II

104TH CONGRESS

1ST SESSION S. 161

To amend the Internal Revenue Code of 1986 to reduce the rate of estate

tax imposed on family-owned business interests.

IN THE SENATE OF THE UNITED STATES

JANUARY 5, 1995

Mrs. MURRAY introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to reduce

the rate of estate tax imposed on family-owned business

interests.

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 ‘‘American Family Busi5 ness Preservation Act’’.

6 SEC. 2. REDUCED ESTATE TAX RATE ON FAMILY-OWNED

7 BUSINESS INTERESTS.

8 (a) IN GENERAL.—Part I of subchapter A of chapter

9 11 of the Internal Revenue Code of 1986 (relating to tax
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1 imposed) is amended by adding at the end the following

2 new section:

3 ‘‘SEC. 2003. REDUCED RATE ON FAMILY-OWNED BUSINESS

4 INTERESTS.

5 ‘‘(a) IN GENERAL.—In the case of an estate of a de6 cedent to which this section applies, the tax imposed by

7 section 2001 shall not exceed the sum of—

8 ‘‘(1) a tax computed at the rates and in the

9 manner as if this section had not been enacted on

10 the greater of—

11 ‘‘(A) the sum described in section

12 2001(c)(1) reduced by the qualified family13 owned business interests, or

14 ‘‘(B) the sum (if any) described in section

15 2001(c)(1) taxed at a rate below the applicable

16 rate, plus

17 ‘‘(2) a tax equal to the applicable rate of the

18 portion of the taxable estate in excess of the amount

19 determined under paragraph (1).

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

21 section shall apply to an estate if—

22 ‘‘(1) the decedent was (at the date of his or her

23 death) a citizen of the United States,

24 ‘‘(2) the sum of—
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1 ‘‘(A) the value of the qualified family2 owned business interests which are included in

3 determining the gross estate and which are ac4 quired from or passed from the decedent to a

5 qualified heir of the decedent, and

6 ‘‘(B) the amount (taken into account

7 under subsection 2001(b)(1)(B)) of the ad8 justed taxable gifts of such interests to mem9 bers of the decedent’s family,

10 exceeds 50 percent of the adjusted gross estate, and

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

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

13 aggregating 5 years or more during which—

14 ‘‘(A) such interests were owned by the de15 cedent or a member of the decedent’s family,

16 and

17 ‘‘(B) there was material participation by

18 the decedent or a member of the decedent’s

19 family in the operation of the business to which

20 such interests relate.

21 ‘‘(c) APPLICABLE RATE.—For purposes of this sec22 tion, the applicable rate is—

23 ‘‘(1) 15 percent if the requirement of subsection

24 (b)(3)(B) is met by a member of the decedent’s fam25 ily, and
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1 ‘‘(2) 20 percent in any other case.

2 ‘‘(d) QUALIFIED FAMILY-OWNED BUSINESS INTER3 EST.—

4 ‘‘(1) IN GENERAL.—For purposes of this sec5 tion, the term ‘qualified family-owned business inter6 est’ means—

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

8 or business carried on as a proprietorship;

9 ‘‘(B) an interest as a partner in a partner10 ship carrying on a trade or business, if such

11 partnership had 15 or fewer partners; or

12 ‘‘(C) stock in a corporation carrying on a

13 trade or business if such corporation had not

14 more than the number of shareholders specified

15 in section 1361(b)(1)(A).

16 Such term shall not include any interest which is

17 readily tradable on an established securities market

18 or otherwise.

19 ‘‘(2) RULES FOR APPLYING PARAGRAPH (1).—

20 For purposes of paragraph (1), rules similar to the

21 rules of paragraphs (2), (3), (4), and (6) of section

22 6166(b) shall apply.

23 ‘‘(e) RECAPTURE OF TAX BENEFIT IF INTERESTS

24 NOT HELD FOR 10 YEARS.—

25 ‘‘(1) IN GENERAL.—If—
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1 ‘‘(A) during the 10-year period beginning

2 on the date of death of the decedent—

3 ‘‘(i)(I) any portion of a qualified fam4 ily-owned business interest is distributed,

5 sold, exchanged, or otherwise disposed of,

6 or

7 ‘‘(II) money and other property at8 tributable to such an interest is withdrawn

9 from such trade or business, and

10 ‘‘(B) the aggregate of such distributions,

11 sales, exchanges, or other dispositions and with12 drawals equals or exceeds 20 percent of the

13 value of such interest, or

14 there is hereby imposed an additional estate tax.

15 ‘‘(2) ADDITIONAL ESTATE TAX.—

16 ‘‘(A) IN GENERAL.—The amount of the

17 additional estate tax imposed by paragraph (1)

18 shall be the applicable percentage of the excess

19 of what would have been the estate tax liability

20 but for subsection (a) over the adjusted estate

21 tax liability.

22 ‘‘(B) APPLICABLE PERCENTAGE.—For

23 purposes of subparagraph (A), the term ‘appli24 cable percentage’ means 100 percent reduced

25 (but not below zero) by the product of—
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1 ‘‘(i) 10 percentage points, and

2 ‘‘(ii) the number of years (if any)

3 after the date of the decedent’s death

4 which the year during which the additional

5 estate tax is imposed by paragraph (1) is

6 after the 1st year after the date of the de7 cedent’s death.

8 ‘‘(C) ADJUSTED ESTATE TAX LIABILITY.—

9 For purposes of subparagraph (A), the term

10 ‘adjusted estate tax liability’ means the estate

11 tax liability increased by the amount (if any) of

12 any prior additional estate tax imposed by sub13 section (f).

14 ‘‘(D) ESTATE TAX LIABILITY.—For pur15 poses of this paragraph, the term ‘estate tax li16 ability’ means the tax imposed by section 2001

17 reduced by the credits allowable against such

18 tax.

19 ‘‘(3) CERTAIN RULES TO APPLY.—For purposes

20 of this subsection, rules similar to the rules of sub21 paragraphs (B), (C), and (D) of section 6166(g)(1)

22 shall apply.

23 ‘‘(f) RECAPTURE OF PORTION OF TAX BENEFIT IF

24 HEIRS CEASE TO MATERIALLY PARTICIPATE DURING 10

25 YEARS AFTER DEATH.—
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1 ‘‘(1) IN GENERAL.—If—

2 ‘‘(A) the applicable rate which applied

3 under subsection (a) to the estate of the dece4 dent was 15 percent,

5 ‘‘(B) at any time during the 10-year period

6 beginning on the date of death of the decedent,

7 no qualified heir materially participates in the

8 operation of the business to which the qualified

9 family-owned business interests relate, and

10 ‘‘(C) there is no recapture under sub11 section (e) on or before the earliest date during

12 such 10-year period that no qualified heir so

13 materially participated,

14 there is hereby imposed an additional estate tax.

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

16 of the additional estate tax imposed by paragraph

17 (1) shall be the applicable percentage of the excess

18 of what would have been the estate tax liability but

19 for subsection (c)(1) over the estate tax liability.

20 ‘‘(3) DEFINITIONS.—For purposes of paragraph

21 (2), the terms ‘applicable percentage’ and ‘estate tax

22 liability’ have the meanings given to such terms by

23 subsection (e).

24 ‘‘(g) OTHER DEFINITIONS.—For purposes of this

25 section, the terms ‘qualified heir’ and ‘member of the fam-
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1 ily’ have the meanings given to such terms by section

2 2032A(e).’’

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

4 for part I of subchapter A of chapter 11 of such Code

5 is amended by adding at the end the following new item:

‘‘Sec. 2003. Reduced rate on family-owned business interests.’’

6 (c) EFFECTIVE DATE.—The amendments made by

7 this section shall apply to estates of decedents dying after

8 the date of the enactment of this section.

9 SEC. 3. LIMITATION ON 4 PERCENT RATE OF INTEREST ON

10 ESTATE TAX EXTENDED UNDER SECTION 6166

11 NOT TO APPLY TO ESTATE TAX ATTRIB12 UTABLE TO QUALIFIED FAMILY-OWNED BUSI13 NESS INTERESTS.

14 (a) IN GENERAL.—Paragraph (2) of section 6601(j)

15 of the Internal Revenue Code of 1986 (relating to 4-per16 cent portion) is amended by adding at the end the follow17 ing new flush sentence:

18 ‘‘Subparagraph (B) shall not take into account the

19 amount of the tax imposed by chapter 11 which is

20 attributable to qualified family-owned business inter21 ests (as defined in section 2003(b)) unless an elec22 tion is in effect under section 2032A with respect to

23 the estate.’’.
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1 (b) EFFECTIVE DATE.—The amendment made by

2 this section shall apply to estates of decedents dying after

3 the date of the enactment of this section.

4 SEC. 4. EXTENSION OF ALTERNATE VALUATION DATE TO 40

5 MONTHS WITH RESPECT TO ESTATE CON6 SISTING LARGELY OF QUALIFIED FAMILY7 OWNED BUSINESS INTERESTS.

8 (a) IN GENERAL.—Section 2032 of the Internal Rev9 enue Code of 1986 (relating to alternate valuation) is

10 amended by redesignating subsections (c) and (d) as sub11 sections (d) and (e), respectively, and by inserting after

12 subsection (b) the following new subsection:

13 ‘‘(c) ESTATES LARGELY CONSISTING OF QUALIFIED

14 FAMILY-OWNED BUSINESS INTERESTS.—In the case of

15 an estate to which section 2003 applies—

16 ‘‘(1) subsection (a) shall be applied by sub17 stituting ‘40 months’ for ‘6 months’ each place it

18 appears, and

19 ‘‘(2) section 6075(a) (relating to time for filing

20 estate tax return) shall be applied by substituting

21 ‘43 months’ for ‘9 months’.’’

22 (b) EFFECTIVE DATE.—The amendment made by

23 this section shall apply to estates of decedents dying after

24 the date of the enactment of this section.
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1 SEC. 5. INCREASE IN GIFT TAX EXCLUSION.

2 (a) IN GENERAL.—Subsection (b) of section 2503 of

3 the Internal Revenue Code of 1986 (relating to taxable

4 gifts) is amended by adding at the end the following new

5 sentence: ‘‘In the case of gifts made during a calendar

6 year by a donor to ancestors or lineal descendents of the

7 donor, the aggregate amount of such gifts which are not

8 included in the total amount of gifts by reason of this sub9 section shall not be less than 15 percent of the donor’s

10 earned income (as defined in section 32(c)(2)) for the tax11 able year ending with or within such calendar year.’’

12 (b) EFFECTIVE DATE.—The amendment made by

13 subsection (a) shall apply to gifts made in calendar years

14 beginning after the date of the enactment of this section.

15 SEC. 6. INCREASE IN UNIFIED ESTATE AND GIFT TAX

16 CREDITS.

17 (a) ESTATE TAX CREDIT.—

18 (1) Subsection (a) of section 2010 of the Inter19 nal Revenue Code of 1986 (relating to unified credit

20 against estate tax) is amended by striking

21 ‘‘$192,800’’ and inserting ‘‘the applicable credit

22 amount’’.

23 (2) Section 2010 of such Code is amended by

24 redesignating subsection (c) as subsection (d) and by

25 inserting after subsection (b) the following new sub26 section:
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1 ‘‘(c) APPLICABLE CREDIT AMOUNT.—For purposes

2 of this section—

3 ‘‘(1) IN GENERAL.—The applicable credit

4 amount is the amount of the tentative tax which

5 would be determined under the rate schedule set

6 forth in section 2001(c) if the amount with respect

7 to which such tentative tax is to be computed were

8 $600,000.

9 ‘‘(2) COST-OF-LIVING ADJUSTMENTS.—In the

10 case of any decedent dying in a calendar year after

11 December 31, 1995, the $600,000 amount set forth

12 in paragraph (1) shall be increased by an amount

13 equal to—

14 ‘‘(A) $600,000, multiplied by

15 ‘‘(B) the cost-of-living adjustment deter16 mined under section 1(f)(3) for such calendar

17 year by substituting ‘calendar year 1996’ for

18 ‘calendar year 1992’ in subparagraph (B)

19 thereof.

20 Any increase determined under the preceding sen21 tence shall be rounded to the nearest multiple of

22 $1,000.’’

23 (3) Paragraph (1) of section 6018(a) of such

24 Code is amended by striking ‘‘$600,000’’ and insert-
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1 ing ‘‘$600,000 (adjusted as provided in section

2 2010(c)(2)’’.

3 (b) UNIFIED GIFT TAX CREDIT.—Paragraph (1) of

4 section 2505(a) of such Code is amended by striking

5 ‘‘$192,800’’ and inserting ‘‘the applicable credit amount

6 in effect under section 2010(c) for such calendar year’’.

7 (c) EFFECTIVE DATE.—The amendments made by

8 this section shall apply to the estates of decedents dying,

9 and gifts made, after December 31, 1995.

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