Family Business and Family Farm Preservation Act of 1998

Summary: Family Business and Family Farm Preservation Act of 1998 - Amends the Internal Revenue Code to provide that the $675,000 limitation on the estate tax deduction shall not apply to interests in a business owned by a single family.  Establishes a reinvestment requirement on estates to which such limitation did not apply.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Family Business and Family Farm 
Preservation Act of 1998''.

SEC. 2. LIMITATION ON ESTATE TAX DEDUCTION FOR FAMILY-OWNED BUSINESS 
              INTERESTS NOT TO APPLY TO INTERESTS IN A BUSINESS OWNED 
              BY A SINGLE FAMILY.

    (a) In General.--Subsection (a) of section 2057 of the Internal 
Revenue Code of 1986 (relating to family-owned business interests) is 
amended by adding at the end the following new paragraph:
            ``(4) Limitation not to apply to single family 
        businesses.--Paragraph (2) shall be applied by not taking into 
        account any deduction under this section for interests in--
                    ``(A) any sole proprietorship, or
                    ``(B) any entity if 100 percent of such entity is 
                owned (directly or indirectly) by the decedent and 
                members of the decedent's family.''
    (b) Additional Estate Tax Deduction Recaptured if Reinvestment 
Requirement Not Met.--Subsection (f) of section 2057 of such Code 
(relating to tax treatment of failure to materially participate in 
business or dispositions of interest) is amended by adding at the end 
the following new paragraphs:
            ``(3) Reinvestment requirement on estates to which dollar 
        limitation on deduction did not apply.--
                    ``(A) In general.--In the case of an estate with 
                respect to which the deduction under this section 
                exceeded $675,000 by reason of subsection (a)(4), the 
                failure to meet the reinvestment requirement of 
                paragraph (4) shall be treated as referred to in a 
                subparagraph of paragraph (1) of this subsection.
                    ``(B) Amount of tax.--If tax is imposed by this 
                subsection by reason of a failure to meet the 
                reinvestment requirement of paragraph (4) for any 
                taxable year--
                            ``(i) the applicable percentage shall be 10 
                        percent (in lieu of the percentage determined 
                        under paragraph (2)), and
                            ``(ii) the adjusted tax difference shall be 
                        determined by taking into account only that 
                        portion of the value of the qualified family-
                        owned business interests involved which bears 
                        the same ratio to such value as the excess for 
                        such year of the adjusted net earnings over the 
                        reinvestment amount bears to the reinvestment 
                        amount.
                    ``(C) Special rule.--Tax shall be imposed by this 
                subsection by reason of a failure only to the extent 
                that the value (for purposes of this chapter) of the 
                qualified family-owned business interests involved in 
                such event, when increased by the value (for such 
                purposes) of qualified family-owned business interests 
                with respect to which prior recapture events have 
                occurred (whether or not tax was imposed by this 
                subsection on such prior events), exceeds $675,000.
                    ``(D) Extension of 10-year period.--
                            ``(i) Increase in reinvestment requirement 
                        by reason of audit.--In the case that the 
                        reinvestment amount is increased for a taxable 
                        year after examination or assessment by the 
                        Secretary, the 10-year period referred to in 
                        paragraph (1) shall be extended for an 
                        additional year.
                            ``(ii) Reinvestment requirement impossible 
                        to meet due to unforeseen circumstances.--In 
                        the case of a failure to meet the reinvestment 
                        requirement of paragraph (4) due to unforeseen 
                        circumstances, the Secretary may extend the 10-
                        year period referred to in paragraph (1) for a 
                        reasonable period in accordance with section 
                        6161.
            ``(4) Reinvestment requirement.--
                    ``(A) In general.--The reinvestment requirement of 
                this paragraph is met with respect to a sole 
                proprietorship or entity for any taxable year if the 
                reinvestment amount for such year is not less than the 
                adjusted net earnings of the proprietorship or entity 
                for such year.
                    ``(B) Reinvestment amount.--For purposes of this 
                paragraph, the term `reinvestment amount' means, with 
                respect to any taxable year, the sum of--
                            ``(i) the increase during the taxable year 
                        in net asset investment in the same trade or 
                        business, and
                            ``(ii) the increase during the taxable year 
                        in working capital of the same trade or 
                        business.
                    ``(C) Increase in net asset investment.--For 
                purposes of this paragraph--
                            ``(i) Determination of increase.--The 
                        increase during the taxable year in net asset 
                        investment is an amount equal to the excess (if 
                        any) of--
                                    ``(I) the net asset investment as 
                                of the close of the taxable year, over
                                    ``(II) the net asset investment as 
                                of the close of the preceding taxable 
                                year.
                            ``(ii) Net asset investment.--The term `net 
                        asset investment' means the excess (if any) 
                        of--
                                    ``(I) the aggregate adjusted bases 
                                of qualified assets held by the 
                                taxpayer for use in the active conduct 
                                of a trade or business, over
                                    ``(II) the aggregate outstanding 
                                amount of indebtedness of the taxpayer 
                                which was incurred to acquire or 
                                improve qualified assets so held.
                            ``(iii) Qualified asset.--The term 
                        `qualified asset' means any tangible or 
                        intangible property other than property 
                        described in subsection (e)(2)(D).
                    ``(D) Adjusted net earnings.--For purposes of this 
                paragraph, the term `adjusted net earnings' means 
                taxable income--
                            ``(i) increased by the sum of--
                                    ``(I) the amount of interest 
                                received or accrued by the taxpayer 
                                during the taxable year which is exempt 
                                from tax, and
                                    ``(II) the amount allowed for 
                                depreciation or amortization, and
                            ``(ii) decreased by the tax imposed by 
                        chapter 1 for the taxable year.''
    (c) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying after the date of enactment of this 
Act.