Family Farm Protection Act

Summary: Family Farm Protection Act - Amends the Internal Revenue Code to exclude from gross income any gain on the sale of a qualified family farm interest to a family member of the taxpayer.  Requires the taxpayer (or a member of the taxpayer's family) to have participated materially in the farming business operation during the five years preceding the sale, and requires the family member purchasing the interest to participate materially during the five years following the sale.  Provides for recapture of tax foregone because of the exclusion if during the five years following the sale: (1) the interest ceases to be used in a farming business; or (2) the purchasing family member fails to participate materially in the farming business.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Family Farm Protection Act''.

SEC. 2. EXCLUSION OF GAIN ON SALE OF FAMILY FARMING BUSINESS TO FAMILY 
              MEMBER.

    (a) In General.--Part I of subchapter P of chapter 1 of the 
Internal Revenue Code of 1986 (relating to treatment of capital gains) 
is amended by adding at the end the following new section:

``SEC. 1203. EXCLUSION OF GAIN ON SALE OF FAMILY FARM TO FAMILY MEMBER.

    ``(a) In General.--At the election of the taxpayer, gross income 
shall not include any gain from the sale of a qualified family farm 
interest to a member of the taxpayer's family if--
            ``(1) at all times during the 5-year period ending on the 
        date of such sale, there was material participation by the 
        taxpayer or a member of the taxpayer's family in the operation 
        of the farming business to which such interest relates, and
            ``(2)(A) such interest is being acquired by a member of the 
        taxpayer's family, and
            ``(B) such member agrees--
                    ``(i) for the 5-year period beginning on the day 
                after the date of such sale, to materially participate 
                in the operation of the farming business to which such 
                interest relates, and
                    ``(ii) to the provisions of subsection (b).
    ``(b) Recapture of Tax if Interest Ceases To Be Used in a Farming 
Business.--
            ``(1) In general.--If, during any year within the 5-year 
        period beginning on the date of such sale--
                    ``(A) a qualified family farm interest with respect 
                to which an election is made under subsection (a) is 
                disposed of, or otherwise ceases to be a qualified 
                family farm interest of the member of the family who 
                acquired such interest, other than through the 
                bankruptcy or insolvency of such member of the family, 
                or
                    ``(B) the member of the family who acquired such 
                interest fails to materially participate (directly or 
                through a family member of such member) in the 
                operation of the farming business to which such 
                interest relates,
        then the tax imposed on such member of the family under this 
        subtitle for the year shall be increased by an amount equal to 
        the recapture percentage of the excluded tax amount, plus 
        interest on the amount of such increase at the underpayment 
        rate established under section 6621 for the period beginning on 
        the date the return of tax for the year of such sale was due 
        under this chapter (without regard to extensions thereof) and 
        ending on the date the increase in tax under this subsection is 
        due (without regard to extensions thereof).
            ``(2) Recapture percentage.--For purposes of paragraph (1), 
        the recapture percentage shall be determined under the 
        following table:

``If the event described              
  in paragraph (1) occurs             
  in the following years            The recapture
  after such sale:                  percentage is:

        1..........................
                                              100 
        2..........................
                                               80 
        3..........................
                                               60 
        4..........................
                                               40 
        5..........................
                                               20.
            ``(3) Excluded tax amount.--For purposes of paragraph (1), 
        the term `excluded tax amount' means the excess of--
                    ``(A) the amount of tax that would have been 
                imposed on the taxpayer under this subtitle for the 
                taxable year ending with or within which the sale for 
                which an election was made under subsection (a), over
                    ``(B) the amount of tax imposed on the taxpayer 
                under this subtitle for such taxable year.
        This paragraph shall be applied without regard to the 
        installment method of accounting or averaging of farm income 
        under section 1301.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified family farm interest.--The term `qualified 
        family farm interest' means an interest which is a qualified 
        family-owned business interest in a farming business.
            ``(2) Qualified family-owned business interest.--The term 
        `qualified family-owned business interest' has the meaning 
        given such term by section 2057(e), determined by substituting 
        `taxpayer' for `decedent' each place it appears.
            ``(3) Farming business.--The term `farming business' has 
        the meaning given such term by section 263A(e)(4).
            ``(4) Member of the family.--The term `member of the 
        family' has the meaning given such term by section 2032A(e).
            ``(5) Material participation.--The term `material 
        participation' has the meaning given such term by section 
        2032A(e)(6).''.
    (b) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 of the Internal Revenue Code of 1986 is 
amended by adding at the end the following new item:

``Sec. 1203. Exclusion of gain on sale of family farm to family 
                            member.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to sales occurring on or after the date of enactment of this Act.