Family Business Protection Act of 1995

Summary: Family Business Protection Act of 1995 - Amends the Internal Revenue Code to exclude from the gross estate, for estate tax purposes, specified portions of the adjusted value of the qualified family-owned business interests of the decedent.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Family Business Protection Act of 
1995''.

SEC. 2. FAMILY-OWNED BUSINESS EXCLUSION.

    (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. FAMILY-OWNED BUSINESS EXCLUSION.

    ``(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 lesser of--
            ``(1) the adjusted value of the qualified family-owned 
        business interests of the decedent otherwise includible in the 
        estate, or
            ``(2) the sum of--
                    ``(A) $1,500,000, plus
                    ``(B) 50 percent of the excess (if any) of the 
                adjusted value of such interests over $1,500,000.
    ``(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 sum of--
                    ``(A) the adjusted value of the qualified family-
                owned business interests which--
                            ``(i) are included in determining the value 
                        of the gross estate (without regard to this 
                        section), and
                            ``(ii) are acquired by a qualified heir 
                        from, or passed to a qualified heir from, the 
                        decedent (within the meaning of section 
                        2032A(e)(9)), plus
                    ``(B) the amount of the adjusted taxable gifts of 
                such interests from the decedent to members of the 
                decedent's family taken into account under subsection 
                2001(b)(1)(B),
        exceeds 50 percent of the adjusted gross estate, and
            ``(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) such interests were 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 
                business to which such interests relate.
    ``(c) Adjusted Gross Estate.--For purposes of this section, the 
term `adjusted gross estate' means the value of the gross estate 
(determined without regard to this section)--
            ``(1) reduced by any amount deductible under section 
        2053(a)(4), and
            ``(2) increased by the sum of--
                    ``(A) the amount taken into account under 
                subsection (b)(2)(B), plus
                    ``(B) the amount of other gifts from the decedent 
                to the decedent's spouse (at the time of the gift) 
                within 10 years of the date of the decedent's death, 
                plus
                    ``(C) the amount of other gifts (not included under 
                subparagraph (A) or (B)) from the decedent within 3 
                years of such date.
    ``(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 section 2053(a)(4), 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 as a partner in a partnership, or 
                stock in a corporation, carrying on a trade or 
                business, if--
                            ``(i) at least--
                                    ``(I) 50 percent of such 
                                partnership or corporation is owned 
                                (directly or indirectly) by the 
                                decedent or members of the decedent's 
                                family,
                                    ``(II) 70 percent of such 
                                partnership or corporation is so owned 
                                by 2 families (including the decedent's 
                                family), or
                                    ``(III) 90 percent of such 
                                partnership or corporation is so owned 
                                by 3 families (including the decedent's 
                                family), and
                            ``(ii) at least 30 percent of such 
                        partnership or corporation is so owned by each 
                        family described in subclause (II) or (III) of 
                        clause (i).
            ``(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--
                            ``(i) an entity which had, or
                            ``(ii) an entity which is a member of a 
                        controlled group (as defined in section 
                        267(f)(1)) which had,
                readily tradable stock or debt on an established 
                securities market or secondary market (as defined by 
                the Secretary) 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)), 
                and
                    ``(D) that portion of an interest in a trade or 
                business that is attributable to cash or marketable 
                securities, or both, in excess of the reasonably 
                expected day-to-day working capital needs of such trade 
                or business.
            ``(3) Ownership rules.--
                    ``(A) Indirect ownership.--For purposes of 
                determining indirect ownership under paragraph (1), 
                rules similar to the rules of paragraphs (2) and (3) of 
                section 447(e) shall apply.
                    ``(B) Tiered entities.--For purposes of this 
                section, if--
                            ``(i) a qualified family-owned business 
                        holds an interest in another trade or business, 
                        and
                            ``(ii) such interest would be a qualified 
                        family-owned business interest if held directly 
                        by the family (or families) holding interests 
                        in the qualified family-owned business meeting 
                        the requirements of paragraph (1)(B),
                then the value of the qualified family-owned business 
                shall include the portion attributable to the interest 
                in the other trade or business.
    ``(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 qualified heir ceases to use for the 
                qualified use (within the meaning of section 
                2032A(c)(6)(B)) the qualified family-owned business 
                interest which was acquired (or passed) from the 
                decedent, or
                    ``(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)).
            ``(2) Additional estate tax.--The amount of the additional 
        estate tax imposed by paragraph (1) shall be equal to--
                    ``(A) the applicable percentage of 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
                    ``(B) interest on the amount determined under 
                subparagraph (A) at the annual rate of 4 percent 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.
            ``(3) Applicable percentage.--For purposes of paragraph 
        (2), the term `applicable percentage' means the percentage 
        determined in accordance with the following table for the year 
        (in the 10-year period referred to in paragraph (1)) in which 
        the recapture event occurs:

        In the case of the:
                                          The applicable percentage is:
            First 5 such years.......................   100 percent    
            6th such year............................    50 percent    
            7th such year............................    40 percent    
            8th such year............................    30 percent    
            9th such year............................    20 percent    
            10th such year...........................   10 percent.    
    ``(g) 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) Inflation adjustment.--In the case of estates of 
        decedents dying in a calendar year after 1996, the $1,500,000 
        amount contained in subsection (a) shall be increased each 
        place it appears by an amount equal to--
                    ``(A) $1,500,000, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for such calendar year by 
                substituting `calendar year 1995' 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 
        nearest multiple of $10,000.
            ``(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)(7) (relating to no tax if 
                use begins within 2 years; active management by 
                eligible qualified heir treatment as material 
                participation).
                    ``(H) Section 2032A(e)(10) (relating to community 
                property).
                    ``(I) Section 2032A(e)(14) (relating to treatment 
                of replacement property acquired in section 1031 or 
                1033 transactions).
                    ``(J) Section 2032A(f) (relating to statute of 
                limitations).
                    ``(K) Section 6166(b)(3) (relating to farmhouses 
                and certain other structures taken into account).
                    ``(L) Subparagraphs (B), (C), and (D) of section 
                6166(g)(1) (relating to acceleration of payment).''
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter A of chapter 11 of the Internal Revenue Code of 1986 is 
amended by inserting after the item relating to section 2033 the 
following new item:

                              ``Sec. 2033A. Family-owned business 
                                        exclusion.''
    (c) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying after December 31, 1995.