SECTION 1. SHORT TITLE.

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

SEC. 2. TREATMENT OF LAND SUBJECT TO A QUALIFIED CONSERVATION EASEMENT.

    (a) Estate Tax With Respect to Land Subject to a Qualified 
Conservation Easement.--Section 2031 of the Internal Revenue Code of 
1986 (relating to the definition of gross estate) is amended by 
redesignating subsection (c) as subsection (d) and by inserting after 
subsection (b) the following new subsection:
    ``(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 (3) of this subsection, then, except as 
        otherwise provided in this subsection, there shall be excluded 
        from the gross estate the value of land subject to a qualified 
        conservation easement (reduced by the amount of any 
        indebtedness to which such land is subject). For purposes of 
        this subsection, the term `land subject to a qualified 
        conservation easement' means land that is located in an area 
        which, on the date of the decedent's death, is a metropolitan 
        area (as defined by the Office of Management and Budget), and 
        which was 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 with respect to which a 
        qualified conservation contribution of a qualified real 
        property interest (as defined in section 170(h)(1) and (2)(C)) 
        is or has been made by the decedent or a member of the 
        decedent's family. For purposes of this subsection, the term 
        `qualified real property interest' shall not include any 
        structure or building constituting a `certified historic 
        structure' (as defined in section 170(h)(4)(B)) or within the 
        definition of a `historically important land area' (as defined 
        in section 170(h)(4)(A)(iv)). For purposes of this subsection, 
        the term `member of the decedent's family' shall have the same 
        meaning as the term `member of the family' in section 2032A.
            ``(2) Payment of tax upon certain disposition of land 
        subject to retained development right.--The exclusion described 
        in paragraph (1) shall not apply to the value of any 
        development right retained by the donor in the conveyance of 
        such qualified conservation easement. The tax imposed by 
        section 2001, if any, attributable to any development right so 
        retained shall be imposed only upon the disposition of such 
        property. For purposes of this paragraph, the term 
        `disposition' shall not include any gift or devise. The tax so 
        imposed shall be due and payable by the person so disposing of 
        such property on the fifteenth day of the fourth month 
        following the calendar year in which such disposition occurs. 
        For purposes of this paragraph, the term `development right' 
        shall mean the right to establish or use, any structure and the 
        land immediately surrounding it for sale, or for rent or any 
        other commercial purpose which is not subordinate to and 
        directly supportive of the conservation purpose identified in 
        the easement, or the activity of farming, forestry, ranching, 
        horticulture, viticulture, or recreation, whether or not for 
        profit, conducted on land subject to the easement in which such 
        right is retained.
            ``(3) Election with respect to land subject to qualified 
        conservation easement.--The election under this subsection 
        shall be made on the return of the tax imposed by section 2001 
        and in such manner as the Secretary shall by regulations 
        prescribe. Such an election, once made, shall be irrevocable.
            ``(4) Calculation and notice of potential estate tax due.--
        An executor making the election described in paragraph (3) of 
        this subsection shall compute the amount of tax imposed by 
        section 2001 upon any development right (as defined in 
        paragraph (2) of this subsection) retained by the donor in the 
        conveyance of such qualified conservation easement and include 
        such computation with the return of the tax imposed by section 
        2001. The executor shall also file a `Notice of Potential 
        Estate Tax Due' in the place or places where deeds are put to 
        public record for the locality in which the land subject to 
        such qualified conservation easement is located. The report of 
        the computation of tax on any retained development right and 
        the filing of the notice prescribed in this paragraph shall be 
        done in such manner and on such forms as the Secretary shall 
        prescribe.''
    (b) Carryover Basis.--Section 1014(a) of the Internal Revenue Code 
of 1986 (relating to basis of property acquired from a decedent) is 
amended by striking the period at the end of paragraph (3), inserting 
``, or'' at the end thereof, and inserting the following new paragraph:
            ``(4) to the extent of the applicability of the exclusion 
        described in section 2031(c), the basis in the hands of the 
        decedent.''
    (c) Effective Date.--The amendments made by this section shall 
apply to gross estates including land on which qualified conservation 
easements were granted after December 31, 1994, in taxable years ending 
after such date.

SEC. 3. GIFT TAX ON LAND SUBJECT TO A QUALIFIED CONSERVATION EASEMENT.

    (a) Gift Tax With Respect to Land Subject to a Qualified 
Conservation Easement.--Section 2503 of the Internal Revenue Code of 
1986 (relating to taxable gifts) is amended by adding a new subsection 
(h) to read as follows:
    ``(h) Gift Tax With Respect to Land Subject to a Qualified 
Conservation Easement.--The transfer by gift of land subject to a 
qualified conservation easement shall not be treated as a transfer of 
property by gift for purposes of this chapter. For purposes of this 
subsection, the term `land subject to a qualified conservation 
easement' shall have the same meaning as in section 2031(c), except 
that references therein to `decedent' shall refer to the donor and 
references to `the date of the decedent's death' shall refer to the 
date of the transfer by the donor.''
    (b) Effective Date.--The amendments made by this section shall 
apply to gifts of land on which qualified conservation easements were 
granted after December 31, 1994, in taxable years ending after such 
date.

SEC. 4. EXCLUSION OF GAIN FROM SALE OF CERTAIN FARMLAND.

    (a) General Rule.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by redesignating section 137 as section 
138 and by inserting after section 136 the following new section:

``SEC. 137. SALES AND EXCHANGES OF FARMLAND THE USE OF WHICH IS 
              RESTRICTED TO FARMING.

    ``(a) General Rule.--In the case of an operator of farmland, gross 
income does not include gain from the sale or exchange of farmland if 
there is in effect on the date of such sale or exchange a qualified 
covenant which does not permit any use of such farmland for any purpose 
other than use as farmland.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Farmland.--The term `farmland' means any real 
        property--
                    ``(A) which is located in the United States, and
                    ``(B) which is used as a farm for farming purposes 
                (within the meaning of section 2032A(e)).
            ``(2) Qualified covenant--The term `qualified covenant' 
        means a covenant--
                    ``(A) which may not be revoked,
                    ``(B) which, with respect to farmland to which such 
                covenant applies, is entered into by all persons having 
                any ownership interest in such farmland, and
                    ``(C) which binds all future owners of the farmland 
                to which such covenant applies.
    ``(c) Application With Principal Residences.--For purposes of this 
section, use as farmland includes use as the principal residence of the 
operator of such farmland.
    ``(d) Verification of Covenant.--Subsection (a) shall not apply by 
reason of any covenant unless such person--
            ``(1) notifies (in such form and manner as the Secretary 
        may by regulations prescribe) both the Secretary and the 
        Secretary of Agriculture of the political subdivision of the 
        State in which such covenant is recorded, and
            ``(2) submits to the Secretary a copy of such covenant.''
    (b) Clerical Amendment.--The table of sections for such part is 
amended by striking out the item relating to section 137 and inserting 
in lieu thereof the following:

                              ``Sec. 137. Sales and exchanges of 
                                        farmland the use of which is 
                                        restricted to farming.
                              ``Sec. 138. Cross references to other 
                                        Acts.''
    (c) Effective Date.--The amendments made by this section shall 
apply to covenants first recorded after December 31, 1994, in taxable 
years ending after such date.
Family Farm Protection Act - Amends the Internal Revenue Code to exclude from the gross estate, for estate tax purposes, the value of certain land subject to a qualified conservation easement (reduced by the amount of any indebtedness secured by such land).  Includes in the gross estate the value of each development right retained by the donor in the conveyance of the easement.  Makes such tax due on a date certain after the disposition of such property. Provides that such land subject to the exclusion will have a carryover basis for purposes of determining gain or loss. 
Excludes from the gift tax transfers by gift of land subject to a qualified conservation easement. 
Excludes from gross income gain from the sale or exchange of eligible farmland that is subject to a qualified covenant which does not permit any use of such farmland for purposes other than as farmland.
Family Farm Protection Act