To amend the Internal Revenue Code of 1986 to exclude certain farmland and family-owned business interests from the value of the gross estate of decedents.

Summary: Family Farm and Small Business Tax Relief Act of 2012 - Amends the Internal Revenue Code to exclude from a decedent's gross estate, for estate tax purposes, the adjusted value of qualified farmland and qualified family-owned business interests.

Imposes an additional estate tax if, within 10 years after the decedent's death and before the date of the qualified heir's death: (1) qualified farmland ceases to be used for farming purposes or is sold outside of the qualified heir's family; or (2) material participation requirements for a qualified family-owned business interest are not met, the business ceases to be located in the United States, or the business is sold outside the qualified heir's family.

Makes permanent estate tax provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Family Farm and Small Business Tax 
Relief Act of 2012''.

SEC. 2. EXCLUSION FROM GROSS ESTATE OF CERTAIN FARMLAND AND FAMILY-
              OWNED BUSINESS INTERESTS.

    (a) In General.--Part III of subchapter A of chapter 11 of the 
Internal Revenue Code of 1986 (relating to gross estate) is amended by 
inserting after section 2033 the following new section:

``SEC. 2033A. CERTAIN FARMLAND AND FAMILY-OWNED BUSINESS INTERESTS.

    ``(a) In General.--In the case of an estate of a decedent to which 
this section applies, the value of the gross estate shall not include 
the adjusted value of--
            ``(1) qualified farmland, and
            ``(2) the qualified family-owned business interests,
of the decedent otherwise includible in the estate.
    ``(b) Estates to Which Section Applies.--This section shall apply 
to an estate if--
            ``(1) the decedent was (at the date of the decedent's 
        death) a citizen or resident of the United States,
            ``(2) the executor elects the application of this section 
        and files the agreement referred to in subsection (h),
            ``(3) 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--
                    ``(A) the qualified farmland or the qualified 
                family-owned business interest, or both, as the case 
                may be, was owned by the decedent or a member of the 
                decedent's family, and
                    ``(B) 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 
                qualified farmland or the business to which such 
                interest relates.
    ``(c) Qualified Family-Owned Business Interests.--For purposes of 
this section--
            ``(1) Adjusted value.--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--
                    ``(A) any amount deductible under paragraph (3) or 
                (4) of section 2053(a), over
                    ``(B) the sum of--
                            ``(i) any indebtedness on any qualified 
                        residence of the decedent the interest on which 
                        is deductible under section 163(h)(3), plus
                            ``(ii) 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
                            ``(iii) any indebtedness not described in 
                        subparagraph (A) or (B), to the extent such 
                        indebtedness does not exceed $10,000.
            ``(2) Qualified family-owned business interest defined.--
        The term `qualified family-owned business interest' has the 
        meaning given such term by section 2057(e).
    ``(d) Qualified Farmland.--For purposes of this section, the term 
`qualified farmland' means any real property--
            ``(1) which is located in the United States,
            ``(2) which is used as a farm for farming purposes (as 
        defined in section 2032A(e)), and
            ``(3) which was acquired from or passed from the decedent 
        to a qualified heir of the decedent which, on the date of the 
        decedent's death, was being so used by the decedent or a member 
        of the decedent's family.
    ``(e) 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) in the case of a qualified family-owned 
                business interest--
                            ``(i) the material participation 
                        requirements of subsection (b)(3)(B) are not 
                        met with respect to the qualified family-owned 
                        business interest which was acquired (or 
                        passed) from the decedent,
                            ``(ii) 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, or
                            ``(iii) the qualified heir disposes of any 
                        interest in the qualified family-owned business 
                        interest, other than by a disposition to a 
                        member of the qualified heir's family,
                    ``(B) in the case of qualified farmland--
                            ``(i) the qualified heir ceases to use the 
                        real property which was acquired (or passed) 
                        from the decedent as a farm for farming 
                        purposes, or
                            ``(ii) the qualified heir disposes of any 
                        interest in qualified farmland, other than by a 
                        disposition to a member of the qualified heir's 
                        family, or
                    ``(C)(i) 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
                    ``(ii) such heir does not comply with the rules 
                similar to the rules of section 2057(g) (relating to 
                security requirements for noncitizen qualified heirs).
            ``(2) Additional estate tax.--
                    ``(A) In general.--The amount of the additional 
                estate tax imposed by paragraph (1) shall be equal to--
                            ``(i) the applicable percentage of the 
                        adjusted tax difference attributable to the 
                        qualified family-owned business interest (as 
                        determined under rules similar to the rules of 
                        section 2032A(c)(2)(B)), plus
                            ``(ii) interest on the amount determined 
                        under clause (i) at the underpayment rate 
                        established under section 6621 for the period 
                        beginning on the date the estate tax liability 
                        was due under this chapter and ending on the 
                        date such additional estate tax is due.
                    ``(B) Applicable percentage.--For purposes of this 
                paragraph, the applicable percentage shall be 
                determined under the following table:

``If the event described in
   paragraph (1) occurs in
  the following year of                                  The applicable
  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.
    ``(f) 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) Material participation.--The term `material 
        participation' has the meaning given to such term by section 
        2032A(e)(6).
            ``(4) 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)(6) (relating to cessation of 
                qualified use).
                    ``(H) Section 2032A(c)(7) (relating to no tax if 
                use begins within 2 years; active management by 
                eligible qualified heir treated as material 
                participation).
                    ``(I) Section 2032A(c)(8) (relating to qualified 
                conservation contribution is not a disposition).
                    ``(J) Paragraphs (1) and (3) of section 2032A(d) 
                (relating to election; agreement).
                    ``(K) Section 2032A(e)(10) (relating to community 
                property).
                    ``(L) Section 2032A(e)(14) (relating to treatment 
                of replacement property acquired in section 1031 or 
                1033 transactions).
                    ``(M) Section 2032A(f) (relating to statute of 
                limitations).
                    ``(N) Section 2032A(g) (relating to application of 
                this section and section 6324B to interests in 
                partnerships, corporations, and trusts).
                    ``(O) Section 2032A(h) (relating to special rules 
                for involuntary conversions of qualified real 
                property).
                    ``(P) Section 2032A(i) (relating to exchanges of 
                qualified real property).
                    ``(Q) Section 6166(b)(3) (relating to farmhouses 
                and certain other structures taken into account).
                    ``(R) Subparagraphs (B), (C), and (D) of section 
                6166(g)(1) (relating to acceleration of payment).
                    ``(S) Section 6324B (relating to special lien for 
                additional estate tax).''.
    (b) Conforming Amendment.--Section 2032A of such Code is amended by 
adding at the end the following:
    ``(e) Termination.--This section shall not apply with respect to 
decedents dying after December 31, 2012.''.
    (c) Clerical Amendment.--The table of sections for part III of 
subchapter A of chapter 11 of such Code is amended by inserting after 
the item relating to section 2033 the following new item:

``Sec. 2033A. Family-owned business exclusion.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying after December 31, 2012.

SEC. 3. ESTATE TAX MADE PERMANENT.

    (a) In General.--Title III of the Tax Relief, Unemployment 
Insurance Reauthorization, and Job Creation Act of 2010 is amended by 
striking section 304.
    (b) Conforming Amendment.--Section 901 of the Economic Growth and 
Tax Relief Reconciliation Act of 2001 shall not apply to title V of 
such Act.
    (c) Effective Date.--The amendment made by subsection (a) shall 
apply to estates of decedents dying, gifts made, and generation 
skipping transfers after December 31, 2012.