I

104TH CONGRESS

1ST SESSION H. R. 2190

To amend the Internal Revenue Code of 1986 to allow a family-owned

business exclusion from the gross estate subject to estate tax, and for

other purposes.

IN THE HOUSE OF REPRESENTATIVES

AUGUST 3, 1995

Mr. MCCRERY (for himself, Ms. DUNN of Washington, Mr. BREWSTER, Mr.

HERGER, Mr. PAYNE of Virginia, Mr. BUNNING of Kentucky, Mr. HANCOCK, Mr. CHRISTENSEN, Mr. LAUGHLIN, Mr. TAUZIN, Mrs. MEYERS of

Kansas, Mr. CRAMER, Mr. ROBERTS, Mr. CONDIT, Mr. TAYLOR of North

Carolina, Mr. HALL of Texas, Mr. BLUTE, Mr. BAKER of Louisiana, Mr.

BAESLER, Mr. WELLER, Mr. PARKER, Mr. HASTINGS of Washington, Mr.

HAYES, Mr. KNOLLENBERG, Mr. BROWDER, Mr. LEWIS of California,

Ms. DANNER, Mr. HOSTETTLER, Mrs. LINCOLN, Mr. SOUDER, Mr.

HUTCHINSON, Mr. JOHNSON of South Dakota, Mr. PETE GEREN of

Texas, Mr. EWING, Mr. CANADY of Florida, Mr. BARRETT of Nebraska,

Mr. LONGLEY, Mr. PETERSON of Minnesota, Mrs. SMITH of Washington,

Mr. HOLDEN, Mr. LUCAS, Mr. TANNER, Mr. NETHERCUTT, Mr.

LAHOOD, Mr. COOLEY, Mr. METCALF, Mr. ALLARD, Mr. ROSE, Mr.

DICKEY, Mr. DEAL of Georgia, Mr. CHAMBLISS, Mr. WATTS of Oklahoma, Mr. MONTGOMERY, Mr. STENHOLM, Mr. HUNTER, Mr. LARGENT,

Mr. ENSIGN, Mr. COBURN, Mr. COMBEST, Mr. DICKS, Mr. BILBRAY, Mr.

POMBO, Mr. CRAPO, Mr. DOOLEY, Mr. OXLEY, Mr. BALLENGER, Mr.

BARCIA of Michigan, Mr. LIVINGSTON, Mr. PORTMAN, Mr. BARTON of

Texas, Mr. NUSSLE, Mr. CALLAHAN, Mr. EVERETT, Mr. KINGSTON, Mr.

CALVERT, Mr. COLLINS of Georgia, Mr. KASICH, Mr. CHAPMAN, Mr.

DOOLITTLE, Mr. FAZIO of California, Mr. SCHAEFER, Mr. TATE, and Mr.

GOODLATTE) introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to allow a
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family-owned business exclusion from the gross estate

subject to estate tax, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Family Business Pro5 tection Act of 1995’’.

6 SEC. 2. FAMILY-OWNED BUSINESS EXCLUSION.

7 (a) IN GENERAL.—Part III of subchapter A of chap8 ter 11 of the Internal Revenue Code of 1986 (relating to

9 gross estate) is amended by inserting after section 2033

10 the following new section:

11 ‘‘SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.

12 ‘‘(a) IN GENERAL.—In the case of an estate of a de13 cedent to which this section applies, the value of the gross

14 estate shall not include the lesser of—

15 ‘‘(1) the adjusted value of the qualified family16 owned business interests of the decedent otherwise

17 includible in the estate, or

18 ‘‘(2) the sum of—

19 ‘‘(A) $1,500,000, plus

20 ‘‘(B) 50 percent of the excess (if any) of

21 the adjusted value of such interests over

22 $1,500,000.

23 ‘‘(b) ESTATES TO WHICH SECTION APPLIES.—This

24 section shall apply to an estate if—
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1 ‘‘(1) the decedent was (at the date of the dece2 dent’s death) a citizen or resident of the United

3 States,

4 ‘‘(2) the sum of—

5 ‘‘(A) the adjusted value of the qualified

6 family-owned business interests which—

7 ‘‘(i) are included in determining the

8 value of the gross estate (without regard to

9 this section), and

10 ‘‘(ii) are acquired by a qualified heir

11 from, or passed to a qualified heir from,

12 the decedent (within the meaning of sec13 tion 2032A(e)(9)), plus

14 ‘‘(B) the amount of the adjusted taxable

15 gifts of such interests from the decedent to

16 members of the decedent’s family taken into ac17 count under subsection 2001(b)(1)(B),

18 exceeds 50 percent of the adjusted gross estate, and

19 ‘‘(3) during the 8-year period ending on the

20 date of the decedent’s death there have been periods

21 aggregating 5 years or more during which—

22 ‘‘(A) such interests were owned by the de23 cedent or a member of the decedent’s family,

24 and
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1 ‘‘(B) there was material participation

2 (within the meaning of section 2032A(e)(6)) by

3 the decedent or a member of the decedent’s

4 family in the operation of the business to which

5 such interests relate.

6 ‘‘(c) ADJUSTED GROSS ESTATE.—For purposes of

7 this section, the term ‘adjusted gross estate’ means the

8 value of the gross estate (determined without regard to

9 this section)—

10 ‘‘(1) reduced by any amount deductible under

11 section 2053(a)(4), and

12 ‘‘(2) increased by the sum of—

13 ‘‘(A) the amount taken into account under

14 subsection (b)(2)(B), plus

15 ‘‘(B) the amount of other gifts from the

16 decedent to the decedent’s spouse (at the time

17 of the gift) within 10 years of the date of the

18 decedent’s death, plus

19 ‘‘(C) the amount of other gifts (not in20 cluded under subparagraph (A) or (B)) from

21 the decedent within 3 years of such date.

22 ‘‘(d) ADJUSTED VALUE OF THE QUALIFIED FAMILY23 OWNED BUSINESS INTERESTS.—For purposes of this sec24 tion, the adjusted value of any qualified family-owned

25 business interest is the value of such interest for purposes
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1 of this chapter (determined without regard to this sec2 tion), reduced by the excess of—

3 ‘‘(1) any amount deductible under section

4 2053(a)(4), over

5 ‘‘(2) the sum of—

6 ‘‘(A) any indebtedness on any qualified

7 residence of the decedent the interest on which

8 is deductible under section 163(h)(3), plus

9 ‘‘(B) any indebtedness to the extent the

10 taxpayer establishes that the proceeds of such

11 indebtedness were used for the payment of edu12 cational and medical expenses of the decedent,

13 the decedent’s spouse, or the decedent’s depend14 ents (within the meaning of section 152), plus

15 ‘‘(C) any indebtedness not described in

16 subparagraph (A) or (B), to the extent such in17 debtedness does not exceed $10,000.

18 ‘‘(e) QUALIFIED FAMILY-OWNED BUSINESS INTER19 EST.—

20 ‘‘(1) IN GENERAL.—For purposes of this sec21 tion, the term ‘qualified family-owned business inter22 est’ means—

23 ‘‘(A) an interest as a proprietor in a trade

24 or business carried on as a proprietorship, or
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1 ‘‘(B) an interest as a partner in a partner2 ship, or stock in a corporation, carrying on a

3 trade or business, if—

4 ‘‘(i) at least—

5 ‘‘(I) 50 percent of such partner6 ship or corporation is owned (directly

7 or indirectly) by the decedent or mem8 bers of the decedent’s family,

9 ‘‘(II) 70 percent of such partner10 ship or corporation is so owned by 2

11 families (including the decedent’s fam12 ily), or

13 ‘‘(III) 90 percent of such part14 nership or corporation is so owned by

15 3 families (including the decedent’s

16 family), and

17 ‘‘(ii) at least 30 percent of such part18 nership or corporation is so owned by each

19 family described in subclause (II) or (III)

20 of clause (i).

21 ‘‘(2) LIMITATION.—Such term shall not in22 clude—

23 ‘‘(A) any interest in a trade or business

24 the principal place of business of which is not

25 located in the United States,
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1 ‘‘(B) any interest in—

2 ‘‘(i) an entity which had, or

3 ‘‘(ii) an entity which is a member of

4 a controlled group (as defined in section

5 267(f)(1)) which had,

6 readily tradable stock or debt on an established

7 securities market or secondary market (as de8 fined by the Secretary) within 3 years of the

9 date of the decedent’s death,

10 ‘‘(C) any interest in a trade or business

11 not described in section 542(c)(2), if more than

12 35 percent of the adjusted ordinary gross in13 come of such trade or business for the taxable

14 year which includes the date of the decedent’s

15 death would qualify as personal holding com16 pany income (as defined in section 543(a)), and

17 ‘‘(D) that portion of an interest in a trade

18 or business that is attributable to cash or mar19 ketable securities, or both, in excess of the rea20 sonably expected day-to-day working capital

21 needs of such trade or business.

22 ‘‘(3) OWNERSHIP RULES.—

23 ‘‘(A) INDIRECT OWNERSHIP.—For pur24 poses of determining indirect ownership under

25 paragraph (1), rules similar to the rules of
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1 paragraphs (2) and (3) of section 447(e) shall

2 apply.

3 ‘‘(B) TIERED ENTITIES.—For purposes of

4 this section, if—

5 ‘‘(i) a qualified family-owned business

6 holds an interest in another trade or busi7 ness, and

8 ‘‘(ii) such interest would be a qualified

9 family-owned business interest if held di10 rectly by the family (or families) holding

11 interests in the qualified family-owned

12 business meeting the requirements of para13 graph (1)(B),

14 then the value of the qualified family-owned

15 business shall include the portion attributable

16 to the interest in the other trade or business.

17 ‘‘(f) TAX TREATMENT OF FAILURE TO MATERIALLY

18 PARTICIPATE IN BUSINESS OR DISPOSITIONS OF INTER19 ESTS.—

20 ‘‘(1) IN GENERAL.—There is imposed an addi21 tional estate tax if, within 10 years after the date

22 of the decedent’s death and before the date of the

23 qualified heir’s death—

24 ‘‘(A) the qualified heir ceases to use for

25 the qualified use (within the meaning of section
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1 2032A(c)(6)(B)) the qualified family-owned

2 business interest which was acquired (or

3 passed) from the decedent, or

4 ‘‘(B) the qualified heir disposes of any por5 tion of a qualified family-owned business inter6 est (other than by a disposition to a member of

7 the qualified heir’s family or through a qualified

8 conservation contribution under section

9 170(h)).

10 ‘‘(2) ADDITIONAL ESTATE TAX.—The amount

11 of the additional estate tax imposed by paragraph

12 (1) shall be equal to—

13 ‘‘(A) the applicable percentage of adjusted

14 tax difference attributable to the qualified fam15 ily-owned business interest (as determined

16 under rules similar to the rules of section

17 2032A(c)(2)(B)), plus

18 ‘‘(B) interest on the amount determined

19 under subparagraph (A) at the annual rate of

20 4 percent for the period beginning on the date

21 the estate tax liability was due under this chap22 ter and ending on the date such additional es23 tate tax is due.

24 ‘‘(3) APPLICABLE PERCENTAGE.—For purposes

25 of paragraph (2), the term ‘applicable percentage’
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1 means the percentage determined in accordance with

2 the following table for the year (in the 10-year pe3 riod referred to in paragraph (1)) in which the re4 capture 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.

5 ‘‘(g) OTHER DEFINITIONS AND APPLICABLE

6 RULES.—For purposes of this section—

7 ‘‘(1) QUALIFIED HEIR.—The term ‘qualified

8 heir’—

9 ‘‘(A) has the meaning given to such term

10 by section 2032A(e)(1), and

11 ‘‘(B) includes any active employee of the

12 trade or business to which the qualified family13 owned business interest relates if such employee

14 has been employed by such trade or business

15 for a period of at least 10 years before the date

16 of the decedent’s death.

17 ‘‘(2) MEMBER OF THE FAMILY.—The term

18 ‘member of the family’ has the meaning given to

19 such term by section 2032A(e)(2).

20 ‘‘(3) INFLATION ADJUSTMENT.—In the case of

21 estates of decedents dying in a calendar year after

22 1996, the $1,500,000 amount contained in sub-
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1 section (a) shall be increased each place it appears

2 by an amount equal to—

3 ‘‘(A) $1,500,000, multiplied by

4 ‘‘(B) the cost-of-living adjustment deter5 mined under section 1(f)(3) for such calendar

6 year by substituting ‘calendar year 1995’ for

7 ‘calendar year 1992’ in subparagraph (B)

8 thereof.

9 If any amount as adjusted under the preceding sen10 tence is not a multiple of $10,000, such amount

11 shall be rounded to the nearest multiple of $10,000.

12 ‘‘(4) APPLICABLE RULES.—Rules similar to the

13 following rules shall apply:

14 ‘‘(A) Section 2032A(b)(4) (relating to de15 cedents who are retired or disabled).

16 ‘‘(B) Section 2032A(b)(5) (relating to spe17 cial rules for surviving spouses).

18 ‘‘(C) Section 2032A(c)(2)(D) (relating to

19 partial dispositions).

20 ‘‘(D) Section 2032A(c)(3) (relating to only

21 1 additional tax imposed with respect to any 1

22 portion).

23 ‘‘(E) Section 2032A(c)(4) (relating to due

24 date).
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1 ‘‘(F) Section 2032A(c)(5) (relating to li2 ability for tax; furnishing of bond).

3 ‘‘(G) Section 2032A(c)(7) (relating to no

4 tax if use begins within 2 years; active manage5 ment by eligible qualified heir treatment as ma6 terial participation).

7 ‘‘(H) Section 2032A(e)(10) (relating to

8 community property).

9 ‘‘(I) Section 2032A(e)(14) (relating to

10 treatment of replacement property acquired in

11 section 1031 or 1033 transactions).

12 ‘‘(J) Section 2032A(f) (relating to statute

13 of limitations).

14 ‘‘(K) Section 6166(b)(3) (relating to farm15 houses and certain other structures taken into

16 account).

17 ‘‘(L) Subparagraphs (B), (C), and (D) of

18 section 6166(g)(1) (relating to acceleration of

19 payment).’’

20 (b) CLERICAL AMENDMENT.—The table of sections

21 for part III of subchapter A of chapter 11 of the Internal

22 Revenue Code of 1986 is amended by inserting after the

23 item relating to section 2033 the following new item:

‘‘Sec. 2033A. Family-owned business exclusion.’’
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to estates of decedents dying after

3 December 31, 1995.

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