(2) Heirs would be required to perform “active management" with respect the property (instead
of "material participation");

(3) The estate tax value of forestland would the lowest of: (a) its State assessed value; (b) the
sales value of comparable rural forestland; (c) the capitalized value of expected income from timber
operations; or (d) any other factor which fairly values the timber value of the property;

(4) There would be no limit on the amount that the value of the forestland could be reduced
by the provision (i.e., there would be no $750,000 limit);

(5) Continued forestland use would be required for 25 years (instead of the 10 years provided
by the sec. 2032A special valuation rules);

(6) A qualified heir can dispose of the forestland to any other person before 25 years without
recapture tax if the transferee agrees to continue use of the property as qualified forest use;

(7) In addition to cessation of forestland use, recapture would occur if any depreciable
improvements are made to the property (other than those relating to qualified forestland use);

(8) A qualified heir can make a contribution of a conservation easement without recapture tax;
and,

(9) Recapture from involuntary conversion or exchanges would be avoided to the extent
conversion proceeds or replacement property are invested in property to be used for qualified forest
use.

Effective Date

The provision would apply to the estates of decedents dying after December 31, 1995.

12



imposing the additional estate tax under Code section 2032A(c). S. 628 would repeal the Federal
estate and gift tax and the Federal generation-skipping transfer tax. S. 692 would provide special
estate tax treatment for qualified conservation easements, and special estate tax valuation for qualified
forest lands. S. 161 and S. 867 would make certain changes to the estate and gift tax treatment of
certain family-owned businesses.

Equipment expensing for small businesses

Taxpayers generally recover the cost of tangible property placed in service in a trade or business
over time through annual depreciation deductions. Under present-law section 179, in lieu of
depreciation, a taxpayer with a sufficiently small amount of annual investment generally may elect to
deduct up to $17,500 of the cost of tangible personal property (i.e., generally, machinery and
equipment) placed in service for the taxable year. The $17,500 amount is reduced by the amount by
which the cost of qualifying property placed in service during the taxable year exceeds $200,000.

Section 352 of H.R. 1215 would increase the amount allowed to be expensed under section 179
to $35,000 for taxable years beginning after 1998. The increase to $35,000 would be gradually
phased in from 1996 to 1999.



inflation each year by multiplying the applicable exclusion amount of $750,000 by a cost of living
adjustment. The indexed exclusion amount would be rounded to the nearest $10,000.

To reflect the increase in the unified credit, the provision also would make conforming
amendments to (1) the 5-percent surtax in order to permit the proper phase out of the increased
unified credit, (2) the general filing requirements for estate and gift tax returns under Code section
6018(a), and (3) the amount of the unified credit allowed under Code section 2102(c)(3) with respect
to nonresident aliens with U.S. situs property who are residents of certain treaty countries.

Indexing of certain provisions

In addition to increasing and indexing the unified credit, the H.R. 1215 would index the
following amounts for inflation beginning after 1998: (1) the $10,000 annual exclusion for gifts; (2)
the $750,000 ceiling amount on special use valuation under Code section 2032A; (3) the $1,000,000
generation-skipping transfer tax exemption; and (4) the value of a closely-held business (i.e.,
$1,000,000) eligible for the special 4-percent interest rate under Code section 6601(j). Indexing of
the annual exclusion would be rounded to the nearest $1,000 and indexing of the other amounts
would be rounded to the nearest $10,000.

Effective Date
The provisions relating to the increase in the unified credit would apply to the estates of
decedents dying, and gifts made, after December 31, 1995. The indexing of the other provisions
would apply after December 31, 1998.
C. Descriptions of Other Bills
1. S. 105 (Senators Daschle, Conrad, Dorgan, Kassebaum, and Baucus)
Description of the Bill

The bill would provide that the cash lease of specially valued real property by a qualified heir
to a "member of the family" (who continues to operate the farm or closely held business) does not
cause the qualified use of such property to cease for purposes of imposing the additional estate tax
under Code section 2032A(c).

Effective Date

The bill would apply to rentals occurring after December 31, 1976.



effective exemption of $225,000 in 1982 to an effective exemption of $600,000 in 1987. The unified
credit has not been increased since 1987.

Annual exclusion for gifts

A taxpayer may exclude $10,000 of gifts made to any one donee during a calendar year (sec.
2503). This annual exclusion does not apply to gifts of future interests (e.g., reversions or
remainders). Prior to 1982, the annual exclusion was $3,000.

Valuation

Generally, for Federal transfer tax purposes, the value of property is its fair market value, ie.,
the price at which the property would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant
facts. Fair market value is determined as of either (1) the time of the decedent's death, or (2) the
"alternate" valuation date of six months after the decedent's death (sec. 2032). .

Under Code section 2032A, an executor may elect for estate tax purposes to value certain
"qualified real property" used in farming or another qualifying closely-held trade or business at its
current use value, rather than its highest and best use value. Currently, the maximum reduction in
the value of such real property resulting from an election under Code section 2032A is $750,000.

An estate may qualify for current use valuation if: (1) the decedent was a citizen or resident of
the United States at the time of death; (2) the value of the farm or closely held business assets in the
decedent's estate, including both real and personal property (but reduced by debts attributable to the
real and personal property) is at least 50 percent of the decedent's gross estate (reduced by mortgages
and other secured debts); (3) at least 25 percent of the adjusted value of the gross estate is qualified
farm or closely held business real property;* (4) the real property qualifying for current use valuation
must pass to a qualified heir;* (5) such real property must have been owned by the decedent or a
member of the decedent's family and used or held for use as a farm or closely held business ("a
qualified use") for 5 of the last 8 years prior to the decedent's death; and (6) there must have been
material participation in the operation of the farm or closely held business by the decedent or a
member of the decedent's family in 5 years out of the 8 years immediately preceding the decedent's
death (Code sec. 2032A (a) and (b)).®

* For purposes of the 50-percent and 25-percent tests, the value of the property is determined
without regard to its current use value.

* The term "qualified heir" means a member of the decedent's family, including his spouse,
lineal descendants, parents, and aunts or uncles of the decedent and their descendants.

§ In the case of qualifying real property where the material participation requirement is
satisfied, the real property which qualifies for current use valuation includes the farmhouse, or

5


I. ESTATE AND GIFT TAXATION

A. Present-Law Rules

Application of the estate and gift tax

A gift tax is imposed on lifetime transfers and an estate tax is imposed on transfers at death.
Since 1976, the gift tax and the estate tax have been unified so that a single graduated rate schedule
applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death.”
Under this rate schedule, the unified estate and gift tax rates begin at 18 percent on the first $10,000
in cumulative taxable transfers and reach 55 percent on cumulative taxable transfers over $3 million
(sec. 2001(c)).

The amount of gift tax payable for any calendar year generally is determined by multiplying the
applicable tax rate (from the unified rate schedule) by the cumulative lifetime taxable transfers made
by the taxpayer and then subtracting any gift taxes payable for prior taxable periods. This amount
is reduced by any available unified credit (and other applicable credits) to determine the gift tax
liability for the taxable period.

The amount of estate tax payable generally is determined by multiplying the applicable tax rate
(from the unified rate schedule) by the cumulative post-1976 taxable transfers made by the taxpayer
during his lifetime or at death and then subtracting any gift taxes payable for prior calendar years
(after 1976). This amount is reduced by any available unified credit (and other applicable credits) to
determine the estate tax liability.

Unified credit

A unified credit is available with respect to taxable transfers by gift and at death. Since 1987,
the unified credit amount has been $192,800 (sec. 2010), which effectively exempts a total of
$600,000 in cumulative taxable transfers from the estate and gift tax. The benefits of the unified
credit (and the graduated estate and gift tax rates) are phased-out by a 5-percent surtax imposed upon
cumulative taxable transfers between $10 million and $21,040,000 (sec. 2001(c)(2)).3

The unified credit originally was enacted in the Tax Reform Act of 1976. As enacted, the credit
was phased in over five years to a level that effectively exempted $175,625 of taxable transfers from
the estate and gift tax in 1981 (i.e., a unified credit of $47,000). The Economic Recovery Tax Act
of 1981 increased the amount of the unified credit each year between 1982 and 1987, from an

? Prior to 1976, separate tax rate schedules applied to the gift tax and the estate tax.

> Thus, if a taxpayer has made cumulative taxable transfers exceeding $21,040,000, his or her
average transfer tax rate will be 55 percent under present law.

4



skips, taxable terminations and taxable distributions.” The generation-skipping transfer tax is imposed
at a flat rate of 55 percent on cumulative generation-skipping transfers in excess of $1 million.

Installment payment of estate tax

Under Code section 6166, an executor generally may elect to pay the Federal estate tax
attributable to an interest in a closely held business in installments over, at most, a 14-year period.
To qualify for the election, the business must be an active trade or business and the value of the
decedent's interest in the closely held business must exceed 35 percent of the decedent's adjusted
gross estate.

If an election is made, the estate pays only interest for the first four years, followed by up to 10
annual installments of principal and interest. Interest is generally imposed at the rate applicable to
underpayments of tax under Code section 6621 (i.e., the Federal short term rate plus three percentage
points). Under Code section 6601(j), however, a special 4-percent interest rate applies to the amount
of deferred estate tax attributable to the first $1,000,000 in value of the closely-held business. The
maximum amount that may be subject to the 4-percent rate is the lower of (1) $345,800 (ie., the
amount of estate tax on the first $1,000,000), less the amount of allowable unified credit, or (2) the
amount of estate tax attributable to the closely-held business that is being paid in installments
pursuant to Code section 6166.

B. Description of Provision in H.R. 1215

Description of Provision

Increase in unified credit

Section 351 of H.R. 1215, as passed by the House, would increase the present-law unified
credit of $192,800 to $248,300 over a three-year period beginning in 1996. For decedents dying and
gifts made in 1996, the unified credit would be $229,800 (i.e., the amount that would effectively
exempt $700,000 in taxable transfers from the estate and gift tax). For decedents dying and gifts
made in 1997, the unified credit would be $239,050 (i.e., the amount that would effectively exempt
$725,000 in taxable transfers from the estate and gift tax). For decedents dying and gifts made after
1997, the unified credit would be $248,300 (ie., the amount that would effectively exempt $750,000
in taxable transfers from the estate and gift tax). After 1998, the unified credit would be indexed for

7 For this purpose, a direct skip is any transfer subject to estate or gift tax of an interest in
property to a skip person (e.g., a gift from grandparent to grandchild). A taxable termination is a
termination (by death, lapse of time, release of power, or otherwise) of an interest in property held
in trust unless, immediately after such termination, a non-skip person has an interest in the
Property, or unless at no time after the termination may a distribution (including a distribution
upon termination) be made from the trust to a skip person. A taxable distribution is a distribution
from a trust to a skip person (other than a taxable termination or a direct skip).

7



PRESENT LAW AND PROPOSALS
RELATING TO
ESTATE AND GIFT TAXATION
AND
EXPENSING BY SMALL BUSINESSES

Scheduled for a Hearing
Before the
SENATE COMMITTEE ON FINANCE

on June 7, 1995

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

June 6, 1995

JCX-23-95

po



occurs during the ten-year period. For this purpose, the term active management means the making
of the management decisions of a business other than the daily operating decisions.

In addition to the special rules applicable to family enterprise property, the bill would increase
the $750,000 ceiling amount on special use valuation under Code section 2032A to $1 million.

Effective Date

The bill would apply to the estates of decedents dying, and gifts made, after December 31,
1995.

4. S. 161 (Senator Murray)

Description of the Bill

The bill would make several changes to the estate and gift tax applicable to qualified "family-
owned business interests." For purposes of the bill, a qualified family-owned business interest would
mean any interest in a sole proprietorship, a partnership carrying on a trade or business with 15
partners or less, and a corporation with 35 shareholders or less.

First, in certain cases, the bill generally would reduce the estate tax rate on qualified family-
owned business interests to either 15 or 20 percent. To qualify for this reduction and tax rates, the
value of the qualified family-owned business interest must exceed 50 percent of the value of the
adjusted gross estate. In addition, during five of the eight years preceding the decedent's death the
qualified family-owned business interest must have been owned by the decedent or a member of her
family and the decedent or a member of her family must have materially participated in the business.
Any reduction in tax rate would be subject to recapture if certain disposition events occurred or the
heirs ceased to materially participate with respect to the qualified family-owned business interest
within ten years following the decedent's death.

Second, if the estate tax is deferred under section 6166, the special 4-percent interest rate
available under section 6601(j) generally would apply to the tax imposed on the value of the qualified
family-owned business interest without regard to the $1 million limitation.

Third, the bill would allow an alternate valuation date of 40 months after the decedent's death
(rather than six months after the decedent's death as provided under present-law sec. 2032) to be used
with respect to estates that qualify for the reduced tax rates.

In addition to the special rules applicable to family-owned businesses, the bill would change the
annual exclusion for gifts such that the annual exclusion cannot be less than 15 percent of the donor's
eared income during the calendar year. Finally, the bill would index the applicable unified credit for
inflation and would make conforming amendments to the unified credit to reflect the other changes
made by the bill.

10



2. S. 628 (Senators Kyl and Helms)

Description of the Bill

The bill would repeal the Federal estate and gift tax and the Federal generation-skipping transfer
tax.

Effective Date

The bill would apply to decedents dying, gifts made, and generation-skipping transfers occurring
the date of enactment. .

3. S. 867 (Senator Cochran)

Description of the Bill

The bill would provide three special rules applicable to "family enterprise property." For
purposes of the bill, family enterprise property generally would mean any interest in real or personal
property devoted to use as a farm or use for farming purposes or that is used in a trade or business,
if at least 80 percent of the ownership of the farm or trade or business is held by five or fewer
individuals or by members of the same family.

First, in addition to the unified credit of $192,800 allowed under present law, the bill would
grant an additional unified credit amount of up to $121,800 with respect to gifts and bequests of
“family enterprise property." Thus, the bill would increase the amount of property that can be
transferred free of estate and gift tax as a result of the unified credit from $600,000 to $1 million,
provided that at least $400,000 of such transfers were gifts and bequests of family enterprise
property.®

Second, the bill would allow an exclusion for annual gifts of up to $10,000 of family enterprise
property per donee, in addition to the $10,000 annual exclusion for gifts allowed under present law.

Third, under the bill, a decedent's gross estate would be reduced by 50 percent of the value of
any family enterprise property included in the gross estate. The maximum reduction under this
provision would be $1 million. Any reduction in value would be subject to recapture of estate tax
if the family member(s) cease active management of the property or dispose of the property within
ten years after the decedent's death. The amount of recapture would depend upon when the recapture

* As presently drafted, the bill literally only requires $121,800 of family enterprise property to
qualify for the maximum additional credit of $400,000. The Joint Committee on Taxation staff
understands that the intent, however, is that the additional credit apply only to family enterprise
property and not be available to offset the tax attributable to other property.

9



If, after an election is made to specially value property at its current use value, the heir who
acquired the real property ceases to use it in its qualified use within 10 years (15 years for individuals
dying before 1982) of the decedent's death, an additional estate tax is imposed in order to "recapture"
the benefit of the special use valuation. Some courts have held that the cash rental of specially valued
property after the death of the decedent is not a qualified use and, therefore, results in the imposition
of the additional estate tax under section 2032A(c). Martin v. Commissioner, 783 F.2d 81 (7th Cir.
1986) (cash lease to unrelated party); Williamson v. Commissioner, 93 T.C. 242 (1989) (cash lease
to family member).

Contributions for conservation purposes

A deduction is allowed for estate and gift tax purposes for a contribution of a qualified real
property interest to a charity (or other qualified organization) exclusively for conservation purposes
(sees. 2055(f), 2522(d)). Qualifying conservation purposes are: (1) the preservation of land areas for
outdoor recreation by, or the education of, the general public; (2) the protection of a relatively natural
habitat of fish, wildlife, or plants, or similar ecosystem; (3) the preservation of open space (including
farmland and forest land) where such preservation will yield a significant public benefit, and is either
for the scenic enjoyment of the general public, or pursuant to a clearly delineated governmental
conservation policy; or (4) the preservation of an historically important land area or certified historic
structure (sec. 170(h)(4)). For this purpose, a qualified real property interest means the entire interest
of the transferor in real property (other than certain mineral interests), a remainder interest in real
property, or a perpetual restriction on the use of real property (sec. 170(h)). Also, a contribution will
be treated as "exclusively for conservation purposes" only if the conservation purpose is protected

in perpetuity.

Generation-skipping transfer tax

A generation-skipping transfer tax ("GST tax") generally is imposed on transfers, either directly
or through a trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation more
than one generation below that of the transferor). Transfers subject to the GST tax include direct

other residential buildings, and related improvements located on qualifying real property if such
buildings are occupied on a regular basis by the owner or lessee of the real property (or by
employees of the owner or lessee) for the purpose of operating or maintaining the real property or
the business conducted on the property. Qualified real property also includes roads, buildings,
and other structures and improvements functionally related to the qualified use.

6



L OVERVIEW

Estate and gift taxation

A gift tax is imposed on any transfer of property by gift. The gift tax is imposed on the donor
and is based on the fair market value of the property transferred. Deductions are allowed for certain
gifts to spouses and to charities. Annual gifts of $10,000 or less per donor per donee generally are
not subject to tax.

An estate tax also is imposed on the “taxable estate" of any person who was a citizen or resident
of the United States at the time of death, and on certain property belonging to a nonresident of the
United States that is located in the United States at the time of death. The estate tax is imposed on
the estate of the decedent and generally is based on the fair market value of the property passing at
death. The taxable estate generally equals the worldwide "gross estate" less certain allowable
deductions, including a marital deduction for certain bequests to the surviving spouse of the decedent
and a deduction for certain bequests to charities.

Since 1976, the gift tax and the estate tax have been unified so that a single graduated rate
schedule applies to an individual's cumulative taxable gifts and bequests. Under this rate schedule,
the unified estate and gift tax rates begin at 18 percent on the first $10,000 in cumulative taxable
transfers and reach 55 percent on cumulative taxable transfers over $3 million. A unified credit of
$192,800 is available with respect to taxable transfers by gift and at death, which effectively exempts
a total of $600,000 in cumulative taxable transfers from the estate and gift tax. The benefits of the
unified credit (and the graduated estate and gift tax rates) are phased out by a 5-percent surtax
imposed upon cumulative taxable transfers over $10 million and not exceeding $21,040,000.

A separate transfer tax is imposed on generation-skipping transfers to a beneficiary of a
generation more than one generation below that of the transferor. The generation-skipping transfer
tax is imposed at a flat rate of 55 percent on cumulative generation-skipping transfers in excess of $1
million.

Section 351 of H.R. 1215, as passed by the House, would increase the present-law unified
credit of $192,800 (i.¢., the amount that effectively exempts $600,000 in taxable transfers from the
estate and gift tax) to $248,300 (i.e., the amount that would effectively exempt $750,000 in taxable
transfers from the estate and gift tax) over a three-year period beginning in 1996. After 1998, the
unified credit amount would be indexed for inflation. The bill would also index the following amounts
for inflation beginning after 1998: (1) the $10,000 annual exclusion for gifts; (2) the $750,000 ceiling
amount on special use valuation under Code section 2032A; (3) the $1,000,000 generation-skipping
transfer tax exemption; and (4) the value of a closely-held business (i.e., $1,000,000) eligible for the
special 4-percent interest rate on deferred payments of estate tax liability under Code section 6601(j).

S. 105 would provide that the cash lease of specially valued real property by a qualified heir to
certain family members would not cause the qualified use of such property to cease for purposes of



Il. EXPENSING BY SMALL BUSINESSES
Present Law

‘Taxpayers generally recover the cost of tangible property placed in service in a trade or business
over time through annual depreciation deductions. In lieu of depreciation, a taxpayer with a
sufficiently small amount of annual investment may elect to expense and deduct up to $17,500 of the
cost of qualifying property placed in service for the taxable year (sec. 179).? In general, qualifying
property is defined as depreciable tangible personal property that is purchased for use in the active
conduct of a trade or business. The $17,500 amount is reduced (but not below zero) by the amount
by which the cost of qualifying property placed in service during the taxable year exceeds $200,000.
In addition, the amount eligible to be expensed for a taxable year may not exceed the taxable income
of the taxpayer for the year that is derived from the active conduct of a trade or business (determined
without regard to this provision). Any amount that is not allowed as a deduction because of the
taxable income limitation may be carried forward to succeeding taxable years (subject to similar
limitations). The $17,500 and $200,000 amounts are not indexed for inflation.!°

Description of Provision

Section 352 of H.R. 1215, as passed by the House, would increase the $17,500 amount allowed
to be expensed under Code section 179 to $35,000. The increase would be phased in as follows:

Taxable year beginningin-- ................... Maximum expensing
1996 $22,500
1997 $27,500
1998 . $32,500
1999 and thereafter $35,000

° The amount permitted to be expensed under Code section 179 is increased by up to an
additional $20,000 for certain property placed in service by a business located in an empowerment
zone (sec. 1397A).

© The Omnibus Budget Reconciliation Act of 1993 increased the amount allowed to be
expensed under section 179 from $10,000 to $17,500. The $10,000 amount had been provided
by the Tax Reform Act of 1986 ("1986 Act"). Prior to the 1986 Act, taxpayers were allowed to
expense up to $5,000 of the cost of qualifying personal property. The $5,000 limit had been
scheduled to rise to $7,500 for taxable years beginning in 1988 and 1989, and $10,000 thereafter.
The 1986 Act also instituted the present-law $200,000 phaseout and taxable income limitation.

13



INTRODUCTION

The Senate Committee on Finance has scheduled a public hearing on June 7, 1995, on issues
relating to small business tax incentives. Specifically, the hearing will examine estate and gift taxation
and expensing of equipment for small businesses under section 179 of the Internal Revenue Code of
1986 and will analyze proposed changes to these present-law provisions. The proposed changes to
the estate and gift taxes are contained in section 351 of H.R. 1215 (the "Tax Fairness and Deficit
Reduction Act of 1995") as passed by the House of Representatives on April 5, 1995; S. 105; S. 161
(the "American Family Business Preservation Act"); S. 628 (the "Family Heritage Preservation Act");
S. 692 (the "Family Forestland Preservation Tax Act of 1995"); and S. 867 (the "National Family;
Enterprise Preservation Act of 1995"). The proposed change to section 179 is contained in section
352 of HR. 1215. This document,’ prepared by the staff of the Joint Committee on Taxation,
describes the present-law estate and gift tax and section 179 and the applicable provisions of
proposed legislation that would amend present law.

Part I of the document is an overview of present-law estate and gift taxation and equipment
expensing and the legislative proposals that would amend these present-law rules. Part II is a
description of estate and gift tax provisions of present law, H.R. 1215 as passed by the House, and
Senate bills. Part I is a description of expensing provisions of present law and H.R. 1215.

' This document may be cited as follows: Joint Committee on Taxation, Present Law and
Pro ing to Estate and Gi! i id Expensin; S inesses (JCX-23-95),
Tune 6, 1995.



CONTENTS

Page
INTRODUCTION... 0. een cence ene eeeees 1
L OVERVIEW oo. cc cence cece nce en eens 2
I. ESTATE AND GIFT TAXATION ..........0.0.0.00 00.0 cece eee ee 4
A Present-Law Rules . 2.0.00. 0 2. eee cece eee e eee 4
B. Description of Provision inH.R.1215 ............00..0....... 7
c. Descriptions of Other Bills 20.0.0. 0 00... cee eee 8
1 S. 105 (Senators Daschle, Conrad, Dorgan, Kassebaum,
and Baucus) 0.0.0.0... eee eee eee eee 8
2. S. 628 (Senators Kyl and Helms) .................... 9
3. S. 867 (Senator Cochran) .........0......00000 0000 9
4. S. 161 (Senator Murray)... 0... eee 10
5. S. 692 (Senator Gregg)... 00.0... eee eee 11

Ill. EXPENSING BY SMALL BUSINESSES .....................0... 13



Effective Date

The bill would be effective with respect to the estates of decedents dying, and gifts made, after
December 31, 1995.

5. S. 692 (Senator Gregg)

Description of the Bill

a. Special treatment for conservation easements (sec. 101 of the bill)

The bill would provide that an executor may irrevocably elect to exclude from a decedent's
gross estate the value of any land subject to a qualified conservation easement. The amount excluded
would be the value of any qualified conservation contribution (within the meaning of sec. 170(h)) of
a qualified real property interest (as generally defined in sec. 170(h)(2)(C)) made by the decedent or
a member of the decedent's family. A qualifying conservation purpose would be any of the purposes
defined in present-law section 170(h)(4), except that the preservation of a historically important land
area or a certified historic structure would not be a qualifying conservation purpose under the bill.
The basis of such land acquired at death would be a carryover basis (i.e., the basis would not be
stepped-up to its fair market value at death). A member of the decedent's family would include his
or her ancestors, his or her spouse, a lineal descendant of the decedent, the decedent's spouse or the
decedent's parents, and the spouses of any of the foregoing lineal descendants (sec. 2032A(e)(2)).

Effective Date

The provision would apply to the estates of decedents dying after December 31, 1995, with
Tespect to qualified conservation easements granted after December 31, 1995.

b. Special estate tax valuation of certain forest land (sec. 102 of the bill)

In general, the value of certain forestland (called “qualified forestland") for Federal estate taxes
purposes would be its value for use as a timber operation. "Qualified forestland" would be real
Property which either (1) qualifies for a State differential use value assessment plan or (2) is
forestland with a minimum size of 10 acres that is subject to a forest management plan. The proposal
is similar to the special valuation rules of present-law section 2032A with the following major
differences:

(1) In order to qualify for the new valuation Tules, the value of the forestland must be more

than 25 percent of the adjusted value of the gross estate (i.e., there also is not a 50 percent test as
with present law special valuation rules)

11



Effective Date

The provision would be effective for property placed in service in taxable years beginning after
December 31, 1995, subject to the phase-in schedule set forth above.

14