To amend the Internal Revenue Code of 1986 to limit the applicability of the estate tax to estates of over $3,500,000, and for other purposes.

SECTION 1. REPEAL OF CARRYOVER BASIS; ETC.

    (a) In General.--Subtitles A and E of title V of the Economic 
Growth and Tax Relief Reconciliation Act of 2001, and the amendments 
made by such subtitles, are hereby repealed; and the Internal Revenue 
Code of 1986 shall be applied as if such subtitles, and amendments, had 
never been enacted.
    (b) Sunset Not To Apply.--
            (1) Subsection (a) of section 901 of the Economic Growth 
        and Tax Relief Reconciliation Act of 2001 is amended by 
        striking ``this Act'' and all that follows and inserting ``this 
        Act (other than title V) shall not apply to taxable, plan, or 
        limitation years beginning after December 31, 2010.''.
            (2) Subsection (b) of such section 901 is amended by 
        striking ``, estates, gifts, and transfers''.
    (c) Conforming Amendments.--Subsections (d) and (e) of section 511 
of the Economic Growth and Tax Relief Reconciliation Act of 2001, and 
the amendments made by such subsections, are hereby repealed; and the 
Internal Revenue Code of 1986 shall be applied as if such subsections, 
and amendments, had never been enacted.

SEC. 2. MODIFICATIONS TO ESTATE TAX.

    (a) Increase in Exclusion Equivalent of Unified Credit to 
$3,500,000.--
            (1) In general.--Subsection (c) of section 2010 of the 
        Internal Revenue Code of 1986 (relating to applicable credit 
        amount) is amended by striking all that follows ``the 
        applicable exclusion amount'' and inserting ``. For purposes of 
        the preceding sentence, the applicable exclusion amount is 
        $3,500,000 ($3,000,000 in the case of estates of decedents 
        dying, and gifts made, after December 31, 2002, and before 
        January 1, 2009).''.
            (2) Earlier termination of section 2057.--Subsection (f) of 
        section 2057 of such Code is amended by striking ``December 31, 
        2003'' and inserting ``December 31, 2002''.
    (b) Maximum Estate Tax Rate To Remain at 50 Percent; Phaseout of 
Graduated Rates and Unified Credit.--Paragraph (2) of section 2001(c) 
of such Code is amended to read as follows:
            ``(2) Phaseout of graduated rates and unified credit.--The 
        tentative tax determined under paragraph (1) shall be increased 
        by an amount equal to 5 percent of so much of the amount (with 
        respect to which the tentative tax is to be computed) as 
        exceeds $10,000,000. The amount of the increase under the 
        preceding sentence shall not exceed the sum of the applicable 
        credit amount under section 2010(c) and $224,200.''
    (c) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying, and gifts made, after December 31, 
2002.

SEC. 3. VALUATION RULES FOR CERTAIN TRANSFERS OF NONBUSINESS ASSETS; 
              LIMITATION ON MINORITY DISCOUNTS.

    (a) In General.--Section 2031 of the Internal Revenue Code of 1986 
(relating to definition of gross estate) is amended by redesignating 
subsection (d) as subsection (f) and by inserting after subsection (c) 
the following new subsections:
    ``(d) Valuation Rules for Certain Transfers of Nonbusiness 
Assets.--For purposes of this chapter and chapter 12--
            ``(1) In general.--In the case of the transfer of any 
        interest in an entity other than an interest which is actively 
        traded (within the meaning of section 1092)--
                    ``(A) the value of any nonbusiness assets held by 
                the entity shall be determined as if the transferor had 
                transferred such assets directly to the transferee (and 
                no valuation discount shall be allowed with respect to 
                such nonbusiness assets), and
                    ``(B) the nonbusiness assets shall not be taken 
                into account in determining the value of the interest 
                in the entity.
            ``(2) Nonbusiness assets.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `nonbusiness asset' 
                means any asset which is not used in the active conduct 
                of 1 or more trades or businesses.
                    ``(B) Exception for certain passive assets.--Except 
                as provided in subparagraph (C), a passive asset shall 
                not be treated for purposes of subparagraph (A) as used 
                in the active conduct of a trade or business unless--
                            ``(i) the asset is property described in 
                        paragraph (1) or (4) of section 1221(a) or is a 
                        hedge with respect to such property, or
                            ``(ii) the asset is real property used in 
                        the active conduct of 1 or more real property 
                        trades or businesses (within the meaning of 
                        section 469(c)(7)(C)) in which the transferor 
                        materially participates and with respect to 
                        which the transferor meets the requirements of 
                        section 469(c)(7)(B)(ii).
                For purposes of clause (ii), material participation 
                shall be determined under the rules of section 469(h), 
                except that section 469(h)(3) shall be applied without 
                regard to the limitation to farming activity.
                    ``(C) Exception for working capital.--Any asset 
                (including a passive asset) which is held as a part of 
                the reasonably required working capital needs of a 
                trade or business shall be treated as used in the 
                active conduct of a trade or business.
            ``(3) Passive asset.--For purposes of this subsection, the 
        term `passive asset' means any--
                    ``(A) cash or cash equivalents,
                    ``(B) except to the extent provided by the 
                Secretary, stock in a corporation or any other equity, 
                profits, or capital interest in any entity,
                    ``(C) evidence of indebtedness, option, forward or 
                futures contract, notional principal contract, or 
                derivative,
                    ``(D) asset described in clause (iii), (iv), or (v) 
                of section 351(e)(1)(B),
                    ``(E) annuity,
                    ``(F) real property used in 1 or more real property 
                trades or businesses (as defined in section 
                469(c)(7)(C)),
                    ``(G) asset (other than a patent, trademark, or 
                copyright) which produces royalty income,
                    ``(H) commodity,
                    ``(I) collectible (within the meaning of section 
                401(m)), or
                    ``(J) any other asset specified in regulations 
                prescribed by the Secretary.
            ``(4) Look-thru rules.--
                    ``(A) In general.--If a nonbusiness asset of an 
                entity consists of a 10-percent interest in any other 
                entity, this subsection shall be applied by 
                disregarding the 10-percent interest and by treating 
                the entity as holding directly its ratable share of the 
                assets of the other entity. This subparagraph shall be 
                applied successively to any 10-percent interest of such 
                other entity in any other entity.
                    ``(B) 10-percent interest.--The term `10-percent 
                interest' means--
                            ``(i) in the case of an interest in a 
                        corporation, ownership of at least 10 percent 
                        (by vote or value) of the stock in such 
                        corporation,
                            ``(ii) in the case of an interest in a 
                        partnership, ownership of at least 10 percent 
                        of the capital or profits interest in the 
                        partnership, and
                            ``(iii) in any other case, ownership of at 
                        least 10 percent of the beneficial interests in 
                        the entity.
            ``(5) Coordination with subsection (b).--Subsection (b) 
        shall apply after the application of this subsection.
    ``(e) Limitation on Minority Discounts.--For purposes of this 
chapter and chapter 12, in the case of the transfer of any interest in 
an entity other than an interest which is actively traded (within the 
meaning of section 1092), no discount shall be allowed by reason of the 
fact that the transferee does not have control of such entity if the 
transferee and members of the family (as defined in section 
2032A(e)(2)) of the transferee have control of such entity.''
    (b) Effective Date.--The amendments made by this section shall 
apply to transfers after the date of the enactment of this Act.

Summary: Amends the Economic Growth and Tax Relief Reconciliation Act of 2001 to repeal subtitles A and E of title V (Estate, Gift, and Generation-Skipping Transfer Tax Provisions. Repeals the sunset provisions applicable to the remaining provisions of title V. Increases the unified tax credit amount for years before 2009. Modifies provisions concerning phaseout of graduated rates and unified credit. Sets valuation rules for certain transfers of nonbusiness assets, or assets not used in the active conduct of one or more trades or businesses. Sets forth criteria under which certain passive assets shall not be treated as used in the active conduct of business and defines passive assets. Specifies a limitation on minority discounts.