under section 2505
with respect to taxable gifts made by
the surviving spouse during the year in
which the spouse becomes a citizen or
any subsequent year, paragraph (1)(A)
shall not apply to any distributions
after such spouse becomes such a
citizen (and paragraph (1)(B) shall not
apply),]
(ii) to treat any reduction in the
tax imposed by paragraph (1)(A) by
reason of the credit allowable under
section 2010 (as in effect on the day
before the date of the enactment of the
Death Tax Elimination Act of 2001) or
the exemption amount allowable under
section 2001(b) with respect to the
decedent as a credit under section 2505
(as so in effect) or exemption under
section 2501 (as the case may be)
allowable to such surviving spouse for
purposes of determining the amount of
the exemption allowable under section
2501 with respect to taxable gifts made
by the surviving spouse during the year
in which the spouse becomes a citizen
or any subsequent year,
* * * * * * *
SEC. 2057. FAMILY-OWNED BUSINESS INTERESTS.
(a) General Rule.--
(1) * * *
[(2) Maximum deduction.--The deduction allowed by
this section shall not exceed $675,000.
[(3) Coordination with unified credit.--
[(A) In general.--Except as provided in
subparagraph (B), if this section applies to an
estate, the applicable exclusion amount under
section 2010 shall be $625,000.
[(B) Increase in unified credit if deduction
is less than $675,000.--If the deduction
allowed by this section is less than $675,000,
the amount of the applicable exclusion amount
under section 2010 shall be increased (but not
above the amount which would apply to the
estate without regard to this section) by the
excess of $675,000 over the amount of the
deduction allowed.]
(2) Maximum deduction.--The deduction allowed by this
section shall not exceed the excess of $1,300,000 over
the exemption amount (as defined in section
2001(b)(3)).
* * * * * * *
Subchapter B--Estates of Nonresidents Not Citizens
* * * * * * *
SEC. 2101. TAX IMPOSED.
(a) * * *
[(b) Computation of Tax.--The tax imposed by this section
shall be the amount equal to the excess (if any) of--
[(1) a tentative tax computed under section 2001(c)
on the sum of--
[(A) the amount of the taxable estate, and
[(B) the amount of the adjusted taxable
gifts, over
[(2) a tentative tax computed under section 2001(c)
on the amount of the adjusted taxable gifts.
For purposes of the preceding sentence, there shall be
appropriate adjustments in the application of section
2001(c)(2) to reflect the difference between the amount of the
credit provided under section 2102(c) and the amount of the
credit provided under section 2010.]
(b) Computation of Tax.--
(1) In general.--The tax imposed by this section
shall be the amount equal to the excess (if any) of--
(A) the tentative tax determined under
paragraph (2), over
(B) a tentative tax computed under section
2001(c) on the amount of the adjusted taxable
gifts.
(2) Tentative tax.--For purposes of paragraph (1),
the tentative tax determined under this paragraph is a
tax computed under section 2001(c) on the excess of--
(A) the sum of--
(i) the amount of the taxable estate,
and
(ii) the amount of the adjusted
taxable gifts, over
(B) the exemption amount for the calendar
year in which the decedent died.
(3) Exemption amount.--
(A) In general.--The term ``exemption
amount'' means $60,000.
(B) Residents of possessions of the united
states.--In the case of a decedent who is
considered to be a nonresident not a citizen of
the United States under section 2209, the
exemption amount under this paragraph shall be
the greater of--
(i) $60,000, or
(ii) that proportion of $175,000
which the value of that part of the
decedent's gross estate which at the
time of his death is situated in the
United States bears to the value of his
entire gross estate wherever situated.
(C) Special rules.--
(i) Coordination with treaties.--To
the extent required under any treaty
obligation of the United States, the
exemption amount allowed under this
paragraph shall be equal to the amount
which bears the same ratio to the
exemption amount under section
2001(b)(3) (for the calendar year in
which the decedent died) as the value
of the part of the decedent's gross
estate which at the time of his death
is situated in the United States bears
to the value of his entire gross estate
wherever situated. For purposes of the
preceding sentence, property shall not
be treated as situated in the United
States if such property is exempt from
the tax imposed by this subchapter
under any treaty obligation of the
United States.
(ii) Coordination with gift tax
exemption and unified credit.--If an
exemption has been allowed under
section 2501 (or a credit has been
allowed under section 2505 as in effect
on the day before the date of the
enactment of the Death Tax Elimination
Act of 2001) with respect to any gift
made by the decedent, each dollar
amount contained in subparagraph (A) or
(B) or the exemption amount applicable
under clause (i) of this subparagraph
(whichever applies) shall be reduced by
the exemption so allowed under section
2501 (or, in the case of such a credit,
by the amount of the gift for which the
credit was so allowed).
SEC. 2102. CREDITS AGAINST TAX.
(a) * * *
* * * * * * *
[(c) Unified Credit.--
[(1) In general.--A credit of $13,000 shall be
allowed against the tax imposed by section 2101.
[(2) Residents of possessions of the united states.--
In the case of a decedent who is considered to be a
``nonresident not a citizen of the United States''
under section 2209, the credit under this subsection
shall be the greater of--
[(A) $13,000, or
[(B) that proportion of $46,800 which the
value of that part of the decedent's gross
estate which at the time of his death is
situated in the United States bears to the
value of his entire gross estate wherever
situated.
[(3) Special rules.--
[(A) Coordination with treaties.--To the
extent required under any treaty obligation of
the United States, the credit allowed under
this subsection shall be equal to the amount
which bears the same ratio to the applicable
credit amount in effect under section 2010(c)
for the calendar year which includes the date
of death as the value of the part of the
decedent's gross estate which at the time of
his death is situated in the United States
bears to the value of his entire gross estate
wherever situated. For purposes of the
preceding sentence, property shall not be
treated as situated in the United States if
such property is exempt from the tax imposed by
this subchapter under any treaty obligation of
the United States.
[(B) Coordination with gift tax unified
credit.--If a credit has been allowed under
section 2505 with respect to any gift made by
the decedent, each dollar amount contained in
paragraph (1) or (2) or subparagraph (A) of
this paragraph (whichever applies) shall be
reduced by the amount so allowed.
[(4) Limitation based on amount of tax.--The credit
allowed under this subsection shall not exceed the
amount of the tax imposed by section 2101.
[(5) Application of other credits.--For purposes of
subsection (a), sections 2011 to 2013, inclusive, shall
be applied as if the credit allowed under this
subsection were allowed under section 2010.]
SEC. 2107. EXPATRIATION TO AVOID TAX.
(a) Treatment of Expatriates.--
(1) Rate of tax.--A tax computed in accordance with
[the table contained in] section 2001 is hereby imposed
on the transfer of the taxable estate, determined as
provided in section 2106, of every decedent nonresident
not a citizen of the United States if, within the 10-
year period ending with the date of death, such
decedent lost United States citizenship, unless such
loss did not have for one of its principal purposes the
avoidance of taxes under this subtitle or subtitle A--
* * * * * * *
[(c) Credits.--
[(1) Unified credit.--
[(A) In general.--A credit of $13,000 shall
be allowed against the tax imposed by
subsection (a).
[(B) Limitation based on amount of tax.--The
credit allowed under this paragraph shall not
exceed the amount of the tax imposed by
subsection (a).]
(c) Exemption Amount and Credits.--
(1) Exemption amount.--For purposes of subsection
(a), the exemption amount under section 2001 shall be
$60,000.
* * * * * * *
(3) Other credits.--The tax imposed by subsection (a)
shall be credited with the amounts determined in
accordance with subsections (a) and (b) of section
2102. [For purposes of subsection (a) of section 2102,
sections 2011 to 2013, inclusive, shall be applied as
if the credit allowed under paragraph (1) were allowed
under section 2010.]
* * * * * * *
CHAPTER 12--GIFT TAX
* * * * * * *
Subchapter A--Determination of Tax Liability
Sec. 2501. Imposition of tax.
* * * * * * *
[Sec. 2505. Unified credit against gift tax.]
* * * * * * *
SEC. 2502. RATE OF TAX.
[(a) Computation of Tax.--The tax imposed by section 2501 for
each calendar year shall be an amount equal to the excess of--
[(1) a tentative tax, computed under section 2001(c),
on the aggregate sum of the taxable gifts for such
calendar year and for each of the preceding calendar
periods, over
[(2) a tentative tax, computed under such section, on
the aggregate sum of the taxable gifts for each of the
preceding calendar periods.]
(a) Computation of Tax.--
(1) In general.--The tax imposed by section 2501 for
each calendar year shall be the amount equal to the
excess (if any) of--
(A) the tentative tax determined under
paragraph (2) for such calendar year, over
(B) the aggregate amount of tax that would
have been payable under this chapter with
respect to gifts made by the donor in preceding
calendar periods if the tax had been computed
under the provisions of section 2001(c) as in
effect for such calendar year.
(2) Tentative tax.--For purposes of paragraph (1),
the tentative tax determined under this paragraph for a
calendar year is a tax computed under section 2001(c)
on the excess of--
(A) the aggregate sum of the taxable gifts
for such calendar year and for each of the
preceding calendar periods, over
(B) the exemption amount under section
2001(b)(3) for such calendar year.
* * * * * * *
[SEC. 2505. UNIFIED CREDIT AGAINST GIFT TAX.
[(a) General Rule.--In the case of a citizen or resident of
the United States, there shall be allowed as a credit against
the tax imposed by section 2501 for each calendar year an
amount equal to--
[(1) The applicable credit amount in effect under
section 2010(c) for such calendar year, reduced by
[(2) the sum of the amounts allowable as a credit to
the individual under this section for allpreceding
calendar periods.
[(b) Adjustment to Credit for Certain Gifts Made Before
1977.--The amount allowable under subsection (a) shall be
reduced by an amount equal to 20 percent of the aggregate
amount allowed as a specific exemption under section 2521 (as
in effect before its repeal by the Tax Reform Act of 1976) with
respect to gifts made by the individual after September 8,
1976.
[(c) Limitation Based on Amount of Tax.--The amount of the
credit allowed under subsection (a) for any calendar year shall
not exceed the amount of the tax imposed by section 2501 for
such calendar year.]
* * * * * * *
CHAPTER 13--TAX ON CERTAIN GENERATION-SKIPPING TRANSFERS
* * * * * * *
Subchapter D--GST Exemption
* * * * * * *
SEC. 2632. SPECIAL RULES FOR ALLOCATION OF GST EXEMPTION.
(a) * * *
(b) Deemed Allocation to Certain Lifetime Direct Skips.--
(1) * * *
(2) Unused portion.--For purposes of paragraph (1),
the unused portion of an individual's GST exemption is
that portion of such exemption which has not previously
been allocated by such individual (or treated as
allocated under paragraph (1) [with respect to a prior
direct skip] or subsection (c)(1)).
(3) Subsection Not to Apply in Certain Cases.--An
individual may elect to have this subsection not apply
to a transfer.
(c) Deemed Allocation to Certain Lifetime Transfers to GST
Trusts.--
(1) In general.--If any individual makes an indirect
skip during such individual's lifetime, any unused
portion of such individual's GST exemption shall be
allocated to the property transferred to the extent
necessary to make the inclusion ratio for such property
zero. If the amount of the indirect skip exceeds such
unused portion, the entire unused portion shall be
allocated to the property transferred.
(2) Unused portion.--For purposes of paragraph (1),
the unused portion of an individual's GST exemption is
that portion of such exemption which has not previously
been--
(A) allocated by such individual,
(B) treated as allocated under subsection (b)
with respect to a direct skip occurring during
or before the calendar year in which the
indirect skip is made, or
(C) treated as allocated under paragraph (1)
with respect to a prior indirect skip.
(3) Definitions.--
(A) Indirect skip.--For purposes of this
subsection, the term ``indirect skip'' means
any transfer of property (other than a direct
skip) subject to the tax imposed by chapter 12
made to a GST trust.
(B) GST trust.--The term ``GST trust'' means
a trust that could have a generation-skipping
transfer with respect to the transferor
unless--
(i) the trust instrument provides
that more than 25 percent of the trust
corpus must be distributed to or may be
withdrawn by one or more individuals
who are non-skip persons--
(I) before the date that the
individual attains age 46,
(II) on or before one or more
dates specified in the trust
instrument that will occur
before the date that such
individual attains age 46, or
(III) upon the occurrence of
an event that, in accordance
with regulations prescribed by
the Secretary, may reasonably
be expected to occur before the
date that such individual
attains age 46;
(ii) the trust instrument provides
that more than 25 percent of the trust
corpus must be distributed to or may be
withdrawn by one or more individuals
who are non-skip persons and who are
living on the date of death of another
person identified in the instrument (by
name or by class) who is more than 10
years older than such individuals;
(iii) the trust instrument provides
that, if one or more individuals who
are non-skip persons die on or before a
date or event described in clause (i)
or (ii), more than 25 percent of the
trust corpus either must be distributed
to the estate or estates of one or more
of such individuals or is subject to a
general power of appointment
exercisable by one or more of such
individuals;
(iv) the trust is a trust any portion
of which would be included in the gross
estate of a non-skip person (other than
the transferor) if such person died
immediately after the transfer;
(v) the trust is a charitable lead
annuity trust (within the meaning of
section 2642(e)(3)(A)) or a charitable
remainder annuity trust or a charitable
remainder unitrust (within the meaning
of section 664(d)); or
(vi) the trust is a trust with
respect to which a deduction was
allowed under section 2522 for the
amount of an interest in the form of
the right to receive annual payments of
a fixed percentage of the net fair
market value of the trust property
(determined yearly) and which is
required to pay principal to a non-skip
person if such person is alive when the
yearly payments for which the deduction
was allowed terminate.
For purposes of this subparagraph, the value of
transferred property shall not be considered to
be includible in the gross estate of a non-skip
person or subject to a right of withdrawal by
reason of such person holding a right to
withdraw so much of such property as does not
exceed the amount referred to in section
2503(b) with respect to any transferor, and it
shall be assumed that powers of appointment
held by non-skip persons will not be exercised.
(4) Automatic allocations to certain gst trusts.--For
purposes of this subsection, an indirect skip to which
section 2642(f) applies shall be deemed to have been
made only at the close of the estate tax inclusion
period. The fair market value of such transfer shall be
the fair market value of the trust property at the
close of the estate tax inclusion period.
(5) Applicability and effect.--
(A) In general.--An individual--
(i) may elect to have this subsection
not apply to--
(I) an indirect skip, or
(II) any or all transfers
made by such individual to a
particular trust, and
(ii) may elect to treat any trust as
a GST trust for purposes of this
subsection with respect to any or all
transfers made by such individual to
such trust.
(B) Elections.--
(i) Elections with respect to
indirect skips.--An election under
subparagraph (A)(i)(I) shall be deemed
to be timely if filed on a timely filed
gift tax return for the calendar year
in which the transfer was made or
deemed to have been made pursuant to
paragraph (4) or on such later date or
dates as may be prescribed by the
Secretary.
(ii) Other elections.--An election
under clause (i)(II) or (ii) of
subparagraph (A) may be made on a
timely filed gift tax return for the
calendar year for which the election is
to become effective.
(d) Retroactive Allocations.--
(1) In general.--If--
(A) a non-skip person has an interest or a
future interest in a trust to which any
transfer has been made,
(B) such person--
(i) is a lineal descendant of a
grandparent of the transferor or of a
grandparent of the transferor's spouse
or former spouse, and
(ii) is assigned to a generation
below the generation assignment of the
transferor, and
(C) such person predeceases the transferor,
then the transferor may make an allocation of any of
such transferor's unused GST exemption to any previous
transfer or transfers to the trust on a chronological
basis.
(2) Special rules.--If the allocation under paragraph
(1) by the transferor is made on a gift tax return
filed on or before the date prescribed by section
6075(b) for gifts made within the calendar year within
which the non-skip person's death occurred--
(A) the value of such transfer or transfers
for purposes of section 2642(a) shall be
determined as if such allocation had been made
on a timely filed gift tax return for each
calendar year within which each transfer was
made,
(B) such allocation shall be effective
immediately before such death, and
(C) the amount of the transferor's unused GST
exemption available to be allocated shall be
determined immediately before such death.
(3) Future interest.--For purposes of this
subsection, a person has a future interest in a trust
if the trust may permit income or corpus to be paid to
such person on a date or dates in the future.
[(c)] (e) Allocation of Unused GST Exemption.--
(1) * * *
* * * * * * *
Subchapter E--Applicable Rate; Inclusion Ratio
* * * * * * *
SEC. 2642. INCLUSION RATIO.
(a) Inclusion Ratio Defined.--For purposes of this chapter--
(1) * * *
* * * * * * *
(3) Severing of trusts.--
(A) In general.--If a trust is severed in a
qualified severance, the trusts resulting from
such severance shall be treated as separate
trusts thereafter for purposes of this chapter.
(B) Qualified severance.--For purposes of
subparagraph (A)--
(i) In general.--The term ``qualified
severance'' means the division of a
single trust and the creation (by any
means available under the governing
instrument or under local law) of two
or more trusts if--
(I) the single trust was
divided on a fractional basis,
and
(II) the terms of the new
trusts, in the aggregate,
provide for the same succession
of interests of beneficiaries
as are provided in the original
trust.
(ii) Trusts with inclusion ratio
greater than zero.--If a trust has an
inclusion ratio of greater than zero
and less than 1, a severance is a
qualified severance only if the single
trust is divided into two trusts, one
of which receives a fractional share of
the total value of all trust assets
equal to the applicable fraction of the
single trust immediately before the
severance. In such case, the trust
receiving such fractional share shall
have an inclusion ratio of zero and the
other trust shall have an inclusion
ratio of 1.
(iii) Regulations.--The term
``qualified severance'' includes any
other severance permitted under
regulations prescribed by the
Secretary.
(C) Timing and manner of severances.--A
severance pursuant to this paragraph may be
made at any time. The Secretary shall prescribe
by forms or regulations the manner in which the
qualified severance shall be reported to the
Secretary.
(b) Valuation Rules, Etc.--Except as provided in subsection
(f)--
[(1) Gifts for which gift tax return filed or deemed
allocation made.--If the allocation of the GST
exemption to any property is made on a gift tax return
filed on or before the date prescribed by section
6075(b) or is deemed to be made under section
2632(b)(1)--
[(A) the value of such property for purposes
of subsection (a) shall be its value for
purposes of chapter 12, and
[(B) such allocation shall be effective on
and after the date of such transfer.]
(1) Gifts for which gift tax return filed or deemed
allocation made.--If the allocation of the GST
exemption to any transfers of property is made on a
gift tax return filed on or before the date prescribed
by section 6075(b) for such transfer or is deemed to be
made under section 2632 (b)(1) or (c)(1)--
(A) the value of such property for purposes
of subsection (a) shall be its value as finally
determined for purposes of chapter 12 (within
the meaning of section 2001(f)(2)), or, in the
case of an allocation deemed to have been made
at the close of an estate tax inclusion period,
its value at the time of the close of the
estate tax inclusion period, and
(B) such allocation shall be effective on and
after the date of such transfer, or, in the
case of an allocation deemed to have been made
at the close of an estate tax inclusion period,
on and after the close of such estate tax
inclusion period.
(2) Transfers and allocations at or after death.--
[(A) Transfers at death.--If property is
transferred as a result of the death of the
transferor, the value of such property for
purposes of subsection (a) shall be its value
for purposes of chapter 11; except that, if the
requirements prescribed by the Secretary
respecting allocation of post-death changes in
value are not met, the value of such property
shall be determined as of the time of the
distribution concerned.]
(A) Transfers at death.--If property is
transferred as a result of the death of the
transferor, the value of such property for
purposes of subsection (a) shall be its value
as finally determined for purposes of chapter
11; except that, if the requirements prescribed
by the Secretary respecting allocation of post-
death changes in value are not met, the value
of such property shall be determined as of the
time of the distribution concerned.
* * * * * * *
(g) Relief Provisions.--
(1) Relief from late elections.--
(A) In general.--The Secretary shall by
regulation prescribe such circumstances and
procedures under which extensions of time will
be granted to make--
(i) an allocation of GST exemption
described in paragraph (1) or (2) of
subsection (b), and
(ii) an election under subsection
(b)(3) or (c)(5) of section 2632.
Such regulations shall include procedures for
requesting comparable relief with respect to
transfers made before the date of the enactment
of this paragraph.
(B) Basis for determinations.--In determining
whether to grant relief under this paragraph,
the Secretary shall take into account all
relevant circumstances, including evidence of
intent contained in the trust instrument or
instrument of transfer and such other factors
as the Secretary deems relevant. For purposes
of determining whether to grant relief under
this paragraph, the time for making the
allocation (or election) shall be treated as if
not expressly prescribed by statute.
(2) Substantial compliance.--An allocation of GST
exemption under section 2632 that demonstrates an
intent to have the lowest possible inclusion ratio with
respect to a transfer or a trust shall be deemed to be
an allocation of so much of the transferor's unused GST
exemption as produces the lowest possible inclusion
ratio. In determining whether there has been
substantial compliance, all relevant circumstances
shall be taken into account, including evidence of
intent contained in the trust instrument or instrument
of transfer and such other factors as the Secretary
deems relevant.
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
PART II--TAX RETURNS OR STATEMENTS
* * * * * * *
Subpart C--Estate and Gift Tax Returns
* * * * * * *
SEC. 6018. ESTATE TAX RETURNS.
(a) Returns by Executor.--
(1) Citizens or residents.--In all cases where the
gross estate at the death of a citizen or resident
exceeds [the applicable exclusion amount in effect
under section 2010(c)] the exemption amount under
section 2001(b)(3) for the calendar year which includes
the date of death, the executor shall make a return
with respect to the estate tax imposed by subtitle B.
* * * * * * *
CHAPTER 62--TIME AND PLACE FOR PAYING TAX
* * * * * * *
Subchapter B--Extension of Time for Payment
* * * * * * *
SEC. 6166. EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX WHERE ESTATE
CONSISTS LARGELY OF INTEREST IN CLOSELY HELD
BUSINESS.
(a) * * *
(b) Definitions and Special Rules.--
(1) Interest in closely held business.--For purposes
of this section, the term ``interest in a closely held
business'' means--
(A) * * *
(B) an interest as a partner in a partnership
carrying on a trade or business, if--
(i) * * *
(ii) such partnership had [15] 45 or
fewer partners; or
(C) stock in a corporation carrying on a
trade or business if--
(i) * * *
(ii) such corporation had [15] 45 or
fewer shareholders.
* * * * * * *
(9) Deferral not available for passive assets.--
(A) * * *
(B) Passive asset defined.--For purposes of
this paragraph--
(i) * * *
* * * * * * *
(iii) Exception for active
corporations.--If--
(I) a corporation owns 20
percent or more in value of the
voting stock of another
corporation, or such other
corporation has [15] 45 or
fewer shareholders, and
* * * * * * *
CHAPTER 67--INTEREST
* * * * * * *
Subchapter A--Interest on Underpayments
* * * * * * *
SEC. 6601. INTEREST ON UNDERPAYMENT, NONPAYMENT, OR EXTENSIONS OF TIME
FOR PAYMENT, OF TAX.
(a) * * *
* * * * * * *
(j) 2-Percent Rate on Certain Portion of Estate Tax Extended
Under Section 6166.--
(1) * * *
(2) 2-percent portion.--For purposes of this
subsection, the term ``2-percent portion'' means the
lesser of--
[(A)(i) the amount of the tentative tax which
would be determined under the rate schedule set
forth in section 2001(c) if the amount with
respect to which such tentative tax is to be
computed were the sum of $1,000,000 and the
applicable exclusion amount in effect under
section 2010(c), reduced by
[(ii) the applicable credit amount in
effect under section 2010(c), or]
(A) the amount of the tentative tax which
would be determined under the rate schedule set
forth in section 2001(c) if the amount with
respect to which such tentative tax is to be
computed were $1,000,000, or
* * * * * * *
THE FOLLOWING AMENDMENTS ARE EFFECTIVE AFTER DECEMBER 31, 2010
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
* * * * * * *
SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
(a) * * *
* * * * * * *
(d) Special Rules.--
(1) * * *
* * * * * * *
(9) Property acquired from a decedent.--The exclusion
under this section shall apply to property sold by--
(A) the estate of a decedent, and
(B) any individual who acquired such property
from the decedent (within the meaning of
section 1022),
determined by taking into account the ownership and use
by the decedent.
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) * * *
* * * * * * *
(e) Certain Contributions of Ordinary Income and Capital Gain
Property.--
(1) General rule.--The amount of any charitable
contribution of property otherwise taken into account
under this section shall be reduced by the sum of--
(A) * * *
* * * * * * *
For purposes of applying this paragraph in the case of a
charitable contribution of stock in an S corporation, rules
similar to the rules of section 751 shall apply in determining
whether gain on such stock would have been long-term capital
gain if such stock were sold by the taxpayer. For purposes of
this paragraph, the determination of whether property is a
capital asset shall be made without regard to the exception
contained in section 1221(a)(3)(C) for basis determined under
section 1022.
* * * * * * *
Subchapter J--Estates, Trusts, Beneficiaries, and Decedents
* * * * * * *
PART I--ESTATES, TRUSTS, AND BENEFICIARIES
* * * * * * *
Subpart F--Miscellaneous
Sec. 681. Limitation on charitable deduction.
* * * * * * *
Sec. 684. Recognition of gain on certain transfers to certain
foreign trusts and estates and nonresident aliens.
* * * * * * *
SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CERTAIN FOREIGN
TRUSTS AND ESTATES AND NONRESIDENT ALIENS.
(a) In General.--Except as provided in regulations, in the
case of any transfer of property by a United States person to a
foreign estate or trust or to a nonresident not a citizen of
the United States, for purposes of this subtitle, such transfer
shall be treated as a sale or exchange for an amount equal to
the fair market value of the property transferred, and
thetransferor shall recognize as gain the excess of--
(1) * * *
* * * * * * *
(b) Exception.--Subsection (a) shall not apply to a transfer
to a trust by a United States person to the extent that any
United States person is treated as the owner of such trust
under section 671.
* * * * * * *
Subchapter O--Gain or Loss on Disposition of Property
* * * * * * *
PART II--BASIS RULES OF GENERAL APPLICATION
Sec. 1011. Adjusted basis for determining gain or loss.
* * * * * * *
Sec. 1022. Treatment of property acquired from a decedent
dying after December 31, 2010.
* * * * * * *
SEC. 1022. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER
DECEMBER 31, 2010.
(a) In General.--Except as otherwise provided in this
section--
(1) property acquired from a decedent dying after
December 31, 2010, shall be treated for purposes of
this subtitle as transferred by gift, and
(2) the basis of the person acquiring 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) Basis Increase for Certain Property.--
(1) In general.--In the case of property to which
this subsection applies, the basis of such property
under subsection (a) shall be increased by its basis
increase under this subsection.
(2) Basis increase.--For purposes of this
subsection--
(A) In general.--The basis increase under
this subsection for any property is the portion
of the aggregate basis increase which is
allocated to the property pursuant to this
section.
(B) Aggregate basis increase.--In the case of
any estate, the aggregate basis increase under
this subsection is $1,300,000.
(C) Limit increased by unused built-in losses
and loss carryovers.--The limitation under
subparagraph (B) shall be increased by--
(i) the sum of the amount of any
capital loss carryover under section
1212(b), and the amount of any net
operating loss carryover under section
172, which would (but for the
decedent's death) be carried from the
decedent's last taxable year to a later
taxable year of the decedent, plus
(ii) the sum of the amount of any
losses that would have been allowable
under section 165 if the property
acquired from the decedent had been
sold at fair market value immediately
before the decedent's death.
(3) Decedent nonresidents who are not citizens of the
united states.--In the case of a decedent nonresident
not a citizen of the United States--
(A) paragraph (2)(B) shall be applied by
substituting ``$60,000'' for ``$1,300,000'',
and
(B) paragraph (2)(C) shall not apply.
(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) (as increased, if any, under subsection (b)) 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
subsection, the term ``qualified spousal property''
means--
(A) outright transfer property, and
(B) qualified terminable interest property.
(4) Outright transfer property.--For purposes of this
subsection--
(A) In general.--The term ``outright transfer
property'' means any interest in property
acquired from the decedent by the decedent's
surviving spouse.
(B) Exception.--Subparagraph (A) shall not
apply where, on the lapse of time, on the
occurrence of an event or contingency, or on
the failure of an event or contingency to
occur, an interest passing to the surviving
spouse will terminate or fail--
(i)(I) if an interest in such
property passes or has passed (for less
than an adequate and full consideration
in money or money's worth) from the
decedent to any person other than such
surviving spouse (or the estate of such
spouse), and
(II) if by reason of such passing
such person (or his heirs or assigns)
may possess or enjoy any part of such
property after such termination or
failure of the interest so passing to
the surviving spouse, or
(ii) if such interest is to be
acquired for the surviving spouse,
pursuant to directions of the decedent,
by his executor or by the trustee of a
trust.
For purposes of this subparagraph, an interest
shall not be considered as an interest which
will terminate or fail merely because it is the
ownership of a bond, note, or similar
contractual obligation, the discharge of which
would not have the effect of an annuity for
life or for a term.
(C) Interest of spouse conditional on
survival for limited period.--For purposes of
this paragraph, an interest passing to the
surviving spouse shall not be considered as an
interest which will terminate or fail on the
death of such spouse if--
(i) such death will cause a
termination or failure of such interest
only if it occurs within a period not
exceeding 6 months after the decedent's
death, or only if it occurs as a result
of a common disaster resulting in the
death of the decedent and the surviving
spouse, or only if it occurs in the
case of either such event; and
(ii) such termination or failure does
not in fact occur.
(5) Qualified terminable interest property.--For
purposes of this subsection--
(A) In general.--The term ``qualified
terminable interest property'' means property--
(i) which passes from the decedent,
and
(ii) in which the surviving spouse
has a qualifying income interest for
life.
(B) Qualifying income interest for life.--The
surviving spouse has a qualifying income
interest for life if--
(i) the surviving spouse is entitled
to all the income from the property,
payable annually or at more frequent
intervals, or has a usufruct interest
for life in the property, and
(ii) no person has a power to appoint
any part of the property to any person
other than the surviving spouse.
Clause (ii) shall not apply to a power
exercisable only at or after the death of the
surviving spouse. To the extent provided in
regulations, an annuity shall be treated in a
manner similar to an income interest in
property (regardless of whether the property
from which the annuity is payable can be
separately identified).
(C) Property includes interest therein.--The
term ``property'' includes an interest in
property.
(D) Specific portion treated as separate
property.--A specific portion of property shall
be treated as separate property. For purposes
of the preceding sentence, the term ``specific
portion'' only includes a portion determined on
a fractional or percentage basis.
(d) Definitions and Special Rules for Application of
Subsections (b) and (c).--
(1) Property to which subsections (b) and (c)
apply.--
(A) In general.--The basis of property
acquired from a decedent may be increased under
subsection (b) or (c) 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 revocable trust to pay all of the
income during the decedent's life to
the decedent or at the direction of the
decedent.
(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 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.--Subsections (b) and
(c) 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.--Subsections
(b) and (c) shall not apply to--
(i) stock or securities 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.
(2) Fair market value limitation.--The adjustments
under subsection (b) and (c) 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.
(3) Allocation rules.--
(A) In general.--The executor shall allocate
the adjustments under subsections (b) and (c)
on the return required by section 6018.
(B) Changes in allocation.--Any allocation
made pursuant to subparagraph (A) may be
changed only as provided by the Secretary.
(4) Inflation adjustment of basis adjustment
amounts.--
(A) In general.--In the case of decedents
dying in a calendar year after 2011, the
$1,300,000, $60,000, and $3,000,000 dollar
amounts in subsections (b) and (c)(2)(B) shall
each be increased by an amount equal to the
product of--
(i) such dollar amount, and
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year, determined by
substituting ``2010'' for ``1992'' in
subparagraph (B) thereof.
(B) Rounding.--If any increase determined
under subparagraph (A) is not a multiple of--
(i) $100,000 in the case of the
$1,300,000 amount,
(ii) $5,000 in the case of the
$60,000 amount, and
(iii) $250,000 in the case of the
$3,000,000 amount,
such increase shall be rounded to the next
lowest multiple thereof.
(e) 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 in trust to pay the income for life to or on
the order or direction of the decedent, with the right
reserved to the decedent at all times before his
death--
(A) to revoke the trust, or
(B) 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.
(f) 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.
(g) Certain Liabilities Disregarded.--In determining whether
gain is recognized on the acquisition of property--
(1) from a decedent by a decedent's estate or any
beneficiary, and
(2) from the decedent's estate by any beneficiary,
and in determining the adjusted basis of such property,
liabilities in excess of basis shall be disregarded.
(h) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
* * * * * * *
PART III--COMMON NONTAXABLE EXCHANGES
Sec. 1031. Exchange of property held for productive use or
investment.
* * * * * * *
[Sec. 1040. Transfer of certain farm, etc., real property.]
Sec. 1040. Use of appreciated carryover basis property to
satisfy pecuniary bequest.
* * * * * * *
[SEC. 1040. TRANSFER OF CERTAIN FARM, ETC., REAL PROPERTY.
[(a) General Rule.--If the executor of the estate of any
decedent transfers to a qualified heir (within the meaning
ofsection 2032A(e)(1)) any property with respect to which an
election was made under section 2032A, then gain on such
transfer shall be recognized to the estate only to the extent
that, on the date of such transfer, the fair market value of
such property exceeds the value of such property for purposes
of chapter 11 (determined without regard to section 2032A).
[(b) Similar Rule for Certain Trusts.--To the extent provided
in regulations prescribed by the Secretary, a rule similar to
the rule provided in subsection (a) shall apply where the
trustee of a trust (any portion of which is included in the
gross estate of the decedent) transfers property with respect
to which an electionwas made under section 2032A.
[(c) Basis of Property Acquired in Transfer Described in
Subsection (a) or (b).--The basis of property acquired in a
transfer with respect to which gain realized is not
recognizedby reason of subsection (a) or (b) shall be the basis
of such property immediately before the transfer increased by
the amount of the gain recognized to the estate or trust on the
transfer.]
SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY
PECUNIARY BEQUEST.
(a) In General.--If the executor of the estate of any
decedent satisfies the right of any person to receive a
pecuniary bequest with appreciated property, then gain on such
exchange shall be recognized to the estate only to the extent
that, on the date of such exchange, the fair market value of
such property exceeds such value on the date of death.
(b) Similar Rule for Certain Trusts.--To the extent provided
in regulations prescribed by the Secretary, a rule similar to
the rule provided in subsection (a) shall apply where--
(1) by reason of the death of the decedent, a person
has a right to receive from a trust a specific dollar
amount which is the equivalent of a pecuniary bequest,
and
(2) the trustee of a trust satisfies such right with
property.
(c) Basis of Property Acquired in Exchange Described in
Subsection (a) or (b).--The basis of property acquired in an
exchange with respect to which gain realized is not recognized
by reason of subsection (a) or (b) shall be the basis of such
property immediately before the exchange increased by the
amount of the gain recognized to the estate or trust on the
exchange.
* * * * * * *
Subchapter P--Capital Gains and Losses
* * * * * * *
PART III--GENERAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1221. CAPITAL ASSET DEFINED.
(a) In General.--For purposes of this subtitle, the term
``capital asset'' means property held by the taxpayer (whether
or not connected with his trade or business), but does not
include--
(1) * * *
* * * * * * *
(3) a copyright, a literary, musical, or artistic
composition, a letter or memorandum, or similar
property, held by--
(A) * * *
* * * * * * *
(C) a taxpayer in whose hands the basis of
such property is determined (other than by
reason of section 1022), for purposes of
determining gain from a sale or exchange, in
whole or part by reference to the basis of such
property in the hands of a taxpayer described
in subparagraph (A) or (B);
* * * * * * *
PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1246. GAIN ON FOREIGN INVESTMENT COMPANY STOCK.
(a) * * *
* * * * * * *
[(e) Rules Relating to Stock Acquired from a Decedent.--
[(1) Basis.--In the case of stock of a foreign
investment company acquired by bequest, devise, or
inheritance (or by the decedent's estate) from a
decedent dying after December 31, 1962, the basis
determined under section 1014 shall be reduced (but not
below the adjusted basis of such stock in the hands of
the decedent immediately before his death) by the
amount of the decedent's ratable share of the earnings
and profits of such company accumulated after December
31, 1962. Any stock so acquired shall be treated as
stock described in subsection (c).
[(2) Deduction for estate tax.--If stock to which
subsection (a) applies is acquired from a decedent, the
taxpayer shall, under regulations prescribed by the
Secretary, be allowed (for the taxable year of the sale
or exchange) a deduction from gross income equal to
that portion of the decedent's estate tax deemed paid
which is attributable to the excess of (A) the value at
which such stock was taken into account for purposes of
determining the value of the decedent's gross estate,
over (B) the value at which it would have been so taken
into account if such value had been reduced by the
amount described in paragraph (1).]
* * * * * * *
PART VI--TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT COMPANIES
* * * * * * *
Subpart A--Interest on Tax Deferral
* * * * * * *
SEC. 1291. INTEREST ON TAX DEFERRAL.
(a) * * *
* * * * * * *
(e) Certain Basis, Etc., Rules Made Applicable.--Except to
the extent inconsistent with the regulations prescribed under
subsection (f), rules similar to the rules of subsections (c),
(d), [(e),] and (f) of section 1246 shall apply for purposes of
this section[; except that--
[(1) the reduction under subsection (e) of such
section shall be the excess of the basis determined
under section 1014 over the adjusted basis of the stock
immediately before the decedent's death, and
[(2) such a reduction shall not apply in the case of
a decedent who was a nonresident alien at all times
during his holding period in the stock.].
* * * * * * *
Subpart C--Election of Mark to Market for Marketable Stock
* * * * * * *
SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.
(a) * * *
* * * * * * *
[(i) Stock acquired from a decedent.--In the case of stock of
a passive foreign investment company which is acquired by
bequest, devise, or inheritance (or by the decedent's estate)
and with respect to which an election under this section was in
effect as of the date of the decedent's death, notwithstanding
section 1014, the basis of such stock in the hands of the
person so acquiring it shall be the adjusted basis of such
stock in the hands of the decedent immediately before his death
(or, if lesser, the basis which would have been determined
under section 1014 without regard to this subsection).]
* * * * * * *
[Subtitle B--Estate and Gift Taxes
[Chapter 11. Estate tax.
[Chapter 12. Gift tax.
[Chapter 13. Tax on certain generation-skipping transfers.
[Chapter 14. Special valuation rules.
[CHAPTER 11--ESTATE TAX
[Subchapter A. Estates of citizens or residents.
[Subchapter B. Estates of nonresidents not citizens.
[Subchapter C. Miscellaneous.
[Subchapter A--Estates of citizens or residents
[Part I. Tax imposed.
[Part II. Credits against tax.
[Part III. Gross estate.
[Part IV. Taxable estate.
[PART I--TAX IMPOSED
[Sec. 2001. Imposition and rate of tax.
[Sec. 2002. Liability for payment.
[SEC. 2001. IMPOSITION AND RATE OF TAX.
[(a) Imposition.--A tax is hereby imposed on the transfer of
the taxable estate of every decedent who is a citizen or
resident of the United States.
[(b) Computation of Tax.--The tax imposed by this section
shall be the amount equal to the excess (if any) of--
[(1) a tentative tax computed under subsection (c) on
the sum of--
[(A) the amount of the taxable estate, and
[(B) the amount of the adjusted taxable
gifts, over
[(2) the aggregate amount of tax which would have
been payable under chapter 12 with respect to gifts
made by the decedent after December 31, 1976, if the
provisions of subsection (c) (as in effect at the
decedent's death) had been applicable at the time of
such gifts.
[For purposes of paragraph (1)(B), the term ``adjusted
taxable gifts'' means the total amount of the taxable gifts
(within the meaning of section 2503) made by the decedent after
December 31, 1976, other than gifts which are includible in the
gross estate of the decedent.
[(c) Rate Schedule.--
[(1) In general.--
[If the amount with respect to which the
tentative tax to be computed is: The tentative tax is:
Not over $10,000........................ 18 percent of such amount.
Over $10,000 but not over $20,000....... $1,800, plus 20 percent of
the excess of such amount
over $10,000.
Over $20,000 but not over $40,000....... $3,800, plus 22 percent of
the excess of such amount
over $20,000.
Over $40,000 but not over $60,000....... $8,200 plus 24 percent of
the excess of such amount
over $40,000.
Over $60,000 but not over $80,000....... $13,000, plus 26 percent of
the excess of such amount
over $60,000.
Over $80,000 but not over $100,000...... $18,200, plus 28 percent of
the excess of such amount
over $80,000.
Over $100,000 but not over $150,000..... $23,800, plus 30 percent of
the excess of such amount
over $100,000.
Over $150,000 but not over $250,000..... $38,800, plus 32 percent of
the excess of such amount
over $150,000.
Over $250,000 but not over $500,000..... $70,800, plus 34 percent of
the excess of such amount
over $250,000.
Over $500,000 but not over $750,000..... $155,800, plus 37 percent of
the excess of such amount
over $500,000.
Over $750,000 but not over $1,000,000... $248,300, plus 39 percent of
the excess of such amount
over $750,000.
Over $1,000,000 but not over $1,250,000. $345,800, plus 41 percent of
the excess of such amount
over $1,000,000.
Over $1,250,000 but not over $1,500,000. $448,300, plus 43 percent of
the excess of such amount
over $1,250,000.
Over $1,500,000 but not over $2,000,000. $555,800, plus 45 percent of
the excess of such amount
over $1,500,000.
Over $2,000,000 but not over $2,500,000. $780,800, plus 49 percent of
the excess of such amount
over $2,000,000.
Over $2,500,000 but not over $3,000,000. $1,025,800, plus 53% of the
excess over $2,500,000.
Over $3,000,000......................... $1,290,800, plus 55% of the
excessover $3,000,000.
[(2) Phaseout of graduated rates and unified
credit.--The tentative tax determined under paragraph
(1) shall be increased by an amount equal to 5 percent
of so much of the amount (with respect to which the
tentative tax is to be computed) as exceeds $10,000,000
but does not exceed the amount at which the average tax
rate under this section is 55 percent.
[(d) Adjustment for Gift Tax Paid by Spouse.--For purposes of
subsection (b)(2), if--
[(1) the decedent was the donor of any gift one-half
of which was considered under section 2513 as made by
the decedent's spouse, and
[(2) the amount of such gift is includible in the
gross estate of the decedent, any tax payable by the
spouse under chapter 12 on such gift (as determined
under section 2012(d)) shall be treated as a tax
payable with respect to a gift made by the decedent.
[(e) Coordination of sections 2513 and 2035.--If--
[(1) the decedent's spouse was the donor of any gift
one-half of which was considered under section 2513 as
made by the decedent, and
[(2) the amount of such gift is includible in the
gross estate of the decedent's spouse by reason of
section 2035, such gift shall not be included in the
adjusted taxable gifts of the decedent for purposes of
subsection (b)(1)(B), and the aggregate amount
determined under subsection (b)(2) shall be reduced by
the amount (if any) determined under subsection (d)
which was treated as a taxpayable by the decedent's
spouse with respect to such gift.
[(f) Valuation of Gifts.--
[(1) In general.--If the time has expired under
section 6501 within which a tax may be assessed under
chapter 12 (or under corresponding provisions of prior
laws) on--
[(A) the transfer of property by gift made
during a preceding calendar period (as defined
in section 2502(b)); or
[(B) an increase in taxable gifts required
under section 2701(d), the value thereof shall,
for purposes of computing the tax under this
chapter, be the value as finally determined for
purposes of chapter 12.
[(2) Final determination.--For purposes of paragraph
(1), a value shall be treated as finally determined for
purposes of chapter 12 if--
[(A) the value is shown on a return under
such chapter and such value is not contested by
the Secretary before the expiration of the time
referred to in paragraph (1) with respect to
such return;
[(B) in a case not described in subparagraph
(A), the value is specified by the Secretary
and such value is not timely contested by the
taxpayer; or
[(C) the value is determined by a court or
pursuant to a settlement agreement with the
Secretary.
For purposes of subparagraph (A), the value of an item shall be
treated as shown on a return if the item is disclosed in the
return, or in a statement attached to the return, in a manner
adequate to apprise the Secretary of the nature of such item.
[SEC. 2002. LIABILITY FOR PAYMENT.
[The tax imposed by this chapter shall be paid by the
executor.
[PART II--CREDITS AGAINST TAX
[Sec. 2010. Unified credit against estate tax.
[Sec. 2011. Credit for State death taxes.
[Sec. 2012. Credit for gift tax.
[Sec. 2013. Credit for tax on prior transfers.
[Sec. 2014. Credit for foreign death taxes.
[Sec. 2015. Credit for death taxes on remainders.
[Sec. 2016. Recovery of taxes claimed as credit.
[SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.
[(a) General Rule.--A credit of the applicable credit amout
shall be allowed to the estate of every decedent against the
tax imposed by section 2001.
[(b) Adjustment to Credit for Certain Gifts Made Before
1977--The amount of the credit allowable under subsection (a)
shall be reduced by an amount equal to 20 percent of the
aggregate amount allowed as a specific exemption under section
2521 (as in effect before its repeal by the Tax Reform Act of
1976) with respect to gifts made by the decedent after
September 8, 1976.
[(c) Applicable Credit Amount.--For purposes of this section,
the applicable credit amount is the amount of the tentative tax
which would be determined under the rate schedule set forth in
section 2001(c) if the amount with respect to which such
tentative tax is to be computed were the applicable exclusion
amount determined in accordance with the following table:
[In the case of estates of decedents
[dying, and gifts made, during: The applicable
exclusion amount is:
1998............................................ $625,000
1999............................................ $650,000
2000 and 2001................................... $675,000
2002 and 2003................................... $700,000
2004............................................ $850,000
2005............................................ $950,000
2006 or thereafter.............................. $1,000,000
[(d) Limitation Based on Amount of Tax.--The amount of the
credit allowed by subsection (a) shall not exceed the amount of
the tax imposed by section 2001.
[SEC. 2011. CREDIT FOR STATE DEATH TAXES.
[(a) In General.--The tax imposed by section 2001 shall be
credited with the amount of any estate, inheritance, legacy, or
succession taxes actually paid to any State or the District of
Columbia, in respect of any property included in the gross
estate (not including any such taxes paid with respect to the
estate of a person other than the decedent).
[(b) Amount of Credit.--The credit allowed by this section
shall not exceed the appropriate amount stated in the following
table:
[If the adjusted taxable estate is: The maximum tax credit
shall be:
Not over $90,000........................ 8/10ths of 1% of the
amountby which the adjusted
taxable estate exceeds
$40,000.
Over $90,000 but not over $140,000...... $400 plus 1.6% of the excess
over $90,000.
Over $140,000 but not over $240,000..... $1,200 plus 2.4% of the
excess over $140,000.
Over $240,000 but not over $440,000..... $3,600 plus 3.2% of the
excess over $240,000.
Over $440,000 but not over $640,000..... $10,000 plus 4% of the
excess over $440,000.
Over $640,000 but not over $840,000..... $18,000 plus 4.8% of the
excess over $640,000.
Over $840,000 but not over $1,040,000... $27,600 plus 5.6% of the
excess over $840,000.
Over $1,040,000 but not over $1,540,000. $38,800 plus 6.4% of the
excess over $1,040,000.
Over $1,540,000 but not over $2,040,000. $70,800 plus 7.2% of the
excess over $1,540,000.
Over $2,040,000 but not over $2,540,000. $106,800 plus 8% of the
excess over $2,040,000.
Over $2,540,000 but not over $3,040,000. $146,800 plus 8.8% of the
excess over $2,540,000
Over $3,040,000 but not over $3,540,000. $190,800 plus 9.6% of the
excess over $3,040,000.
Over $3,540,000 but not over $4,040,000. $238,800 plus 10.4% of the
excess over $3,540,000.
Over $4,040,000 but not over $5,040,000. $290,800 plus 11.2% of the
excess over $4,040,000.
Over $5,040,000 but not over $6,040,000. $402,800 plus 12% of the
excess over $5,040,000.
Over $6,040,000 but not over $7,040,000. $522,800 plus 12.8% of the
excess over $6,040,000.
Over $7,040,000 but not over $8,040,000. $650,800 plus 13.6% of the
excess over $7,040,000.
Over $8,040,000 but not over $9,040,000. $786,800 plus 14.4% of the
excess over $8,040,000.
Over $9,040,000 but not over $10,040,000 $930,800 plus 15.2% of the
excess over $9,040,000.
Over $10,040,000........................ $1,082,800 plus 16% of the
excess over $10,040,000.
For purposes of this section, the term ``adjusted taxable
estate'' means the taxable estate reduced by $60,000.
[(c) Period of Limitations on Credit.--The credit allowed by
this section shall include only such taxes as were actually
paid and credit therefor claimed within 4 years after the
filing of the return required by section 6018, except that--
[(1) If a petition for redetermination of a
deficiency has been filed with the Tax Court within the
time prescribed in section 6213(a), then within such 4-
year period or before the expiration of 60 days after
the decision of the Tax Court becomes final.
[(2) If, under section 6161 or 6166, an extension of
time has been granted for payment of the tax shown on
the return, or of a deficiency, then within such 4-year
period or before the date of the expiration of the
period of the extension.
[(3) If a claim for refund or credit of an
overpayment of tax imposed by this chapter has been
filed within the time prescribed in section 6511, then
within such 4-year period or before the expiration of
60 days from the date of mailing by certified mail or
registered mail by the Secretary to the taxpayer of a
notice of the disallowance of any part of such claim,
or before the expiration of 60 days after a decision by
any court of competent jurisdiction becomes final with
respect to a timely suit instituted upon such claim,
whichever is later.
Refund based on the credit may (despite the provisions of
sections 6511 and 6512) be made if claim therefor is filed
within the period above provided. Any such refund shall be made
without interest.
[(d) Basic Estate Tax.--The basic estate tax and the estate
tax imposed by the Revenue Act of 1926 shall be 125 percent of
the amount determined to be the maximum credit provided by
subsection (b). The additional estate tax shall be the
difference between the tax imposed by section 2001 or 2101 and
the basic estate tax.
[(e) Limitation in Cases Involving Deduction Under Section
2053(d)--In any case where a deduction is allowed under section
2053(d) for an estate, succession, legacy, or inheritance tax
imposed by a State or the District of Columbia upon a transfer
for public, charitable, or religious uses described in section
2055 or 2106(a)(2), the allowance of the credit under this
section shall be subject to the following conditions and
limitations:
[(1) The taxes described in subsection (a) shall not
include any estate, succession, legacy, or inheritance
tax for which such deduction is allowed under section
2053(d).
[(2) The credit shall not exceed the lesser of--
[(A) the amount stated in subsection (b) on
an adjusted taxable estate determined by
allowing such deduction authorized by section
2053(d), or
[(B) that proportion of the amount stated in
subsection (b) on an adjusted taxable estate
determined without regard to such deduction
authorized by section 2053(d) as (i) the amount
of the taxes described in subsection (a), as
limited by the provisions of paragraph (1) of
this subsection, bears to (ii) the amount of
the taxes described in subsection (a) before
applying the limitation contained in paragraph
(1) of this subsection.
[(3) If the amount determined under subparagraph (B)
of paragraph (2) is less than the amount determined
under subparagraph (A) of that paragraph, then for
purposes of subsection (d) such lesser amount shall be
the maximum credit provided by subsection (b).
[(f) Limitation Based on Amount of Tax.--The credit provided
by this section shall not exceed the amount of the tax imposed
by section 2001, reduced by the amount of the unified credit
provided by section 2010.
[SEC. 2012. CREDIT FOR GIFT TAX.
[(a) In General.--If a tax on a gift has been paid under
chapter 12 (sec. 2501 and following), or under corresponding
provisions of prior laws, and thereafter on the death of the
donor any amount in respect of such gift is required to be
included in the value of the gross estate of the decedent for
purposes of this chapter, then there shall be credited against
the tax imposed by section 2001 the amount of the tax paid on a
gift under chapter 12, or under corresponding provisions of
prior laws, with respect to so much of the property which
constituted the gift as is included in the gross estate, except
that the amount of such credit shall not exceed an amount which
bears the same ratio to the tax imposed by section 2001 (after
deducting from such tax the credit for State death taxes
provided by section 2011 and the unified credit provided by
section 2010) as the value (at the time of the gift or at the
time of the death, whichever is lower) of so much of the
property which constituted the gift as is included in the gross
estate bears to the value of the entire gross estate reduced by
the aggregate amount of the charitable and marital deductions
allowed under sections 2055, 2056, and 2106(a)(2).
[(b) Valuation Reductions.--In applying, with respect to any
gift, the ratio stated in subsection (a), the value at the time
of the gift or at the time of the death, referred to in such
ratio, shall be reduced--
[(1) by such amount as will properly reflect the
amount of such gift which was excluded in determining
(for purposes of section 2503(a)), or of corresponding
provisions of prior laws, the total amount of gifts
made during the calendar quarter (or calendar year if
the gift was made before January 1, 1971) in which the
gift was made;
[(2) if a deduction with respect to such gift is
allowed under section 2056(a) (relating to marital
deduction), then by the amount of such value, reduced
as provided in paragraph (1); and
[(3) if a deduction with respect to such gift is
allowed under sections 2055 or 2106(a)(2) (relating to
charitable deduction), then by the amount of such
value, reduced as provided in paragraph (1) of this
subsection.
[(c) Where Gift Considered Made One-Half by Spouse.--Where
the decedent was the donor of the gift but, under the
provisions of section 2513, or corresponding provisions of
prior laws, the gift was considered as made one-half by his
spouse--
[(1) the term ``the amount of the tax paid on a gift
under chapter 12'', as used in subsection (a), includes
the amounts paid with respect to each half of such
gift, the amount paid with respect to each being
computed in the manner provided in subsection (d); and
[(2) in applying, with respect to such gift, the
ratio stated in subsection (a), the value at the time
of the gift or at the time of the death, referred to in
such ratio, includes such value with respect to each
half of such gift, each such value being reduced as
provided in paragraph (1) of subsection (b).
[(d) Computation of Amount of Gift Tax Paid.--
[(1) Amount of tax.--For purposes of subsection (a),
the amount of tax paid on a gift under chapter 12, or
under corresponding provisions of prior laws, with
respect to any gift shall be an amount which bears the
same ratio to the total tax paid for the calendar
quarter (or calendar year if the gift was made before
January 1, 1971) in which the gift was made as the
amount of such gift bears to the total amount of
taxable gifts (computed without deduction of the
specific exemption) for such quarter or year.
[(2) Amount of gift.--For purposes of paragraph (1),
the ``amount of such gift'' shall be the amount
included with respect to such gift in determining (for
the purposes of section 2503(a), or of corresponding
provisions of prior laws) the total amount of gifts
made during such quarter or year, reduced by the amount
of any deduction allowed with respect to such gift
under section 2522, or under corresponding provisions
of prior laws (relating to charitable deduction), or
under section 2523 (relating to marital deduction).
[(e) Section Inapplicable to Gifts Made After December 31,
1976.--No credit shall be allowed under this section with
respect to the amount of any tax paid under chapter 12 on any
gift made after December 31, 1976.
[SEC. 2013. CREDIT FOR TAX ON PRIOR TRANSFERS.
[(a) General Rule.--The tax imposed by section 2001 shall be
credited with all or a part of the amount of the Federal estate
tax paid with respect to the transfer of property (including
property passing as a result of the exercise or non-exercise of
a power of appointment) to the decedent by or from a person
(herein designated as a ``transferor'') who died within 10
years before, or within 2 years after, the decedent's death. If
the transferor died within 2 years of the death of the
decedent, the credit shall be the amount determined under
subsections (b) and (c). If the transferor predeceased the
decedent by more than 2 years, the credit shall be the
following percentage of the amount so determined--
[(1) 80 percent, if within the third or fourth years
preceding the decedent's death;
[(2) 60 percent, if within the fifth or sixth years
preceding the decedent's death;
[(3) 40 percent, if within the seventh or eighth
years preceding the decedent's death; and
[(4) 20 percent, if within the ninth or tenth years
preceding the decedent's death.
[(b) Computation of Credit.--Subject to the limitation
prescribed in subsection (c), the credit provided by this
section shall be an amount which bears the same ratio to the
estate tax paid (adjusted as indicated hereinafter) with
respect to the estate of the transferor as the value of the
property transferred bears to the taxable estate of the
transferor (determined for purposes of the estate tax)
decreased by any death taxes paid with respect to such estate.
For purposes of the preceding sentence, the estate tax paid
shall be the Federal estate tax paid increased by any credits
allowed against such estate tax under section 2012, or
corresponding provisions of prior laws, on account of gift tax,
and for any credits allowed against such estate tax under this
section on account of prior transfers where the transferor
acquired property from a person who died within 10 years before
the death of the decedent.
[(c) Limitation on Credit.--
[(1) In general.--The credit provided in this section
shall not exceed the amount by which--
[(A) the estate tax imposed by section 2001
or section 2101 (after deducting the credits
provided for in sections 2010, 2011, 2012, and
2014) computed without regard to this section,
exceeds
[(B) such tax computed by excluding from the
decedent's gross estate the value of such
property transferred and, if applicable, by
making the adjustment hereinafter indicated.
If any deduction is otherwise allowable under section 2055 or
section 2106(a)(2) (relating to charitable deduction) then, for
the purpose of the computation indicated in subparagraph (B),
the amount of such deduction shall be reduced by that part of
such deduction which the value of such property transferred
bears to the decedent's entire gross estate reduced by the
deductions allowed under sections 2053 and 2054, or section
2106(a)(1) (relating to deduction for expenses, losses, etc.).
For purposes of this section, the value of such property
transferred shall be the value as provided for in subsection
(d) of this section.
[(2) Two or more transferors.--If the credit provided
in this section relates to property received from 2 or
more transferors, the limitation provided in paragraph
(1) of this subsection shall be computed by aggregating
the value of the property so transferred to the
decedent. The aggregate limitation so determined shall
be apportioned in accordance with the value of the
property transferred to the decedent by each
transferor.
[(d) Valuation of Property Transferred.--The value of
property transferred to the decedent shall be the value used
for the purpose of determining the Federal estate tax liability
of the estate of the transferor but--
[(1) there shall be taken into account the effect of
the tax imposed by section 2001 or 2101, or any estate,
succession, legacy, or inheritance tax, on the net
value to the decedent of such property;
[(2) where such property is encumbered in any manner,
or where the decedent incurs any obligation imposed by
the transferor with respect to such property, such
encumbrance or obligation shall be taken into account
in the same manner as if the amount of a gift to the
decedent of such property was being determined; and
[(3) if the decedent was the spouse of the transferor
at the time of the transferor's death, the net value of
the property transferred to the decedent shall be
reduced by the amount allowed under section 2056
(relating to marital deductions), as a deduction from
the gross estate of the transferor.
[(e) Property Defined.--For purposes of this section, the
term ``property'' includes any beneficial interest in
property,including a general power of appointment (as defined
in section 2041).
[(f) Treatment of Additional Tax Imposed Under Section
2032A.--If section 2032A applies to any property included in
the gross estate of the transferor and an additional tax is
imposed with respect to such property under section 2032A(c)
before the date which is 2 years after the date of the
decedent's death, for purposes of this section--
[(1) the additional tax imposed by section 2032A(c)
shall be treated as a Federal estate tax payable with
respect to the estate of the transferor; and
[(2) the value of such property and the amount of the
taxable estate of the transferor shall be determined as
if section 2032A did not apply with respect to such
property.
[SEC. 2014. CREDIT FOR FOREIGN DEATH TAXES.
[(a) In General.--The tax imposed by section 2001 shall be
credited with the amount of any estate, inheritance, legacy, or
succession taxes actually paid to any foreign country in
respect of any property situated within such foreign country
and included in the gross estate (not including any such taxes
paid with respect to the estate of a person other than the
decedent). The determination of the country within which
property is situated shall be made in accordance with the rules
applicable under subchapter B (sec. 2101 and following) in
determining whether property is situated within or without the
United States.
[(b) Limitations on Credit.--The credit provided in this
section with respect to such taxes paid to any foreign
country--
[(1) shall not, with respect to any such tax, exceed
an amount which bears the same ratio to the amount of
such tax actually paid to such foreign country as the
value of property which is--
[(A) situated within such foreign country,
[(B) subjected to such tax, and
[(C) included in the gross estate bears to
the value of all property subjected to such
tax; and
[(2) shall not, with respect to all such taxes,
exceed an amount which bears the same ratio to the tax
imposed by section 2001 (after deducting from such tax
the credits provided by sections 2010, 2011, and 2012)
as the value of property which is--
[(A) situated within such foreign country,
[(B) subjected to the taxes of such foreign
country, and
[(C) included in the gross estate bears to
the value of the entire gross estate reduced by
the aggregate amount of the deductions allowed
under sections 2055 and 2056.
[(c) Valuation of Property.--
[(1) The values referred to in the ratio stated in
subsection (b)(1) are the values determined for
purposes of the tax imposed by such foreign country.
[(2) The values referred to in the ratio stated in
subsection (b)(2) are the values determined under this
chapter; but, in applying such ratio, the value of any
property described in subparagraphs (A), (B), and (C)
thereof shall be reduced by such amount as will
properly reflect, in accordance with regulations
prescribed by the Secretary, the deductions allowed in
respect of such property under sections 2055 and 2056
(relating to charitable and marital deductions).
[(d) Proof of Credit.--The credit provided in this section
shall be allowed only if the taxpayer establishes to the
satisfaction of the Secretary--
[(1) the amount of taxes actually paid to the foreign
country,
[(2) the amount and date of each payment thereof,
[(3) the description and value of the property in
respect of which such taxes are imposed, and
[(4) all other information necessary for the
verification and computation of the credit.
[(e) Period of Limitation.--The credit provided in this
section shall be allowed only for such taxes as were actually
paid and credit therefor claimed within 4 years after the
filing of the return required by section 6018, except that--
[(1) If a petition for redetermination of a
deficiency has been filed with the Tax Court within the
time prescribed in section 6213(a), then within such 4-
year period or before the expiration of 60 days after
the decision of the Tax Court becomes final.
[(2) If, under section 6161, an extension of time has
been granted for payment of the tax shown on the
return, or of a deficiency, then within such 4-year
period or before the date of the expiration of the
period of the extension.
Refund based on such credit may (despite the provisions of
sections 6511 and 6512) be made if claim therefor is filed
within the period above provided. Any such refund shall be made
without interest.
[(f) Additional Limitation in Cases Involving a Deduction
Under Section 2053(d).--In any case where a deduction is
allowed under section 2053(d) for an estate, succession,
legacy, orinheritance tax imposed by and actually paid to any
foreign country upon a transfer by the decedent for public, charitable,
or religious uses described in section 2055, the property described in
subparagraphs (A), (B), and (C) of paragraphs (1) and (2) of subsection
(b) of this section shall not include any property in respect of which
such deduction is allowed under section 2053(d).
[(g) Possession of United States Deemed a Foreign Country.--
For purposes of the credits authorized by this section, each
possession of the United States shall be deemed to be a foreign
country.
[(h) Similar Credit Required for Certain Alien Residents.--
Whenever the President finds that--
[(1) a foreign country, in imposing estate,
inheritance, legacy, or succession taxes, does not
allow to citizens of the United States resident in such
foreign country at the time of death a credit similar
to the credit allowed under subsection (a),
[(2) such foreign country, when requested by the
United States to do so has not acted to provide such a
similar credit in the case of citizens of the United
States resident in such foreign country at the time of
death, and
[(3) it is in the public interest to allow the credit
under subsection (a) in the case of citizens or
subjects of such foreign country only if it allows such
a similar credit in the case of citizens of the United
States resident in such foreign country at the time of
death, the President shall proclaim that, in the case
of citizens or subjects of such foreign country dying
while the proclamation remains in effect, the credit
under subsection (a) shall be allowed only if such
foreign country allows such a similar credit in the
case of citizens of the United States resident in such
foreign country at the time of death.
[SEC. 2015. CREDIT FOR DEATH TAXES ON REMAINDERS.
[Where an election is made under section 6163(a) to postpone
payment of the tax imposed by section 2001, or 2101, such part
of any estate, inheritance, legacy, or succession taxes
allowable as a credit under section 2011 or 2014, as is
attributable to a reversionary or remainder interest may be
allowed as a credit against the tax attributable to such
interest, subject to the limitations on the amount of the
credit contained in such sections, if such part is paid, and
credit therefor claimed, at any time before the expiration of
the time for payment of the tax imposed by section 2001 or 2101
as postponed and extended under section 6163.
[SEC. 2016. RECOVERY OF TAXES CLAIMED AS CREDIT.
[If any tax claimed as a credit under section 2011 or 2014 is
recovered from any foreign country, any State, any possession
of the United States, or the District of Columbia, the
executor, or any other person or persons recovering such
amount, shall give notice of such recovery to the Secretary at
such time and in such manner as may be required by regulations
prescribed by him, and the Secretary shall (despite the
provisions of section 6501) redetermine the amount of the tax
under this chapter and the amount, if any, of the tax due on
such redetermination, shall be paid by the executor or such
person or persons, as the case may be, on notice and demand. No
interest shall be assessed or collected on any amount of tax
due on any redetermination by the Secretary resulting from a
refund to the executor of tax claimed as a credit under section
2014, for any period before the receipt of such refund, except
to the extent interest was paid by the foreign country on such
refund.
[PART III--GROSS ESTATE
[Sec. 2031. Definition of gross estate.
[Sec. 2032. Alternate valuation.
[Sec. 2032A. Valuation of certain farm, etc., real property.
[Sec. 2033. Property in which the decedent had an interest.
[Sec. 2034. Dower or curtesy interests.
[Sec. 2035. Adjustments for certain gifts made within 3 years of
decedent's death.
[Sec. 2036. Transfers with retained life estate.
[Sec. 2037. Transfers taking effect at death.
[Sec. 2038. Revocable transfers.
[Sec. 2039. Annuities.
[Sec. 2040. Joint interests.
[Sec. 2041. Powers of appointment.
[Sec. 2042. Proceeds of life insurance.
[Sec. 2043. Transfers for insufficient consideration.
[Sec. 2044. Certain property for which marital deduction was
previously allowed.
[Sec. 2045. Prior interests.
[Sec. 2046. Disclaimers.
[SEC. 2031. DEFINITION OF GROSS ESTATE.
[(a) General.--The value of the gross estate of the decedent
shall be determined by including to the extent provided for in
this part, the value at the time of his death of all property,
real or personal, tangible or intangible, wherever situated.
[(b) Valuation of Unlisted Stock and Securities.--In the case
of stock and securities of a corporation the value of which, by
reason of their not being listed on an exchange and by reason
of the absence of sales thereof, cannot be determined with
reference to bid and asked prices or with reference to sales
prices, the value thereof shall be determined by taking into
consideration, in addition to all other factors, the value of
stock or securities of corporations engaged in the same or a
similar line of business which are listed on an exchange.
[(c) Estate Tax With Respect to Land Subject to a Qualified
Conservation Easement.--
[(1) In general.--If the executor makes the election
described in paragraph (6), then, except as otherwise
provided in this subsection, there shall be excluded
from the gross estate the lesser of--
[(A) the applicable percentage of the value
of land subject to a qualified conservation
easement, reduced by the amount of any
deduction under section 2055(f) with respect to
such land, or
[(B) the exclusion limitation.
[(2) Applicable percentage.--For purposes of
paragraph (1), the term ``applicable percentage'' means
40 percent reduced (butnot below zero) by 2 percentage
points for each percentage point (or fraction thereof)
by which the value of the qualified conservation
easement is less than 30 percent of the value of the
land (determined without regard to the value of such
easement and reduced by the value of any retained
development right (as defined in paragraph (5)).
[(3) Exclusion limitation.--For purposes of paragraph
(1), the exclusion limitation is the limitation
determined in accordance with the following table:
[In the case of estates of The exclusion decedents dying
during limitation is:1998 $100,0001999 $200,0002000
$300,0002001 $400,0002002 or thereafter $500,000.
[(4) Treatment of certain indebtedness.--
[(A) In general.--The exclusion provided in
paragraph (1) shall not apply to the extent
that the land is debt-financed property.
[(B) Definitions.--For purposes of this
paragraph--
[(i) Debt-financed property.--The
term ``debt-financed property'' means
any property with respect to which
there is an acquisition indebtedness
(as defined in clause (ii)) on the date
of the decedent's death.
[(ii) Acquisition indebtedness.--The
term ``acquisition indebtedness''
means, with respect to debt-financed
property, the unpaid amount of--
[(I) the indebtedness
incurred by the donor in
acquiring such property,
[(II) the indebtedness
incurred before the acquisition
of such property if such
indebtedness wouldnot have been
incurred but for such
acquisition,
[(III) the indebtedness
incurred after the acquisition
of such property if such
indebtedness wouldnot have been
incurred but for such
acquisition and the incurrence
of such indebtedness
wasreasonably foreseeable at
the time of such acquisition,
and
[(IV) the extension, renewal,
or refinancing of an
acquisition indebtedness.
[(5) Treatment of retained development right.--
[(A) In general.--Paragraph (1) shall not
apply to the value of any development right
retained by the donor in the conveyance of a
qualified conservation easement.
[(B) Termination of retained development
right.--If every person in being who has an
interest (whether or not in possession) in the
land executes an agreement to extinguish
permanently some or all of any development
rights (as defined in subparagraph (D))
retained by the donor on or before the date for
filing the return of the tax imposed by section
2001, then any tax imposed by section 2001
shall be reduced accordingly.
Such agreement shall be filed with the return of the tax
imposed by section 2001. The agreement shall be in such form as
the Secretary shall prescribe.
[(C) Additional tax.--Any failure to
implement the agreement described in
subparagraph (B) not later than the earlier
of--
[(i) the date which is 2 years after
the date of the decedent's death, or
[(ii) the date of the sale of such
land subject to the qualified
conservation easement, shall result in
the imposition of an additional tax in
the amount of the tax which would have
been due on the retained development
rights subject to such agreement. Such
additional tax shall be due and payable
on the last day of the 6th month
following such date.
[(D) Development right defined.--For purposes
of this paragraph, the term ``development
right'' means any right to use the land subject
to the qualified conservation easement in which
such right is retained for any commercial
purpose which is not subordinate to and
directly supportive of the use of such land as
a farm for farming purposes (within the meaning
of section 2032A(e)(5)).
[(6) Election.--The election under this subsection
shall be made on or before the due date (including
extensions) for filing the return of tax imposed by
section 2001 and shall be made on such return.
[(7) Calculation of estate tax due.--An executor
making the election described in paragraph (6) shall,
for purposes of calculating the amount of tax imposed
by section 2001, include the value of any development
right (as defined in paragraph (5)) retained by the
donor in the conveyance of such qualified conservation
easement. The computation of tax on any retained
development right prescribed in this paragraph shall be
done in such manner and on such forms as the Secretary
shall prescribe.
[(8) Definitions.--For purposes of this subsection--
[(A) Land subject to a qualified conservation
easement.--The term ``land subject to a
qualified conservation easement'' means land--
[(i) which is located--
[(I) in or within 25 miles of
an area which, on the date of
the decedent's death, is a
metropolitan area (as defined
by the Office of Management and
Budget),
[(II) in or within 25 miles
of an area which, on the date
of the decedent's death, is a
national park or wilderness
area designated as part of the
National Wilderness
Preservation System (unless it
is determined by the Secretary
that land in or within 25 miles
of such a park or wilderness
area is not under significant
development pressure), or
[(III) in or within 10 miles
of an area which, on the date
of the decedent's death, is an
Urban National Forest (as
designated by the Forest
Service),
[(ii) which was owned by the decedent
or a member of the decedent's family at
all times during the 3-year period
ending on the date of the decedent's
death, and
[(iii) with respect to which a
qualified conservation easement has
been made by an individual described in
subparagraph (C), as of the date of the
election described in paragraph (6).
[(B) Qualified conservation easement.--The
term ``qualified conservation easement'' means
a qualified conservation contribution (as
defined in section 170(h)(1) of a qualified
real property interest (as defined in section
170(h)(2)(C), except that clause (iv) of
section 170(h)(4)(A) shall not apply, and the
restriction on the use of such interest
described in section 170(h)(2)(C) shall include
a prohibition on more than a de minimis use for
a commercial recreational activity.
[(C) Individual described.--An individual is
described in this subparagraph if such
individual is--
[(i) the decedent,
[(ii) a member of the decedent's
family,
[(iii) the executor of the decedent's
estate, or
[(iv) the trustee of a trust the
corpus of which includes the land to be
subject to the qualifiedconservation
easement.
[(D) Member of family.--The term ``member of
the decedent's family'' means any member of the
family (as defined in section 2032A(e)(2)) of
the decedent.
[(9) Treatment of easements granted after death.--In
any case in which the qualified conservation easement
is granted after the date of the decedent's death and
on or before the due date (including extensions) for
filing the return of tax imposed by section 2001, the
deduction under section 2055(f) with respect to such
easement shall be allowed to the estate but only if no
charitable deduction is allowed under chapter 1 to any
person with respect to the grant of such easement.
[(10) Application of this section to interests in
partnerships, corporations, and trusts.--This section
shall apply to an interest in a partnership,
corporation, or trust if at least 30 percent of the
entity is owned (directly or indirectly) by the
decedent, as determined under the rules described in
section 2057(e)(3).
[(d) Cross Reference.--
[For executor's right to be furnished on request a statement
regarding any valuation made by the Secretary within the gross
estate, see section 7517.
[SEC. 2032. ALTERNATE VALUATION.
[(a) General.--The value of the gross estate may be
determined, if the executor so elects, by valuing all the
property included in the gross estate as follows:
[(1) In the case of property distributed, sold,
exchanged, or otherwise disposed of, within 6 months
after the decedent's death such property shall be
valued as of the date of distribution, sale, exchange,
or other disposition.
[(2) In the case of property not distributed, sold,
exchanged, or otherwise disposed of, within 6 months
after the decedent's death such property shall be
valued as of the date 6 months after the decedent's
death.
[(3) 4Any interest or estate which is affected by
mere lapse of time shall be included at its value as of
the time of death (instead of the later date) with
adjustment for any difference in its value as of the
later date not due to mere lapse of time.
[(b) Special Rules.--No deduction under this chapter of any
item shall be allowed if allowance for such item is in effect
given by the alternate valuation provided by this section.
Wherever in any other subsection or section of this chapter
reference is made to the value of property at the time of the
decedent's death, such reference shall be deemed to refer to
the value of such property used in determining the value of the
gross estate. In case of an election made by the executor under
this section, then--
[(1) for purposes of the charitable deduction under
section 2055 or 2106(a)(2), any bequest, legacy,
devise, or transfer enumerated therein, and
[(2) for the purpose of the marital deduction under
section 2056, any interest in property passing to the
surviving spouse, shall be valued as of the date of the
decedent's death with adjustment for any difference in
value (not due to mere lapse of time or the occurrence
or nonoccurrence of a contingency) of the property as
of the date 6 months after the decedent's death
(substituting, in the case of property distributed by
the executor or trustee, or sold, exchanged, or
otherwise disposed of, during such 6-month period, the
date thereof).
[(c) Election Must Decrease Gross Estate and Estate Tax.--No
election may be made under this section with respect to an
estate unless such election will decrease--
[(1) the value of the gross estate, and
[(2) the sum of the tax imposed by this chapter and
the tax imposed by chapter 13 with respect to property
includible in the decedent's gross estate (reduced by
credits allowable against such taxes).
[(d) Election.--
[(1) In general.--The election provided for in this
section shall be made by the executor on the return of
the tax imposed by this chapter. Such election, once
made, shall be irrevocable.
[(2) Exception.--No election may be made under this
section if such return is filed more than 1 year after
the time prescribed by law (including extensions) for
filing such return.
[SEC. 2032A. VALUATION OF CERTAIN FARM, ETC., REAL PROPERTY.
[(a) Value Based on Use Under Which Property Qualifies.--
[(1) General rule.--If--
[(A) the decedent was (at the time of his
death) a citizen or resident of the United
States, and
[(B) the executor elects the application of
this section and files the agreement referred
to in subsection (d)(2), then, for purposes of
this chapter, the value of qualified real
property shall be its value for the use under
which it qualifies, under subsection (b), as
qualified real property.
[(2) Limitation on aggregate reduction in fair market
value.--The aggregate decrease in the value of
qualified real property taken into account for purposes
of this chapter which results from the application of
paragraph (1) with respect to any decedent shall not
exceed $750,000.
[(3) Inflation Adjustment.--In the case of estates of
decedents dying in a calendar year after 1998, the
$750,000 amount contained in paragraph (2) shall be
increased by an amount equal to--
[(A) $750,000, multiplied by
[(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting ``calendar year 1997'' for
``calendar year 1992'' in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the next
lowest multiple of $10,000.
[(b) Qualified Real Property.--
[(1) In general.--For purposes of this section, the
term ``qualified real property'' means real property
located in the United States which was acquired from or
passed from the decedent to a qualified heir of the
decedent and which, on the date of the decedent's
death, was being used for a qualified use by the
decedent or a member of the decedent's family, but only
if--
[(A) 50 percent or more of the adjusted value
of the gross estate consists of the adjusted
value of real or personal property which--
[(i) on the date of the decedent's
death, was being used for a qualified
use by the decedent or a member of the
decedent's family, and
[(ii) was acquired from or passed
from the decedent to a qualified heir
of the decedent.
[(B) 25 percent or more of the adjusted value
of the gross estate consists of the adjusted
value of real property which meets the
requirements of subparagraphs (A)(ii) and (C),
[(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) such real property was owned by
the decedent or a member of the
decedent's family and used for a
qualified use by the decedent or a
member of the decedent's family, and
[(ii) there was material
participation by the decedent or a
member of the decedent's family in the
operation of the farm or other
business, and
[(D) such real property is designated in the
agreement referred to in subsection (d)(2).
[(2) Qualified use.--For purposes of this section,
the term ``qualified use'' means the devotion of the
property to any ofthe following:
[(A) use as a farm for farming purposes, or
[(B) use in a trade or business other than
the trade or business of farming.
[(3) Adjusted value.--For purposes of paragraph (1),
the term ``adjusted value'' means--
[(A) in the case of the gross estate, the
value of the gross estate for purposes of this
chapter (determined without regard to this
section), reduced by any amounts allowable as a
deduction under paragraph (4) of section
2053(a), or
[(B) in the case of any real or personal
property, the value of such property for
purposes of this chapter (determined without
regard to this section), reduced by any amounts
allowable as a deduction in respect of such
property under paragraph (4) of section
2053(a).
[(4) Decedents who are retired or disabled.--
[(A) In general.--If, on the date of the
decedent's death, the requirements of paragraph
(1)(C)(ii) with respect to the decedent for any
property are not met, and the decedent--
[(i) was receiving old-age benefits
under title II of the Social Security
Act for a continuous period ending on
such date, or
[(ii) was disabled for a continuous
period ending on such date, then
paragraph (1)(C)(ii) shall be applied
with respect to such property by
substituting ``the date on which the
longer of such continuous periods
began'' for ``the date of the
decedent's death'' in paragraph (1)(C).
[(B) Disabled defined.--For purposes of
subparagraph (A), an individual shall be
disabled if such individual has a mental or
physical impairment which renders him unable to
materially participate in the operation of the
farm or other business.
[(C) Coordination with recapture.--For
purposes of subsection (c)(6)(B)(i), if the
requirements of paragraph (1)(C)(ii) are met
with respect to any decedent by reason of
subparagraph (A), the period ending on the date
on which the continuous period taken into
account under subparagraph (A) began shall be
treated as theperiod immediately before the
decedent's death.
[(5) Special rules for surviving spouses.--
[(A) In general.--If property is qualified
real property with respect to a decedent
(hereinafter in this paragraph referred to as
the ``first decedent") and such property was
acquired from or passed from the first decedent
to the surviving spouse of the first decedent,
for purposes of applying this subsection and
subsection (c) in the case of the estate of
such surviving spouse, active management of the
farm or other business by the surviving spouse
shall be treated as material participation by
such surviving spouse in the operation of such
farm or business.
[(B) Special rule.--For the purposes of
subparagraph (A), the determination of whether
property is qualified real property with
respect to the first decedent shall be made
without regard to subparagraph (D) of paragraph
(1) and without regard to whether an election
under this section was made.
[(C) Coordination with paragraph (4).--In any
case in which to do so will enable the
requirements of paragraph (1)(C)(ii) to be met
with respect to the surviving spouse, this
subsection and subsection (c) shall be applied
by taking into account any application of
paragraph (4).
[(c) Tax Treatment of Dispositions and Failures To Use for
Qualified Use.--
[(1) Imposition of additional estate tax.--If, within
10 years after the decedent's death and before the
death of the qualified heir--
[(A) the qualified heir disposes of any
interest in qualified real property (other than
by a disposition to a member of his family), or
[(B) the qualified heir ceases to use for the
qualified use the qualified real property which
was acquired (or passed) from the decedent,
then, there is hereby imposed an additional
estate tax.
[(2) Amount of additional tax.--
[(A) In general.--The amount of the
additional tax imposed by paragraph (1) with
respect to any interest shall be the amount
equal to the lesser of--
[(i) the adjusted tax difference
attributable to such interest, or
[(ii) the excess of the amount
realized with respect to the interest
(or, in any case other than a sale or
exchange at arm's length, the fair
market value of the interest) over the
value of the interest determined under
subsection (a).
[(B) Adjusted tax difference attributable to
interest.--For purposes of subparagraph (A),
the adjusted tax difference attributable to an
interest is the amount which bears the same
ratio to the adjusted tax difference with
respect to the estate (determined under
subparagraph (C)) as--
[(i) the excess of the value of such
interest for purposes of this chapter
(determined without regard to
subsection (a)) over the value of such
interest determined under subsection
(a), bears to
[(ii) a similar excess determined for
all qualified real property.
[(C) Adjusted tax difference with respect to
the estate.--For purposes of subparagraph (B),
the term ``adjusted tax difference with respect
to the estate'' means the excess of what would
have been the estate tax liability but for
subsection (a) over the estate tax liability.
For purposes of this subparagraph, the term
``estate tax liability'' means the tax imposed
by section 2001 reduced by the credits
allowable against such tax.
[(D) Partial dispositions.--For purposes of
this paragraph, where the qualified heir
disposes of a portion of the interest acquired
by (or passing to) such heir (or a predecessor
qualified heir) or there is a cessation of use
of such a portion--
[(i) the value determined under
subsection (a) taken into account under
subparagraph (A)(ii) with respect to
such portion shall be its pro rata
share of such value of such interest,
and
[(ii) the adjusted tax difference
attributable to the interest taken into
account with respect to the transaction
involving the second or any succeeding
portion shall be reduced by the amount
of the tax imposed by this subsection
with respect to all prior transactions
involving portions of such interest.
[(E) Special rule for disposition of
timber.--In the case of qualified woodland to
which an election under subsection (e)(13)(A)
applies, if the qualified heir disposes of (or
severs) any standing timber on such qualified
woodland--
[(i) such disposition (or severance)
shall be treated as a disposition of a
portion of the interest of the
qualified heir in such property, and
[(ii) the amount of the additional
tax imposed by paragraph (1) with
respect to such disposition shall be an
amount equal to the lesser of--
[(I) the amount realized on
such disposition (or, in any
case other than a sale or
exchange at arm's length, the
fair market value of the
portion of the interest
disposed or severed), or
[(II) the amount of
additional tax determined under
this paragraph (without regard
to this subparagraph) if the
entire interest of the
qualified heir in the qualified
woodland had beendisposed of,
less the sum of the amount of
the additional tax imposed with
respect to all prior
transactions involving such
woodland to which this
subparagraph applied.
For purposes of the preceding sentence, the
disposition of a right to sever shall be
treated as the disposition of the standing
timber. The amount of additional tax imposed
under paragraph (1) inany case in which a
qualified heir disposes of his entire interest
in the qualified woodland shall be reduced by
any amount determined under this subparagraph
with respect to such woodland.
[(3) Only 1 additional tax imposed with respect to
any 1 portion.--In the case of an interest acquired
from (or passing from) any decedent, if subparagraph
(A) or
[(B) of paragraph (1) applies to any portion
of an interest, subparagraph (B) or (A), as the
case may be, of paragraph (1) shall not apply
with respect to the same portion of such
interest.
[(4) Due date.--The additional tax imposed by this
subsection shall become due and payable on the day
which is 6 months after the date of the disposition or
cessation referred to in paragraph (1).
[(5) Liability for tax; furnishing of bond.--The
qualified heir shall be personally liable for the
additional tax imposed by this subsection with respect
to his interest unless the heir has furnished bond
which meets the requirements of subsection (e)(11).
[(6) Cessation of qualified use.--For purposes of
paragraph (1)(B), real property shall cease to be used
for the qualified use if--
[(A) such property ceases to be used for the
qualified use set forth in subparagraph (A) or
(B) of subsection (b)(2) under which the
property qualified under subsection (b), or
[(B) during any period of 8 years ending
after the date of the decedent's death and
before the date of the death of the qualified
heir, there had been periods aggregating more
than 3 years during which--
[(i) in the case of periods during
which the property was held by the
decedent, there was no material
participation by the decedent or any
member of his family in the operation
of the farm or other business, and
[(ii) in the case of periods during
which the property was held by any
qualified heir, there was no material
participation by such qualified heir or
any member of his family in the
operation of the farm or other
business.
[(7) Special rules.--
[(A) No tax if use begins within 2 years.--If
the date on which the qualified heir begins to
use the qualified real property (hereinafter in
this subparagraph referred to as the
commencement date) is before the date 2 years
after the decedent's death--
[(i) no tax shall be imposed under
paragraph (1) by reason of the failure
by the qualified heir to so use such
property before the commencement date,
and
[(ii) the 10-year period under
paragraph (1) shall be extended by the
period after the decedent's death and
before the commencement date.
[(B) Active management by eligible qualified
heir treated as material participation.--For
purposes of paragraph (6)(B)(ii), the active
management of a farm or other business by--
[(i) an eligible qualified heir, or
[(ii) a fiduciary of an eligible
qualified heir described in clause (ii)
or (iii) of subparagraph (C),
shall be treated as material participation by
such eligible qualified heir in the operation
of such farm or business. In the case of an
eligible qualified heir described in clause
(ii), (iii), or (iv) of subparagraph (C), the
preceding sentence shall apply only during
periods during which such heir meets the
requirements of such clause.
[(C) Eligible qualified heir.--For purposes
of this paragraph, the term ``eligible
qualified heir'' means a qualified heir who--
[(i) is the surviving spouse of the
decedent,
[(ii) has not attained the age of 21,
[(iii) is disabled (within the
meaning of subsection (b)(4)(B)), or
[(iv) is a student.
[(D) Student.--For purposes of subparagraph
(C), an individual shall be treated as a
student with respect to periods during any
calendar year if (and only if) such individual
is a student (within the meaning of section
151(c)(4)) for such calendar year.
[(E) Certain rents treated as qualified
use.--For purposes of this subsection, a
surviving spouse or lineal descendant of the
decedent shall not be treated as failing to use
qualified real property in a qualified use
solely because such spouse or descendant rents
such property to a member of the family of such
spouse or descendant on a net cash basis. For
purposes of the preceding sentence, a legally
adopted child of an individual shall be treated
as the child of such individual by blood.
[(8) Qualified conservation contribution is not a
disposition.--A qualified conservation contribution (as
defined in section 170(h) by gift or otherwise shall
not be deemed a disposition under subsection (c)(1)(A).
[(d) Election; Agreement.--
[(1) Election.--The election under this section shall
be made on the return of the tax imposed by section
2001. Such election shall be made in such manner as the
Secretary shall by regulations prescribe. Such an
election, once made, shall be irrevocable.
[(2) Agreement.--The agreement referred to in this
paragraph is a written agreement signed by each person
in being who has an interest (whether or not in
possession) in any property designated in such
agreement consenting to the application of subsection
(c) with respect to such property.
[(3) Modification of election and agreement to be
permitted.--The Secretary shall prescribe procedures
which provide that in any case in which the executor
makes an election under paragraph (1) (and submits the
agreement referred to in paragraph (2)) within the time
prescribed therefor, but--
[(A) the notice of election, as filed, does
not contain all required information, or
[(B) signatures of 1 or more persons required
to enter into the agreement described in
paragraph (2) are not included on the agreement
as filed, or the agreement does not contain all
required information, the executor will have a
reasonable period of time (not exceeding 90
days) after notification of such failures to
provide such information or signatures.
[(e) Definitions; Special Rules.--For purposes of this
section--
[(1) Qualified heir.--The term ``qualified heir''
means, with respect to any property, a member of the
decedent's family who acquired such property (or to
whom such property passed) from the decedent. If a
qualified heir disposes of any interest in qualified
real property to any member of his family, such member
shall thereafter be treated as the qualified heir with
respect to such interest.
[(2) Member of family.--The term ``member of the
family'' means, with respect to any individual, only--
[(A) an ancestor of such individual,
[(B) the spouse of such individual,
[(C) a lineal descendant of such individual,
of such individual's spouse, or of a parent of
such individual, or
[(D) the spouse of any lineal descendant
described in subparagraph (C).
For purposes of the preceding sentence, a legally
adopted child of an individual shall be treated as the
child of such individual by blood.
[(3) Certain real property included.--In the case of
real property which meets the requirements of
subparagraph (C) of subsection (b)(1), residential
buildings and related improvements on such real
property occupied on a regular basis by the owner or
lessee of such real property or by persons employed by
such owner or lessee for the purpose of operating or
maintaining such real property, and roads, buildings,
and other structures and improvements functionally
related to the qualified use shall be treated as real
property devoted to the qualified use.
[(4) Farm.--The term ``farm'' includes stock, dairy,
poultry, fruit, furbearing animal, and truck farms,
plantations, ranches, nurseries, ranges, greenhouses or
other similar structures used primarily for the raising
of agricultural or horticultural commodities, and
orchards and woodlands.
[(5) Farming purposes.--The term ``farming purposes''
means--
[(A) cultivating the soil or raising or
harvesting any agricultural or horticultural
commodity (including the raising, shearing,
feeding, caring for, training, and management
of animals) on a farm;
[(B) handling, drying, packing, grading, or
storing on a farm any agricultural or
horticultural commodity in its unmanufactured
state, but only if the owner, tenant, or
operator of the farm regularly produces more
than one-half of the commodity so treated; and
[(C)(i) the planting, cultivating, caring
for, or cutting of trees, or
[(ii) the preparation (other than
milling) of trees for market.
[(6) Material participation.--Material participation
shall be determined in a manner similar to the manner
used for purposes of paragraph (1) of section 1402(a)
(relating to net earnings from self-employment).
[(7) Method of valuing farms.--
[(A) In general.--Except as provided in
subparagraph (B), the value of a farm for
farming purposes shall be determined by
dividing--
[(i) the excess of the average annual
gross cash rental for comparable land
used for farming purposes and located
in the locality of such farm over the
average annual State and local real
estate taxes for such comparable land,
by
[(ii) the average annual effective
interest rate for all new Federal Land
Bank loans.
For purposes of the preceding sentence, each average
annual computation shall be made on the basis of the 5
most recent calendar years ending before the date of
the decedent's death.
[(B) Value based on net share rental in
certain cases.--
[(i) In general.--If there is no
comparable land from which the average
annual gross cash rental may be
determined but there is comparable land
from which the average net share rental
may be determined, subparagraph (A)(i)
shall be applied by substituting
``average annual net share rental'' for
``average annual gross cash rental''.
[(ii) Net share rental.--For purposes
of this paragraph, the term ``net share
rental'' means the excess of--
[(I) the value of the produce
received by the lessor of the
land on which such produce is
grown, over
[(II) the cash operating
expenses of growing such
produce which, under the lease,
are paid by the lessor.
[(C) Exception.--The formula provided by
subparagraph (A) shall not be used--
[(i) where it is established that
there is no comparable land from which
the average annual gross cash rental
may be determined, and that there is no
comparable land from which the average
net share rental may be determined or
[(ii) where the executor elects to
have the value of the farm for farming
purposes determined under paragraph
(8).
[(8) Method of valuing closely held business
interests, etc.--In any case to which paragraph (7)(A)
does not apply, the following factors shall apply in
determining the value of any qualified real property:
[(A) The capitalization of income which the
property can be expected to yield for farming
or closely held business purposes over a
reasonable period of time under prudent
management using traditional cropping patterns
for the area, taking into account soil
capacity, terrain configuration, and similar
factors,
[(B) The capitalization of the fair rental
value of the land for farm land or closely held
business purposes,
[(C) Assessed land values in a State which
provides a differential or use value assessment
law for farmland or closely held business,
[(D) Comparable sales of other farm or
closely held business land in the same
geographical area far enough removed from a
metropolitan or resort area so that
nonagricultural use is not a significant factor
in the sales price, and
[(E) Any other factor which fairly values the
farm or closely held business value of the
property.
[(9) Property acquired from decedent.--Property shall
be considered to have been acquired from or to have
passed from the decedent if--
[(A) such property is so considered under
section 1014(b) (relating to basis of property
acquired from a decedent),
[(B) such property is acquired by any person
from the estate, or
[(C) such property is acquired by any person
from a trust (to the extent such property is
includible in the gross estate of the
decedent).
[(10) Community property.--If the decedent and his
surviving spouse at any time held qualified real
property as community property, the interest of the
surviving spouse in such property shall be taken into
account under this section to the extent necessary to
provide a result under this section with respect to
such property which is consistent with the result which
would have obtained under this section if such property
had not been community property.
[(11) Bond in lieu of personal liability.--If the
qualified heir makes written application to the
Secretary for determination of the maximum amount of
the additional tax which may be imposed by subsection
(c) with respect to the qualified heir's interest, the
Secretary (as soon as possible, and in any event within
1 year after the making of such application) shall
notify the heir of such maximum amount. The qualified
heir, on furnishing a bond in such amount and for such
period as may be required, shall be discharged from
personal liability for any additional tax imposed by
subsection (c) and shall be entitled to a receipt or
writing showing such discharge.
[(12) Active management.--The term ``active
management'' means the making of the management
decisions of a business (other than the daily operating
decisions).
[(13) Special rules for woodlands.--
[(A) In general.--In the case of any
qualified woodland with respect to which the
executor elects to have this subparagraph
apply, trees growing on such woodland shall not
be treated as a crop.
[(B) Qualified woodland.--The term
``qualified woodland'' means any real property
which--
[(i) is used in timber operations,
and
[(ii) is an identifiable area of land
such as an acre or other area for which
records are normally maintained in
conducting timber operations.
[(C) Timber operations.--The term ``timber
operations'' means--
[(i) the planting, cultivating,
caring for, or cutting of trees, or
[(ii) the preparation (other than
milling) of trees for market.
[(D) Election.--An election under
subparagraph (A) shall be made on the return of
the tax imposed by section 2001. Such election
shall be made in such manner as the Secretary
shall by regulations prescribe. Such an
election, once made, shall be irrevocable.
[(14) Treatment of replacement property acquired in
section 1031 or 1033 transactions.--
[(A) In general.--In the case of any
qualified replacement property, any period
during which there was ownership, qualified
use, or material participation with respect to
the replaced property by the decedent or any
member of his family shall be treated as a
period during which there was such ownership,
use, or material participation (as the case may
be) with respect to the qualified replacement
property.
[(B) Limitation.--Subparagraph (A) shall not
apply to the extent that the fair market value
of the qualified replacement property (as of
the date of its acquisition) exceeds the fair
market value of the replaced property (as of
the date of its disposition).
[(C) Definitions.--For purposes of this
paragraph--
[(i) Qualified replacement
property.--The term ``qualified
replacement property'' means any real
property which is--
[(I) acquired in an exchange
which qualifies under section
1031, or
[(II) the acquisition of
which results in the
nonrecognition of gain under
section 1033.
[Such term shall only include property which
is used for the same qualified use as the
replacedproperty was being used before the
exchange.
[(ii) Replaced property.--The term
``replaced property means--
[(I) the property transferred
in the exchange which qualifies
under section 1031, or
[(II) the property
compulsorily or involuntarily
converted (within the meaning
of section 1033).
[(f) Statute of Limitations.--If qualified real property is
disposed of or ceases to be used for a qualified use, then--
[(1) the statutory period for the assessment of any
additional tax under subsection (c) attributable to
such disposition or cessation shall not expire before
the expiration of 3 years from the date the Secretary
is notified (in such manner as the Secretary may by
regulations prescribe) of such disposition or cessation
(or if later in the case of an involuntary conversion
or exchange to which subsection (h) or (i) applies, 3
years from the date the Secretary is notified of the
replacement of the converted property or of an
intention not to replace or of the exchange of
property), and
[(2) such additional tax may be assessed before the
expiration of such 3-year period notwithstanding the
provisions of any other law or rule of law which would
otherwise prevent such assessment.
[(g) Application of This Section and Section 6324B to
Interests in Partnerships, Corporations, and Trusts.--The
Secretary shall prescribe regulations setting forth the
application of this section and section 6324B in the case of an
interest in a partnership, corporation, or trust which, with
respect to the decedent, is an interest in a closely held
business (within the meaning of paragraph (1) of section
6166(b)). For purposes of the preceding sentence, an interest
in a discretionary trust all the beneficiaries of which are
qualified heirs shall be treated as a present interest.
[(h) Special Rules for Involuntary Conversions of Qualified
Real Property.--
[(1) Treatment of converted property.--
[(A) In general.--If there is an involuntary
conversion of an interest in qualified real
property--
[(i) no tax shall be imposed by
subsection (c) on such conversion if
the cost of the qualified replacement
property equals or exceeds the amount
realized on such conversion, or
[(ii) if clause (i) does not apply,
the amount of the tax imposed by
subsection (c) on such conversion shall
be the amount determined under
subparagraph (B).
[(B) Amount of tax where there is not
complete reinvestment.--The amount determined
under this subparagraph with respect to any
involuntary conversion is the amount of the tax
which (but for this subsection) would have been
imposed on such conversion reduced by an amount
which--
[(i) bears the same ratio to such
tax, as
[(ii) the cost of the qualified
replacement property bears to the
amount realized on the conversion.
[(2) Treatment of replacement property.--For purposes
of subsection (c)--
[(A) any qualified replacement property shall
be treated in the same manner as if it were a
portion of the interest in qualified real
property which was involuntarily converted;
except that with respect to such qualified
replacement property the 10-year period under
paragraph (1) of subsection (c) shall be
extended by any period, beyond the 2-year
period referred to in section 1033(a)(2)(B)(i),
during which the qualified heir was allowed to
replace the qualified real property,
[(B) any tax imposed by subsection (c) on the
involuntary conversion shall be treated as a
tax imposed on a partial disposition, and
[(C) paragraph (6) of subsection (c) shall be
applied--
[(i) by not taking into account
periods after the involuntary
conversion and before the acquisition
of the qualified replacement property,
and
[(ii) by treating material
participation with respect to the
converted property as material
participation with respect to the
qualified replacement property.
[(3) Definitions and special rules.--For purposes of
this subsection--
[(A) Involuntary conversion.--The term
``involuntary conversion'' means a compulsory
or involuntary conversion within themeaning of
section 1033.
[(B) Qualified replacement property.--The
term ``qualified replacement property'' means--
[(i) in the case of an involuntary
conversion described in section
1033(a)(1), any real property into
which the qualified real property is
converted, or
[(ii) in the case of an involuntary
conversion described in section
1033(a)(2), any real property purchased
by the qualified heir during the period
specified in section 1033(a)(2)(B) for
purposes of replacing the qualified
real property.
Such term only includes property which is to be used
for the qualified use set forth in subparagraph (A) or
(B) of subsection (b)(2) under which the qualified real
property qualified under subsection (a).
[(4) Certain rules made applicable.--The rules of the
last sentence of section 1033(a)(2)(A) shall apply for
purposes of paragraph (3)(B)(ii).
[(i) Exchanges of Qualified Real
Property.--
[(1) Treatment of property exchanged.--
[(A) Exchanges solely for qualified exchange
property.--If an interest in qualified real
property is exchanged solely for an interest in
qualified exchange property in a transaction
which qualifies under section 1031, no tax
shall be imposed by subsection (c) by reason of
such exchange.
[(B) Exchanges where other property
received.--If an interest in qualified real
property is exchanged for an interest in
qualified exchange property and other property
in a transaction which qualifies under section
1031, the amount of the tax imposed by
subsection (c) by reason of such exchange shall
be the amount of tax which (but for this
subparagraph) would have been imposed on such
exchange under subsection (c)(1), reduced by an
amount which--
[(i) bears the same ratio to such
tax, as
[(ii) the fair market value of the
qualified exchange property bears to
the fair market value of the qualified
real property exchanged.
[For purposes of clause (ii) of the preceding sentence, fair
market value shall be determined as of the time of the
exchange.
[(2) Treatment of qualified exchange property.--For
purposes of subsection (c)--
[(A) any interest in qualified exchange
property shall be treated in the same manner as
if it were a portion of the interest in
qualified real property which was exchanged,
[(B) any tax imposed by subsection (c) by
reason of the exchange shall be treated as a
tax imposed on a partial disposition, and
[(C) paragraph (6) of subsection (c) shall be
applied by treating material participation with
respect to the exchanged property as material
participation with respect to the qualified
exchange property.
[(3) Qualified exchange property.--For purposes of
this subsection, the term ``qualified exchange
property'' means real property which is to be used for
the qualified use set forth in subparagraph (A) or (B)
of subsection (b)(2) under which the real property
exchanged therefor originally qualified under
subsection (a).
[SEC. 2033. PROPERTY IN WHICH THE DECEDENT HAD AN INTEREST.
[The value of the gross estate shall include the value of all
property to the extent of the interest therein of the decedent
at the time of his death.
[SEC. 2034. DOWER OR CURTESY INTERESTS.
[The value of the gross estate shall include the value of all
property to the extent of any interest therein of the surviving
spouse, existing at the time of the decedent's death as dower
or curtesy, or by virtue of a statute creating an estate in
lieu of dower or curtesy.
[SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS OF
DECEDENT'S DEATH.
[(a) Inclusion of Certain Property in Gross Estate.--If--
[(1) the decedent made a transfer (by trust or
otherwise) of an interest in any property, or
relinquished a power with respect to any property,
during the 3-year period ending on the date of the
decedent's death, and
[(2) the value of such property (or an interest
therein) would have been included in the decedent's
gross estate under section 2036, 2037, 2038, or 2042 if
such transferred interest or relinquished power had
been retained by the decedent on the date of his death,
the value of the gross estate shall include the value
of any property (or interest therein) which would have
been so included.
[(b) Inclusion of Gift Tax on Gifts Made During 3 Years
Before Decedent's Death.--The amount of the gross estate
(determined without regard to this subsection) shall be
increased by the amount of any tax paid under chapter 12 by the
decedent or his estate on any gift made by the decedent or his
spouse during the 3-year period ending on the date of the
decedent's death.
[(c) Other Rules Relating to Transfers Within 3 Years of
Death.--
[(1) In general.--For purposes of--
[(A) section 303(b) (relating to
distributions in redemption of stock to pay
death taxes),
[(B) section 2032A (relating to special
valuation of certain farms, etc., real
property), and
[(C) subchapter C of chapter 64 (relating to
lien for taxes), the value of the gross estate
shall include the value of all property to the
extent of any interest therein of which the
decedent has at any time made a transfer, by
trust or otherwise, during the 3-year period
ending on the date of the decedent's death.
[(2) Coordination with section 6166.--An estate shall
be treated as meeting the 35 percent of adjusted gross
estate requirement of section 6166(a)(1) only if the
estate meets such requirement both with and without the
application of paragraph (1).
[(3) Marital and small transfers.--Paragraph (1)
shall not apply to any transfer (other than a transfer
with respect to a life insurance policy) made during a
calendar year to any donee if the decedent was not
required by section 6019 (other than by reason of
section 6019(2) to file any gift tax return for such
year with respect to transfers to such donee.
[(d) Exception.--Subsection (a) shall not apply to any bona
fide sale for an adequate and full consideration in money or
money's worth.
[(e) Treatment of Certain Transfers from Revocable Trusts.--
For purposes of this section and section 2038, any transfer
from any portion of a trust during any period that such portion
was treated under section 676 as owned by the decedent by
reason of a power in the grantor (determined without regard to
section 672(e) shall be treated as a transfer made directly by
the decedent.
[SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.
[(a) General Rule.--The value of the gross estate shall
include the value of all property to the extent of any interest
therein of which the decedent has at any time made a transfer
(except in case of a bona fide sale for an adequate and full
consideration in money or money's worth), by trust or
otherwise, under which he has retained for his life or for any
period not ascertainable without reference to his death or for
any period which does not in fact end before his death--
[(1) the possession or enjoyment of, or the right to
the income from, the property, or
[(2) the right, either alone or in conjunction with
any person, to designate the persons who shall possess
or enjoy the property or the income therefrom.
[(b) Voting Rights.--
[(1) In general.--For purposes of subsection (a)(1),
the retention of the right to vote (directly or
indirectly) shares of stock of a controlled corporation
shall be considered to be a retention of the enjoyment
of transferred property.
[(2) Controlled corporation.--For purposes of
paragraph (1), a corporation shall be treated as a
controlled corporation if, at any time after the
transfer of the property and during the 3-year period
ending on the date of the decedent's death, the
decedent owned (with the application of section 318),
or had the right (either alone or in conjunction with
any person) to vote, stock possessing at least 20
percent of the total combined voting power of all
classes of stock.
[(3) Coordination with section 2035.--For purposes of
applying section 2035 with respect to paragraph (1),
the relinquishment or cessation of voting rights shall
be treated as a transfer of property made by the
decedent.
[(c) Limitation on Application of General Rule.--This section
shall not apply to a transfer made before March 4, 1931; nor to
a transfer made after March 3, 1931, and before June 7, 1932,
unless the property transferred would have been includible in
the decedent's gross estate by reason of the amendatory
language of the joint resolution of March 3, 1931 (46 Stat.
1516).
[SEC. 2037. TRANSFERS TAKING EFFECT AT DEATH.
[(a) General Rule.--The value of the gross estate shall
include the value of all property to the extent of any interest
therein of which the decedent has at any time after September
7, 1916, made a transfer (except in case of a bona fide sale
for an adequate and full consideration in money or money's
worth), by trust or otherwise, if--
[(1) possession or enjoyment of the property can,
through ownership of such interest, be obtained only by
surviving the decedent, and
[(2) the decedent has retained a reversionary
interest in the property (but in the case of a transfer
made before October 8, 1949, only if such reversionary
interest arose by the express terms of the instrument
of transfer), and the value of such reversionary
interest immediately before the death of the decedent
exceeds 5 percent of the value of such property.
[(b) Special Rules.--For purposes of this section, the term
``reversionary interest'' includes a possibility that
propertytransferred by the decedent--
[(1) may return to him or his estate, or
[(2) may be subject to a power of disposition by him,
but such term does not include a possibility that the
income alone from such property may return to him or
become subject to a power of disposition by him. The
value of a reversionary interest immediately before the
death of the decedent shall be determined (without
regard to the fact of the decedent's death) by usual
methods of valuation, including the use of tables of
mortality and actuarial principles, under regulations
prescribed by the Secretary. In determining the value
of a possibility that property may be subject to a
power of disposition by the decedent, such possibility
shall be valued as if it were a possibility that such
property may return to the decedent or his estate.
Notwithstanding the foregoing, an interest so
transferred shall not be included in the decedent's
gross estate under this section if possession or
enjoyment of the property could have been obtained by
any beneficiary during the decedent's life through the
exercise of a general power of appointment (as defined
in section 2041) which in fact was exercisable
immediately before the decedent's death.
[SEC. 2038. REVOCABLE TRANSFERS.
[(a) In General.--The value of the gross estate shall include
the value of all property.
[(1) Transfers after June 22, 1936.--To the extent of
any interest therein of which the decedent has at any
time made a transfer (except in case of a bona fide
sale for an adequate and full consideration in money or
money's worth), by trust or otherwise, where the
enjoyment thereof was subject at the date of his death
to any change through the exercise of a power (in
whatever capacity exercisable) by the decedent alone or
by the decedent in conjunction with any other person
(without regard to when or from what source the
decedent acquired such power), to alter, amend, revoke,
or terminate, or where any such power is relinquished
during the 3 year period ending on the date of the
decedent's death.
[(2) Transfers on or before June 22, 1936.--To the
extent of any interest therein of which the decedent
has at any time made a transfer (except in case of a
bona fide sale for an adequate and full consideration
in money or money's worth), by trust or otherwise,
where the enjoyment thereof was subject at the date of
his death to any change through the exercise of a
power, either by the decedent alone or in conjunction
with any person, to alter, amend, or revoke, or where
the decedent relinquished any such power during the 3
year period ending on the date of the decedent's death.
Except in the case of transfers made after June 22,
1936, no interest of the decedent of which he has made
a transfer shall be included in the gross estate under
paragraph (1) unless it is includible under this
paragraph.
[(b) Date of Existence of Power.--For purposes of this
section, the power to alter, amend, revoke, or terminate shall
be considered to exist on the date of the decedent's death even
though the exercise of the power is subject to a precedent
giving of notice or even though the alteration, amendment,
revocation, or termination takes effect only on the expiration
of a stated period after the exercise of the power, whether or
not on or before the date of the decedent's death notice has
been given or the power has been exercised. In such cases
proper adjustment shall be made representing the interests
which would have been excluded from the power if the decedent
had lived, and for such purpose, if the notice has not been
given or the power has not been exercised on or before the date
of his death, such notice shall be considered to have been
given, or the power exercised, on the date of his death.
[SEC. 2039. ANNUITIES.
[(a) General.--The gross estate shall include the value of an
annuity or other payment receivable by any beneficiary by
reason of surviving the decedent under any form of contract or
agreement entered into after March 3, 1931 (other than as
insurance under policies on the life of the decedent), if,
under such contract or agreement, an annuity or other payment
was payable to the decedent, or the decedent possessed the
right to receive such annuity or payment, either alone or in
conjunction with another for his life or for any period not
ascertainable without reference to his death or for any period
which does not in fact end before his death.
[(b) Amount Includible.--Subsection (a) shall apply to only
such part of the value of the annuity or other payment
receivable under such contract or agreement as is proportionate
to that part of the purchase price therefor contributed by the
decedent. For purposes of this section, any contribution by the
decedent's employer or former employer to the purchase price of
such contract or agreement (whether or not to an employee's
trust or fund forming part of a pension, annuity, retirement,
bonus or profit sharing plan) shall be considered to be
contributed by the decedent if made by reason of his
employment.
[SEC. 2040. JOINT INTERESTS.
[(a) General Rule.--The value of the gross estate shall
include the value of all property to the extent of the interest
therein held as joint tenants with right of survivorship by the
decedent and any other person, or as tenants by the entirety by
the decedent and spouse, or deposited, with any person carrying
on the banking business, in their joint names and payable to
either or the survivor, except such part thereof as may be
shown to have originally belonged to such other person and
never to have been received or acquired by the latter from the
decedent for less than an adequate and full consideration in
money or money's worth: Provided, That where such property or
any part thereof, or part of the consideration with which such
property was acquired, is shown to have been at any time
acquired by such other person from the decedent for less than
an adequate and full consideration in money or money's worth,
there shall be excepted only such part of the value of such
property as is proportionate to the consideration furnished by
such other person: Provided further, That where any property
has been acquired by gift, bequest, devise, or inheritance, as
a tenancy by the entirety by the decedent and spouse, then to
the extent of one-half of the value thereof, or, where so
acquired 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, then 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.
[(b) Certain Joint Interests of Husband and Wife.--
[(1) Interests of spouse excluded from gross
estate.--Notwithstanding subsection (a), in the case of
any qualified joint interest, the value included in the
gross estate with respect to such interest by reason of
this section is one-half of the value of such qualified
joint interest.
[(2) Qualified joint interest defined.--For purposes
of paragraph (1), the term ``qualified joint interest''
means any interest in property held by the decedent and
the decedent's spouse as--
[(A) tenants by the entirety, or
[(B) joint tenants with right of
survivorship, but only if the decedent and the
spouse of the decedent are the only joint
tenants.
[SEC. 2041. POWERS OF APPOINTMENT.
[(a) In General.--The value of the gross estate shall include
the value of all property.
[(1) Powers of appointment created on or before
October 21, 1942.--To the extent of any property with
respect to which a general power of appointment created
on or before October 21, 1942, is exercised by the
decedent--
[(A) by will, or
[(B) by a disposition which is of such nature
that if it were a transfer of property owned by
the decedent, such property would be includible
in the decedent's gross estate under sections
2035 to 2038, inclusive;
but the failure to exercise such a power or the
complete release of such a power shall not be deemed an
exercise thereof. If a general power of appointment
created on or before October 21, 1942, has been
partially released so that it is no longer a general
power of appointment, the exercise of such power shall
not be deemed to be the exercise of a general power of
appointment if--
[(i) such partial release occurred
before November 1, 1951, or
[(ii) the donee of such power was
under a legal disability to release
such power on October 21, 1942, and
such partial release occurred not later
than 6 months after the termination of
such legal disability.
[(2) Powers created after October 21, 1942.--To the
extent of any property with respect to which the
decedent has at the time of his death a general power
of appointment created after October 21, 1942, or with
respect to which the decedent has at any time exercised
or released such a power of appointment by a
disposition which is of such nature that if it were a
transfer of property owned by the decedent, such
property would be includible in the decedent's gross
estate under sections 2035 to 2038, inclusive. For
purposes of this paragraph (2), the power of
appointment shall be considered to exist on the date of
the decedent's death even though the exercise of the
power is subject to a precedent giving of notice or
even though the exercise of the power takes effect only
on the expiration of a stated period after its
exercise, whether or not on or before the date of the
decedent's death notice has been given or the power has
been exercised.
[(3) Creation of another power in certain cases.--To
the extent of any property with respect to which the
decedent--
[(A) by will, or
[(B) by a disposition which is of such nature
that if it were a transfer of property owned by
the decedent such property would be includible
in the decedent's gross estate under section
2035, 2036, or 2037, exercises a power of
appointment created after October 21, 1942, by
creating another power of appointment which
under the applicable local law can be validly
exercised so as to postpone the vesting of any
estate or interest in such property, or suspend
the absolute ownership or power of alienation
of such property, for a period ascertainable
without regard to the date of the creation of
the first power.
[(b) Definitions.--For purposes of subsection (a)--
[(1) General power of appointment.--The term
``general power of appointment'' means a power which is
exercisable in favor of the decedent, his estate, his
creditors, or the creditors of his estate; except
that--
[(A) A power to consume, invade, or
appropriate property for the benefit of the
decedent which is limited by an ascertainable
standard relating to the health, education,
support, or maintenance of the decedent shall
not be deemed a general power of appointment.
[(B) A power of appointment created on or
before October 21, 1942, which is exercisable
by the decedent only in conjunction with
another person shall not be deemed a general
power of appointment.
[(C) In the case of a power of appointment
created after October 21, 1942, which is
exercisable by the decedent only in conjunction
with another person--
[(i) If the power is not exercisable
by the decedent except in conjunction
with the creator of the power--such
power shall not be deemed a general
power of appointment.
[(ii) If the power is not exercisable
by the decedent except in conjunction
with a person having a substantial
interest in the property, subject to
the power, which is adverse to exercise
of the power in favor of the decedent--
such power shall not be deemed a
general power of appointment. For the
purposes of this clause a person who,
after the death of the decedent, may be
possessed of a power of appointment
(with respect to the property subject
to the decedent's power) which he may
exercise in his own favor shall be
deemed as having an interest in the
property and such interest shall be
deemed adverse to such exercise of the
decedent's power.
[(iii) If (after the application of
clauses (i) and (ii)) the power is a
general power of appointment and is
exercisable in favor of such other
person--such power shall be deemed a
general power of appointment only in
respect of a fractional part of the
property subject to such power, such
part to be determined by dividing the
value of such property by the number of
such persons (including the decedent)
in favor of whom such power is
exercisable.
For purposes of clauses (ii) and (iii), a power
shall be deemed to be exercisable in favor of a
person if it is exercisable in favor of such
person, his estate, his creditors, or the
creditors of his estate.
[(2) Lapse of power.--The lapse of a power of
appointment created after October 21, 1942, during the
life of the individual possessing the power shall be
considered a release of such power. The preceding
sentence shall apply with respect to the lapse of
powers during any calendar year only to the extent that
the property, which could have been appointed by
exercise of such lapsed powers, exceeded in value, at
the time of such lapse, the greater of the following
amounts:
[(A) $5,000, or
[(B) 5 percent of the aggregate value, at the
time of such lapse, of the assets out of which,
or the proceeds of which, the exercise of the
lapsed powers could have been satisfied.
[(3) Date of creation of power.--For purposes of this
section, a power of appointment created by a will
executed on or before October 21, 1942, shall be
considered a power created on or before such date if
the person executing such will dies before July 1,
1949, without having republished such will, by codicil
or otherwise, after October 21, 1942.
[SEC. 2042. PROCEEDS OF LIFE INSURANCE.
[The value of the gross estate shall include the value of all
property--
[(1) Receivable by the executor.--To the extent of
the amount receivable by the executor as insurance
under policies on the life of the decedent.
[(2) Receivable by other beneficiaries.--To the
extent of the amount receivable by all other
beneficiaries as insurance under policies on the life
of the decedent with respect to which the decedent
possessed at his death any of the incidents of
ownership, exercisable either alone or in conjunction
with any other person. For purposes of the preceding
sentence, the term ``incident of ownership'' includes a
reversionary interest (whether arising by the express
terms of the policy or other instrument or by operation
of law) only if the value of such reversionary interest
exceeded 5 percent of the value of the policy
immediately before the death of the decedent. As used
in this paragraph, the term ``reversionary interest''
includes a possibility that the policy, or the proceeds
of the policy, may return to the decedent or his
estate, or may be subject to a power of disposition by
him. The value of a reversionary interest at any time
shall be determined (without regard to the fact of the
decedent's death) by usual methods of valuation,
including the use of tables of mortality and actuarial
principles, pursuant to regulations prescribed by the
Secretary. In determining the value of a possibility
that the policy or proceeds thereof may be subject to a
power of disposition by the decedent, such possibility
shall be valued as if it were a possibility that such
policy or proceeds may return to the decedent or his
estate.
[SEC. 2043. TRANSFERS FOR INSUFFICIENT CONSIDERATION.
[(a) In General.--If any one of the transfers, trusts,
interests, rights, or powers enumerated and described in
sections 2035 to 2038, inclusive, and section 2041 is made,
created, exercised, or relinquished for a consideration in
money or money's worth, but is not a bona fide sale for an
adequate and full consideration in money or money's worth,
there shall be included in the gross estate only the excess of
the fair market value at the time of death of the property
otherwise to be included on account of such transaction, over
the value of the consideration received therefor by the
decedent.
[(b) Marital Rights Not Treated as Consideration.--
[(1) In general.--For purposes of this chapter, a
relinquishment or promised relinquishment of dower or
curtesy, or of a statutory estate created in lieu of
dower or curtesy, or of other marital rights in the
decedent's property or estate, shall not be considered
to any extent a consideration ``in money or money's
worth''.
[(2) Exception.--For purposes of section 2053
(relating to expenses, indebtedness, and taxes), a
transfer of property which satisfies the requirements
of paragraph (1) of section 2516 (relating to certain
property settlements) shall be considered to be made
for an adequate and full consideration in money or
money's worth.
[SEC. 2044. CERTAIN PROPERTY FOR WHICH MARITAL DEDUCTION WAS PREVIOUSLY
ALLOWED.
[(a) General Rule.--The value of the gross estate shall
include the value of any property to which this section applies
in which the decedent had a qualifying income interest for
life.
[(b) Property to Which This Section Applies.--This section
applies to any property if--
[(1) a deduction was allowed with respect to the
transfer of such property to the decedent--
[(A) under section 2056 by reason of
subsection (b)(7) thereof, or
[(B) under section 2523 by reason of
subsection (f) thereof, and
[(2) section 2519 (relating to dispositions of
certain life estates) did not apply with respect to a
disposition by the decedent of part or all of such
property.
[(c) Property Treated as Having Passed From Decedent.--For
purposes of this chapter and chapter 13, property includible in
the gross estate of the decedent under subsection (a) shall be
treated as property passing from the decedent.
[SEC. 2045. PRIOR INTERESTS.
[Except as otherwise specifically provided by law, sections
2034 to 2042, inclusive, shall apply to the transfers, trusts,
estates, interests, rights, powers, and relinquishment of
powers, as severally enumerated and described therein, whenever
made, created, arising, existing, exercised, or relinquished.
[SEC. 2046. DISCLAIMERS.
[For provisions relating to the effect of a qualified
disclaimer for purposes of this chapter, see section 2518.
[PART IV--TAXABLE ESTATE
[Sec. 2051. Definition of taxable estate.
[Sec. 2053. Expenses, indebtedness, and taxes.
[Sec. 2054. Losses.
[Sec. 2055. Transfers for public, charitable, and religious
uses.
[Sec. 2056. Bequests, etc., to surviving spouse.
[Sec. 2056A. Qualified domestic trust.
[Sec. 2057. Family-owned business interests.
[SEC. 2051. DEFINITION OF TAXABLE ESTATE.
[For purposes of the tax imposed by section 2001, the value
of the taxable estate shall be determined by deducting from the
value of the gross estate the deductions provided for in this
part.
[SEC. 2053. EXPENSES, INDEBTEDNESS, AND TAXES.
[(a) General Rule.--For purposes of the tax imposed by
section 2001, the value of the taxable estate shall be
determined by deducting from the value of the gross estate such
amounts--
[(1) for funeral expenses,
[(2) for administration expenses,
[(3) for claims against the estate, and
[(4) for unpaid mortgages on, or any indebtedness in
respect of, property where the value of the decedent's
interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross
estate, as are allowable by the laws of the
jurisdiction, whether within or without the United
States, under which the estate is being administered.
[(b) Other Administration Expenses.--Subject to the
limitations in paragraph (1) of subsection (c), there shall be
deducted in determining the taxable estate amounts representing
expenses incurred in administering property not subject to
claims which is included in the gross estate to the same extent
such amounts would be allowable as a deduction under subsection
(a) if such property were subject to claims, and such amounts
are paid before the expiration of the period of limitation for
assessment provided in section 6501.
[(c) Limitations.--
[(1) Limitations applicable to subsections (a) and
(b).--
[(A) Consideration for claims.--The deduction
allowed by this section in the case of claims
against the estate, unpaid mortgages, or any
indebtedness shall, when founded on a promise
or agreement, be limited to the extent that
they were contracted bona fide and for an
adequate and full consideration in money or
money's worth; except that in any case in which
any such claim is founded on a promise or
agreement of the decedent to make a
contribution or gift to or for the use of any
donee described in section 2055 for the
purposes specified therein, the deduction for
such claims shall not be so limited, but shall
be limited to the extent that it would be
allowable as a deduction under section 2055 if
such promise or agreement constituted a
bequest.
[(B) Certain taxes.--Any income taxes on
income received after the death of the
decedent, or property taxes not accrued before
his death, or any estate, succession, legacy,
or inheritance taxes, shall not be deductible
under this section.
[(C) Certain claims by remaindermen.--No
deduction shall be allowed under this section
for a claim against the estate by a
remainderman relating to any property described
in section 2044.
[(D) Section 6166 interest.--No deduction
shall be allowed under this section for any
interest payable under section 6601 on any
unpaid portion of the tax imposed by section
2001 for the period during which an extension
of time for payment of such tax is in effect
under section 6166.
[(2) Limitations applicable only to subsection (a).--
In the case of the amounts described in subsection (a),
there shall be disallowed the amount by which the
deductions specified therein exceed the value, at the
time of the decedent's death, of property subject to
claims, except to the extent that such deductions
represent amounts paid before the date prescribed for
the filing of the estate tax return. For purposes of
this section, the term ``property subject to claims''
means property includible in the gross estate of the
decedent which, or the avails of which, would under the
applicable law, bear the burden of the payment of such
deductions in the final adjustment and settlement of
the estate, except that the value of the property shall
be reduced by the amount of the deduction under section
2054 attributable to such property.
[(d) Certain State and Foreign Death Taxes.--
[(1) General rule.--Notwithstanding the provisions of
subsection (c)(1)(B) of this section, for purposes of
the tax imposed by section 2001 the value of the
taxable estate may be determined, if the executor so
elects before the expiration of the period of
limitation for assessment provided in section 6501, by
deducting from the value of the gross estate the amount
(as determined in accordance with regulations
prescribed by the Secretary) of--
[(A) any estate, succession, legacy, or
inheritance tax imposed by a State or the
District of Columbia upon a transfer by the
decedent for public, charitable, or religious
uses described insection 2055 or 2106(a)(2),
and
[(B) any estate, succession, legacy, or
inheritance tax imposed by and actually paid to
any foreign country, in respect of any property
situated within such foreign country and
included in the gross estate of a citizen or
resident of the United States, upon a transfer
by the decedent for public, charitable, or
religious uses described in section 2055.
The determination under subparagraph (B) of the country
within which property is situated shall be made in
accordance with the rules applicable under subchapter B
(sec. 2101 and following) in determining whether
property is situated within or without the United
States. Any election under this paragraph shall be
exercised in accordance with regulations prescribed by
the Secretary.
[(2) Condition for allowance of deduction.--No
deduction shall be allowed under paragraph (1) for a
State death tax or a foreign death tax specified
therein unless the decrease in the tax imposed by
section 2001 which results from the deduction provided
in paragraph (1) will inure solely for the benefit of
the public, charitable, or religious transferees
described in section 2055 or section 2106(a)(2). In any
case where the tax imposed by section 2001 is equitably
apportioned among all the transferees of property
included in the gross estate, including those described
in sections 2055 and 2106(a)(2) (taking into account
any exemptions, credits, or deductions allowed by this
chapter), in determining such decrease, there shall be
disregarded any decrease in the Federal estate tax
which any transferees other than those described in
sections 2055 and 2106(a)(2) are required to pay.
[(3) Effect on credits for State and foreign death
taxes of deduction under this subsection.--
[(A) Election.--An election under this
subsection shall be deemed a waiver of the
right to claim a credit, against the Federal
estate tax, under a death tax convention with
any foreign country for any tax or portion
thereof in respect of which a deduction is
taken under this subsection.
[(B) Cross references.--
[See section 2011(e) for the effect of a deduction taken under
this subsection on the credit for State death taxes, and see
section 2014(f) for the effect of a deduction taken under this
subsectionon the credit for foreign death taxes.
[(e) Marital Rights.--For provisions treating certain
relinquishments of marital rights as consideration in money or
money's worth, see section 2043(b)(2).
[SEC. 2054. LOSSES
[For purposes of the tax imposed by section 2001, the value
of the taxable estate shall be determined by deducting from the
value of the gross estate losses incurred during the settlement
of estates arising from fires, storms, shipwrecks, or other
casualties, or from theft, when such losses are not compensated
for by insurance or otherwise.
[SEC. 2055. TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES
[(a) In General.--For purposes of the tax imposed by section
2001, the value of the taxable estate shall be determined by
deducting from the value of the gross estate the amount of all
bequests, legacies, devises, or transfers--
[(1) to or for the use of the United States, any
State, any political subdivision thereof, or the
District of Columbia, for exclusively public purposes;
[(2) to or for the use of any corporation organized
and operated exclusively for religious, charitable,
scientific, literary, or educational purposes,
including the encouragement of art, or to foster
national or international amateur sports competition
(but only if no part of its activities involve the
provision of athletic facilities or equipment), and the
prevention of cruelty to children or animals, no part
of the net earnings of which inures to the benefit of
any private stockholder or individual, which is not
disqualified for tax exemption under section 501(c)(3)
by reason of attempting to influence legislation, and
which does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on behalf of (or in
opposition to) any candidate for public office;
[(3) to a trustee or trustees, or a fraternal
society, order, or association operating under the
lodge system, but only if such contributions or gifts
are to be used by such trustee or trustees, or by such
fraternal society, order, or association, exclusively
for religious, charitable, scientific, literary, or
educational purposes, or for the prevention of cruelty
to children or animals, such trust, fraternal society,
order, or association would not be disqualified for tax
exemption under section 501(c)(3) by reason of
attempting to influence legislation, and such trustee
or trustees, or such fraternal society, order, or
association, does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on behalf of (or in
opposition to) any candidate for public office;
[(4) to or for the use of any veterans' organization
incorporated by Act of Congress, or of its departments
or local chapters or posts, no part of the net earnings
of which inures to the benefit of any private
shareholder or individual; or
[(5) to an employee stock ownership plan if such
transfer qualifies as a qualified gratuitous transfer
of qualified employer securities within the meaning of
section 664(g).
For purposes of this subsection, the complete termination
before the date prescribed for the filing of the estate tax
return of a power to consume, invade, or appropriate property
for the benefit of an individual before such power has been
exercised by reason of the death of such individual or for any
other reason shall be considered and deemed to be a qualified
disclaimer with the same full force and effect as though he had
filed such qualified disclaimer. Rules similar to the rules of
section 501(j) shall apply for purposes of paragraph (2).
[(b) Powers of Appointment.--Property includible in the
decedent's gross estate under section 2041 (relating to powers
of appointment) received by a donee described in this section
shall, for purposes of this section, be considered a bequest of
such decedent.
[(c) Death Taxes Payable Out of Bequests.--If the tax imposed
by section 2001, or any estate, succession, legacy, or
inheritance taxes, are, either by the terms of the will, by the
law of the jurisdiction under which the estate is administered,
or by the law of the jurisdiction imposing the particular tax,
payable in whole or in part out of the bequests, legacies, or
devises otherwise deductible under this section, then the
amount deductible under this section shall be the amount of
such bequests, legacies, or devises reduced by the amount of
such taxes.
[(d) Limitation on Deduction.--The amount of the deduction
under this section for any transfer shall not exceed the value
of the transferred property required to be included in the
gross estate.
[(e) Disallowance of Deductions in Certain Cases.--
[(1) No deduction shall be allowed under this section
for a transfer to or for the use of an organization or
trust described in section 508(d) or 4948(c)(4) subject
to the conditions specified in such sections.
[(2) Where an interest in property (other than an
interest described in section 170(f)(3)(B)) passes or
has passed from the decedent to a person, or for a use,
described in subsection (a), and an interest (other
than an interest which is extinguished upon the
decedent's death) in the same property passes or has
passed (for less than an adequate and full
consideration in money or money's worth) from the
decedent to a person, or for a use, not described in
subsection (a), no deduction shall be allowed under
this section for the interest which passes or has
passed to the person, or for the use, described in
subsection (a) unless--
[(A) in the case of a remainder interest,
such interest is in a trust which is a
charitable remainder annuity trust or a
charitable remainder unitrust (described in
section 664) or a pooled income fund (described
in section 642(c)(5)), or
[(B) in the case of any other interest, such
interest is in the form of a guaranteed annuity
or is a fixed percentage distributed yearly of
the fair market value of the property (to be
determined yearly).
[(3) Reformations to comply with paragraph (2).--
[(A) In general.--A deduction shall be
allowed under subsection (a) in respect of any
qualified reformation.
[(B) Qualified reformation.--For purposes of
this paragraph, the term ``qualified
reformation'' means a change of a governing
instrument by reformation, amendment,
construction, or otherwise which changes a
reformable interest into a qualified interest
but only if--
[(i) any difference between--
[(I) the actuarial value
(determined as of the date of
the decedent's death) of the
qualified interest, and
[(II) the actuarial value (as
so determined) of the
reformable interest, does not
exceed 5 percent of the
actuarial value (as so
determined) of the reformable
interest,
[(ii) in the case of--
[(I) a charitable remainder
interest, the nonremainder
interest (before and after the
qualified reformation)
terminated at the same time, or
[(II) any other interest, the
reformable interest and the
qualified interest are for the
same period, and
[(iii) such change is effective as of
the date of the decedent's death.
A nonremainder interest (before reformation)
for a term of years in excess of 20 years shall
be treated as satisfying subclause (I) of
clause (ii) if such interest (after
reformation) is for a term of 20 years.
[(C) Reformable interest.--For purposes of
this paragraph--
[(i) In general.--The term
``reformable interest'' means any
interest for which a deduction would be
allowable under subsection (a) at the
time of the decedent's death but for
paragraph (2).
[(ii) Beneficiary's interest must be
fixed.--The term ``reformable
interest'' does not include any
interest unless, before the remainder
vests in possession, all payments to
persons other than an organization
described in subsection (a) are
expressed either in specified dollar
amounts or a fixed percentage of the
fair market value of the property. For
purposes of determining whether all
such payments are expressed as a fixed
percentage of the fair market value of
the property, section 664(d)(3) shall
be taken into account.
[(iii) Special rule where timely
commencement of reformation.--Clause
(ii) shall not apply to any interest if
a judicial proceeding is commenced to
change such interest into a qualified
interest not later than the 90th day
after--
[(I) if an estate tax return
is required to be filed, the
last date (including
extensions) for filing such
return, or
[(II) if no estate tax return
is required to be filed, the
last date (including
extensions) for filing the
income tax return for the 1st
taxable year for which such a
return is required to be filed
by the trust.
[(iv) Special rule for will executed
before january 1, 1979, etc.--In the
case of any interest passing under a
will executed before January 1, 1979,
or under a trust created before such
date, clause (ii) shall not apply.
[(D) Qualified interest.--For purposes of
this paragraph, the term ``qualified interest''
means an interest for which a deduction is
allowable under subsection (a).
[(E) Limitation.--The deduction referred to
in subparagraph (A) shall not exceed the amount
of the deduction which would have been
allowable for the reformable interest but for
paragraph (2).
[(F) Special rule where income beneficiary
dies.--If (by reason of the death of any
individual, or by termination or distribution
of a trust in accordance with the terms of the
trust instrument) by the due date for filing
the estate tax return (including any extension
thereof) a reformable interest is in a wholly
charitable trust or passes directly to a person
or for a use described in subsection (a), a
deduction shall be allowed for such reformable
interest as if it had met the requirements of
paragraph (2) on the date of the decedent's
death. For purposes of the preceding sentence,
the term ``wholly charitable trust'' means a
charitable trust which, upon the allowance of a
deduction, would be described in section
4947(a)(1).
[(G) Statute of limitations.--The period for
assessing any deficiency of any tax
attributable to the application of this
paragraph shall not expire before the date 1
year after the date on which the Secretary is
notified that such reformation (or other
proceeding pursuant to subparagraph (J) has
occurred.
[(H) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
to carry out the purposes of this paragraph,
including regulations providing such
adjustments in the application of the
provisions of section 508 (relating to special
rules relating to section 501(c)(3)
organizations), subchapter J (relating to
estates, trusts, beneficiaries, and decedents),
and chapter 42 (relating to private
foundations) as may be necessary by reason of
the qualified reformation.
[(I) Reformations permitted in case of
remainder interests in residence or farm,
pooled income funds, etc.--The Secretary shall
prescribe regulations (consistent with the
provisions of this paragraph) permitting
reformations in the case of any failure--
[(i) to meet the requirements of
section 170(f)(3)(B) (relating to
remainder interests in personal
residence or farm, etc.), or
[(ii) to meet the requirements of
section 642(c)(5).
[(J) Void or reformed trust in cases of
insufficient remainder interests.--In the case
of a trust that would qualify (or could be
reformed to qualify pursuant to subparagraph
(B)) but for failure to satisfy the requirement
of paragraph (1)(D) or (2)(D) of section
664(d), such trust may be--
[(i) declared null and void ab
initio, or
[(ii) changed by reformation,
amendment, or otherwise to meet such
requirement by reducing the payout rate
or the duration (or both) of any
noncharitable beneficiary's interest to
the extent necessary to satisfy such
requirement,
pursuant to a proceeding that is commenced
within the period required in subparagraph
(C)(iii). In a case described in clause (i), no
deduction shall be allowed under this title for
any transfer to the trust and any transactions
entered into by the trust prior to being
declared void shall be treated as entered into
by the transferor.
[(4) Works of art and their copyrights treated as
separate properties in certain cases.--
[(A) In general.--In the case of a qualified
contribution of a work of art, the work of art
and the copyright on such work of art shall be
treated as separate properties for purposes of
paragraph (2).
[(B) Work of art defined.--For purposes of
this paragraph, the term ``work of art'' means
any tangible personal property with respect to
which there is a copyright under Federal law.
[(C) Qualified contribution defined.--For
purposes of this paragraph, the term
``qualified contribution'' means any transfer
of property to a qualified organization if the
use of the property by the organization is
related to the purpose or function constituting
the basis for its exemption under section 501.
[(D) Qualified organization defined.--For
purposes of this paragraph, the term
``qualified organization'' means any
organization described in section 501(c)(3)
other than a private foundation (as defined in
section 509). For purposes of the preceding
sentence, a private operating foundation (as
defined in section 4942(j)(3)) shall not be
treated as a private foundation.
[(f) Special Rule for Irrevocable Transfers of Easements in
Real Property.--A deduction shall be allowed under subsection
(a) in respect of any transfer of a qualified real property
interest (as defined in section 170(h)(2)(C)) which meets the
requirements of section 170(h) (without regard to paragraph
(4)(A) thereof).
[(g) Cross References.--
[(1) For option as to time for valuation for purpose of
deduction under this section, see section 2032.
[(2) For treatment of certain organizations providing child
care, see section 501(k).
[(3) For exemption of gifts and bequests to or for the benefit
of Library of Congress, see section 5 of the Act of March 3,
1925, as amended (2 U.S.C. 161).
[(4) For treatment of gifts and bequests for the benefit of
the Naval Historical Center as gifts or bequests to or for the
use of the United States, see section 7222 of title 10, United
States Code.
[(5) For treatment of gifts and bequests to or for the benefit
of National Park Foundation as gifts or bequests to or for the
use of the United States, see section 8 of the Act of December
18, 1967 (16 U.S.C. 191).
[(6) For treatment of gifts, devises, or bequests accepted by
the Secretary of State, the Director of the International
Communication Agency, or the Director of the United States
International Development Cooperation Agency as gifts, devises,
or bequests to or for the use of the United States, see section
25 of the State Department Basic Authorities Act of 1956.
[(7) For treatment of gifts or bequests of money accepted by
the Attorney General for credit to ``Commissary Funds, Federal
Prisons,'' as gifts or bequests to or for the use of the United
States, see section 4043 of title 18, United States Code.
[(8) For payment of tax on gifts and bequests of United States
obligations to the United States, see section 3113(e) of title
31, United States Code.
[(9) For treatment of gifts and bequests for benefit of the
Naval Academy as gifts or bequests to or for the use of the
United States, see section 6973 of title 10, United States Code.
[(10) For treatment of gifts and bequests for benefit of the
Naval Academy Museum as gifts or bequests to or for the use of
the United States, see section 6974 of title 10, United States
Code.
[(11) For exemption of gifts and bequests received by National
Archives Trust Fund Board, see section 2308 of title 44, United
States Code.
[(12) For treatment of gifts and bequests to or for the use of
Indian tribal governments (or their subdivisions), see section
7871.
[SEC. 2056. BEQUESTS, ETC., TO SURVIVING SPOUSE.
[(a) Allowance of Marital Deduction.--For purposes of the tax
imposed by section 2001, the value of the taxable estate shall,
except as limited by subsection (b), be determined by deducting
from the value of the gross estate an amount equal to the value
of any interest in property which passes or has passed from the
decedent to his surviving spouse, but only to the extent that
such interest is included in determining the value of the gross
estate.
[(b) Limitation in the Case of Life Estate or Other
Terminable Interest.--
[(1) General rule.--Where, on the lapse of time, on
the occurrence of an event or contingency, or on the
failure of an event or contingency to occur, an
interest passing to the surviving spouse will terminate
or fail, no deduction shall be allowed under this
section with respect to such interest--
[(A) if an interest in such property passes
or has passed (for less than an adequate and
full consideration in money or money's worth)
from the decedent to any person other than such
surviving spouse (or the estate of such
spouse); and
[(B) if by reason of such passing such person
(or his heirs or assigns) may possess or enjoy
any part of such property after such
termination or failure of the interest so
passing to the surviving spouse;
and no deduction shall be allowed with respect to such
interest (even if such deduction is not disallowed
under subparagraphs (A) and (B))--
[(C) if such interest is to be acquired for
the surviving spouse, pursuant to directions of
the decedent, by his executor or by the trustee
of a trust.
For purposes of this paragraph, an interest shall not
be considered as an interest which will terminate or
fail merely because it is the ownership of a bond,
note, or similar contractual obligation, the discharge
of which would not have the effect of an annuity for
life or for a term.
[(2) Interest in unidentified assets.--Where the
assets (included in the decedent's gross estate) out of
which, or the proceeds of which, an interest passing to
the surviving spouse may be satisfied include a
particular asset or assets with respect to which no
deduction would be allowed if such asset or assets
passed from the decedent to such spouse, then the value
of such interest passing to such spouse shall, for
purposes of subsection (a), be reduced by the aggregate
value of such particular assets.
[(3) Interest of spouse conditional on survival for
limited period.--For purposes of this subsection, an
interest passing to the surviving spouse shall not be
considered as an interest which will terminate or fail
on the death of such spouse if--
[(A) such death will cause a termination or
failure of such interest only if it occurs
within a period not exceeding 6 months after
the decedent's death, or only if it occurs as a
result of a common disaster resulting in the
death of the decedent and the surviving spouse,
or only if it occurs in the case of either such
event; and
[(B) such termination or failure does not in
fact occur.
[(4) Valuation of interest passing to surviving
spouse.--In determining for purposes of subsection (a)
the value of any interest in property passing to the
surviving spouse for which a deduction is allowed by
this section--
[(A) there shall be taken into account the
effect which the tax imposed by section 2001,
or any estate, succession, legacy, or
inheritance tax, has on the net value to the
surviving spouse of such interest; and
[(B) where such interest or property is
encumbered in any manner, or where the
surviving spouse incurs any obligation imposed
by the decedent with respect to the passing of
such interest, such encumbrance or obligation
shall be taken into account in the same manner
as if the amount of a gift to such spouse of
such interest were being determined.
[(5) Life estate with power of appointment in
surviving spouse.--In the case of an interest in
property passing from the decedent, if his surviving
spouse is entitled for life to all the income from the
entire interest, or all the income from a specific
portion thereof, payable annually or at more frequent
intervals, with power in the surviving spouse to
appoint the entire interest, or such specific portion
(exercisable in favor of such surviving spouse, or of
the estate of such surviving spouse, or in favor of
either, whether or not in each case the power is
exercisable in favor of others), and with no power in
any other person to appoint any part of the interest,
or such specific portion, to any person other than the
surviving spouse--
[(A) the interest or such portion thereof so
passing shall, for purposes of subsection (a),
be considered as passing to the surviving
spouse, and
[(B) no part of the interest so passing
shall, for purposes of paragraph (1)(A), be
considered as passing to any person other than
the surviving spouse.
This paragraph shall apply only if such power in the
surviving spouse to appoint the entire interest, or
such specific portion thereof, whether exercisable by
will or during life, is exercisable by such spouse
alone and in all events.
[(6) Life insurance or annuity payments with power of
appointment in surviving spouse.--In the case of an
interest in property passing from the decedent
consisting of proceeds under a life insurance,
endowment, or annuity contract, if under the terms of
the contract such proceeds are payable in installments
or are held by the insurer subject to an agreement to
pay interest thereon (whether the proceeds, on the
termination of any interest payments, are payable in a
lump sum or in annual or more frequent installments),
and such installment or interest payments are payable
annually or at more frequent intervals, commencing not
later than 13 months after the decedent's death, and
all amounts, or a specific portion of all such amounts,
payable during the life of the surviving spouse are
payable only to such spouse, and such spouse has the
power to appoint all amounts, or such specific portion,
payable under such contract (exercisable in favor of
such surviving spouse, or of the estate of such
surviving spouse, or in favor of either, whether or not
in each case the power is exercisable in favor of
others), with no power in any other person to appoint
such amounts to any person other than the surviving
spouse--
[(A) such amounts shall, for purposes of
subsection (a), be considered as passing to the
surviving spouse, and
[(B) no part of such amounts shall, for
purposes of paragraph (1)(A), be considered as
passing to any person other than the surviving
spouse.
This paragraph shall apply only if, under the terms of
the contract, such power in the surviving spouse to
appoint such amounts, whether exercisable by will or
during life, is exercisable by such spouse alone and in
all events.
[(7) Election with respect to life estate for
surviving spouse.--
[(A) In general.--In the case of qualified
terminable interest property--
[(i) for purposes of subsection (a),
such property shall be treated as
passing to the surviving spouse, and
[(ii) for purposes of paragraph
(1)(A), no part of such property shall
be treated as passing to any person
other than the surviving spouse.
[(B) Qualified terminable interest property
defined.--For purposes of this paragraph--
[(i) In general.--The term
``qualified terminable interest
property'' means property--
[(I) which passes from the
decedent,
[(II) in which the surviving
spouse has a qualifying income
interest for life, and
[(III) to which an election
under this paragraph applies.
[(ii) Qualifying income interest for
life.--The surviving spouse has a
qualifying income interest for life
if--
[(I) the surviving spouse is
entitled to all the income from
the property, payable annually
or at more frequent intervals,
or has a usufruct interest for
life in the property, and
[(II) no person has a power
to appoint any part of the
property to any person other
than the surviving spouse.
Subclause (II) shall not apply to a
power exercisable only at or after the
death of the surviving spouse. To the
extent provided in regulations, an
annuity shall be treated in a manner
similar to an income interest in
property (regardless of whether the
property from which the annuity is
payable can be separately identified).
[(iii) Property includes interest
therein.--The term ``property''
includes an interest in property.
[(iv) Specific portion treated as
separate property.--A specific portion
of property shall be treated as
separate property.
[(v) Election.--An election under this paragraph with respect
to any property shall be made by the executor on the return of
tax imposed by section 2001. Such an election, once made, shall
be irrevocable.
[(C) Treatment of survivor annuities.--In the
case of an annuity included in the gross estate
of the decedent under section 2039 (or, in the
case of an interest in an annuity arising under
the community property laws of a State,
included in the gross estate of the decedent
under section 2033 where only the surviving
spouse has the right to receive payments before
the death of such surviving spouse--
[(i) the interest of such surviving
spouse shall be treated as a qualifying
income interest for life, and
[(ii) the executor shall be treated
as having made an election under this
subsection with respect to such annuity
unless the executor otherwise elects on
the return of tax imposed by section
2001.
An election under clause (ii), once made, shall
be irrevocable.
[(8) Special rule for charitable remainder trusts.--
[(A) In general.--If the surviving spouse of
the decedent is the only beneficiary of a
qualified charitable remainder trust who is not
a charitable beneficiary nor an ESOP
beneficiary, paragraph (1) shall not apply to
any interest in such trust which passes or has
passed from the decedent to such surviving
spouse.
[(B) Definitions.--For purposes of
subparagraph (A)--
[(i) Charitable beneficiary.--The
term ``charitable beneficiary'' means
any beneficiary which is an
organization described in section
170(c).
[(ii) ESOP beneficiary.--The term
``ESOP beneficiary'' means any
beneficiary which is an employee stock
ownership plan (as defined in section
4975(e)(7) that holds a remainder
interest in qualified employer
securities (as defined in section
664(g)(4) to be transferred to such
plan in a qualified gratuitous transfer
(as defined in section 664(g)(1).
[(iii) Qualified charitable remainder
trust.--The term ``qualified charitable
remainder trust'' means a charitable
remainder annuity trust or a charitable
remainder unitrust (described in
section 664.
[(9) Denial of double deduction.--Nothing in this
section or any other provision of this chapter shall
allow the value of any interest in property to be
deducted under this chapter more than once with respect
to the same decedent.
[(10) Specific portion.--For purposes of paragraphs
(5), (6), and (7)(B)(iv), the term ``specific portion''
only includes a portion determined on a fractional or
percentage basis.
[(c) Definition.--For purposes of this section, an interest
in property shall be considered as passing from the decedent to
any person if and only if--
[(1) such interest is bequeathed or devised to such
person by the decedent;
[(2) such interest is inherited by such person from
the decedent;
[(3) such interest is the dower or curtesy interest
(or statutory interest in lieu thereof) of such person
as surviving spouse of the decedent;
[(4) such interest has been transferred to such
person by the decedent at any time;
[(5) such interest was, at the time of the decedent's
death, held by such person and the decedent (or by them
and any other person) in joint ownership with right of
survivorship;
[(6) the decedent had a power (either alone or in
conjunction with any person) to appoint such interest
and if he appoints or has appointed such interest to
such person, or if such person takes such interest in
default on the release or nonexercise of such power; or
[(7) such interest consists of proceeds of insurance
on the life of the decedent receivable by such person.
Except as provided in paragraph (5) or (6) of subsection (b),
where at the time of the decedent's death it is not possible to
ascertain the particular person or persons to whom an interest
in property may pass from the decedent, such interest shall,
for purposes of subparagraphs (A) and (B) of subsection (b)(1),
be considered as passing from the decedent to a person other
than the surviving spouse.
[(d) Disallowance of Marital Deduction Where Surviving Spouse
Not United States Citizen.--
[(1) In general.--Except as provided in paragraph
(2), if the surviving spouse of the decedent is not a
citizen of the United States--
[(A) no deduction shall be allowed under
subsection (a), and
[(B) section 2040(b) shall not apply.
[(2) Marital deduction allowed for certain transfers
in trust.--
[(A) In general.--Paragraph (1) shall not
apply to any property passing to the surviving
spouse in a qualified domestic trust.
[(B) Special rule.--If any property passes
from the decedent to the surviving spouse of
the decedent, for purposes of subparagraph (A),
such property shall be treated as passing to
such spouse in a qualified domestic trust if--
[(i) such property is transferred to
such a trust before the date on which
the return of the tax imposed by this
chapter is made, or
[(ii) such property is irrevocably
assigned to such a trust under an
irrevocable assignment made on or
before such date which is enforceable
under local law.
[(3) Allowance of credit to certain spouses.--If--
[(A) property passes to the surviving spouse
of the decedent (hereinafter in this paragraph
referred to as the ``first decedent''),
[(B) without regard to this subsection, a
deduction would be allowable under subsection
(a) with respect to such property, and
[(C) such surviving spouse dies and the
estate of such surviving spouse is subject to
the tax imposed by this chapter, the Federal
estate tax paid (or treated as paid under
section 2056A(b)(7)) by the first decedent with
respect to such property shall be allowed as a
credit under section 2013 to the estate of such
surviving spouse and the amount of such credit
shall be determined under such section without
regard to when the first decedent died and
without regard to subsection (d)(3) of such
section.
[(4) Special rule where resident spouse becomes
citizen.--Paragraph (1) shall not apply if--
[(A) the surviving spouse of the decedent
becomes a citizen of the United States before
the day on which the return of the tax imposed
by this chapter is made, and
[(B) such spouse was a resident of the United
States at all times after the date of the death
of the decedent and before becoming a citizen
of the United States.
[(5) Reformations permitted.--
[(A) In general.--In the case of any property
with respect to which a deduction would be
allowable under subsection (a) but for this
subsection, the determination of whether a
trust is a qualified domestic trust shall be
made--
[(i) as of the date on which the
return of the tax imposed by this
chapter is made, or
[(ii) if a judicial proceeding is
commenced on or before the due date
(determined with regard to extensions)
for filing such return to change such
trust into a trust which is a qualified
domestic trust, as of the time when the
changes pursuant to such proceeding are
made.
[(B) Statute of limitations.--If a judicial
proceeding described in subparagraph (A)(ii) is
commenced with respect to any trust, the period
for assessing any deficiency of tax
attributable to any failure of such trust to be
a qualified domestic trust shall not expire
before the date 1 year after the date on which
the Secretary is notified that the trust has
been changed pursuant to such judicial
proceeding or that such proceeding has been
terminated.
[SEC. 2056A. QUALIFIED DOMESTIC TRUST.
[(a) Qualified Domestic Trust Defined.--For purposes of this
section and section 2056(d), the term ``qualified domestic
trust'' means, with respect to any decedent, any trust if--
[(1) the trust instrument--
[(A) except as provided in regulations
prescribed by the Secretary, requires that at
least 1 trustee of the trust be an individual
citizen of the United States or a domestic
corporation, and
[(B) provides that no distribution (other
than a distribution of income) may be made from
the trust unless a trustee who is an individual
citizen of the United States or a domestic
corporation has the right to withhold from such
distribution the tax imposed by this section on
such distribution,
[(2) such trust meets such requirements as the
Secretary may by regulations prescribe to ensure the
collection of any tax imposed by subsection (b), and
[(3) an election under this section by the executor
of the decedent applies to such trust.
[(b) Tax Treatment of Trust.--
[(1) Imposition of estate tax.--There is hereby
imposed an estate tax on--
[(A) any distribution before the date of the
death of the surviving spouse from a qualified
domestic trust and
[(B) the value of the property remaining in a
qualified domestic trust on the date of the
death of the surviving spouse.
[(2) Amount of tax.--
[(A) In general.--In the case of any taxable
event, the amount of the estate tax imposed by
paragraph (1) shall be the amount equal to--
[(i) the tax which would have been
imposed under section 2001 on the
estate of the decedent if the taxable
estate of the decedent had been
increased by the sum of--
[(I) the amount involved in
such taxable event, plus
[(II) the aggregate amount
involved in previous taxable
events with respect to
qualified domestic trusts of
such decedent, reduced by
[(ii) the tax which would have been
imposed under section 2001 on the
estate of the decedent if the taxable
estate of the decedent had been
increased by the amount referred to in
clause (i)(II).
[(B) Tentative tax where tax of decedent not
finally determined.--
[(i) In general.--If the tax imposed
on the estate of the decedent under
section 2001 is not finally determined
before the taxable event, the amount of
the tax imposed by paragraph (1) on
such event shall be determined by using
the highest rate of tax in effect under
section 2001 as of the date of the
decedent's death.
[(ii) Refund of excess when tax
finally determined.--If--
[(I) the amount of the tax
determined under clause (i),
exceeds
[(II) the tax determined
under subparagraph (A) on the
basis of the final
determination of the tax
imposed by section 2001 on the
estate of the decedent,
such excess shall be allowed as a
credit or refund (with interest) if
claim therefor is filed not later than
1 year after the date of such final
determination.
[(C) Special rule where decendent has more
than 1 qualified domestic trust.--If there is
more than 1 qualified domestic trust with
respect to any decedent, the amount of the tax
imposed by paragraph (1) with respect to such
trusts shall be determined by using the highest
rate of tax in effect under section 2001 as of
the date of the decedent's death (and the
provisions of paragraph (3)(B) shall not apply)
unless, pursuant to a designation made by the
decedent's executor, there is 1 person--
[(i) who is an individual citizen of
the United States or a domestic
corporation and is responsible for
filing all returns of tax imposed under
paragraph (1) with respect to such
trusts and for paying all tax so B
imposed, and
[(ii) who meets such requirements as
the Secretary may by regulations
prescribe.
[(3) Certain lifetime distributions exempt from
tax.--
[(A) Income distributions.--No tax shall be
imposed by paragraph (1)(A) on any distribution
of income to the surviving spouse.
[(B) Hardship exemption.--No tax shall be
imposed by paragraph (1)(A) on any distribution
to the surviving spouse on account of hardship.
[(4) Tax where trust ceases to qualify.--If any
qualified domestic trust ceases to meet the
requirements of paragraphs (1) and (2) of subsection
(a), the tax imposed by paragraph (1) shall apply as if
the surviving spouse died on the date of such
cessation.
[(5) Due date.--
[(A) Tax on distributions.--The estate tax
imposed by paragraph (1)(A) shall be due and
payable on the 15th day of the 4th month
following the calendar year in which the
taxable event occurs; except that the estate
tax imposed by paragraph (1)(A) on
distributions during the calendar year in which
the surviving spouse dies shall be due and
payable not later than the date on which the
estate tax imposed by paragraph (1)(B) is due
and payable.
[(B) Tax at death of spouse.--The estate tax
imposed by paragraph (1)(B) shall be due and
payable on the date 9 months after the date of
such death.
[(6) Liability for tax.--Each trustee shall be
personally liable for the amount of the tax imposed by
paragraph (1). Rules similar to the rules of section
2204 shall apply for purposes of the preceding
sentence.
[(7) Treatment of tax.--For purposes of section
2056(d), any tax paid under paragraph (1) shall be
treated as a tax paid under section 2001 with respect
to the estate of the decedent.
[(8) Lien for tax.--For purposes of section 6324, any
tax imposed by paragraph (1) shall be treated as an
estate tax imposed under this chapter with respect to a
decedent dying on the date of the taxable event (and
the property involved shall be treated as the gross
estate of such decedent).
[(9) Taxable event.--The term ``taxable event'' means
the event resulting in tax being imposed under
paragraph (1).
[(10) Certain benefits allowed.--
[(A) In general.--If any property remaining
in the qualified domestic trust on the date of
the death of the surviving spouse is includible
in the gross estate of such spouse for purposes
of this chapter (or would be includible if such
spouse were a citizen or resident of the United
States), any benefit which is allowable (or
would be allowable if such spouse were a
citizen or resident of the United States) with
respect to such property to the estate of such
spouse under section 2011, 2014, 2032, 2032A,
2055, 2056, or 6166 shall be allowed for
purposes of the tax imposed by paragraph
(1)(B).
[(B) Section 303.--If the estate of the
surviving spouse meets the requirements of
section 303 with respect to any property
described in subparagraph (A), for purposes of
section 303, the tax imposed by paragraph
(l)(B) with respect to such property shall be
treated as a Federal estate tax payable with
respect to the estate of the surviving spouse.
[(C) Section 6161(a)(2).--The provisions of
section 6161(a)(2) shall apply with respect to
the tax imposed by paragraph (1)(B), and the
reference in such section to the executor shall
be treated as a reference to the trustees of
the trust.
[(11) Special rule where distribution tax paid out of
trust.--For purposes of this subsection, if any portion
of the tax imposed by paragraph (l)(A) with respect to
any distribution is paid out of the trust, an amount
equal to the portion so paid shall be treated as a
distribution described in paragraph (1)(A).
[(12) Special rule where spouse becomes citizen.--If
the surviving spouse of the decedent becomes a citizen
of the United States and if--
[(A) such spouse was a resident of the United
States at all times after the date of the death
of the decedent and before such spouse becomes
a citizen of the United States,
[(B) no tax was imposed by paragraph (l)(A)
with respect to any distribution before such
spouse becomes such a citizen, or
[(C) such spouse elects--
[(i) to treat any distribution on
which tax was imposed by paragraph
(1)(A) as a taxable gift made by such
spouse for purposes of--
[(I) section 2001, and
[(II) determining the amount
of the tax imposed by section
2501 on actual taxable gifts
made bysuch spouse during the
year in which the spouse
becomes a citizen or any
subsequent year, and
[(ii) to treat any reduction in the
tax imposed by paragraph (1)(A) by
reason of the credit allowable under
section 2010 with respect to the
decedent as a credit allowable to such
survivingspouse under section 2505 for
purposes of determining the amount of
the credit allowable under section 2505
with respect to taxable gifts made by
the surviving spouse during the year in
whichthe spouse becomes a citizen or
any subsequent year,
paragraph (1)(A) shall not apply to any distributions
after such spouse becomes such a citizen (and paragraph
(1)(B) shall not apply).
[(13) Coordination with section 1015.--For purposes
of section 1015, any distribution on which tax is
imposed by paragraph (1)(A) shall be treated as a
transfer by gift, and any tax paid under paragraph
(1)(A) shall be treated as a gift tax.
[(14) Coordination with terminable interest rules.--
Any interest in a qualified domestic trust shall not be
treated as failing to meet the requirements of
paragraph (5) or (7) of section 2056(b) merely by
reason of any provision of the trust instrument
permitting the withholding from any distribution of an
amount to pay the tax imposed by paragraph (1) on such
distribution.
[(15) No tax on certain distributions.--No tax shall
be imposed by paragraph (1) on any distribution to the
surviving spouse to the extent such distribution is to
reimburse such surviving spouse for any tax imposed by
subtitle A on any item of income of the trust to which
such surviving spouse is not entitled under the terms
of the trust.
[(c) Definitions.--For purposes of this section--
[(1) Property includes interest therein.--The term
``property'' includes an interest in property.
[(2) Income.--Except as provided in regulations, the
term ``income'' has the meaning given to such term by
section 643(b).
[(3) Trust.--To the extent provided in regulations
prescribed by the Secretary, the term ``trust''
includes other arrangements which have substantially
the same effect as a trust.
[(d) Election.--An election under this section with respect
to any trust shall be made by the executor on the return of the
tax imposed by section 2001. Such an election, once made, shall
be irrevocable. No election may be made under this section on
any return if such return is filed more than one year after the
time prescribed by law (including extensions) for filing such
return.
[(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including regulations under which
there may be treated as a qualified domestic trust any annuity
or other payment which is includible in the decedent's gross
estate and is by its terms payable for life or a term of years.
[SEC. 2057. FAMILY-OWNED BUSINESS INTERESTS.
[(a) General Rule.--
[(1) Allowance 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 qualified family-owned business interests of the
decedent which are described in subsection (b)(2).
[(2) Maximum deduction.--The deduction allowed by
this section shall not exceed $675,000.
[(3) Coordination with unified credit.--
[(A) In general.--Except as provided in
subparagraph (B), if this section applies to an
estate, the applicable exclusion amount under
section 2010 shall be $625,000.
[(B) Increase in unified credit if deduction
is less than $675,000.--If the deduction
allowed by this section is less than $675,000,
the amount of the applicable exclusion amount
under section 2010 shall be increased (but not
above the amount which would apply to the
estate without regard to this section) by the
excess of $675,000 over the amount of the
deduction allowed.
[(b) Estates to which section applies.--
[(1) In general.--This section shall apply to an
estate if--
[(A) the decedent was (at the date of the
decedent's death) a citizen or resident of the
United States,
[(B) the executor elects the application of
this section and files the agreement referred
to in subsection (h),
[(C) the sum of--
[(i) the adjusted value of the
qualified family-owned business
interests described in paragraph (2),
plus
[(ii) the amount of the gifts of such
interests determined under paragraph
(3),
exceeds 50 percent of the adjusted gross
estate, and
[(D) during the 8-year period ending on the
date of the decedent's death there have been
periods aggregating 5 years or more during
which--
[(i) such interests were owned by the
decedent or a member of the decedent's
family, and
[(ii) there was material
participation (within the meaning of
section 2032A(e)(6)) by the decedent or
a member of the decedent's family in
the operation of the business to which
such interests relate.
[(2) Includible qualified family-owned business
interests.--The qualified family-owned business
interests described in this paragraph are the interests
which--
[(A) are included in determining the value of
the gross estate, and
[(B) are acquired by any qualified heir from,
or passed to any qualified heir from, the
decedent (within the meaning of section
2032A(e)(9)).
[(3) Includible gifts of interest.--The amount of the
gifts of qualified family-owned business interests
determined under this paragraph is the sum of--
[(A) the amount of such gifts from the
decedent to members of the decedent's family
taken into account under section 2001(b)(1)(B),
plus
[(B) the amount of such gifts otherwise
excluded under section 2503(b),
[to the extent such interests are continuously held
by members of such family (other than the decedent's
spouse) between the date of the gift and the date of
the decedent's death.
[(c) Adjusted Gross Estate.--For purposes of this section,
the term ``adjusted gross estate'' means the value of the gross
estate--
[(1) reduced by any amount deductible under paragraph
(3) or (4) of section 2053(a), and
[(2) increased by the excess of--
[(A) the sum of--
[(i) the amount of gifts determined
under subsection (b)(3), plus
[(ii) the amount (if more than de
minimis) of other transfers from the
decedent to the decedent's spouse (at
the time of the transfer) within 10
years of the date of the decedent's
death, plus
[(iii) the amount of other gifts (not
included under clause (i) or (ii)) from
the decedent within 3 years of such
date, other than gifts to members of
the decedent's family otherwise
excluded under section 2503(b), over
[(B) the sum of the amounts described in
clauses (i), (ii), and
[(iii) of subparagraph (A) which are
otherwise includible in the gross
estate.
For purposes of the preceding sentence, the Secretary may
provide that de minimis gifts to persons other than members of
the decedent's family shall not be taken into account.
[(d) Adjusted Value of the Qualified Family-Owned Business
Interests.--For purposes of this section, the adjusted value of
any qualified family-owned business interest is the value of
such interest for purposes of this chapter (determined without
regard to this section), reduced by the excess of--
[(1) any amount deductible under paragraph (3) or (4)
of section 2053(a), over
[(2) the sum of--
[(A) any indebtedness on any qualified
residence of the decedent the interest on which
is deductible under section 163(h)(3), plus
[(B) any indebtedness to the extent the
taxpayer establishes that the proceeds of such
indebtedness were used for the payment of
educational and medical expenses of the
decedent, the decedent's spouse, or the
decedent's dependents (within the meaning of
section 152, plus
[(C) any indebtedness not described in
subparagraph (A) or (B), to the extent such
indebtedness does not exceed $10,000.
[(e) Qualified Family-Owned Business Interest.--
[(1) In general.--For purposes of this section, the
term ``qualified family-owned business interest''
means--
[(A) an interest as a proprietor in a trade
or business carried on as a proprietorship, or
[(B) an interest in an entity carrying on a
trade or business, if--
[(i) at least--
[(I) 50 percent of such
entity is owned (directly or
indirectly) by the decedent and
members of the decedent's
family,
[(II) 70 percent of such
entity is so owned by members
of 2 families, or
[(III) 90 percent of such
entity is so owned by members
of 3 families, and
[(ii) for purposes of subclause (II)
or (III) of clause (i), at least 30
percent of such entity is so owned by
the decedent and members of the
decedent's family.
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) Limitation.--Such term shall not include--
[(A) any interest in a trade or business the
principal place of business of which is not
located in the United States,
[(B) any interest in an entity, if the stock
or debt of such entity or a controlled group
(as defined in section 267(f)(1) of which such
entity was a member was readily tradable on an
established securities market or secondary
market (as defined by the Secretary) at any
time within 3 years of the date of the
decedent's death,
[(C) any interest in a trade or business not
described in section 542(c)(2), if more than 35
percent of the adjusted ordinary gross income
of such trade or business for the taxable year
which includes the date of the decedent's death
would qualify as personal holding company
income (as defined in section 543(a) without
regard to paragraph (2)(B) thereof) if such
trade or business were a corporation,
[(D) that portion of an interest in a trade
or business that is attributable to--
[(i) cash or marketable securities,
or both, in excess of the reasonably
expected day-to-dayworking capital
needs of such trade or business, and
[(ii) any other assets of the trade
or business (other than assets used in
the active conduct of a trade or
business described in section
542(c)(2), which produce, or are held
for the production of, personal holding
company income (as defined in
subparagraph (C)) or income described
in section 954(c)(1) (determined
without regard to subparagraph (A)
thereof and by substituting ``trade or
business'' for ``controlled foreign
corporation'').
In the case of a lease of property on a net cash basis
by the decedent to a member of the decedent's family,
income from such lease shall not be treated as personal
holding company income for purposes of subparagraph
(C), and such property shall not be treated as an asset
described in subparagraph (D)(ii), if such income and
property would not be so treated if the lessor had
engaged directly in the activities engaged in by the
lessee with respect to such property.
[(3) Rules regarding ownership.--
[(A) Ownership of entities.--For purposes of
paragraph (1)(B)--
[(i) Corporations.--Ownership of a
corporation shall be determined by the
holding of stock possessing the
appropriate percentage of the total
combined voting power of all classes of
stock entitled to vote and the
appropriate percentage of the total
value of shares of all classes of
stock.
[(ii) Partnerships.--Ownership of a
partnership shall be determined by the
owning of the appropriate percentage of
the capital interest in such
partnership.
[(B) Ownership of tiered entities.--For
purposes of this section, if by reason of
holding an interest in a trade or business, a
decedent, any member of the decedent's family,
any qualified heir, or any member of any
qualified heir's family is treated as holding
an interest in any other trade or business--
[(i) such ownership interest in the
other trade or business shall be
disregarded in determining if the
ownership interest in the first trade
or business is a qualified family-owned
business interest, and
[(ii) this section shall be applied
separately in determining if such
interest in any other trade or business
is a qualified family-owned business
interest.
[(C) Individual ownership rules.--For
purposes of this section, an interest owned,
directly or indirectly, by or for an entity
described in paragraph (1)(B) shall be
considered as being owned proportionately by or
for the entity's shareholders, partners, or
beneficiaries. A person shall be treated as a
beneficiary of any trust only if such person
has a present interest in such trust.
[(f) Tax Treatment of Failure to Materially Participate in
Business or Dispositions of Interests.--
[(1) In general.--There is imposed an additional
estate tax if, within 10 years after the date of the
decedent's death and before the date of the qualified
heir's death--
[(A) the material participation requirements
described in section 2032A(c)(6)(B) are not met
with respect to the qualified family-owned
business interest which was acquired (or
passed) from the decedent,
[(B) the qualified heir disposes of any
portion of a qualified family-owned business
interest (other than by a disposition to a
member of the qualified heir's family or
through a qualified conservation contribution
under section 170(h),
[(C) the qualified heir loses United States
citizenship (within the meaning of section 877
or with respect to whom an event described in
subparagraph (A) or (B) of section 877(e)(1)
occurs, and such heir does not comply with the
requirements of subsection (g), or
[(D) the principal place of business of a
trade or business of the qualified family-owned
business interest ceases to be located in the
United States.
[(2) Additional estate tax.--
[(A) In general.--The amount of the
additional estate tax imposed by paragraph (1)
shall be equal to--
[(i) the applicable percentage of the
adjusted tax difference attributable to
the qualified family-owned business
interest, plus
[(ii) interest on the amount
determined under clause (i) at the
underpayment rate established under
section 6621 for the period beginning
on the date the estate tax liability
was due under this chapter and ending
on the date such additional estate tax
is due.
[(B) Applicable percentage.--For purposes of
this paragraph, the applicable percentage shall
be determined under the following table:
[If the event described in
paragraph (1) occurs in following The applicable
year of material participation: percentage is:
1 through 6..................................................... 100
7............................................................... 80
8............................................................... 60
9............................................................... 40
10.............................................................. 20
[(C) Adjusted tax difference.--For purposes
of subparagraph (A)--
[(i) In general.--The adjusted tax
difference attributable to a qualified
family-owned business interest is the
amount which bears the same ratio to
the adjusted tax difference with
respect to the estate (determined under
clause (ii)) as the value of such
interest bears to the value of all
qualified family-owned business
interests described in subsection
(b)(2).
[(ii) Adjusted tax difference with
respect to the estate.--
[For purposes of clause (i), the term ``adjusted tax
difference with respect to the estate'' means the excess of
what would have been the estate tax liability but for the
election under this section over the estate tax liability. For
purposes of this clause, the term ``estate tax liability''
means the tax imposed by section 2001 reduced by the credits
allowable against such tax.
[(3) Use in trade or business by family members.--A
qualified heir shall not be treated as disposing of an
interest described in subsection (e)(1)(A) by reason of
ceasing to be engaged in a trade or business so long as
the property to which such interest relates is used in
a trade or business by any member of such individual's
family.
[(g) Security requirements for noncitizen qualified heirs.--
[(1) In general.--Except upon the application of
subparagraph (F) of subsection (i)(3), if a qualified
heir is not a citizen of the United States, any
interest under this section passing to or acquired by
such heir (including any interest held by such heir at
a time described in subsection (f)(1)(C)) shall be
treated as a qualified family-owned business interest
only if the interest passes or is acquired (or is held)
in a qualified trust.
[(2) Qualified trust.--he term ``qualified trust''
means a trust--
[(A) which is organized under, and governed
by, the laws of the United States or a State,
and
[(B) except as otherwise provided in
regulations, with respect to which the trust
instrument requires that at least 1 trustee of
the trust be an individual citizen of the
United States or adomestic corporation.
[(h) Agreement.--The agreement referred to in this subsection
is a written agreement signed by each person in being who has
an interest (whether or not in possession) in any property
designated in such agreement consenting to the application of
subsection (f) with respect to such property.
[(i) Other Definitions and Applicable
Rules.--For purposes of this section--
[(1) Qualified heir.--The term ``qualified heir''--
[(A) has the meaning given to such term by
section 2032A(e)(1), and
[(B) includes any active employee of the
trade or business to which the qualified
family-owned business interest relates if such
employee has been employed by such trade or
business for a period of at least 10 years
before the date of the decedent's death.
[(2) Member of the family.--The term ``member of the
family'' has the meaning given to such term by section
2032A(e)(2).
[(3) Applicable rules.--Rules similar to the
following rules shall apply:
[(A) Section 2032A(b)(4) (relating to
decedents who are retired or disabled).
[(B) Section 2032A(b)(5) (relating to special
rules for surviving spouses).
[(C) Section 2032A(c)(2)(D) (relating to
partial dispositions).
[(D) Section 2032A(c)(3) (relating to only 1
additional tax imposed with respect to any 1
portion).
[(E) Section 2032A(c)(4) (relating to due
date).
[(F) Section 2032A(c)(5) (relating to
liability for tax; furnishing of bond).
[(G) Section 2032A(c)(7) (relating to no tax
if use begins within 2 years; active management
by eligible qualified heir treated as material
participation).
[(H) Paragraphs (1) and (3) of section
2032A(d) (relating to election; agreement).
[(I) Section 2032A(e)(10)
(relating to community
property).
[(J) Section 2032A(e)(14) (relating to
treatment of replacement property acquired in
section 1031 or 1033 transactions).
[(K) Section 2032A(f) (relating to statute of
limitations).
[(L) Section 2032A(g) (relating to
application to interests in partnerships,
corporations, and trusts).
[(M) Subsections (h) and (i) of section
2032A.
[(N) Section 6166(b)(3) (relating to
farmhouses and certain other structures taken
into account).
[(O) Subparagraphs (B), (C), and (D) of
section 6166(g)(1) (relating to acceleration of
payment).
[(P) Section 6324B (relating to special lien
for additional estate tax).
[Subchapter B--Estates of Nonresidents Not Citizens
[Sec. 2101. Tax imposed.
[Sec. 2102. Credits against tax.
[Sec. 2103. Definition of gross estate.
[Sec. 2104. Property within the United States.
[Sec. 2105. Property without the United States.
[Sec. 2106. Taxable estate.
[Sec. 2107. Expatriation to avoid tax.
[Sec. 2108. Application of pre-1967 estate tax provisions.
[SEC. 2101. TAX IMPOSED.
[(a) Imposition.--Except as provided in section 2107, a tax
is hereby imposed on the transfer of the taxable estate
(determined as provided in section 2106) of every decedent
nonresident not a citizen of the United States.
[(b) Computation of Tax.--The tax imposed by this section
shall be the amount equal to the excess (if any) of--
[(1) a tentative tax computed under section 2001(c)
on the sum of--
[(A) the amount of the taxable estate, and
[(B) the amount of the adjusted taxable
gifts, over
[(2) a tentative tax computed under section 2001(c)
on the amount of the adjusted taxable gifts.
For purposes of the preceding sentence, there shall be
appropriate adjustments in the application of section
2001(c)(2) to reflect the difference between the amount of the
credit provided under section 2102(c) and the amount of the
credit provided under section 2010.
[(c) Adjustments for Taxable Gifts.--
[(1) Adjusted taxable gifts defined.--For purposes of
this section, the term ``adjusted taxable gifts'' means
the total amount of the taxable gifts (within the
meaning of section 2503 as modified by section 2511)
made by the decedent after December 31, 1976, other
than gifts which are includible in the gross estate of
the decedent.
[(2) Adjustment for certain gift tax.--For purposes
of this section, the rules of section 2001(d) shall
apply.
[SEC. 2102. CREDITS AGAINST TAX.
[(a) In General.--The tax imposed by section 2101 shall be
credited with the amounts determined in accordance with
sections 2011 to 2013, inclusive (relating to State death
taxes, gift tax, and tax on prior transfers), subject to the
special limitation provided in subsection (b).
[(b) Special Limitation.--The maximum credit allowed under
section 2011 against the tax imposed by section 2101 for State
death taxes paid shall be an amount which bears the same ratio
to the credit computed as provided in section 2011(b) as the
value of the property, as determined for purposes of this
chapter, upon which State death taxes were paid and which is
included in the gross estate under section 2103 bears to the
value of the total gross estate under section 2103. For
purposes of this subsection, the term ``State death taxes''
means the taxes described in section 2011(a).
[(c) Unified Credit.--
[(1) In general.--A credit of $13,000 shall be
allowed against the tax imposed by section 2101.
[(2) Residents of possessions of the united states.--
In the case of a decedent who is considered to be a
``nonresident not a citizen of the United States''
under section 2209, the credit under this subsection
shall be the greater of--
[(A) $13,000, or
[(B) that proportion of $46,800 which the
value of that part of the decedent's gross
estate which at the time of his death is
situated in the United States bears to the
value of his entire gross estate wherever
situated.
[(3) Special rules.--
[(A) Coordination with treaties.--To the
extent required under any treaty obligation of
the United States, the credit allowed under
this subsection shall be equal to the amount
which bears the same ratio to the applicable
credit amount in effect under section 2010(c)
for the calendar year which includes the date
of death as the value of the part of the
decedent's gross estate which at the time of
his death is situated in the United States
bears to the value of his entire gross estate
wherever situated. For purposes of the
preceding sentence, property shall not be
treated as situated in the United States if
such property is exempt from the tax imposed by
this subchapter under any treaty obligation of
the United States.
[(B) Coordination with gift tax unified
credit.--If a credit has been allowed under
section 2505 with respect to any gift made by
the decedent, each dollar amount contained in
paragraph (1) or (2) or subparagraph (A) of
this paragraph (whichever applies) shall be
reduced by the amount so allowed.
[(4) Limitation based on amount of tax.--The credit
allowed under this subsection shall not exceed the
amount of the tax imposed by section 2101.
[(5) Application of other credits.--For purposes of
subsection (a), sections 2011 to 2013, inclusive, shall
be applied as if the credit allowed under this
subsection were allowed under section 2010.
[SEC. 2103. DEFINITION OF GROSS ESTATE.
[For the purpose of the tax imposed by section 2101, the
value of the gross estate of every decedent nonresident not a
citizen of the United States shall be that part of his gross
estate (determined as provided in section 2031) which at the
time of his death is situated in the United States.
[SEC. 2104. PROPERTY WITHIN THE UNITED STATES.
[(a) Stock in Corporation.--For purposes of this subchapter
shares of stock owned and held by a nonresident not a citizen
of the United States shall be deemed property within the United
States only if issued by a domestic corporation.
[(b) Revocable Transfers and Transfers Within-- Years of
Death.--For purposes of this subchapter, any property of which
the decedent has made a transfer, by trust or otherwise, within
the meaning of sections 2035 to 2038, inclusive, shall be
deemed to be situated in the United States, if so situated
either at the time of the transfer or at the time of the
decedent's death.
[(c) Debt Obligations.--For purposes of this subchapter, debt
obligations of--
[(1) a United States person, or
[(2) the United States, a State or any political
subdivision thereof, or the District of Columbia, owned
and held by a nonresident not a citizen of the United
States shall be deemed property within the United
States. With respect to estates of decedents dying
after December 31, 1969, deposits with a domestic
branch of a foreign corporation, if such branch is
engaged in the commercial banking business, shall, for
purposes of this subchapter, be deemed property within
the United States. This subsection shall not apply to a
debt obligation to which section 2105(b) applies or to
a debt obligation of a domestic corporation if any
interest on such obligation, were such interest
received by the decedent at the time of his death,
would be treated by reason of section 861(a)(1)(A) as
income from sources without the United States.
[SEC. 2105. PROPERTY WITHOUT THE UNITED STATES.
[(a) Proceeds of Life Insurance.--For purposes of this
subchapter, the amount receivable as insurance on the life of a
nonresident not a citizen of the United States shall not be
deemed property within the United States.
[(b) Bank Deposits and Certain Other Debt Obligations.--For
purposes of this subchapter, the following shall not be deemed
property within the United States--
[(1) amounts described in section 871(i)(3), if any
interest thereon would not be subject to tax by reason
of section 871(i)(1) were such interest received by the
decedent at the time of his death,
[(2) deposits with a foreign branch of a domestic
corporation or domestic partnership, if such branch is
engaged in the commercial banking business,
[(3) debt obligations, if, without regard to whether
a statement meeting the requirements of section
871(h)(5) has been received, any interest thereon would
be eligible for the exemption from tax under section
871(h)(1) were such interest received by the decedent
at the time of his death, and
[(4) obligations which would be original issue
discount obligations as defined in section 871(g)(1)
but for subparagraph (B)(i) thereof, if any interest
thereon (were such interest received by the decedent at
the time of his death) would not be effectively
connected with the conduct of a trade or business
within the United States.
Notwithstanding the preceding sentence, if any portion of the
interest on an obligation referred to in paragraph (3) would
not be eligible for the exemption referred to in paragraph (3)
by reason of section 871(h)(4) if the interest were received by
the decedent at the time of his death, then an appropriate
portion (as determined in a manner prescribed by the Secretary)
of the value (as determined for purposes of this chapter) of
such debt obligation shall be deemed property within the United
States.
[(c) Works of Art on Loan for Exhibition.--For purposes of
this subchapter, works of art owned by a nonresident not a
citizen of the United States shall not be deemed property
within the United States if such works of art are--
[(1) imported into the United States solely for
exhibition purposes,
[(2) loaned for such purposes, to a public gallery or
museum, no part of the net earnings of which inures to
the benefit of any private stockholder or individual,
and
[(3) at the time of the death of the owner, on
exhibition, or en route to or from exhibition, in such
a public gallery or museum.
[SEC. 2106. TAXABLE ESTATE.
[(a) Definition of Taxable Estate.--For purposes of the tax
imposed by section 2101, the value of the taxable estate of
every decedent nonresident not a citizen of the United States
shall be determined by deducting from the value of that part of
his gross estate which at the time of his death is situated in
the United States--
[(1) Expenses, losses, indebtedness, and taxes.--That
proportion of the deductions specified in sections 2053
and 2054 (other than the deductions described in the
following sentence) which the value of such part bears
to the value of his entire gross estate, wherever
situated. Any deduction allowable under section 2053 in
the case of a claim against the estate which was
founded on a promise or agreement but was not
contracted for an adequate and full consideration in
money or money's worth shall be allowable under this
paragraph to the extent that it would be allowable as a
deduction under paragraph (2) if such promise or
agreement constituted a bequest.
[(2) Transfers for public, charitable, and religious
uses.--
[(A) In general.--The amount of all bequests,
legacies, devises, or transfers (including the
interest which falls into any such bequest,
legacy, devise, or transfer as a result of an
irrevocable disclaimer of a bequest, legacy,
devise, transfer, or power, if the disclaimer
is made before the date prescribed for the
filing of the estate tax return)--
[(i) to or for the use of the United
States, any State, any political
subdivision thereof, or the District of
Columbia, for exclusively public
purposes;
[(ii) to or for the use of any
domestic corporation organized and
operated exclusively for religious,
charitable, scientific, literary, or
educational purposes, including the
encouragement of art and the prevention
of cruelty to children or animals, no
part of the net earnings of which
inures to the benefit of any private
stockholder or individual, which is not
disqualified for tax exemption under
section 501(c)(3) by reason of
attempting to influence legislation,
and which does not participate in, or
intervene in (including the publishing
or distributing of statements), any
political campaign on behalf of (or in
opposition to) any candidate for public
office; or
[(iii) to a trustee or trustees, or a
fraternal society, order, or
association operating under the lodge
system, but only if such contributions
or gifts are to be used within the
United States by such trustee or
trustees, or by such fraternal society,
order, or association, exclusively for
religious, charitable, scientific,
literary, or educational purposes, or
for the prevention of cruelty to
children or animals, such trust,
fraternal society, order, or
association would not be disqualified
for tax exemption under section
501(c)(3) by reason of attempting to
influence legislation, and such trustee
or trustees, or such fraternal society,
order, or association, does not
participate in, orintervene in
(including the publishing or
distributing of statements), any
political campaign on behalf of (or in
opposition to) any candidate for public
office;
[(B) Powers of appointment.--Property
includible in the decedent's gross estate under
section 2041 (relating to powers of
appointment) received by a donee described in
this paragraph shall, for purposes of this
paragraph, be considered a bequest of such
decedent.
[(C) Death taxes payable out of bequests.--If
the tax imposed by section 2101, or any estate,
succession, legacy, or inheritance taxes, are,
either by the terms of the will, by the law of
the jurisdiction under which the estate is
administered, or by the law of the jurisdiction
imposing the particular tax, payable in whole
or in part out of the bequests, legacies, or
devises otherwise deductible under this
paragraph, then the amount deductible under
this paragraph shall be the amount of such
bequests, legacies, or devises reduced by the
amount of such taxes.
[(D) Limitation on deduction.--The amount of
the deduction under this paragraph for any
transfer shall not exceed the value of the
transferred property required to be included in
the gross estate.
[(E) Disallowance of deductions in certain
cases.--The provisions of section 2055(e) shall
be applied in the determination of the amount
allowable as a deduction under this paragraph.
[(F) Cross references.--
[(i) For option as to time for valuation for purposes of
deduction under this section, see section 2032.
[(ii) For exemption of certain bequests for the benefit of the
United States and for rules of construction for certain
bequests, see section 2055(g).
[(iii) For treatment of gifts and bequests to or for the use
of Indian tribal governments (or their subdivisions), see
section 7871.
[(3) Marital deduction.--The amount which would be
deductible with respect to property situated in the
United States at the time of the decedent's death under
the principles of section 2056.
[(b) Condition of Allowance of Deductions.--No deduction
shall be allowed under paragraphs (1) and (2) of subsection (a)
in the case of a nonresident not a citizen of the United States
unless the executor includes in the return required to be filed
under section 6018 the value at the time of his death of that
part of the gross estate of such nonresident not situated in
the United States.
[SEC. 2107. EXPATRIATION TO AVOID TAX.
[(a) Treatment of Expatriates.--
[(1) Rate of tax.--A tax computed in accordance with
the table contained in section 2001 is hereby imposed
on the transfer of the taxable estate, determined as
provided in section 2106, of every decedent nonresident
not a citizen of the United States if, within the 10-
year period ending with the date of death, such
decedent lost United States citizenship, unless such
loss did not have for one of its principal purposes the
avoidance of taxes under this subtitle or subtitle A--
[(2) Certain individuals treated as having tax
avoidance purpose.--
[(A) In general.--For purposes of paragraph
(1), an individual shall be treated as having a
principal purpose to avoid such taxes if such
individual is so treated under section
877(a)(2).
[(B) Exception.--Subparagraph (A) shall not
apply to a decedent meeting the requirements of
section 877(c)(1).
[(b) Gross Estate.--For purposes of the tax imposed by
subsection (a), the value of the gross estate of every decedent
to whom subsection (a) applies shall be determined as provided
in section 2103, except that--
[(1) if such decedent owned (within the meaning of
section 958(a)) at the time of his death 10 percent or
more of the total combined voting power of all classes
of stock entitled to vote of a foreign corporation, and
[(2) if such decedent owned (within the meaning of
section 958(a)), or is considered to have owned (by
applying the ownership rules of section 958(b)), at the
time of his death, more than 50 percent of--
[(A) the total combined voting power of all
classes of stock entitled to vote of such
corporation, or
[(B) the total value of the stock of such
corporation,
then that proportion of the fair market value of the stock of
such foreign corporation owned (within the meaning of section
958(a)) by such decedent at the time of his death, which the
fair market value of any assets owned by such foreign
corporation and situated in the United States, at the time of
his death, bears to the total fair market value of all assets
owned by such foreign corporation at the time of his death,
shall be included in the gross estate of such decedent. For
purposes of the preceding sentence, a decedent shall be treated
as owning stock of a foreign corporation at the time of his
death if, at the time of a transfer, by trust or otherwise,
within the meaning of sections 2035 to 2038, inclusive, he
owned such stock.
[(c) Credits.--
[(1) Unified credit.--
[(A) In general.--A credit of $13,000 shall
be allowed against the tax imposed by
subsection (a).
[(B) Limitation based on amount of tax.--The
credit allowed under this paragraph shall not
exceed the amount of the tax imposed by
subsection (a).
[(2) Credit for foreign death taxes.--
[(A) In general.--The tax imposed by
subsection (a) shall be credited with the
amount of any estate, inheritance, legacy, or
succession taxes actually paid to any foreign
country in respect of any property which is
included in the gross estate solely by reason
of subsection (b).
[(B) Limitation on credit.--The credit
allowed by subparagraph (A) for such taxes paid
to a foreign country shall not exceed the
lesser of--
[(i) the amount which bears the same
ratio to the amount of such taxes
actually paid to such foreign country
as the value of the property subjected
to such taxes by such foreign country
and included in the gross estate solely
by reason of subsection (b) bears to
the value of all property subjected to
such taxes by such foreign country, or
[(ii) such property's proportionate
share of the excess of--
[(I) the tax imposed by
subsection (a), over
[(II) the tax which would be
imposed by section 2101 but for
this section.
[(C) Proportionate share.--In the case of
property which is included in the gross estate
solely by reason of subsection (b), such
property's proportionate share is the
percentage which the value of such property
bears to the total value of all property
included in the gross estate solely by reason
of subsection (b).
[(3) Other credits.--The tax imposed by subsection
(a) shall be credited with the amounts determined in
accordance with subsections (a) and (b) of section
2102. For purposes of subsection (a) of section 2102,
sections 2011 to 2013, inclusive, shall be applied as
if the credit allowed under paragraph (1) were allowed
under section 2010.
[(d) Burden of Proof.--If the Secretary establishes that it
is reasonable to believe that an individual's loss of United
States citizenship would, but for this section, result in a
substantial reduction in the estate, inheritance, legacy, and
succession taxes in respect of the transfer of his estate, the
burden of proving that such loss of citizenship did not have
for one of its principal purposes the avoidance of taxes under
this subtitle or subtitle A shall be on the executor of such
individual's estate.
[(e) Cross Reference.--
[For comparable treatment of long-term lawful permanent
residents who ceased to be taxed as residents, see section
877(e).
[SEC. 2108. APPLICATION OF PRE-1967 ESTATE TAX PROVISIONS.
[(a) Imposition of More Burdensome Tax By Foreign Country.--
Whenever the President finds that--
[(1) under the laws of any foreign country,
considering the tax system of such foreign country, a
more burdensome tax is imposed by such foreign country
on the transfer of estates of decedents who were
citizens of the United States and not residents of such
foreign country than the tax imposed by this subchapter
on the transfer of estates of decedents who were
residents of such foreign country,
[(2) such foreign country, when requested by the
United States to do so, has not acted to revise or
reduce such tax so that it is no more burdensome than
the tax imposed by this subchapter on the transfer of
estates of decedents who were residents of such foreign
country, and
[(3) it is in the public interest to apply pre-1967
tax provisions in accordance with this section to the
transfer of estates of decedents who were residents of
such foreign country, the President shall proclaim that
the tax on the transfer of the estate of every decedent
who was a resident of such foreign country at the time
of his death shall, in the case of decedents dying
after the date of such proclamation, be determined
under this subchapter without regard to amendments made
to sections 2101 (relating to tax imposed), 2102
(relating to credits against tax), 2106 (relating to
taxable estate), and 6018 (relating to estate tax
returns) on or after November 13, 1966.
[(b) Alleviation of More Burdensome Tax.--Whenever the
President finds that the laws of any foreign country with
respect to which the President has made a proclamation under
subsection (a) have been modified so that the tax on the
transfer of estates of decedents who were citizens of the
United States and not residents of such foreign country is no
longer more burdensome than the tax imposed by this subchapter
on the transfer of estates of decedents who were residents of
such foreign country, he shall proclaim that the tax on the
transfer of the estate of every decedent who was a resident of
such foreign country at the time of his death shall, in the
case of decedents dying after the date of such proclamation, be
determined under this subchapter without regard to subsection
(a).
[(c) Notification of Congress Required.--No proclamation
shall be issued by the President pursuant to this section
unless, at least 30 days prior to such proclamation, he has
notified the Senate and the House of Representatives of his
intention to issue such proclamation.
[(d) Implementation By Regulations.--The Secretary shall
prescribe such regulations as may be necessary or appropriate
to implement this section.
[Subchapter C--Miscellaneous
[Sec. 2201. Members of the Armed Forces dying in combat zone or
by reason of combat-zone-incurred wounds, etc.
[Sec. 2203. Definition of executor.
[Sec. 2204. Discharge of fiduciary from personal liability.
[Sec. 2205. Reimbursement out of estate.
[Sec. 2206. Liability of life insurance beneficiaries.
[Sec. 2207. Liability of recipient of property over which
decedent had power of appointment.
[Sec. 2207A. Right of recovery in the case of certain marital
deduction property.
[Sec. 2207B. Right of recovery where decedent retained interest.
[Sec. 2208. Certain residents of possessions considered citizens
of the United States.
[Sec. 2209. Certain residents of possessions considered
nonresidents not citizens of the United States.
[SEC. 2201. MEMBERS OF THE ARMED FORCES DYING IN COMBAT ZONE OR BY
REASON OF COMBAT-ZONE-INCURRED WOUNDS, ETC.
[The additional estate tax as defined in section 2011(d)
shall not apply to the transfer of the taxable estate of a
citizen or resident of the United States dying while in active
service as a member of the Armed Forces of the United States,
if such decedent--
[(1) was killed in action while serving in a combat
zone, as determined under section 112(c); or
[(2) died as a result of wounds, disease, or injury
suffered, while serving in a combat zone (as determined
under section 112(c)), and while in line of duty, by
reason of a hazard to which he was subjected as an
incident of such service.
[SEC. 2203. DEFINITION OF EXECUTOR.
[The term ``executor'' wherever it is used in this title in
connection with the estate tax imposed by this chapter means
the executor or administrator of the decedent, or, if there is
no executor or administrator appointed, qualified, and acting
within the United States, then any person in actual or
constructive possession of any property of the decedent.
[SEC. 2204. DISCHARGE OF FIDUCIARY FROM PERSONAL LIABILITY.
[(a) General Rule.--If the executor makes written application
to the Secretary for determination of the amount of the tax and
discharge from personal liability therefor, the Secretary (as
soon as possible, and in any event within 9 months after the
making of such application, or, if the application is made
before the return is filed, then within 9 months after the
return is filed, but not after the expiration of the period
prescribed for the assessment of the tax in section 6501) shall
notify the executor of the amount of the tax. The executor, on
payment of the amount of which he is notified (other than any
amount the time for payment of which is extended under section
6161, 6163, or 6166), and on furnishing any bond which may be
required for any amount for which the time for payment is
extended, shall be discharged from personal liability for any
deficiency in tax thereafter found to be due and shall be
entitled to a receipt or writing showing such discharge.
[(b) Fiduciary Other Than the Executor.--If a fiduciary (not
including a fiduciary in respect of the estate of a nonresident
decedent) other than the executor makes written application to
the Secretary for determination of the amount of any estate tax
for which the fiduciary may be personally liable, and for
discharge from personal liability therefor, the Secretary upon
the discharge of the executor from personal liability under
subsection (a), or upon the expiration of 6 months after the
making of such application by the fiduciary, if later, shall
notify the fiduciary (1) of the amount of such tax for which it
has been determined the fiduciary is liable, or (2) that it has
been determined that the fiduciary is not liable for any such
tax. Such application shall be accompanied by a copy of the
instrument, if any, under which such fiduciary is acting, a
description of the property held by the fiduciary, and such
other information for purposes of carrying out the provisions
of this section as the Secretary may require by regulations. On
payment of the amount of such tax for which it has been
determined the fiduciary is liable (other than any amount the
time for payment of which has been extended under section 6161,
6163, or 6166), and on furnishing any bond which may be
required for any amount for which the time for payment has been
extended, or on receipt by him of notification of a
determination that he is not liable for any such tax, the
fiduciary shall be discharged from personal liability for any
deficiency in such tax thereafter found to be due and shall be
entitled to a receipt or writing evidencing such discharge.
[(c) Special Lien Under Section 6324A.--For purposes of the
second sentence of subsection (a) and the last sentence of
subsection (b), an agreement which meets the requirements of
section 6324A (relating to special lien for estate tax deferred
under section 6166) shall be treated as the furnishing of bond
with respect to the amount for which the time for payment has
been extended under section 6166.
[(d) Good Faith Reliance on Gift Tax Returns.--If the
executor in good faith relies on gift tax returns furnished
under section 6103(e)(3) for determining the decedent's
adjusted taxable gifts, the executor shall be discharged from
personal liability with respect to any deficiency of the tax
imposed by this chapter which is attributable to adjusted
taxable gifts which--
[(1) are made more than 3 years before the date of
the decedent's death, and
[(2) are not shown on such returns.
[SEC. 2205. REIMBURSEMENT OUT OF ESTATE.
[If the tax or any part thereof is paid by, or collected out
of, that part of the estate passing to or in the possession of
any person other than the executor in his capacity as such,
such person shall be entitled to reimbursement out of any part
of the estate still undistributed or by a just and equitable
contribution by the persons whose interest in the estate of the
decedent would have been reduced if the tax had been paid
before the distribution of the estate or whose interest is
subject to equal or prior liability for the payment of taxes,
debts, or other charges against the estate, it being the
purpose and intent of this chapter that so far as is
practicable and unless otherwise directed by the will of the
decedent the tax shall be paid out of the estate before its
distribution.
[SEC. 2206. LIABILITY OF LIFE INSURANCE BENEFICIARIES.
[Unless the decedent directs otherwise in his will, if any
part of the gross estate on which tax has been paid consists of
proceeds of policies of insurance on the life of the decedent
receivable by a beneficiary other than the executor, the
executor shall be entitled to recover from such beneficiary
such portion of the total tax paid as the proceeds of such
policies bear to the taxable estate. If there is more than one
such beneficiary, the executor shall be entitled to recover
from such beneficiaries in the same ratio. In the case of such
proceeds receivable by the surviving spouse of the decedent for
which a deduction is allowed under section 2056 (relating to
marital deduction), this section shall not apply to such
proceeds except as to the amount thereof in excess of the
aggregate amount of the marital deductions allowed under such
section.
[SEC. 2207. LIABILITY OF RECIPIENT OF PROPERTY OVER WHICH DECEDENT HAD
POWER OF APPOINTMENT.
[Unless the decedent directs otherwise in his will, if any
part of the gross estate on which the tax has been paid
consists of the value of property included in the gross estate
under section 2041, the executor shall be entitled to recover
from the person receiving such property by reason of the
exercise, nonexercise, or release of a power of appointment
such portion of the total tax paid as the value of such
property bears to the taxable estate. If there is more than one
such person, the executor shall be entitled to recover from
such persons in the same ratio. In the case of such property
received by the surviving spouse of the decedent for which a
deduction is allowed under section 2056 (relating to marital
deduction), this section shall not apply to such property
except as to the value thereof reduced by an amount equal to
the excess of the aggregateamount of the marital deductions
allowed under section 2056 over the amount of proceeds of insurance
upon the life of the decedent receivable by the surviving spouse for
which proceeds a marital deduction is allowed under such section.
[SEC. 2207A. RIGHT OF RECOVERY IN THE CASE OF CERTAIN MARITAL DEDUCTION
PROPERTY.
[(a) Recovery With Respect to Estate Tax.--
[(1) In general.--If any part of the gross estate
consists of property the value of which is includible
in the gross estate by reason of section 2044 (relating
to certain property for which marital deduction was
previously allowed), the decedent's estate shall be
entitled to recover from the person receiving the
property the amount by which--
[(A) the total tax under this chapter which
has been paid, exceeds
[(B) the total tax under this chapter which
would have been payable if the value of such
property had not been included in the gross
estate.
[(2) Decedent may otherwise direct.--Paragraph (1)
shall not apply with respect to any property to the
extent that the decedent in his will (or a revocable
trust) specifically indicates an intent to waive any
right of recovery under this subchapter with respect to
such property.
[(b) Recovery With Respect to Gift Tax.--If for any calendar
year tax is paid under chapter 12 with respect to any person by
reason of property treated as transferred by such person under
section 2519, such person shall be entitled to recover from the
person receiving the property the amount by which--
[(1) the total tax for such year under chapter 12,
exceeds
[(2) the total tax which would have been payable
under such chapter for such year if the value of such
property had not been taken into account for purposes
of chapter 12.
[(c) More Than One Recipient of Property.--For purposes of
this section, if there is more than one person receiving the
property, the right of recovery shall be against each such
person.
[(d) Taxes and Interest.--In the case of penalties and
interest attributable to additional taxes described in
subsections (a) and (b), rules similar to subsections (a), (b),
and (c) shall apply.
[SEC. 2207B. RIGHT OF RECOVERY WHERE DECEDENT RETAINED INTEREST.
[(a) Estate Tax.--
[(1) In general.--If any part of the gross estate on
which tax has been paid consists of the value of
property included in the gross estate by reason of
section 2036 (relating to transfers with retained life
estate), the decedent's estate shall be entitled to
recover from the person receiving the property the
amount which bears the same ratio to the total tax
under this chapter which has been paid as--
[(A) the value of such property, bears to
[(B) the taxable estate.
[(2) Decedent may otherwise direct.--Paragraph (1)
shall not apply with respect to any property to the
extent that the decedent in his will (or a revocable
trust) specifically indicates an intent to waive any
right of recovery under this subchapter with respect to
such property.
[(b) More Than One Recipient.--For purposes of this section,
if there is more than 1 person receiving the property, the
right of recovery shall be against each such person.
[(c) Penalties and Interest.--In the case of penalties and
interest attributable to the additional taxes described in
subsection (a), rules similar to the rules of subsections (a)
and (b) shall apply.
[(d) No Right of Recovery Against Charitable Remainder
Trusts.--No person shall be entitled to recover any amount by
reason of this section from a trust to which section 664
applies (determined without regard to this section).
[SEC. 2208. CERTAIN RESIDENTS OF POSSESSIONS CONSIDERED CITIZENS OF THE
UNITED STATES.
[A decedent who was a citizen of the United States and a
resident of a possession thereof at the time of his death
shall, for purposes of the tax imposed by this chapter, be
considered a ``citizen'' of the United States within the
meaning of that term wherever used in this title unless he
acquired his United States citizenship solely by reason of (1)
his being a citizen of such possession of the United States, or
(2) his birth or residence within such possession of the United
States.
[SEC. 2209. CERTAIN RESIDENTS OF POSSESSIONS CONSIDERED NONRESIDENTS
NOT CITIZENS OF THE UNITED STATES.
[A decedent who was a citizen of the United States and a
resident of a possession thereof at the time of his death
shall, for purposes of the tax imposed by this chapter, be
considered a ``nonresident not a citizen of the United States''
within the meaning of that term wherever used in this title,
but only if such person acquired his United States citizenship
solely by reason of (1) his being a citizen of such possession
of the United States, or (2) his birth or residence within such
possession of the United States.
[CHAPTER 12--GIFT TAX
[Subchapter A. Determination of tax liability.
[Subchapter B. Transfers.
[Subchapter C. Deductions.
[Subchapter A--Determination of Tax Liability
[Sec. 2501. Imposition of tax.
[Sec. 2502. Rate of tax.
[Sec. 2503. Taxable gifts.
[Sec. 2504. Taxable gifts for preceding calendar periods.
[Sec. 2505. Unified credit against gift tax.
[SEC. 2501. IMPOSITION OF TAX.
[(a) Taxable Transfers.--
[(1) General rule.--A tax, computed as provided in
section 2502, is hereby imposed for each calendar year
on the transfer of property by gift during such
calendar year by any individual resident or
nonresident.
[(2) Transfers of intangible property.--Except as
provided in paragraph (3), paragraph (1) shall not
apply to the transfer of intangible property by a
nonresident not a citizen of the United States.
[(3) Exception.--
[(A) Certain individuals.--Paragraph (2)
shall not apply in the case of a donor who,
within the 10-year period ending with the date
of transfer, lost United States citizenship,
unless such loss did not have for one of its
principal purposes the avoidance of taxes under
this subtitle or subtitle A.
[(B) Certain individuals treated as having
tax avoidance purpose.--For purposes of
subparagraph (A), an individual shall be
treated as having a principal purpose to avoid
such taxes if such individual is so treated
under section 877(a)(2).
[(C) Exception for certain individuals.--
Subparagraph (B) shall not apply to a donor
meeting the requirements of section 877(c)(1).
[(D) Credit for foreign gift taxes.--The tax
imposed by this section solely by reason of
this paragraph shall be credited with the
amount of any gift tax actually paid to any
foreign country in respect of any gift which is
taxable under this section solely by reason of
this paragraph.
[(E) Cross reference.--For comparable
treatment of long-term lawful permanent
residents who ceased to be taxed as residents,
see section 877(e).
[(4) Burden of proof.--If the Secretary establishes
that it is reasonable to believe that an individual's
loss of United
[States citizenship would, but for paragraph (3), result in a
substantial reduction for the calendar year in the taxes on the
transfer of property by gift, the burden of proving that such
loss of citizenship did not have for one of its principal
purposes the avoidance of taxes under this subtitle or subtitle
A shall be on such individual.
[(5) Transfers to political organizations.--Paragraph
(1) shall not apply to the transfer of money or other
property to a political organization (within the
meaning of section 527(e)(1)) for the use of such
organization.
[(b) Certain Residents of Possessions Considered Citizens of
the United States.--A donor who is a citizen of the United
States and a resident of a possession thereof shall, for
purposes of the tax imposed by this chapter, be considered a
``citizen'' of the United States within the meaning of that
term wherever used in this title unless he acquired his United
States citizenship solely by reason of (1) his being a citizen
of such possession of the United States, or
[(2) his birth or residence within such possession of
the United States.
[(c) Certain Residents of Possessions Considered Nonresidents
Not Citizens of the United States.--A donor who is a citizen of
the United States and a resident of a possession thereof shall,
for purposes of the tax imposed by this chapter, be considered
a ``nonresident not a citizen of the United States'' within the
meaning of that term wherever used in this title, but only if
suchdonor acquired his United States citizenship solely by
reason of (1) his being a citizen of such possession of the United
States, or
[(2) his birth or residence within such possession of
the United States.
[(d) Cross References.--
[(1) For increase in basis of property acquired by
gift for gift tax paid, see section 1015(d).
[(2) For exclusion of transfers of property outside
the United States by a nonresident who is not a citizen
of the United States, see section 2511(a).
[SEC. 2502. RATE OF TAX.
[(a) Computation of Tax.--The tax imposed by section 2501 for
each calendar year shall be an amount equal to the excess of--
[(1) a tentative tax, computed under section 2001(c),
on the aggregate sum of the taxable gifts for such
calendar year and for each of the preceding calendar
periods, over
[(2) a tentative tax, computed under such section, on
the aggregate sum of the taxable gifts for each of the
preceding calendar periods.
[(b) Preceding Calendar Period.--Whenever used in this title
in connection with the gift tax imposed by this chapter, the
term ``preceding calendar period'' means--
[(1) calendar years 1932 and 1970 and all calendar
years intervening between calendar year 1932 and
calendar year 1970,
[(2) the first calendar quarter of calendar year 1971
and all calendar quarters intervening between such
calendar quarter and the first calendar quarter of
calendar year 1982, and
[(3) all calendar years after 1981 and before the
calendar year for which the tax is being computed.
For purposes of paragraph (1), the term ``calendar year 1932''
includes only that portion of such year after June 6, 1932.
[(c) Tax to Be Paid By Donor.--The tax imposed by section
2501 shall be paid by the donor.
[SEC. 2503. TAXABLE GIFTS.
[(a) General Definition.--The term ``taxable gifts'' means
the total amount of gifts made during the calendar year, less
the deductions provided in subchapter C (section 2522 and
following).
[(b) Exclusions from Gifts.--
[(1) In general.--In the case of gifts (other than
gifts of future interests in property) made to any
person by the donor during the calendar year, the first
$10,000 of such gifts to such person shall not, for
purposes of subsection (a), be included in the total
amount of gifts made during such year. Where there has
been a transfer to any person of a present interest in
property, the possibility that such interest may be
diminished by the exercise of a power shall be
disregarded in applying this subsection, if no part of
such interest will at any time pass to any other
person.
[(2) Inflation adjustment.--In the case of gifts made
in a calendar year after 1998, the $10,000 amount
contained in paragraph (1) shall be increased by an
amount equal to--
[(A) $10,000, multiplied by
[(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting ``calendar year 1997'' for ``calendar year
1992'' in subparagraph (B) thereof. If any amount as
adjusted under the preceding sentence is not a multiple
of $1,000, such amount shall be rounded to the next
lowest multiple of $1,000.
[(c) Transfer for the Benefit of Minor.--No part of a gift to
an individual who has not attained the age of 21 years on the
date of such transfer shall be considered a gift of a future
interest in property for purposes of subsection (b) if the
property and the income therefrom--
[(1) may be expended by, or for the benefit of, the
donee before his attaining the age of 21 years, and
[(2) will to the extent not so expended--
[(A) pass to the donee on his attaining the
age of 21 years, and
[(B) in the event the donee dies before
attaining the age of 21 years, be payable to
the estate of the donee or as he may appoint
under a general power of appointment as defined
in section 2514(c).
[(e) Exclusion for Certain Transfers for Educational Expenses
or Medical Expenses.--
[(1) In general.--Any qualified transfer shall not be
treated as a transfer of property by gift for purposes
of this chapter.
[(2) Qualified transfer.--For purposes of this
subsection, the term ``qualified transfer'' means any
amount paid on behalf of an individual--
[(A) as tuition to an educational
organization described in section
170(b)(1)(A)(ii) for the education or training
of such individual, or
[(B) to any person who provides medical care
(as defined in section 213(d)) with respect to
such individual as payment for such medical
care.
[(f) Waiver of Certain Pension Rights.--If any individual
waives, before the death of a participant, any survivor
benefit, or right to such benefit, under section 401(a)(11) or
417, such waiver shall not be treated as a transfer of property
by gift for purposes of this chapter.
[(g) Treatment of Certain Loans of Artworks.--
[(1) In general.--For purposes of this subtitle, any
loan of a qualified work of art shall not be treated as
a transfer (and the value of such qualified work of art
shall be determined as if such loan had not been made)
if--
[(A) such loan is to an organization
described in section 501(c)(3) and exempt from
tax undersection 501(c) (other than a private
foundation), and
[(B) the use of such work by such
organization is related to the purpose or
function constituting the basis for its
exemption under section 501.
[(2) Definitions.--For purposes of this section--
[(A) Qualified work of art.--The term
``qualified work of art'' means any
archaeological, historic, or creative tangible
personal property.
[(B) Private foundation.--The term ``private
foundation'' has the meaning given such term by
section 509, except that such term shall not
include any private operating foundation (as
defined in section 4942(j)(3)).
[SEC. 2504. TAXABLE GIFTS FOR PRECEDING CALENDAR PERIODS.
[(a) In General.--In computing taxable gifts for preceding
calendar periods for purposes of computing the tax for any
calendar year--
[(1) there shall be treated as gifts such transfers
as were considered to be gifts under the gift tax laws
applicable to the calendar period in which the
transfers were made,
[(2) there shall be allowed such deductions as were
provided for under such laws, and
[(3) the specific exemption in the amount (if any)
allowable under section 2521 (as in effect before its
repeal by the Tax Reform Act of 1976) shall be applied
in all computations in respect of preceding calendar
periods ending before January 1, 1977, for purposes of
computing the tax for any calendar year.
[(b) Exclusions from Gifts for Preceding Calendar Periods.--
In the case of gifts made to any person by the donor during
preceding calendar periods, the amount excluded, if any, by the
provisions of gift tax laws applicable to the periods in which
the gifts were made shall not, for purposes of subsection (a),
be included in the total amount of the gifts made during such
preceding calendar periods.
[(c) Valuation of Gifts.--If the time has expired under
section 6501 within which a tax may be assessed under this
chapter 12 (or under corresponding provisions of prior laws)
on--
[(1) the transfer of property by gift made during a
preceding calendar period (as defined in section
2502(b)); or
[(2) an increase in taxable gifts required under
section 2701(d), the value thereof shall, for purposes
of computing the tax under this chapter, be the value
as finally determined (within the meaning of section
2001(f)(2)) for purposes of this chapter.
[(d) Net Gifts.--The term ``net gifts'' as used in
corresponding provisions of prior laws shall be read as
``taxable gifts'' for purposes of this chapter.
[SEC. 2505. UNIFIED CREDIT AGAINST GIFT TAX.
[(a) General Rule.--In the case of a citizen or resident of
the United States, there shall be allowed as a credit against
the tax imposed by section 2501 for each calendar year an
amount equal to--
[(1) the applicable credit amount in effect under
section 2010(c) for such calendar year, reduced by
[(2) the sum of the amounts allowable as a credit to
the individual under this section for all preceding
calendar periods.
[(b) Adjustment to Credit for Certain Gifts Made Before
1977.--The amount allowable under subsection (a) shall be
reduced by an amount equal to 20 percent of the aggregate
amount allowed as a specific exemption under section 2521 (as
in effect before its repeal by the Tax Reform Act of 1976) with
respect to gifts made by the individual after September 8,
1976.
[(c) Limitation Based on Amount of Tax.--The amount of the
credit allowed under subsection (a) for any calendar year shall
not exceed the amount of the tax imposed by section 2501 for
such calendar year.
[Subchapter B--Transfers
[Sec. 2511. Transfers in general.
[Sec. 2512. Valuation of gifts.
[Sec. 2513. Gift by husband or wife to third party.
[Sec. 2514. Powers of appointment.
[Sec. 2515. Treatment of generation-skipping transfer tax.
[Sec. 2516. Certain property settlements.
[Sec. 2518. Disclaimers.
[Sec. 2519. Disposition of certain life estates.
[SEC. 2511. TRANSFERS IN GENERAL.
[(a) Scope.--Subject to the limitations contained in this
chapter, the tax imposed by section 2501 shall apply whether
the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or
personal, tangible or intangible; but in the case of a
nonresident not a citizen of the United States, shall apply to
a transfer only if the property is situated within the United
States.
[(b) Intangible Property.--For purposes of this chapter, in
the case of a nonresident not a citizen of the United States
who is excepted from the application of section 2501(a)(2)--
[(1) shares of stock issued by a domestic
corporation, and
[(2) debt obligations of--
[(A) a United States person, or
[(B) the United States, a State or any
political subdivision thereof, or the District
of Columbia,
which are owned and held by such nonresident shall be deemed to
be property situated within the United States.
[SEC. 2512. VALUATION OF GIFTS.
[(a) If the gift is made in property, the value thereof at
the date of the gift shall be considered the amount of the
gift.
[(b) Where property is transferred for less than an adequate
and full consideration in money or money's worth, then the
amount by which the value of the property exceeded the value of
the consideration shall be deemed a gift, and shall be included
in computing the amount of gifts made during the calendar year.
[(c) Cross Reference.--For individual's right to be furnished
on request a statement regarding any valuation made by the
Secretary of a gift by that individual, see section 7517.
[SEC. 2513. GIFT BY HUSBAND OR WIFE TO THIRD PARTY.
[(a) Considered as Made One-Half by Each.--
[(1) In general.--A gift made by one spouse to any
person other than his spouse shall, for the purposes of
this chapter, be considered as made one-half by him and
one-half by his spouse, but only if at the time of the
gift each spouse is a citizen or resident of the United
States. This paragraph shall not apply with respect to
a gift by a spouse of an interest in property if he
creates in his spouse a general power of appointment,
as defined in section 2514(c), over such interest. For
purposes of this section, an individual shall be
considered as the spouse of another individual only if
he is married to such individual at the time of the
gift and does not remarry during the remainder of the
calendar year.
[(2) Consent of both spouses.--Paragraph (1) shall
apply only if both spouses have signified (under the
regulations provided for in subsection (b)) their
consent to the application of paragraph (1) in the case
of all such gifts made during the calendar year by
either while married to the other.
[(b) Manner and Time of Signifying Consent.--
[(1) Manner.--A consent under this section shall be
signified in such manner as is provided under
regulations prescribed by the Secretary.
[(2) Time.--Such consent may be so signified at any
time after the close of the calendar year in which the
gift was made, subject to the following limitations--
[(A) The consent may not be signified after
the 15th day of April following the close of
such year, unless before such 15th day no
return has been filed for such year by either
spouse, in which case the consent may not be
signified after a return for such year is filed
by either spouse.
[(B) The consent may not be signified after a
notice of deficiency with respect to the tax
for such year has been sent to either spouse in
accordance with section 6212(a).
[(c) Revocation of Consent.--Revocation of a consent
previously signified shall be made in such manner as is
provided under regulations prescribed by the Secretary, but the
right to revoke a consent previously signified with respect to
a calendar year--
[(1) shall not exist after the 15th day of April
following the close of such year if the consent was
signified on or before such 15th day; and
[(2) shall not exist if the consent was not signified
until after such 15th day.
[(d) Joint and Several Liability for Tax.--If the consent
required by subsection (a)(2) is signified with respect to a
gift made in any calendar year, the liability with respect to
the entire tax imposed by this chapter of each spouse for such
year shall be joint and several.
[SEC. 2514. POWERS OF APPOINTMENT.
[(a) Powers Created On or Before October 21, 1942.--An
exercise of a general power of appointment created on or before
October 21, 1942, shall be deemed a transfer of property by the
individual possessing such power; but the failure to exercise
such a power or the complete release of such a power shall not
be deemed an exercise thereof. If a general power of
appointment created on or before October 21, 1942, has been
partially released so that it is no longer a general power of
appointment, the subsequent exercise of such power shall not be
deemed to be the exercise of a general power of appointment
if--
[(1) such partial release occurred before November 1,
1951, or
[(2) the donee of such power was under a legal
disability to release such power on October 21, 1942,
and such partial release occurred not later than six
months after the termination of such legal disability.
[(b) Powers Created After October 21, 1942.--The exercise or
release of a general power of appointment created after October
21, 1942, shall be deemed a transfer of property by the
individual possessing such power.
[(c) Definition of General Power of Appointment.--For
purposes of this section, the term ``general power of
appointment'' means a power which is exercisable in favor of
the individual possessing the power (hereafter in this
subsection referred to as the ``possessor''), his estate, his
creditors, or the creditors of his estate; except that--
[(1) A power to consume, invade, or appropriate
property for the benefit of the possessor which is
limited by an ascertainable standard relating to the
health, education, support, or maintenance of the
possessor shall not be deemed a general power of
appointment.
[(2) A power of appointment created on or before
October 21, 1942, which is exercisable by the possessor
only in conjunction with another person shall not be
deemed a general power of appointment.
[(3) In the case of a power of appointment created
after October 21, 1942, which is exercisable by the
possessor only in conjunction with another person--
[(A) if the power is not exercisable by the
possessor except in conjunction with the
creator of the power--such power shall not be
deemed a general power of appointment;
[(B) if the power is not exercisable by the
possessor except in conjunction with a person
having a substantial interest, in the property
subject to the power, which is adverse to
exercise of the power in favor of the
possessor--such power shall not be deemed a
general power of appointment. For the purposes
of this subparagraph a person who, after the
death of the possessor, may be possessed of a
power of appointment (with respect to the
property subject to the possessor's power)
which he may exercise in his own favor shall be
deemed as having an interest in the property
and such interest shall be deemed adverse to
such exercise of the possessor's power;
[(C) if (after the application of
subparagraphs (A) and (B)) the power is a
general power of appointment and is exercisable
in favor of such other person--such power shall
be deemed a general power of appointment only
in respect of a fractional part of the property
subject to such power, such part to be
determined by dividing the value of such
property by the number of such persons
(including the possessor) in favor of whom such
power is exercisable.
For purposes of subparagraphs (B) and (C), a power
shall be deemed to be exercisable in favor of a person
if it is exercisable in favor of such person, his
estate, his creditors, or the creditors of his estate.
[(d) Creation of Another Power in Certain Cases.--If a power
of appointment created after October 21, 1942, is exercised by
creating another power of appointment which, under the
applicable local law, can be validly exercised so as to
postpone the vesting of any estate or interest in the property
which was subject to the first power, or suspend the absolute
ownership or power of alienation of such property, for a period
ascertainable without regard to the date of the creation of the
first power, such exercise of the first power shall, to the
extent of the property subject to the second power, be deemed a
transfer of property by the individual possessing such power.
[(e) Lapse of Power.--The lapse of a power of appointment
created after October 21, 1942, during the life of the
individual possessing the power shall be considered a release
of such power. The rule of the preceding sentence shall apply
with respect to the lapse of powers during any calendar year
only to the extent that the property which could have been
appointed by exercise of such lapsed powers exceeds in value
the greater of the following amounts:
[(1) $5,000, or
[(2) 5 percent of the aggregate value of the assets
out of which, or the proceeds of which, the exercise of
the lapsed powers could be satisfied.
[(f) Date of Creation of Power.--For purposes of this section
a power of appointment created by a will executed on or before
October 21, 1942, shall be considered a power created on or
before such date if the person executing such will dies before
July 1, 1949, without having republished such will, by codicil
or otherwise, after October 21, 1942.
[SEC. 2515. TREATMENT OF GENERATION-SKIPPING TRANSFER TAX.
[In the case of any taxable gift which is a direct skip
(within the meaning of chapter 13), the amount of such gift
shall be increased by the amount of any tax imposed on the
transferor under chapter 13 with respect to such gift.
[SEC. 2516. CERTAIN PROPERTY SETTLEMENTS.
[Where a husband and wife enter into a written agreement
relative to their marital and property rights and divorce
occurs within the 3-year period beginning on the date 1 year
before such agreement is entered into (whether or not such
agreement is approved by the divorce decree), any transfers of
property or interests in property made pursuant to such
agreement--
[(1) to either spouse in settlement of his or her
marital or property rights, or
[(2) to provide a reasonable allowance for the
support of issue of the marriage during minority, shall
be deemed to be transfers made for a full and adequate
consideration in money or money's worth.
[SEC. 2518. DISCLAIMERS.
[(a) General Rule.--For purposes of this subtitle, if a
person makes a qualified disclaimer with respect to any
interest in property, this subtitle shall apply with respect to
such interest as if the interest had never been transferred to
such person.
[(b) Qualified Disclaimer Defined.--For purposes of
subsection (a), the term ``qualified disclaimer'' means an
irrevocable and unqualified refusal by a person to accept an
interest in property but only if--
[(1) such refusal is in writing,
[(2) such writing is received by the transferor of
the interest, his legal representative, or the holder
of the legal title to the property to which the
interest relates not later than the date which is 9
months after the later of--
[(A) the day on which the transfer creating
the interest in such person is made, or
[(B) the day on which such person attains age
21,
[(3) such person has not accepted the interest or any
of its benefits, and
[(4) as a result of such refusal, the interest passes
without any direction on the part of the person making
the disclaimer and passes either--
[(A) to the spouse of the decedent, or
[(B) to a person other than the person making
the disclaimer.
[(c) Other Rules.--For purposes of subsection (a)--
[(1) Disclaimer of undivided portion of interest.--A
disclaimer with respect to an undivided portion of an
interest which meets the requirements of the preceding
sentence shall be treated as a qualified disclaimer of
such portion of the interest.
[(2) Powers.--A power with respect to property shall
be treated as an interest in such property.
[(3) Certain transfers treated as disclaimers.--A
written transfer of the transferor's entire interest in
the property--
[(A) which meets requirements similar to the
requirements of paragraphs (2) and (3) of
subsection (b), and
[(B) which is to a person or persons who
would have received the property had the
transferor made a qualified disclaimer (within
the meaning of subsection (b)), shall be
treated as a qualified disclaimer.
[SEC. 2519. DISPOSITIONS OF CERTAIN LIFE ESTATES.
[(a) General Rule.--For purposes of this chapter and chapter
11, any disposition of all or part of a qualifying income
interest for life in any property to which this section applies
shall be treated as a transfer of all interests in such
property other than the qualifying income interest.
[(b) Property to Which This Subsection Applies.--This section
applies to any property if a deduction was allowed with respect
to the transfer of such property to the donor--
[(1) under section 2056 by reason of subsection
(b)(7) thereof, or
[(2) under section 2523 by reason of subsection (f)
thereof.
[(c) Cross Reference.--For right of recovery for gift tax in
the case of property treated as transferred under this
section,see section 2207A(b).
[Subchapter C--Deductions
[Sec. 2522. Charitable and similar gifts.
[Sec. 2522. Gift to spouse.
[Sec. 2522. Extent of deductions.
[SEC. 2522. CHARITABLE AND SIMILAR GIFTS.
[(a) Citizens or Residents.--In computing taxable gifts for
the calendar year, there shall be allowed as a deduction in the
case of a citizen or resident the amount of all gifts made
during such year to or for the use of--
[(1) the United States, any State, or any political
subdivision thereof, or the District of Columbia, for
exclusively public purposes;
[(2) a corporation, or trust, or community chest,
fund, or foundation, organized and operated exclusively
for religious, charitable, scientific, literary, or
educational purposes, or to foster national or
international amateur sports competition (but only if
no part of its activities involve the provision of
athletic facilities or equipment), including the
encouragement of art and the prevention of cruelty to
children or animals, no part of the net earnings of
which inures to the benefit of any private shareholder
or individual, which is not disqualified for tax
exemption under section 501(c)(3) by reason of
attempting to influence legislation, and which does not
participate in, or intervene in (including the
publishing or distributing of statements), any
political campaign on behalf of (or in opposition to)
any candidate for public office;
[(3) a fraternal society, order, or association,
operating under the lodge system, but only if such
gifts are to be used exclusively for religious,
charitable, scientific, literary, or educational
purposes, including the encouragement of art and the
prevention of cruelty to children or animals;
[(4) posts or organizations of war veterans, or
auxiliary units or societies of any such posts or
organizations, if such posts, organizations, units, or
societies are organized in the United States or any of
its possessions, and if no part of their net earnings
inures to the benefit of any private shareholder or
individual.
Rules similar to the rules of section 501(j) shall apply for
purposes of paragraph (2).
[(b) Nonresidents.--In the case of a nonresident not a
citizen of the United States, there shall be allowed as a
deduction the amount of all gifts made during such year to or
for the use of--
[(1) the United States, any State, or any political
subdivision thereof, or the District of Columbia, for
exclusively public purposes;
[(2) a domestic corporation organized and operated
exclusively for religious, charitable, scientific,
literary, or educational purposes, including the
encouragement of art and the prevention of cruelty to
children or animals, no part of the net earnings of
which inures to the benefit of any private shareholder
or individual, which is not disqualified for tax
exemption under section 501(c)(3) by reason of
attempting to influence legislation, and which does not
participate in, or intervene in (including the
publishing or distributing of statements), any
political campaign on behalf of (or in opposition to)
any candidate for public office;
[(3) a trust, or community chest, fund, or
foundation, organized and operated exclusively for
religious, charitable, scientific, literary, or
educational purposes, including the encouragement of
art and the prevention of cruelty to children or
animals, no substantial part of the activities of which
is carrying on propaganda, or otherwise attempting, to
influence legislation, and which does not participate
in, or intervene in (including the publishing or
distributing of statements), any political campaign on
behalf of (or in opposition to) any candidate for
public office; but only if such gifts are to be used
within the United States exclusively for such purposes;
[(4) a fraternal society, order, or association,
operating under the lodge system, but only if such
gifts are to be used within the United States
exclusively for religious, charitable, scientific,
literary, or educational purposes, including the
encouragement of art and the prevention of cruelty to
children or animals;
[(5) posts or organizations of war veterans, or
auxiliary units or societies of any such posts or
organizations, if such posts, organizations, units, or
societies are organized in the United States or any of
its possessions, and if no part of their net earnings
inures to the benefit of any private shareholder or
individual.
[(c) Disallowance of Deductions in Certain Cases.--
[(1) No deduction shall be allowed under this section
for a gift to or for the use of an organization or
trust described in section 508(d) or 4948(c)(4) subject
to the conditions specified in such sections.
[(2) Where a donor transfers an interest in property
(other than an interest described in section
170(f)(3)(B)) to a person, or for a use, described in
subsection (a) or (b) and an interest in the same
property is retained by the donor, or is transferred or
has been transferred (for less than an adequate and
full consideration in money or money's worth) from the
donor to a person, or for a use, not described in
subsection (a) or (b), no deduction shall be allowed
under this section for the interest which is, or has
been transferred to the person, or for the use,
described in subsection (a) or (b), unless--
[(A) in the case of a remainder interest,
such interest is in a trust which is a
charitable remainder annuity trust or a
charitable remainder unitrust (described in
section 664) or a pooled income fund (described
in section 642(c)(5)), or
[(B) in the case of any other interest, such
interest is in the form of a guaranteed annuity
or is a fixed percentage distributed yearly of
the fair market value of the property (to be
determinedyearly).
[(3) Rules similar to the rules of section 2055(e)(4)
shall apply for purposes of paragraph (2).
[(4) Reformations to comply with paragraph (2)
[(A) In general.--A deduction shall be
allowed under subsection (a) in respect of any
qualified reformation (within the meaning of
section 2055(e)(3)(B)).
[(B) Rules similar to section 2055(e)(3) to
apply.--For purposes of this paragraph, rules
similar to the rules of section 2055(e)(3)
shall apply.
[(d) Special Rule for Irrevocable Transfers of Easements in
Real Property.--A deduction shall be allowed under subsection
(a) in respect of any transfer of a qualified real property
interest (as defined in section 170(h)(2)(C)) which meets the
requirements of section 170(h) (without regard to paragraph
(4)(A) thereof).
[(e) Cross References.--
[(1) For treatment of certain organizations providing child
care, see section 501(k).
[(2) For exemption of certain gifts to or for the benefit of
the United States and for rules of construction with respect to
certain bequests, see section 2055(f).
[(3) For treatment of gifts to or for the use of Indian tribal
governments (or their subdivisions), see section 7871.
[SEC. 2523. GIFT TO SPOUSE.
[(a) Allowance of Deduction.--Where a donor transfers during
the calendar year by gift an interest in property to a donee
who at the time of the gift is the donor's spouse, there shall
be allowed as a deduction in computing taxable gifts for the
calendar year an amount with respect to such interest equal to
its value.
[(b) Life Estate or Other Terminable Interest.--Where, on the
lapse of time, on the occurrence of an event or contingency, or
on the failure of an event or contingency to occur, such
interest transferred to the spouse will terminate or fail, no
deduction shall be allowed with respect to such interest--
[(1) if the donor retains in himself, or transfers or
has transferred (for less than an adequate and full
consideration in money or money's worth) to any person
other than such donee spouse (or the estate of such
spouse), an interest in such property, and if by reason
of such retention or transfer the donor (or his heirs
or assigns) or such person (or his heirs or assigns)
may possess or enjoy any part of such property after
such termination or failure of the interest transferred
to the donee spouse; or
[(2) if the donor immediately after the transfer to
the donee spouse has a power to appoint an interest in
such property which he can exercise (either alone or in
conjunction with any person) in such manner that the
appointee may possess or enjoy any part of such
property after such termination or failure of the
interest transferred to the donee spouse. For purposes
of this paragraph, the donor shall be considered as
having immediately after the transfer to the donee
spouse such power to appoint even though such power
cannot be exercised until after the lapse of time, upon
the occurrence of an event or contingency, or on the
failure of an event or contingency to occur.
An exercise or release at any time by the donor, either alone
or in conjunction with any person, of a power to appoint an
interest in property, even though not otherwise a transfer,
shall, for purposes of paragraph (1), be considered as a
transfer by him. Except as provided in subsection (e), where at
the time of the transfer it is impossible to ascertain the
particular person or persons who may receive from the donor an
interest in property so transferred by him, such interest
shall, for purposes of paragraph (1), be considered as
transferred to a person other than the donee's spouse.
[(c) Interest in Unidentified Assets.--Where the assets out
of which, or the proceeds of which, the interest transferred to
the donee spouse may be satisfied include a particular asset or
assets with respect to which no deduction would be allowed if
such asset or assets were transferred from the donor to such
spouse, then the value of the interest transferred to such
spouse shall, for purposes of subsection (a), be reduced by the
aggregate value of such particular assets.
[(d) Joint Interests.--If the interest is transferred to the
donee spouse as sole joint tenant with the donor or as tenant
by the entirety, the interest of the donor in the property
which exists solely by reason of the possibility that the donor
may survive the donee spouse, or that there may occur a
severance of the tenancy, shall not be considered for purposes
of subsection (b) as an interest retained by the donor in
himself.
[(e) Life Estate With Power of Appointment in Donee Spouse.--
Where the donor transfers an interest in property, if by such
transfer his spouse is entitled for life to all of the income
from the entire interest, or all the income from a specific
portion thereof, payable annually or at more frequent
intervals, with power in the donee spouse to appoint the entire
interest, or such specific portion (exercisable in favor of
such donee spouse, or of the estate of such donee spouse, or in
favor of either, whether or not in each case the power is
exercisable in favor of others), and with no power in any other
person to appoint any part of such interest, or such portion,
to any person other than the donee spouse--
[(1) the interest, or such portion, so transferred
shall, for purposes of subsection (a) be considered as
transferred to the donee spouse, and
[(2) no part of the interest, or such portion, so
transferred shall, for purposes of subsection (b)(1),
be considered as retained in the donor or transferred
to any person other than the donee spouse.
This subsection shall apply only if, by such transfer, such
power in the donee spouse to appoint the interest, or such
portion, whether exercisable by will or during life, is
exercisable by such spouse alone and in all events. For
purposes of this subsection, the term ``specific portion'' only
includes a portion determined on a fractional or percentage
basis.
[(f) Election With Respect to Life Estate for Donee Spouse.--
[(1) In general.--In the case of qualified terminable
interest property--
[(A) for purposes of subsection (a), such
property shall be treated as transferred to the
donee spouse, and
[(B) for purposes of subsection (b)(1), no
part of such property shall be considered as
retained in the donor or transferred to any
person other than the donee spouse.
[(2) Qualified terminable interest property.--For
purposes of this subsection, the term ``qualified
terminable interest property'' means any property--
[(A) which is transferred by the donor
spouse,
[(B) in which the donee spouse has a
qualifying income interest for life, and
[(C) to which an election under this
subsection applies.
[(3) Certain rules made applicable.--For purposes of
this subsection, rules similar to the rules of clauses
(ii), (iii), and (iv) of section 2056(b)(7)(B) shall
apply and the rules of section 2056(b)(10) shall apply.
[(4) Election.--
[(A) Time and manner.--An election under this
subsection with respect to any property shall
be made on or before the date prescribed by
section 6075(b) for filing a gift tax return
with respect to the transfer (determined
without regard to section 6019(2)) and shall be
made in such manner as the Secretary shall by
regulations prescribe.
[(B) Election irrevocable.--An election under
this subsection, once made, shall be
irrevocable.
[(5) Treatment of interest retained by donor
spouse.--
[(A) In general.--In the case of any
qualified terminable interest property--
[(i) such property shall not be
includible in the gross estate of the
donor spouse, and
[(ii) any subsequent transfer by the
donor spouse of an interest in such
property shall not be treated as a
transfer for purposes of this chapter.
[(B) Subparagraph (A) not to apply after
transfer by donee spouse.--Subparagraph (A)
shall not apply with respect to any property
after the donee spouse is treated as having
transferred such property under section 2519,
or such property is includible in the donee
spouse's gross estate under section 2044.
[(6) Treatment of joint and survivor annuities.--In
the case of a joint and survivor annuity where only the
donor spouse and donee spouse have the right to receive
payments before the death of the last spouse to die--
[(A) the donee spouse's interest shall be
treated as a qualifying income interest for
life,
[(B) the donor spouse shall be treated as
having made an election under this subsection
with respect to such annuity unless the donor
spouse otherwise elects on or before the date
specified inparagraph (4)(A),
[(C) paragraph (5) and section 2519 shall not
apply to the donor spouse's interest in the
annuity, and
[(D) if the donee spouse dies before the
donor spouse, no amount shall be includible in
the gross estate of the donee spouse under
section 2044 with respect to such annuity.
An election under subparagraph (B), once made, shall be
irrevocable.
[(g) Special Rule for Charitable Remainder Trusts.--
[(1) In general.--If, after the transfer, the donee
spouse is the only noncharitable beneficiary (other
than the donor) of a qualified charitable remainder
trust, subsection (b) shall not apply to the interest
in such trust which is transferred to the donee spouse.
[(2) Definitions.--For purposes of paragraph (1), the
terms ``noncharitable beneficiary'' and ``qualified
charitable remainder trust'' have the meanings given to
such terms by section 2056(b)(8)(B).
[(h) Denial of Double Deduction.--Nothing in this section or
any other provision of this chapter shall allow the value of
any interest in property to be deducted under this chapter more
than once with respect to the same donor.
[(i) Disallowance of Marital Deduction Where Spouse Not
Citizen.--If the spouse of the donor is not a citizen of the
United States--
[(1) no deduction shall be allowed under this
section,
[(2) section 2503(b) shall be applied with respect to
gifts which are made by the donor to such spouse and
with respect to which a deduction would be allowable
under this section but for paragraph (1) by
substituting ``$100,000'' for ``$10,000'', and
[(3) the principles of sections 2515 and 2515A (as
such sections were in effect before their repeal by the
Economic Recovery Tax Act of 1981) shall apply, except
that the provisions of such section 2515 providing for
an election shall not apply.
This subsection shall not apply to any transfer resulting from
the acquisition of rights under a joint and survivor annuity
described in subsection (f)(6).
[SEC. 2524. EXTENT OF DEDUCTIONS.
[The deductions provided in sections 2522 and 2523 shall be
allowed only to the extent that the gifts therein specified are
included in the amount of gifts against which such deductions
are applied.
[CHAPTER 13--TAX ON CERTAIN GENERATION-SKIPPING TRANSFERS
[Subchapter A. Tax imposed.
[Subchapter B. Generation-skipping transfers.
[Subchapter C. Taxable amount.
[Subchapter D. GST exemption.
[Subchapter E. Applicable rate; inclusion ratio.
[Subchapter F. Other definitions and special rules.
[Subchapter G. Administration.
[Subchapter A--Tax Imposed
[SEC. 2601. TAX IMPOSED.
[A tax is hereby imposed on every generation-skipping
transfer (within the meaning of subchapter B).
[SEC. 2602. AMOUNT OF TAX.
[The amount of the tax imposed by section 2601 is--
[(1) the taxable amount (determined under subchapter
C), multiplied by
[(2) the applicable rate (determined under subchapter
E).
[SEC. 2603. LIABILITY FOR TAX.
[(a) Personal Liability.--
[(1) Taxable distributions.--In the case of a taxable
distribution, the tax imposed by section 2601 shall be
paid by the transferee.
[(2) Taxable termination.--In the case of a taxable
termination or a direct skip from a trust, the tax
shall be paid by the trustee.
[(3) Direct skip.--In the case of a direct skip
(other than a direct skip from a trust), the tax shall
be paid by the transferor.
[(b) Source of tax.--Unless otherwise directed pursuant to
the governing instrument by specific reference to the tax
imposed by this chapter, the tax imposed by this chapter on a
generation-skipping transfer shall be charged to the property
constituting such transfer.
[(c) Cross Reference.--For provisions making estate and gift
tax provisions with respect to transferee liability, liens, and
related matters applicable to the tax imposed by section 2601,
see section 2661.
[SEC. 2604. CREDIT FOR CERTAIN STATE TAXES.
[(a) General Rule.--If a generation-skipping transfer (other
than a direct skip) occurs at the same time as and as a result
of the death of an individual, a credit against the tax imposed
by section 2601 shall be allowed in an amount equal to the
generation-skipping transfer tax actually paid to any State in
respect to any property included in the generation-skipping
transfer.
[(b) Limitation.--The aggregate amount allowed as a credit
under this section with respect to any transfer shall not
exceed 5 percent of the amount of the tax imposed by section
2601 on such transfer.
[Subchapter B--Generation-Skipping Transfers
[Sec. 2611. Generation-skipping transfer defined.
[Sec. 2612. Taxable termination; taxable distribution; direct
skip.
[Sec. 2613. Skip person and non-skip person defined.
[SEC. 2611. GENERATION-SKIPPING TRANSFER DEFINED.
[(a) In General.--For purposes of this chapter, the term
``generation-skipping transfer'' means--
[(1) a taxable distribution,
[(2) a taxable termination, and
[(3) a direct skip.
[(b) Certain Transfers Excluded.--The term ``generation-
skipping transfer'' does not include--
[(1) any transfer which, if made inter vivos by an
individual, would not be treated as a taxable gift by
reason of section 2503(e) (relating to exclusion of
certain transfers for educational or medical expenses),
and
[(2) any transfer to the extent--
[(A) the property transferred was subject to
a prior tax imposed under this chapter,
[(B) the transferee in the prior transfer was
assigned to the same generation as (or a lower
generation than) the generation assignment of
the transferee in this transfer, and
[(C) such transfers do not have the effect of
avoiding tax under this chapter with respect to
any transfer.
[SEC. 2612. TAXABLE TERMINATION; TAXABLE DISTRIBUTION; DIRECT SKIP.
[(a) Taxable Termination.--
[(1) General rule.--For purposes of this chapter, the
term ``taxable termination'' means the termination (by
death, lapse of time, release of power, or otherwise)
of an interest in property held in a trust unless--
[(A) immediately after such termination, a
non-skip person has an interest in such
property, or
[(B) at no time after such termination may a
distribution (including distributions on
termination) be made from such trust to a skip
person.
[(2) Certain partial terminations treated as
taxable.--If, upon the termination of an interest in
property held in trust by reason of the death of a
lineal descendant of the transferor, a specified
portion of the trust's assets are distributed to 1 or
more skip persons (or 1 or more trusts for the
exclusive benefit of such persons), such termination
shall constitute a taxable termination with respect to
such portion of the trust property.
[(b) Taxable Distribution.--For purposes of this chapter, the
term ``taxable distribution'' means any distribution from a
trust to a skip person (other than a taxable termination or a
direct skip).
[(c) Direct Skip.--For purposes of this chapter--
[(1) In general.--The term ``direct skip'' means a
transfer subject to a tax imposed by chapter 11 or 12
of an interest in property to a skip person.
[(2) Look-thru rules not to apply.--Solely for
purposes of determining whether any transfer to a trust
is a direct skip, the rules of section 2651(f)(2) shall
not apply.
[SEC. 2613. SKIP PERSON AND NON-SKIP PERSON DEFINED.
[(a) Skip Person.--For purposes of this chapter, the term
``skip person'' means--
[(1) a natural person assigned to a generation which
is 2 or more generations below the generation
assignment of the transferor, or
[(2) a trust--
[(A) if all interests in such trust are held
by skip persons, or
[(B) if--
[(i) there is no person holding an
interest in such trust, and
[(ii) at no time after such transfer
may a distribution (including
distributions on termination) be made
from such trust to a nonskip person.
[(b) Non-Skip Person.--For purposes of this chapter, the term
``non-skip person'' means any person who is not a skipperson.
[Subchapter C--Taxable Amount
[Sec. 2621. Taxable amount in case of taxable distribution.
[Sec. 2622. Taxable amount in case of taxable termination.
[Sec. 2623. Taxable amount in case of direct skip.
[Sec. 2624. Valuation.
[SEC. 2621. TAXABLE AMOUNT IN CASE OF TAXABLE DISTRIBUTION.
[(a) In General.--For purposes of this chapter, the taxable
amount in the case of any taxable distribution shall be--
[(1) the value of the property received by the
transferee, reduced by
[(2) any expense incurred by the transferee in
connection with the determination, collection, or
refund of the tax imposed by this chapter with respect
to such distribution.
[(b) Payment of GST Tax Treated as Taxable Distribution.--For
purposes of this chapter, if any of the tax imposed by this
chapter with respect to any taxable distribution is paid out of
the trust, an amount equal to the portion so paid shall be
treated as a taxable distribution.
[SEC. 2622. TAXABLE AMOUNT IN CASE OF TAXABLE TERMINATION.
[(a) In General.--For purposes of this chapter, the taxable
amount in the case of a taxable termination shall be--
[(1) the value of all property with respect to which
the taxable termination has occurred, reduced by
[(2) any deduction allowed under subsection (b).
[(b) Deduction for Certain Expenses.--For purposes of
subsection (a), there shall be allowed a deduction similar to
the deduction allowed by section 2053 (relating to expenses,
indebtedness, and taxes) for amounts attributable to the
property with respect to which the taxable termination has
occurred.
[SEC. 2623. TAXABLE AMOUNT IN CASE OF DIRECT SKIP.
[For purposes of this chapter, the taxable amount in the case
of a direct skip shall be the value of the property received by
the transferee.
[SEC. 2624. VALUATION.
[(a) General Rule.--Except as otherwise provided in this
chapter, property shall be valued as of the time of the
generation-skipping transfer.
[(b) Alternate Valuation and Special Use Valuation Elections
Apply to Certain Direct Skips.--In the case of any direct skip
of property which is included in the transferor's gross estate,
the value of such property for purposes of this chapter shall
be the same as its value for purposes of chapter 11 (determined
with regard to sections 2032 and 2032A).
[(c) Alternate Valuation Election Permitted in the Case of
Taxable Terminations Occurring at Death.--If 1 or more taxable
terminations with respect to the same trust occur at the same
time as and as a result of the death of an individual, an
election may be made to value all of the property included in
such terminations in accordance with section 2032.
[(d) Reduction for Consideration Provided by Transferee.--For
purposes of this chapter, the value of the property transferred
shall be reduced by the amount of any consideration provided by
the transferee.
[Subchapter D--GST Exemption
[Sec. 2631. GST Exemption.
[Sec. 2632. Special rules for allocation of GST exemption.
[SEC. 2631. GST EXEMPTION.
[(a) General Rule.--For purposes of determining the inclusion
ratio, every individual shall be allowed a GST exemption of
$1,000,000 which may be allocated by such individual (or his
executor) to any property with respect to which such individual
is the transferor.
[(b) Allocations Irrevocable.--Any allocation under
subsection (a), once made, shall be irrevocable.
[(c) Inflation Adjustment.--
[(1) In general.--In the case of any calendar year
after 1998, the $1,000,000 amount contained in
subsection (a) shall be increased by an amount equal
to--
[(A) $1,000,000, multiplied by
[(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting ``calendar year 1997'' for
``calendar year 1992'' in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $10,000, such amount shall be
rounded to the next lowest multiple of $10,000.
[(2) Allocation of increase.--Any increase under
paragraph (1) for any calendar year shall apply only to
generation-skipping transfers made during or after such
calendar year; except that no such increase for
calendar years after the calendar year in which the
transferor dies shall apply to transfers by such
transferor.
[SEC. 2632. SPECIAL RULES FOR ALLOCATION OF GST EXEMPTION.
[(a) Time and Manner of Allocation.--
[(1) Time.--Any allocation by an individual of his
GST exemption under section 2631(a) may be made at any
time on or before the date prescribed for filing the
estate tax return for such individual's estate
(determined with regard to extensions), regardless of
whether such a return is required to be filed.
[(2) Manner.--The Secretary shall prescribe by forms
or regulations the manner in which any allocation
referred to in paragraph (1) is to be made.
[(b) Deemed Allocation to Certain Lifetime Direct Skips.--
[(1) In general.--If any individual makes a direct
skip during his lifetime, any unused portion of such
individual's GST exemption shall be allocated to the
property transferred to the extent necessary to make
the inclusion ratio for such property zero. If the
amount of the direct skip exceeds such unused portion,
the entire unused portion shall be allocated to the
property transferred.
[(2) Unused portion.--For purposes of paragraph (1),
the unused portion of an individual's GST exemption is
that portion of such exemption which has not previously
been allocated by such individual (or treated as
allocated under paragraph (1) with respect to a prior
direct skip).
[(3) Subsection not to apply in certain cases.--An
individual may elect to have this subsection not apply
to a transfer.
[(c) Allocation of Unused GST Exemption.--
[(1) In general.--Any portion of an individual's GST
exemption which has not been allocated within the time
prescribed by subsection (a) shall be deemed to be
allocated as follows--
[(A) first, to property which is the subject
of a direct skip occurring at such individual's
death, and
[(B) second, to trusts with respect to which
such individual is the transferor and from
which a taxable distribution or a taxable
termination might occur at or after such
individual's death.
[(2) Allocation within categories.--
[(A) In general.--The allocation under
paragraph (1) shall be made among the
properties described in subparagraph (A)
thereof and the trusts described in
subparagraph (B) thereof, as the case may be,
in proportion to the respective amounts (at the
time of allocation) of the nonexempt portions
of such properties or trusts.
[(B) Nonexempt portion.--For purposes of
subparagraph (A), the term ``nonexempt
portion'' means the value (at the time of
allocation) of the property or trust,
multiplied by the inclusion ratio with respect
to such property or trust.
[Subchapter E--Applicable Rate; Inclusion Ratio
[Sec. 2641. Applicable rate.
[Sec. 2642. Inclusion rate.
[SEC. 2641. APPLICABLE RATE.
[(a) General Rule.--For purposes of this chapter, the term
``applicable rate'' means, with respect to any generation-
skipping transfer, the product of--
[(1) the maximum Federal estate tax rate, and
[(2) the inclusion ratio with respect to the
transfer.
[(b) Maximum Federal Estate Tax Rate.--For purposes of
subsection (a), the term ``maximum Federal estate tax rate''
means the maximum rate imposed by section 2001 on the estates
of decedents dying at the time of the taxable distribution,
taxable termination, or direct skip, as the case may be.
[SEC. 2642. INCLUSION RATIO.
[(a) Inclusion Ratio Defined.--For purposes of this chapter--
[(1) In general.--Except as otherwise provided in
this section, the inclusion ratio with respect to any
property transferred in a generation-skipping transfer
shall be the excess (if any) of 1 over--
[(A) except as provided in subparagraph (B),
the applicable fraction determined for the
trust from which such transfer is made, or
[(B) in the case of a direct skip, the
applicable fraction determined for such skip.
[(2) Applicable fraction.--For purposes of paragraph
(1), the applicable fraction is a fraction--
[(A) the numerator of which is the amount of
the GST exemption allocated to the trust (or in
the case of a direct skip, allocated to the
property transferred in such skip), and
[(B) the denominator of which is--
[(i) the value of the property
transferred to the trust (or involved
in the direct skip), reduced by
[(ii) the sum of--
[(I) any Federal estate tax
or State death tax actually
recovered from the trust
attributable to suchproperty,
and
[(II) any charitable
deduction allowed under section
2055 or 2522 with respect to
such property.
[(b) Valuation Rules, Etc.--Except as provided in subsection
(f)--
[(1) Gifts for which gift tax return filed or deemed
allocation made.--If the allocation of the GST
exemption to any property is made on a gift tax return
filed on or before the date prescribed by section
6075(b) or is deemed to be made under section
2632(b)(1)--
[(A) the value of such property for purposes
of subsection (a) shall be its value for
purposes of chapter 12, and
[(B) such allocation shall be effective on
and after the date of such transfer.
[(2) Transfers and allocations at or after death.--
[(A) Transfers at death.--If property is
transferred as a result of the death of the
transferor, the value of such property for
purposes of subsection (a) shall be its value
for purposes of chapter 11; except that, if the
requirements prescribed by the Secretary
respecting allocation of post-death changes in
value are not met, the value of such property
shall be determined as of the time of the
distribution concerned.
[(B) Allocations to property transferred at
death of transferor.--Any allocation to
property transferred as a result of the death
of the transferor shall be effective on and
after the date of the death of the transferor.
[(3) Allocations to inter vivos transfers not made on
timely filed gift tax return.--If any allocation of the
GST exemption to any property not transferred as a
result of the death of the transferor is not made on a
gift tax return filed on or before the date prescribed
by section 6075(b) and is not deemed to be made under
section 2632(b)(1)--
[(A) the value of such property for purposes
of subsection (a) shall be determined as of the
time such allocation is filed with the
Secretary, and
[(B) such allocation shall be effective on
and after the date on which such allocation is
filed with the Secretary.
[(4) QTIP trusts.--If the value of property is
included in the estate of a spouse by virtue of section
2044, and if such spouse is treated as the transferor
of such property under section 2652(a), the value of
such property for purposes of subsection (a) shall be
its value for purposes of chapter 11 in the estate of
such spouse.
[(c) Treatment of Certain Direct Skips Which Are Nontaxable
Gifts.--
[(1) In general.--In the case of a direct skip which
is a nontaxable gift, the inclusion ratio shall be
zero.
[(2) Exception for certain transfers in trust.--
Paragraph (1) shall not apply to any transfer to a
trust for the benefit of an individual unless--
[(A) during the life of such individual, no
portion of the corpus or income of the trust
may be distributed to (or for the benefit of)
any person other than such individual, and
[(B) if the trust does not terminate before
the individual dies, the assets of such trust
will be includible in the gross estate of such
individual.
Rules similar to the rules of section 2652(c)(3) shall
apply for purposes of subparagraph (A).
[(3) Nontaxable gift.--For purposes of this
subsection, the term ``nontaxable gift'' means any
transfer of property to the extent such transfer is not
treated as a taxable gift by reason of--
[(A) section 2503(b) (taking into account the
application of section 2513), or
[(B) section 2503(e).
[(d) Special Rules Where More Than 1 Transfer Made to
Trust.--
[(1) In general.--If a transfer of property is made
to a trust in existence before such transfer, the
applicable fraction for such trust shall be recomputed
as of the time of such transfer in the manner provided
in paragraph (2).
[(2) Applicable fraction.--In the case of any such
transfer, the recomputed applicable fraction is a
fraction--
[(A) the numerator of which is the sum of--
[(i) the amount of the GST exemption
allocated to property involved in such
transfer, plus
[(ii) the nontax portion of such
trust immediately before such transfer,
and
[(B) the denominator of which is the sum of--
[(i) the value of the property
involved in such transfer reduced by
the sum of--
[(I) any Federal estate tax
or State death tax actually
recovered from the trust
attributable to suchproperty,
and
[(II) any charitable
deduction allowed under section
2055 or 2522 with respect to
such property, and
[(ii) the value of all of the
property in the trust (immediately
before such transfer).
[(3) Nontax portion.--For purposes of paragraph (2),
the term ``nontax portion'' means the product of--
[(A) the value of all of the property in the
trust, and
[(B) the applicable fraction in effect for
such trust.
[(4) Similar recomputation in case of certain late
allocations.--If--
[(A) any allocation of the GST exemption to
property transferred to a trust is not made on
a timely filed gift tax return required by
section 6019, and
[(B) there was a previous allocation with
respect to property transferred to such trust,
the applicable fraction for such trust shall be
recomputed as of the time of such allocation
under rules similar to the rules of paragraph
(2).
[(e) Special Rules for Charitable Lead Annuity Trusts.--
[(1) In general.--For purposes of determining the
inclusion ratio for any charitable lead annuity trust,
the applicable fraction shall be a fraction--
[(A) the numerator of which is the adjusted
GST exemption, and
[(B) the denominator of which is the value of
all of the property in such trust immediately
after the termination of the charitable lead
annuity.
[(2) Adjusted GST exemption.--For purposes of
paragraph (1), the adjusted GST exemption is an amount
equal to the GST exemption allocated to the trust
increased by interest determined--
[(A) at the interest rate used in determining
the amount of the deduction under section 2055
or 2522 (as the case may be) for the charitable
lead annuity, and
[(B) for the actual period of the charitable
lead annuity.
[(3) Definitions.--For purposes of this subsection--
[(A) Charitable lead annuity trust.--The term
``charitable lead annuity trust'' means any
trust in which there is a charitable lead
annuity.
[(B) Charitable lead annuity.--The term
``charitable lead annuity'' means any interest
in the form of a guaranteed annuity with
respect to which a deduction was allowed under
section 2055 or 2522 (as the case may be).
[(4) Coordination with subsection (d).--Under
regulations, appropriate adjustments shall be made in
the application of subsection (d) to take into account
the provisions of this subsection.
[(f) Special Rules for Certain Inter Vivos Transfers.--Except
as provided in regulations--
[(1) In general.--For purposes of determining the
inclusion ratio, if--
[(A) an individual makes an inter vivos
transfer of property, and
[(B) the value of such property would be
includible in the gross estate of such
individual under chapter 11 if such individual
died immediately after making such transfer
(other than by reasonof section 2035), any
allocation of GST exemption to such property
shall not be made before the close of the
estate tax inclusion period (and the value of
such property shall be determined under
paragraph (2)). If such transfer is a direct
skip, such skip shall be treated as occurring
as of the close of the estate tax inclusion
period.
[(2) Valuation.--In the case of any property to which
paragraph (1) applies, the value of such property shall
be--
[(A) if such property is includible in the
gross estate of the transferor (other than by
reason ofsection 2035), its value for purposes
of chapter 11, or
[(B) if subparagraph (A) does not apply, its
value as of the close of the estate tax
inclusion period (or, if any allocation of GST
exemption to such property is not made on a
timely filed gift tax return for the calendar
year in which such period ends, its value as of
the time such allocation is filed with the
Secretary).
[(3) Estate tax inclusion period.--For purposes of
this subsection, the term ``estate tax inclusion
period'' means any period after the transfer described
in paragraph (1) during which the value of the property
involved in such transfer would be includible in the
gross estate of the transferor under chapter 11 if he
died. Such period shall in no event extend beyond the
earlier of--
[(A) the date on which there is a generation-
skipping transfer with respect to such
property, or
[(B) the date of the death of the transferor.
[(4) Treatment of spouse.--Except as provided in
regulations, any reference in this subsection to an
individual or transferor shall be treated as including
a reference to the spouse of such individual or
transferor.
[(5) Coordination with subsection (d).--Under
regulations, appropriate adjustments shall be made in
the application of subsection (d) to take into account
the provisions of this subsection.
[Subchapter F--Other Definitions and Special Rules
[Sec. 2651. Generation assignment.
[Sec. 2652. Other definitions.
[Sec. 2653. Taxation of multiple skips.
[Sec. 2654. Special rules.
[SEC. 2651. GENERATION ASSIGNMENT.
[(a) In General.--For purposes of this chapter, the
generation to which any person (other than the transferor)
belongs shall be determined in accordance with the rules set
forth in this section.
[(b) Lineal Descendants.--
[(1) In general.--An individual who is a lineal
descendant of a grandparent of the transferor shall be
assigned to that generation which results from
comparing the number of generations between the
grandparent and such individual with the number of
generations between the grandparent and the transferor.
[(2) On spouse's side.--An individual who is a lineal
descendant of a grandparent of a spouse (or former
spouse) of the transferor (other than such spouse)
shall be assigned to that generation which results from
comparing the number of generations between such
grandparent and such individual with the number of
generations between such grandparent and such spouse.
[(3) Treatment of legal adoptions, etc.--For purposes
of this subsection--
[(A) Legal adoptions.--A relationship by
legal adoption shall be treated as a
relationship by blood.
[(B) Relationships by half-blood.--A
relationship by the half-blood shall be treated
as a relationship of the whole-blood.
[(c) Marital Relationship.--
[(1) Marriage to transferor.--An individual who has
been married at any time to the transferor shall be
assigned to thetransferor's generation.
[(2) Marriage to other lineal descendants.--An
individual who has been married at any time to an
individual described in subsection (b) shall be
assigned to the generation of the individual so
described.
[(d) Persons Who Are Not Lineal Descendants.--An individual
who is not assigned to a generation by reason of the foregoing
provisions of this section shall be assigned to a generation on
the basis of the date of such individual's birth with--
[(1) an individual born not more than 12-1/2 years
after the date of the birth of the transferor assigned
to the transferor's generation,
[(2) an individual born more than 12-1/2 years but
not more than 37-1/2 years after the date of the birth
of the transferor assigned to the first generation
younger than the transferor, and
[(3) similar rules for a new generation every 25
years.
[(e) Special Rule for Persons With a Deceased Parent.--
[(1) In general.--For purposes of determining whether
any transfer is a generation-skipping transfer, if--
[(A) an individual is a descendant of a
parent of the transferor (or the transferor's
spouse or former spouse), and
[(B) such individual's parent who is a lineal
descendant of the parent of the transferor (or
the transferor's spouse or former spouse) is
dead at the time the transfer (from which an
interest of such individual is established or
derived) is subject to a tax imposed by chapter
11 or 12 upon the transferor (and if there
shall be more than 1 such time, then at the
earliest such time), such individual shall be
treated as if such individual were a member of
the generation which is 1 generation below the
lower of the transferor's generation or the
generation assignment of the youngest living
ancestor of such individual who is also a
descendant of the parent of the transferor (or
the transferor's spouse or former spouse), and
the generation assignment of any descendant of
such individual shall be adjusted accordingly.
[(2) Limited application of subsection to collateral
heirs.--This subsection shall not apply with respect to
a transfer to any individual who is not a lineal
descendant of the transferor (or the transferor's
spouse or former spouse) if, at the time of the
transfer, such transferor has any living lineal
descendant.
[(f) Other Special Rules.--
[(1) Individuals assigned to more than 1
generation.--Except as provided in regulations, an
individual who, but for this subsection, would be
assigned to more than 1 generation shall be assigned to
the youngest such generation.
[(2) Interests through entities.--Except as provided
in paragraph (3), if an estate, trust, partnership,
corporation, or other entity has an interest in
property, each individual having a beneficial interest
in such entity shall be treated as having an interest
in such property and shall be assigned to a generation
under the foregoing provisions of this subsection.
[(3) Treatment of certain charitable organizations
and governmental entities.--Any--
[(A) organization described in section
511(a)(2),
[(B) charitable trust described in section
511(b)(2), and
[(C) governmental entity,
shall be assigned to the transferor's generation.
[SEC. 2652. OTHER DEFINITIONS.
[(a) Transferor.--For purposes of this chapter--
[(1) In general.--Except as provided in this
subsection or section 2653(a), the term ``transferor''
means--
[(A) in the case of any property subject to
the tax imposed by chapter 11, the decedent,
and
[(B) in the case of any property subject to
the tax imposed by chapter 12, the donor.
An individual shall be treated as transferring any property
with respect to which such individual is the transferor.
[(2) Gift-splitting by married couples.--If, under
section 2513, one-half of a gift is treated as made by
an individual and one-half of such gift is treated as
made by the spouse of such individual, such gift shall
be so treated for purposes of this chapter.
[(3) Special election for qualified terminable
interest property.--In the case of--
[(A) any trust with respect to which a
deduction is allowed to the decedent under
section 2056 by reason of subsection (b)(7)
thereof, and
[(B) any trust with respect to which a
deduction to the donor spouse is allowed under
section 2523 by reason of subsection (f)
thereof, the estate of the decedent or the
donor spouse, as the case may be, may elect to
treat all of the property in such trust for
purposes of this chapter as if the election to
be treated as qualified terminable interest
property had not been made.
[(b) Trust and Trustee.--
[(1) Trust.--The term ``trust'' includes any
arrangement (other than an estate) which, although not
a trust, has substantially the same effect as a trust.
[(2) Trustee.--In the case of an arrangement which is
not a trust but which is treated as a trust under this
subsection, the term ``trustee'' shall mean the person
in actual or constructive possession of the property
subject to such arrangement.
[(3) Examples.--Arrangements to which this subsection
applies include arrangements involving life estates and
remainders, estates for years, and insurance and
annuity contracts.
[(c) Interest.--
[(1) In general.--A person has an interest in
property held in trust if (at the time the
determination is made) such person--
[(A) has a right (other than a future right)
to receive income or corpus from the trust,
[(B) is a permissible current recipient of
income or corpus from the trust and is not
described in section 2055(a), or
[(C) is described in section 2055(a) and the
trust is--
[(i) a charitable remainder annuity
trust,
[(ii) a charitable remainder unitrust
within the meaning of section 664, or
[(iii) a pooled income fund within
the meaning of section 642(c)(5).
[(2) Certain interests disregarded.--For purposes of
paragraph (1), an interest which is used primarily to
postpone or avoid any tax imposed by this chapter shall
be disregarded.
[(3) Certain support obligations disregarded.--The
fact that income or corpus of the trust may be used to
satisfy an obligation of support arising under State
law shall be disregarded in determining whether a
person has an interest in the trust, if--
[(A) such use is discretionary, or
[(B) such use is pursuant to the provisions
of any State law substantially equivalent to
the Uniform Gifts to Minors Act.
[(d) Executor.--For purposes of this chapter, the term
``executor'' has the meaning given such term by section 2203.
[SEC. 2653. TAXATION OF MULTIPLE SKIPS.
[(a) General Rule.--For purposes of this chapter, if--
[(1) there is a generation-skipping transfer of any
property, and
[(2) immediately after such transfer such property is
held in trust,
for purposes of applying this chapter (other than section 2651)
to subsequent transfers from the portion of such trust
attributable to such property, the trust will be treated as if
the transferor of such property were assigned to the first
generation above the highest generation of any person who has
an interest in such trust immediately after the transfer.
[(b) Trust Retains Inclusion Ratio.--
[(1) In general.--Except as provided in paragraph
(2), the provisions of subsection (a) shall not affect
the inclusion ratio determined with respect to any
trust. Under regulations prescribed by the Secretary,
notwithstanding the preceding sentence, proper
adjustment shall be made to the inclusion ratio with
respect to such trust to take into account any tax
under this chapter borne by such trust which is imposed
by this chapter on the transfer described in subsection
(a).
[(2) Special rule for pour-over trust.--
[(A) In general.--If the generation-skipping
transfer referred to in subsection (a) involves
the transfer of property from 1 trust to
another trust (hereinafter in this paragraph
referred to as the ``pour-over trust''), the
inclusion ratio for the pour-over trust shall
be determined by treating the nontax portion of
such distribution as if it were a part of a GST
exemption allocated to such trust.
[(B) Nontax portion.--For purposes of
subparagraph (A), the nontax portion of any
distribution is the amount of such distribution
multiplied by the applicable fraction which
applies to such distribution.
[SEC. 2654. SPECIAL RULES.
[(a) Basis Adjustment.--
[(1) In general.--Except as provided in paragraph
(2), if property is transferred in a generation-
skipping transfer, the basis of such property shall be
increased (but not above the fair market value of such
property) by an amount equal to that portion of the tax
imposed by section 2601 (computed without regard to
section 2604) with respect to the transfer which is
attributable to the excess of the fair market value of
such property over its adjusted basis immediately
before the transfer. The preceding shall be applied
after any basis adjustment under section 1015 with
respect to the transfer.
[(2) Certain transfers at death.--If property is
transferred in a taxable termination which occurs at
the same time as and as a result of the death of an
individual, the basis of such property shall be
adjusted in a manner similar to the manner provided
under section 1014(a); except that, if the inclusion
ratio with respect to such property is less than 1, any
increase or decrease in basis shall be limited by
multiplying such increase or decrease (as the case may
be) by the inclusion ratio.
[(b) Certain Trusts Treated as Separate Trusts.--For purposes
of this chapter--
[(1) the portions of a trust attributable to
transfers from different transferors shall be treated
as separate trusts, and
[(2) substantially separate and independent shares of
different beneficiaries in a trust shall be treated as
separate trusts.
Except as provided in the preceding sentence, nothing in this
chapter shall be construed as authorizing a single trust to be
treated as 2 or more trusts. For purposes of this subsection, a
trust shall be treated as part of an estate during any period
that the trust is so treated under section 645.
[(c) Disclaimers.--For provisions relating to the effect of a
qualified disclaimer for purposes of this chapter, see section
2518.
[(d) Limitation on Personal Liability of Trustee.--A trustee
shall not be personally liable for any increase in the tax
imposed by section 2601 which is attributable to the fact
that--
[(1) section 2642(c) (relating to exemption of
certain nontaxable gifts) does not apply to a transfer
to the trust which was made during the life of the
transferor and for which a gift tax return was not
filed, or
[(2) the inclusion ratio with respect to the trust is
greater than the amount of such ratio as computed on
the basis of the return on which was made (or was
deemed made) an allocation of the GST exemption to
property transferred to such trust.
The preceding sentence shall not apply if the trustee has
knowledge of facts sufficient reasonably to conclude that a
gift tax return was required to be filed or that the inclusion
ratio was erroneous.
[Subchapter G--Administration
[Sec. 2661. Administration.
[Sec. 2662. Return requirements.
[Sec. 2663. Regulations.
[SEC. 2661. ADMINISTRATION.
[Insofar as applicable and not inconsistent with the
provisions of this chapter--
[(1) except as provided in paragraph (2), all
provisions of subtitle F (including penalties)
applicable to the gift tax, to chapter 12, or to
section 2501, are hereby made applicable in respect of
the generation-skipping transfer tax, this chapter, or
section 2601, as the case may be, and
[(2) in the case of a generation-skipping transfer
occurring at the same time as and as a result of the
death of an individual, all provisions of subtitle F
(including penalties) applicable to the estate tax, to
chapter 11, or to section 2001 are hereby made
applicable in respect of the generation-skipping
transfer tax, this chapter, or section 2601 (as the
case may be).
[SEC. 2662. RETURN REQUIREMENTS.
[(a) In General.--The Secretary shall prescribe by
regulations the person who is required to make the return with
respect to the tax imposed by this chapter and the time by
which any such return must be filed. To the extent practicable,
such regulations shall provide that--
[(1) the person who is required to make such return
shall be the person liable under section 2603(a) for
payment of such tax, and
[(2) the return shall be filed--
[(A) in the case of a direct skip (other than
from a trust), on or before the date on which
an estate or gift tax return is required to be
filed with respect to the transfer, and
[(B) in all other cases, on or before the
15th day of the 4th month after the close of
the taxable year of the person required to make
such return in which such transfer occurs.
[(b) Information Returns.--The Secretary may by regulations
require a return to be filed containing such information as he
determines to be necessary for purposes of this chapter.
[SEC. 2663. REGULATIONS.
[The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this
chapter, including--
[(1) such regulations as may be necessary to
coordinate the provisions of this chapter with the
recapture tax imposed under section 2032A(c),
[(2) regulations (consistent with the principles of
chapters 11 and 12) providing for the application of
this chapter in the case of transferors who are
nonresidents not citizens of the United States, and
[(3) regulations providing for such adjustments as
may be necessary to the application of this chapter in
the case of any arrangement which, although not a
trust, is treated as a trust under section 2652(b).
[CHAPTER 14--SPECIAL VALUATION RULES
[Sec. 2701. Special valuation rules in case of transfers of
certain interests in corporations or partnerships.
[Sec. 2702. Special valuation rules in case of transfers of
interests in trusts.
[Sec. 2703. Certain rights and restrictions disregarded.
[Sec. 2704. Treatment of certain lapsing rights and
restrictions.
[SEC. 2701. SPECIAL VALUATION RULES IN CASE OF TRANSFERS OF CERTAIN
INTERESTS IN CORPORATIONS OR PARTNERSHIPS.
[(a) Valuation Rules.--
[(1) In general.--Solely for purposes of determining
whether a transfer of an interest in a corporation or
partnership to (or for the benefit of) a member of the
transferor's family is a gift (and the value of such
transfer), the value of any right--
[(A) which is described in subparagraph (A)
or (B) of subsection (b)(1), and
[(B) which is with respect to any applicable
retained interest that is held by the
transferor or an applicable family member
immediately after the transfer, shall be
determined under paragraph (3). This paragraph
shall not apply to the transfer of any interest
for which market quotations are readily
available (as of the date of transfer) on an
established securities market.
[(2) Exceptions for marketable retained interests,
etc.--Paragraph (1) shall not apply to any right with
respect to an applicable retained interest if--
[(A) market quotations are readily available
(as of the date of the transfer) for such
interest on an established securities market,
[(B) such interest is of the same class as
the transferred interest, or
[(C) such interest is proportionally the same
as the transferred interest, without regard to
nonlapsing differences in voting power (or, for
a partnership, nonlapsing differences with
respect to management and limitations on
liability).
Subparagraph (C) shall not apply to any interest in a
partnership if the transferor or an applicable family
member has the right to alter the liability of the
transferee of the transferred property. Except as
provided by the Secretary, any difference described in
subparagraph (C) which lapses by reason of any Federal
or State law shall be treated as a nonlapsing
difference for purposes of such subparagraph.
[(3) Valuation of rights to which paragraph (1)
applies.--
[(A) In general.--The value of any right
described in paragraph (1), other than a
distribution right which consists of a right to
receive a qualified payment, shall be treated
as being zero.
[(B) Valuation of certain qualified
payments.--If--
[(i) any applicable retained interest
confers a distribution right which
consists of the right to a qualified
payment, and
[(ii) there are 1 or more
liquidation, put, call, or conversion
rights with respect to such interest,
the value of all such rights shall be
determined as if each liquidation, put,
call, or conversion right were
exercised in the manner resulting in
the lowest value being determined for
all such rights.
[(C) Valuation of qualified payments where no
liquidation, etc. rights.--In the case of an
applicable retained interest which is described
in subparagraph (B)(i) but not subparagraph
(B)(ii), the value of the distribution right
shall be determined without regard to this
section.
[(4) Minimum valuation of junior equity.--
[(A) In general.--In the case of a transfer
described in paragraph (1) of a junior equity
interest in a corporation or partnership, such
interest shall in no event be valued at an
amount less than the value which would be
determined if the total value of all of the
junior equity interests in the entity were
equal to 10 percent of the sum of--
[(i) the total value of all of the
equity interests in such entity, plus
[(ii) the total amount of
indebtedness of such entity to the
transferor (or an applicable family
member).
[(B) Definitions.--For purposes of this
paragraph--
[(i) Junior equity interest.--The
term ``junior equity interest'' means
common stock or, in the case of a
partnership, any partnership interest
under which the rights as to income and
capital (or, to the extent provided in
regulations, the rights as to either
income or capital) are junior to the
rights of all other classes of equity
interests.
[(ii) Equity interest.--The term
``equity interest'' means stock or any
interest as a partner, as the case may
be.
[(b) Applicable Retained Interests.--For purposes of this
section--
[(1) In general.--The term ``applicable retained
interest'' means any interest in an entity with respect
to which there is--
[(A) a distribution right, but only if,
immediately before the transfer described in
subsection (a)(1), the transferor and
applicable family members hold (after
application of subsection (e)(3)) control of
the entity, or
[(B) a liquidation, put, call, or conversion
right.
[(2) Control.--For purposes of paragraph (1)--
[(A) Corporations.--In the case of a
corporation, the term ``control'' means the
holding of at least 50 percent (by vote or
value) of the stock of the corporation.
[(B) Partnerships.--In the case of a
partnership, the term ``control'' means--
[(i) the holding of at least 50
percent of the capital or profits
interests in the partnership, or
[(ii) in the case of a limited
partnership, the holding of any
interest as a general partner.
[(C) Applicable family member.--For purposes
of this subsection, the term ``applicable
family member'' includes any lineal descendant
of any parent of the transferor or the
transferor's spouse.
[(c) Distribution and Other Rights; Qualified Payments.--For
purposes of this section--
[(1) Distribution right.--
[(A) In general.--The term ``distribution
right'' means--
[(i) a right to distributions from a
corporation with respect to its stock,
and
[(ii) a right to distributions from a
partnership with respect to a partner's
interest in the partnership.
[(B) Exceptions.--The term ``distribution
right'' does not include--
[(i) a right to distributions with
respect to any interest which is junior
to the rights of the transferred
interest,
[(ii) any liquidation, put, call, or
conversion right, or
[(iii) any right to receive any
guaranteed payment described in section
707(c) of a fixed amount.
[(2) Liquidation, etc., rights.--
[(A) In general.--The term ``liquidation,
put, call, or conversion right'' means any
liquidation, put, call, or conversion right, or
any similar right, the exercise or nonexercise
of which affects the value of the transferred
interest.
[(B) Exception for fixed rights.--
[(i) In general.--The term
``liquidation, put, call, or conversion
right'' does not include any right
which must be exercised at a specific
time and at a specific amount.
[(ii) Treatment of certain rights.--
If a right is assumed to be exercised
in a particular manner under subsection
(a)(3)(B), such right shall be treated
as so exercised for purposes of clause
(i).
[(C) Exception for certain rights to
convert.--The term ``liquidation, put, call, or
conversion right'' does not include any right
which--
[(i) is a right to convert into a
fixed number (or a fixed percentage) of
shares of the same class of stock in a
corporation as the transferred stock in
such corporation under subsection
(a)(1) (or stock which would be of the
same class but for nonlapsing
differences in voting power),
[(ii) is nonlapsing,
[(iii) is subject to proportionate
adjustments for splits, combinations,
reclassifications, and similar changes
in the capital stock, and
[(iv) is subject to adjustments
similar to the adjustments under
subsection (d) for accumulated but
unpaid distributions.
A rule similar to the rule of the preceding
sentence shall apply for partnerships.
[(3) Qualified payment.--
[(A) In general.--Except as otherwise
provided in this paragraph, the term
``qualified payment'' means any dividend
payable on a periodic basis under any
cumulative preferred stock (or a comparable
payment under any partnership interest) to the
extent that such dividend (or comparable
payment) is determined at a fixed rate.
[(B) Treatment of variable rate payments.--
For purposes of subparagraph (A), a payment
shall be treated as fixed as to rate if such
payment is determined at a rate which bears a
fixed relationship to a specified market
interest rate.
[(C) Election.--
[(i) In general.--Payments under any
interest held by a transferor which
(without regard to this subparagraph)
are qualified payments shall be treated
as qualified payments unless the
transferor elects not to treat such
payments as qualified payments.
Payments described in the preceding
sentence which are held by an
applicable family member shall be
treated as qualified payments only if
such member elects to treat such
payments as qualified payments.
[(ii) Election to have interest as
qualified payment.--A transferor or
applicable family member holding any
distribution right which (without
regard to this subparagraph) is not a
qualified payment may elect to treat
such right as a qualified payment, to
be paid in the amounts and at the times
specified in such election. The
preceding sentence shall apply only to
the extent that the amounts and times
so specified are not inconsistent with
the underlying legal instrument giving
rise to such right.
[(iii) Election irrevocable.--Any
election under this subparagraph with
respect to an interest shall, once
made, be irrevocable.
[(d) Transfer Tax Treatment of Cumulative but Unpaid
Distributions.--
[(1) In general.--If a taxable event occurs with
respect to any distribution right to which subsection
(a)(3)(B) or (C) applied, the following shall be
increased by the amount determined under paragraph (2):
[(A) The taxable estate of the transferor in
the case of a taxable event described in
paragraph (3)(A)(i).
[(B) The taxable gifts of the transferor for
the calendar year in which the taxable event
occurs in the case of a taxable event described
in paragraph (3)(A)(ii) or (iii).
[(2) Amount of increase.--
[(A) In general.--The amount of the increase
determined under this paragraph shall be the
excess (if any) of--
[(i) the value of the qualified
payments payable during the period
beginning on the date of the transfer
under subsection (a)(1) and ending on
the date of the taxable event
determined as if--
[(I) all such payments were
paid on the date payment was
due, and
[(II) all such payments were
reinvested by the transferor as
of the date of payment at a
yield equal to the discount
rate used in determining the
value of the applicable
retained interest described in
subsection (a)(1), over
[(ii) the value of such payments paid
during such period computed under
clause (i) on the basis of the time
when such payments were actually paid.
[(B) Limitation on amount of increase.--
[(i) In general.--The amount of the
increase under subparagraph (A) shall
not exceed the applicable percentage of
the excess (if any) of--
[(I) the value (determined as
of the date of the taxable
event) of all equity interests
in the entity which are junior
to the applicable retained
interest, over
[(II) the value of such
interests (determined as of the
date of the transfer to which
subsection (a)(1) applied).
[(ii) Applicable percentage.--For
purposes of clause (i), the applicable
percentage is the percentage determined
by dividing--
[(I) the number of shares in
the corporation held (as of the
date of the taxable event) by
the transferor which are
applicable retained interests
of the same class, by
[(II) the total number of
shares in such corporation (as
of such date) which are of the
same class as the class
described in subclause (I).
A similar percentage shall be
determined in the case of interests in
a partnership.
[(iii) Definition.--For purposes of
this subparagraph, the term ``equity
interest'' has the meaning given such
term by subsection (a)(4)(B).
[(C) Grace period.--For purposes of
subparagraph (A), any payment of any
distribution during the 4-year period beginning
on its due date shall be treated as having been
made on such due date.
[(3) Taxable events.--For purposes of this
subsection--
[(A) In general.--The term ``taxable event''
means any of the following:
[(i) The death of the transferor if
the applicable retained interest
conferring the distribution right is
includible in the estate of the
transferor.
[(ii) The transfer of such applicable
retained interest.
[(iii) At the election of the
taxpayer, the payment of any qualified
payment after the period described in
paragraph (2)(C), but only with respect
to such payment.
[(B) Exception where spouse is transferee.--
[(i) Deathtime transfers.--
Subparagraph (A)(i) shall not apply to
any interest includible in the gross
estate of the transferor if a deduction
with respect to such interest is
allowable under section 2056 or
2106(a)(3).
[(ii) Lifetime transfers.--A transfer
to the spouse of the transferor shall
not be treated as a taxable event under
subparagraph (A)(ii) if such transfer
does not result in a taxable gift by
reason of--
[(I) any deduction allowed
under section 2523, or the
exclusion under section
2503(b), or
[(II) consideration for the
transfer provided by the
spouse.
[(iii) Spouse succeeds to treatment
of transferor.--If an event is not
treated as a taxable event by reason of
this subparagraph, the transferee
spouse or surviving spouse (as the case
may be) shall be treated in the same
manner as the transferor in applying
this subsection with respect to the
interest involved.
[(4) Special rules for applicable family members.--
[(A) Family member treated in same manner as
transferor.--For purposes of this subsection,
an applicable family member shall be treated in
the same manner as the transferor with respect
to any distribution right retained by such
family member to which subsection (a)(3)(B) or
(C) applied.
[(B) Transfer to applicable family member.--
In the case of a taxable event described in
paragraph (3)(A)(ii) involving the transfer of
an applicable retained interest to an
applicable family member (other than the spouse
of the transferor), the applicable family
member shall be treated in the same manner as
the transferor in applying this subsection to
distributions accumulating with respect to such
interest after such taxable event.
[(C) Transfer to transferors.--In the case of
a taxable event described in paragraph
(3)(A)(ii) involving a transfer of an
applicable retained interest from an applicable
family member to a transferor, this subsection
shall continue to apply to the transferor
during any period the transferor holds such
interest.
[(5) Transfer to include termination.--For purposes
of this subsection, any termination of an interest
shall be treated as a transfer.
[(e) Other Definitions and Rules.--For purposes of this
section--
[(1) Member of the family.--The term ``member of the
family'' means, with respect to any transferor--
[(A) the transferor's spouse,
[(B) a lineal descendant of the transferor or
the transferor's spouse, and
[(C) the spouse of any such descendant.
[(2) Applicable family member.--The term ``applicable
family member'' means, with respect to any transferor--
[(A) the transferor's spouse,
[(B) an ancestor of the transferor or the
transferor's spouse, and
[(C) the spouse of any such ancestor.
[(3) Attribution of indirect holdings and
transfers.--An individual shall be treated as holding
any interest to the extent such interest is held
indirectly by such individual through a corporation,
partnership, trust, or other entity. If any individual
is treated as holding any interest by reason of the
preceding sentence, any transfer which results in such
interest being treated as no longer held by such
individual shall be treated as a transfer of such
interest.
[(4) Effect of adoption.--A relationship by legal
adoption shall be treated as a relationship by blood.
[(5) Certain changes treated as transfers.--Except as
provided in regulations, a contribution to capital or a
redemption, recapitalization, or other change in the
capital structure of a corporation or partnership shall
be treated as a transferof an interest in such entity
to which this section applies if the taxpayer or an applicable family
member--
[(A) receives an applicable retained interest
in such entity pursuant to such transaction, or
[(B) under regulations, otherwise holds,
immediately after such transaction, an
applicable retained interest in such entity.
This paragraph shall not apply to any transaction
(other than a contribution to capital) if the interests
in the entity held by the transferor, applicable family
members, and members of the transferor's family before
and after the transaction are substantially identical.
[(6) Adjustments.--Under regulations prescribed by
the Secretary, if there is any subsequent transfer, or
inclusion in the gross estate, of any applicable
retained interest which was valued under the rules of
subsection (a), appropriate adjustments shall be made
for purposes of chapter 11, 12, or 13 to reflect the
increase in the amount of any prior taxable gift made
by the transferor or decedent by reason of such
valuation or to reflect the application of subsection
(d).
[(7) Treatment as separate interests.--The Secretary
may by regulation provide that any applicable retained
interest shall be treated as 2 or more separate
interests for purposes of this section.
[SEC. 2702. SPECIAL VALUATION RULES IN CASE OF TRANSFERS OF INTERESTS
IN TRUSTS.
[(a) Valuation Rules.--
[(1) In general.--Solely for purposes of determining
whether a transfer of an interest in trust to (or for
the benefit of) a member of the transferor's family is
a gift (and the value of such transfer), the value of
any interest in such trust retained by the transferor
or any applicable family member (as defined in section
2701(e)(2)) shall be determined as provided in
paragraph (2).
[(2) Valuation of retained interests.--
[(A) In general.--The value of any retained
interest which is not a qualified interest
shall be treated as being zero.
[(B) Valuation of qualified interest.--The
value of any retained interest which is a
qualified interest shall be determined under
section 7520.
[(3) Exemptions.--
[(A) In general.--This subsection shall not
apply to any transfer--
[(i) if such transfer is an
incomplete gift,
[(ii) if such transfer involves the
transfer of an interest in trust all
the property in which consists of a
residence to be used as a personal
residence by persons holding term
interests in such trust, or
[(iii) to the extent that regulations
provide that such transfer is not
inconsistent with the purposes of this
section.
[(B) Incomplete gift.--For purposes of
subparagraph (A), the term ``incomplete gift`'
means any transfer which would not be treated
as a gift whether or not consideration was
received for such transfer.
[(b) Qualified Interest.--For purposes of this section, the
term ``qualified interest'' means--
[(1) any interest which consists of the right to
receive fixed amounts payable not less frequently than
annually,
[(2) any interest which consists of the right to
receive amounts which are payable not less frequently
than annually and are a fixed percentage of the fair
market value of the property in the trust (determined
annually), and
[(3) any noncontingent remainder interest if all of
the other interests in the trust consist of interests
described in paragraph (1) or (2).
[(c) Certain Property Treated as Held in Trust.--For purposes
of this section--
[(1) In general.--The transfer of an interest in
property with respect to which there is 1 or more term
interests shall be treated as a transfer of an interest
in a trust.
[(2) Joint purchases.--If 2 or more members of the
same family acquire interests in any property described
in paragraph (1) in the same transaction (or a series
of related transactions), the person (or persons)
acquiring the term interests in such property shall be
treated as having acquired the entire property and then
transferred to the other persons the interests acquired
by such other persons in the transaction (or series of
transactions). Such transfer shall be treated as made
in exchange for the consideration (if any) provided by
such other persons for the acquisition of their
interests in such property.
[(3) Term interest.--The term ``term interest`'
means--
[(A) a life interest in property, or
[(B) an interest in property for a term of
years.
[(4) Valuation rule for certain term interests.--If
the nonexercise of rights under a term interest in
tangible property would not have a substantial effect
on the valuation of the remainder interest in such
property--
[(A) subparagraph (A) of subsection (a)(2)
shall not apply to such term interest, and
[(B) the value of such term interest for
purposes of applying subsection (a)(1) shall be
the amount which the holder of the term
interest establishes as the amount for which
such interest could be sold to an unrelated
third party.
[(d) Treatment of Transfers of Interests in Portion of
Trust.--In the case of a transfer of an income or remainder
interest with respect to a specified portion of the property in
a trust, only such portion shall be taken into account in
applying this section to such transfer.
[(e) Member of the Family.--For purposes of this section, the
term ``member of the family'' shall have the meaning given
suchterm by section 2704(c)(2).
[SEC. 2703. CERTAIN RIGHTS AND RESTRICTIONS DISREGARDED.
[(a) General Rule.--For purposes of this subtitle, the value
of any property shall be determined without regard to--
[(1) any option, agreement, or other right to acquire
or use the property at a price less than the fair
market value of the property (without regard to such
option, agreement, or right), or
[(2) any restriction on the right to sell or use such
property.
[(b) Exceptions.--Subsection (a) shall not apply to any
option, agreement, right, or restriction which meets each of
the following requirements:
[(1) It is a bona fide business arrangement.
[(2) It is not a device to transfer such property to
members of the decedent's family for less than full and
adequate consideration in money or money's worth.
[(3) Its terms are comparable to similar arrangements
entered into by persons in an arms' length transaction.
[SEC. 2704. TREATMENT OF CERTAIN LAPSING RIGHTS AND RESTRICTIONS.
[(a) Treatment of Lapsed Voting or Liquidation Rights.--
[(1) In general.--For purposes of this subtitle, if--
[(A) there is a lapse of any voting or
liquidation right in a corporation or
partnership, and
[(B) the individual holding such right
immediately before the lapse and members of
such individual's family hold, both before and
after the lapse, control of the entity, such
lapse shall be treated as a transfer by such
individual by gift, or a transfer which is
includible in the gross estate of the decedent,
whichever is applicable, in the amount
determined under paragraph (2).
[(2) Amount of transfer.--For purposes of paragraph
(1), the amount determined under this paragraph is the
excess (if any) of--
[(A) the value of all interests in the entity
held by the individual described in paragraph
(1) immediately before the lapse (determined as
if the voting and liquidation rights were
nonlapsing), over
[(B) the value of such interests immediately
after the lapse.
[(3) Similar rights.--The Secretary may by
regulations apply this subsection to rights similar to
voting and liquidation rights.
[(b) Certain Restrictions on Liquidation Disregarded.--
[(1) In general.--For purposes of this subtitle, if--
[(A) there is a transfer of an interest in a
corporation or partnership to (or for the
benefit of) a member of the transferor's
family, and
[(B) the transferor and members of the
transferor's family hold, immediately before
the transfer, control of the entity, any
applicable restriction shall be disregarded in
determining the value of the transferred
interest.
[(2) Applicable restriction.--For purposes of this
subsection, the term ``applicable restriction'' means
any restriction--
[(A) which effectively limits the ability of
the corporation or partnership to liquidate,
and
[(B) with respect to which either of the
following applies:
[(i) The restriction lapses, in whole
or in part, after the transfer referred
to in paragraph (1).
[(ii) The transferor or any member of
the transferor's family, either alone
or collectively, has the right after
such transfer to remove, in whole or in
part, the restriction.
[(3) Exceptions.--The term ``applicable restriction''
shall not include--
[(A) any commercially reasonable restriction
which arises as part of any financing by the
corporation or partnership with a person who is
not related to the transferor or transferee, or
a member of the family of either, or
[(B) any restriction imposed, or required to
be imposed, by any Federal or State law.
[(4) Other restrictions.--The Secretary may by
regulations provide that other restrictions shall be
disregarded in determining the value of the transfer of
any interest in a corporation or partnership to a
member of the transferor's family if such restriction
has the effect of reducing the value of the transferred
interest for purposes of this subtitle but does not
ultimately reduce the value of such interest to the
transferee.
[(c) Definitions and Special Rules.--For purposes of this
section--
[(1) Control.--The term ``control'' has the meaning
given such term by section 2701(b)(2).
[(2) Member of the family.--The term ``member of the
family'' means, with respect to any individual--
[(A) such individual's spouse,
[(B) any ancestor or lineal descendant of
such individual or such individual's spouse,
[(C) any brother or sister of the individual,
and
[(D) any spouse of any individual described
in subparagraph (B) or (C).
[(3) Attribution.--The rule of section 2701(e)(3)
shall apply for purposes of determining the interests
held by any individual.]
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 42--PRIVATE FOUNDATIONS & CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
* * * * * * *
Subchapter A--Private Foundations
* * * * * * *
SEC. 4947. APPLICATION OF TAXES TO CERTAIN NONEXEMPT TRUSTS.
(a) Application of Tax.--
(1) * * *
(2) Split-interest trusts.--In the case of a trust
which is not exempt from tax under section 501(a), not
all of the unexpired interests in which are devoted to
one or more of the purposes described in section
170(c)(2)(B), and which has amounts in trust for which
a deduction was allowed under section 170, 545(b)(2),
556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, section
507 (relating to termination of private foundation
status), section 508(e) (relating to governing
instruments) to the extent applicable to a trust
described in this paragraph, section 4941 (relating to
taxes on self-dealing), section 4943 (relating to taxes
on excess business holdings) except as provided in
subsection (b)(3), section 4944 (relating to
investments which jeopardize charitable purpose) except
as provided in subsection (b)(3), and section 4945
(relating to taxes on taxable expenditures) shall apply
as if such trust were a private foundation. This
paragraph shall not apply with respect to--
(A) any amounts payable under the terms of
such trust to income beneficiaries, unless a
deduction was allowed under section
170(f)(2)(B), 642(c), 2055(e)(2)(B), or
2522(c)(2)(B),
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
PART II--TAX RETURNS OR STATEMENTS
Subpart A. General requirement.
* * * * * * *
[Subpart C. Estate and gift tax returns.]
Subpart C. Returns relating to transfers during life or at
death.
* * * * * * *
[Subpart C--Estate and Gift Tax Returns
[Sec. 6018. Estate Tax Returns.
[Sec. 6019. Gift Tax Returns.
[SEC. 6018. ESTATE TAX RETURNS.
[(a) Returns by Executor.--
[(1) Citizens or residents.--In all cases where the
gross estate at the death of a citizen or resident
exceeds the applicable exclusion amount in effect under
section 2010(c) for the calendar year which includes
the date of death, the executor shall make a return
with respect to the estate tax imposed by subtitle B.
[(2) Nonresidents not citizens of the united
states.--In the case of the estate of every nonresident
not a citizen of the United States if that part of the
gross estate which is situated in the United States
exceeds $60,000, the executor shall make a return with
respect to the estate tax imposed by subtitle B.
[(3) Adjustment for certain gifts.--The amount
applicable under paragraph (1) and the amount set forth
in paragraph (2) shall each be reduced (but not below
zero) by the sum of--
[(A) the amount of the adjusted taxable gifts
(within the meaning of section 2001(b)) made by
the decedent after December 31, 1976, plus
[(B) the aggregate amount allowed as a
specific exemption under section 2521 (as in
effect before its repeal by the Tax Reform Act
of 1976) with respect to gifts made by the
decedent after September 8, 1976.
[(b) Returns by Beneficiaries.--If the executor is unable to
make a complete return as to any part of the gross estate of
the decedent, he shall include in his return a description of
such part and the name of every person holding a legal or
beneficial interest therein. Upon notice from the Secretary
such person shall in like manner make a return as to such part
of the gross estate.
[SEC. 6019. GIFT TAX RETURNS.
[Any individual who in any calendar year makes any transfer
by gift other than--
[(1) a transfer which under subsection (b) or (e) of
section 2503 is not to be included in the total amount
of gifts for such year,
[(2) a transfer of an interest with respect to which
a deduction is allowed under section 2523, or
[(3) a transfer with respect to which a deduction is
allowed under section 2522 but only if--
[(A)(i) such transfer is of the donor's
entire interest in the property transferred,
and
[(ii) no other interest in such
property is or has been transferred
(for less than adequate and full
consideration in money or money's
worth) from the donor to a person, or
for a use, not described in subsection
(a) or (b) of section 2522, or
[(B) such transfer is described in section
2522(d), shall make a return for such year with
respect to the gift tax imposed by subtitle B.]
Subpart C--Returns Relating to Transfers During Life or at Death
Sec. 6018. Returns relating to large transfers at death.
Sec. 6019. Returns relating to large lifetime gifts.
SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.
(a) In General.--If this section applies to property acquired
from a decedent, the executor of the estate of such decedent
shall make a return containing the information specified in
subsection (c) with respect to such property.
(b) Property to Which Section Applies.--
(1) Large transfers.--This section shall apply to all
property (other than cash) acquired from a decedent if
the fair market value of such property acquired from
the decedent exceeds the dollar amount applicable under
section 1022(b)(2)(B) (without regard to section
1022(b)(2)(C)).
(2) Transfers of certain gifts received by decedent
within 3 years of death.--This section shall apply to
any appreciated property acquired from the decedent
if--
(A) subsections (b) and (c) of section 1022
do not apply to such property by reason of
section 1022(d)(1)(C), and
(B) such property was required to be included
on a return required to be filed under section
6019.
(3) Nonresidents not citizens of the united states.--
In the case of a decedent who is a nonresident not a
citizen of the United States, paragraphs (1) and (2)
shall be applied--
(A) by taking into account only--
(i) tangible property situated in the
United States, and
(ii) other property acquired from the
decedent by a United States person, and
(B) by substituting the dollar amount
applicable under section 1022(b)(3) for the
dollar amount referred to in paragraph (1).
(4) Returns by trustees or beneficiaries.--If the
executor is unable to make a complete return as to any
property acquired from or passing from the decedent,
the executor shall include in the return a description
of such property and the name of every person holding a
legal or beneficial interest therein. Upon notice from
the Secretary such person shall in like manner make a
return as to such property.
(c) Information Required To Be Furnished.--The information
specified in this subsection with respect to any property
acquired from the decedent is--
(1) the name and TIN of the recipient of such
property,
(2) an accurate description of such property,
(3) the adjusted basis of such property in the hands
of the decedent and its fair market value at the time
of death,
(4) the decedent's holding period for such property,
(5) sufficient information to determine whether any
gain on the sale of the property would be treated as
ordinary income,
(6) the amount of basis increase allocated to the
property under subsection (b) or (c) of section 1022,
and
(7) such other information as the Secretary may by
regulations prescribe.
(d) Property Acquired From Decedent.--For purposes of this
section, section 1022 shall apply for purposes of determining
the property acquired from a decedent.
(e) Statements To Be Furnished to Certain Persons.--Every
person required to make a return under subsection (a) shall
furnish to each person whose name is required to be set forth
in such return (other than the person required to make such
return) a written statement showing--
(1) the name, address, and phone number of the person
required to make such return, and
(2) the information specified in subsection (c) with
respect to property acquired from, or passing from, the
decedent to the person required to receive such
statement.
The written statement required under the preceding sentence
shall be furnished not later than 30 days after the date that
the return required by subsection (a) is filed.
SEC. 6019. RETURNS RELATING TO LARGE LIFETIME GIFTS.
(a) In General.--If the value of the aggregate gifts of
property made by an individual to any United States person
during a calendar year exceeds $25,000, such individual shall
make a return for such year setting forth--
(1) the name and TIN of the donee,
(2) an accurate description of such property,
(3) the adjusted basis of such property in the hands
of the donor at the time of the gift,
(4) the donor's holding period for such property,
(5) sufficient information to determine whether any
gain on the sale of the property would be treated as
ordinary income, and
(6) such other information as the Secretary may by
regulations prescribe.
(b) Exceptions.--Subsection (a) shall not apply to--
(1) Cash.--Any gift of cash.
(2) Gifts to charity.--Any gift to an organization
described in section 501(c) and exempt from tax under
section 501(a) but only if no interest in the property
is held for the benefit of any person other than such
an organization.
(3) Waiver of certain pension rights individual
waives, before the death of a participant, any survivor
benefit, or right to such benefit, under section
401(a)(11) or 417, subsection (a) shall not apply to
such waiver.
(4) Reporting elsewhere.--Any gift required to be
reported to the Secretary under any other provision of
this title.
(c) Statements To Be Furnished to Certain Persons.--Every
person required to make a return under subsection (a) shall
furnish to each person whose name is required to be set forth
in such return a written statement showing--
(1) the name, address, and phone number of the person
required to make such return, and
(2) the information specified in subsection (a) with
respect to property received by the person required to
receive such statement.
The written statement required under the preceding sentence
shall be furnished on or before January 31 of the year
following the calendar year for which the return under
subsection (a) was required to be made.
* * * * * * *
PART V--TIME FOR FILING RETURNS AND OTHER DOCUMENTS
* * * * * * *
SEC. 6075. TIME FOR FILING ESTATE AND GIFT TAX RETURNS.
[(a) Estate Tax Returns.--Returns made under section 6018(a)
(relating to estate taxes) shall be filed within 9 months after
the date of the decedent's death.]
(a) Returns Relating to Large Transfers at Death.--The return
required by section 6018 with respect to a decedent shall be
filed with the return of the tax imposed by chapter 1 for the
decedent's last taxable year or such later date specified in
regulations prescribed by the Secretary.
[(b) Gift Tax Returns.--]
(b) Returns Relating to Large Lifetime Gifts.--
(1) General rule.--Returns made under section 6019
[(relating to gift taxes)] (relating to returns
relating to large lifetime gifts) shall be filed on or
before the 15th day of April following the close of the
calendar year.
* * * * * * *
(3) Coordination with due date for [estate tax
return] section 6018 return.--Notwithstanding
paragraphs (1) and (2), the time for filing the return
made under section 6019 for the calendar year which
includes the date of death of the donor shall not be
later than the time (including extensions) for filing
the return made under section 6018 [(relating to estate
tax returns)] (relating to returns relating to large
transfers at death) with respect to such donor.
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter B--Assessable Penalties
* * * * * * *
PART I--GENERAL PROVISIONS
Sec. 6671. Rules for application of assessable penalities.
* * * * * * *
Sec. 6716. Failure to file information with respect to certain
transfers at death and gifts.
* * * * * * *
SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN
TRANSFERS AT DEATH AND GIFTS.
(a) Information Required To Be Furnished to the Secretary.--
Any person required to furnish any information under section
6018 or 6019 who fails to furnish such information on the date
prescribed therefor (determined with regard to any extension of
time for filing) shall pay a penalty of $10,000 ($500 in the
case of information required to be furnished under section
6018(b)(2) or 6019) for each such failure.
(b) Information Required To Be Furnished to Beneficiaries.--
Any person required to furnish in writing to each person
described in section 6018(e) or 6019(c) the information
required under such section who fails to furnish such
information shall pay a penalty of $50 for each such failure.
(c) Reasonable Cause Exception.--No penalty shall be imposed
under subsection (a) or (b) with respect to any failure if it
is shown that such failure is due to reasonable cause.
(d) Intentional Disregard.--If any failure under subsection
(a) or (b) is due to intentional disregard of the requirements
under sections 6018 and 6019, the penalty under such subsection
shall be 5 percent of the fair market value (as of the date of
death or, in the case of section 6019, the date of the gift) of
the property with respect to which the information is required.
(e) Deficiency Procedures Not To Apply.--Subchapter B of
chapter 63 (relating to deficiency procedures for income,
estate, gift, and certain excise taxes) shall not apply in
respect of the assessment or collection of any penalty imposed
by this section.
* * * * * * *
* * * * * * *
CHAPTER 79--DEFINITIONS
* * * * * * *
SEC. 7701. DEFINITIONS.
(a) When used in this title, where not otherwise distinctly
expressed or manifestly incompatible with the intent thereof--
(1) * * *
* * * * * * *
(47) Executor.--The term ``executor'' means the
executor or administrator of the decedent, or, if there
is no executor or administrator appointed, qualified,
and acting within the United States, then any person in
actual or constructive possession of any property of
the decedent.
* * * * * * *
(n) Purported Gifts May Be Disregarded.--For purposes of
subtitle A, the Secretary may treat a transfer which purports
to be a gift as having never been transferred if, in connection
with such transfer--
(1)(A) the transferor (or any person related to or
designated by the transferor or such person) has
received anything of value in connection with such
transfer from the transferee directly or indirectly, or
(B) there is an understanding or expectation that the
transferor (or such person) will receive anything of
value in connection with such transfer from the
transferee directly or indirectly, and
(2) the Secretary determines that such treatment is
appropriate to prevent avoidance of tax imposed by
subtitle A.
[(n)] (o) Cross References.--
(1) * * *
* * * * * * *
VII. DISSENTING VIEWS ON H.R. 8, THE DEATH TAX ELIMINATION ACT OF 2001,
APRIL 3, 2001
The Republican Members of the Committee were very
convincing during the Committee markup when they argued that
immediate repeal of estate and gift taxes would be fiscally
irresponsible. The revenue estimates provided by the staff of
the Joint Committee on Taxation indicate clearly that they were
correct. Those estimates indicate that repeal effective on
January 1, 2002, would cost $662.2 billion over the next 10
years. The cost approaches $100 billion per year before the end
of the 10-year budget window. The estimates show costs
increasing in every year, so it is clear that the total cost in
the second 10 years would be well in excess of $1 trillion.
The first argument we have with Committee Republicans is
that we do not understand why they seem confident that the
repeal will be fiscally responsible when it finally takes
effect under the Committee bill in the year 2011. The
Congressional Budget Office has been clear in stating that its
budget projections have very high levels of uncertainty in the
later part of the budget window. However, the demographic
trends in this country are certain. The Social Security and
Medicare Trust Funds will face increasing pressures as the baby
boom generation begins to reach retirement age after 2010. The
repeal of estate and gift taxes under the Committee bill would
finally take effect at that time. In our view, the Committee
bill may promise to repeal the ``death tax'' but it also
threatens the imposition of a large ``retirement tax'' in the
form of reduced Medicare benefits and Social Security benefits.
We can not support it.
We recognize that there are problems with the current
estate and gift taxes. They impose compliance and liquidity
burdens that can and should be reduced. The burdens fall more
heavily on the less wealthy estates. We believe that relief
should be focused on those estates and take effect immediately.
Our substitute would repeal immediately the estate tax for over
two-thirds of those currently subject to that tax. The tax
would be eliminated for approximately 99% of all farms. Our
substitute would accomplish this by increasing the estate tax
exclusion to $2 million effective January 1, 2002 from its
current level of $675,000. For a married couple who does some
estate tax planning, our substitute would result in an
effective exclusion of $4 million. The substitute would provide
further increases in the exclusion, ultimately reaching $2.5
million (effectively $5 million for married couples).
Like our substitute, H.R. 8 (as introduced) would have
provided immediate relief to small estates by increasing the
exclusion from $675,000 to $1.3 million effective January 1,
2001. However, the Committee-reported bill contains no increase
in the exclusion in order to reduce the cost of the bill. The
strategy is clear. Immediate increases in the exclusion for
small and moderate sized estates might undercut the drive to
repeal the tax for the wealthiest segment of our society and,
therefore, will be opposed by proponents of repeal.
The difference in strategy is clear. Under the Democratic
substitute, immediate and total repeal would be provided to
two-thirds of those currently liable for the tax, leaving only
the wealthiest one-half of one percent of our society subject
to the tax. Instead of immediate relief, the Committee bill
makes an unfunded, nonbinding promise to provide repeal ten
years in the future. Small and moderate sized estates are
denied immediate relief, in effect held hostage to ensure that
the wealthiest receive the full benefit.
Before discussing some of the more technical aspects of the
Committee bill, we would like to take this opportunity to point
out that Committee action on tax legislation to date already
has used virtually all of the $1.6 trillion set aside in the
budget resolution for tax reductions over 10 years. President
Bush campaigned as a compassionate conservative. The tax agenda
so far followed by the House clearly is conservative, large tax
reductions to the wealthiest of our society. The compassionate
side of the President's tax agenda such as his refundable
credit for health insurance expenses and incentives for
charitable giving have been ignored.
burden of ten-year phase-out
One of the arguments made by the proponents of repeal
involves the burdens of estate tax planning. Those proponents
ignore the fact that the 10-year phase-in contained in the
Committee bill will result in an increase, not a decrease, in
compliance burdens for at least the next 10 years. The complex
carryover basis rules that accompany repeal may result in
permanent increases in compliance burdens. Every estate tax
plan in the country will have to be rewritten at least once in
the next 10 years, perhaps many times. The new estate tax plan
will be far more complex and much more expensive for the client
because there would be total uncertainty as to what would be
the law when the individual died.
Some have suggested that estate tax lawyers oppose repeal
because it is bad for their business. The opposite is true. The
total uncertainty created by the committee bill could create an
extraordinary increase in the demand for estate tax lawyers and
planners. As in the past, those burdens will be the heaviest
for the small and moderate sized estates that would receive
immediate repeal of the tax under the Democratic substitute.
income tax avoidance
The Joint Committee on Taxation's estimates of the cost of
immediate repeal of estate and gift taxes contain a fact that
is surprising to most. Their estimate of $662 billion over the
next 10years is $250 billion greater than the amount projected
to be collected under the estate and gift tax system over the same
period. That $250 billion is due to the potential for income tax
avoidance created by the repeal. The cost estimate for the year 2011
indicates that total repeal would cost 180% of the revenues raised
under the estate and gift tax system in that year.
The potential for income tax avoidance will have to be
addressed or Congress ultimately may be forced to rescind the
promised repeal of the estate and gift tax. The Committee bill
contains a provision requiring a Treasury study of the
potential income tax avoidance. Until we see the results of
that study, there is no assurance that the repeal ever will
take effect.
Carryover Basis
Under current law, individuals inheriting property from a
decedent receive a tax basis in that property equal to its fair
market value at the time of the decedents death. That basis
rule in effect eliminates liability for capital gains tax on
the increase in the value of that property that occurred before
death. This favorable tax treatment is called ``step-up in
basis.'' The Democratic substitute would make no change to
those rules.
The Committee bill would impose a new carryover basis
regime for property acquired at death. The new rules would
limit the current law step up in basis, creating liability for
capital gains tax on increases in value before death. The
Committee bill attempts to exclude small and moderate sized
estates from the new carryover basis rules through a $1.3
million exclusion ($4.3 million for transfers to a surviving
spouse). The carryover basis rules contained in the Committee
bill are similar in concept to rules that were enacted by the
Congress in 1976 and repealed retroactively in 1978.
It is truly ironic that, while the Republicans led the
charge for repeal of carryover taxes in 1978, they are quietly
slipping the same provision back in to the Internal Revenue
Code today. In the process, they are conveniently choosing to
ignore their own words of 1978. At hearings on this issue, the
ranking Republican on the Ways and Means Committee, Barber
Connable, referred to ``the kind of complex, make-work stuff we
have here [in the Code].'' Rep. Frenzel argued that if
carryover basis was not repealed, there would be no immediate
public outcry, but that ``as soon as the effect of this law
begins to be felt, then we are going to hear an outcry, but, by
that time, all of us perpetrators will also have gone to our
great reward.''
It is difficult to comment in detail on the new carryover
basis rules because of the short time that we have had to
analyze the new rules. However, several conclusions are clear.
1. The Democratic substitute retains current law step up in
basis rules. Therefore, families with net wealth of less than
the exclusion ultimately provided in the Democratic substitute
($2.5 million for single individuals, $5 million for married
couples) would receive tax benefits under the Democratic
substitute that are the same or larger than those provided
under the Committee bill. It is estimated that approximately
99.5% of all decedents will have net wealth of less than the
exclusion contained in the Democratic substitute.
2. The Committee bill will be a tax increase on many
families when compared to the benefits of the Democratic
substitute. There also will be circumstances where the
Committee bill will result in an actual tax increase compared
to current law. In those circumstance, the potential capital
gains tax liability resulting from the carryover basis regime
would exceed the benefit from the estate tax repeal. Those
circumstances include estates where all of the property of the
decedent is transferred to a surviving spouse, and in the case
of estates where there is debt-financed property, most often
real estate. The potential tax increase on surviving spouses is
recognized in the Committee bill, and there is an attempt to
mitigate it by providing a larger exemption from the carryover
basis rules. However, we doubt that many Members of the
Committee understand that there could be tax increases under
the Committee bill where land or other real estate is
encumbered by debt in excess of its tax basis. This could occur
when a farmer incurs additional debt because of low farm prices
or where depreciation reduces the adjusted basis of a building
below outstanding mortgage debt. In those circumstances, the
additional capital gains tax owed by reason of the carryover
basis rules could exceed the tax reduction resulting from the
estate tax repeal.
3. It will be very difficult for executors to administer
estates under the new rules. They will have to allocate
potential income tax liability among the heirs. The executors
have a fiduciary responsibility to all of the heirs, but the
Committee bill may create circumstances where actions of the
executor will create benefits for one category of heirs with
resulting tax increases on other categories of heirs.
4. All individuals, regardless of their current wealth,
would have to retain records of purchases, sales, depreciation
and other factors that may be necessary to comply with the
carryover basis rules.
Conclusion
We believe that our Democratic substitute provides
immediate relief to the compliance and liquidity burdens of the
estate tax. Unlike the Committee-reported bill, it does not
deny relief to small and moderate sized estates in order to
build support for relief to the most wealthy in our society.
The following table clearly shows the difference between our
approach and the Committee bill. It shows the amount of wealth
that a family would have to have before the tax reductions
under the Republican bill exceed those under our substitute.
Family Wealth Below Which Democratic Plan Provides Greater Benefit
Year Millions of dollars
2002.......................................................... 27.7
2003.......................................................... 22.3
2004.......................................................... 18.3
2005.......................................................... 15.9
2006.......................................................... 13.6
2007.......................................................... 12.3
2008.......................................................... 10.6
2009.......................................................... 10.0
2010.......................................................... 9.6
C.B. Rangel.
William J. Coyne.
Jim McDermott.
Ben Cardin.
William J. Jefferson.
Karen L. Thurman.
Lloyd Doggett.
Xavier Becerra.
Pete Stark.
Robert T. Matsui.
Jerry Kleczka.
Richard E. Neal.
John Lewis.
Earl Pomeroy.
Sandra A. Levin.
Michael R. McNulty.