II

104TH CONGRESS

2D SESSION S. 2173

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 SENATE OF THE UNITED STATES

SEPTEMBER 30, 1996

Mr. DORGAN 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 allow a

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 Es5 tate Tax Relief Act of 1996’’.

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
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1 gross estate) is amended by inserting after section 2033

2 the following new section:

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

4 ‘‘(a) IN GENERAL.—In the case of an estate of a de5 cedent to which this section applies, the value of the gross

6 estate shall not include the lesser of—

7 ‘‘(1) the adjusted value of the qualified family8 owned business interests of the decedent otherwise

9 includible in the estate, or

10 ‘‘(2) $900,000, reduced by the amount of any

11 exclusion allowed under this section with respect to

12 the estate of a previously deceased spouse of the de13 cedent.

14 ‘‘(b) ESTATES TO WHICH SECTION APPLIES.—

15 ‘‘(1) IN GENERAL.—This section shall apply to

16 an estate if—

17 ‘‘(A) the decedent was (at the date of the

18 decedent’s death) a citizen or resident of the

19 United States,

20 ‘‘(B) the sum of—

21 ‘‘(i) the adjusted value of the qualified

22 family-owned business interests described

23 in paragraph (2), plus

24 ‘‘(ii) the amount of the gifts of such

25 interests determined under paragraph (3),
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1 exceeds 50 percent of the adjusted gross estate,

2 and

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

4 the date of the decedent’s death there have

5 been periods aggregating 5 years or more dur6 ing which—

7 ‘‘(i) such interests were owned by the

8 decedent or a member of the decedent’s

9 family, and

10 ‘‘(ii) there was material participation

11 (within the meaning of section

12 2032A(e)(6)) by the decedent or a member

13 of the decedent’s family in the operation of

14 the business to which such interests relate.

15 ‘‘(2) INCLUDIBLE QUALIFIED FAMILY-OWNED

16 BUSINESS INTERESTS.—The qualified family-owned

17 business interests described in this paragraph are

18 the interests which—

19 ‘‘(A) are included in determining the value

20 of the gross estate (without regard to this sec21 tion), and

22 ‘‘(B) are acquired by any qualified heir

23 from, or passed to any qualified heir from, the

24 decedent (within the meaning of section

25 2032A(e)(9)).
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1 ‘‘(3) INCLUDIBLE GIFTS OF INTERESTS.—The

2 amount of the gifts of qualified family-owned busi3 ness interests determined under this paragraph is

4 the excess of—

5 ‘‘(A) the sum of—

6 ‘‘(i) the amount of such gifts from the

7 decedent to members of the decedent’s

8 family taken into account under subsection

9 2001(b)(1)(B), plus

10 ‘‘(ii) the amount of such gifts other11 wise excluded under section 2503(b),

12 to the extent such interests are continuously

13 held by members of such family (other than the

14 decedent’s spouse) between the date of the gift

15 and the date of the decedent’s death, over

16 ‘‘(B) the amount of such gifts from the de17 cedent to members of the decedent’s family oth18 erwise included in the gross estate.

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

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

21 value of the gross estate (determined without regard to

22 this section)—

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

24 paragraph (3) or (4) of section 2053(a), and

25 ‘‘(2) increased by the excess of—
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1 ‘‘(A) the sum of—

2 ‘‘(i) the amount of gifts determined

3 under subsection (b)(3), plus

4 ‘‘(ii) the amount (if more than de

5 minimis) of other transfers from the dece6 dent to the decedent’s spouse (at the time

7 of the transfer) within 10 years of the date

8 of the decedent’s death, plus

9 ‘‘(iii) the amount of other gifts (not

10 included under clause (i) or (ii)) from the

11 decedent within 3 years of such date, other

12 than gifts to members of the decedent’s

13 family otherwise excluded under section

14 2503(b), over

15 ‘‘(B) the sum of the amounts described in

16 clauses (i), (ii), and (iii) of subparagraph (A)

17 which are otherwise includible in the gross es18 tate.

19 For purposes of the preceding sentence, the Secretary may

20 provide that de minimis gifts to persons other than mem21 bers of the decedent’s family shall not be taken into ac22 count.

23 ‘‘(d) ADJUSTED VALUE OF THE QUALIFIED FAMILY24 OWNED BUSINESS INTERESTS.—For purposes of this sec25 tion, the adjusted value of any qualified family-owned
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1 business interest is the value of such interest for purposes

2 of this chapter (determined without regard to this sec3 tion), reduced by the excess of—

4 ‘‘(1) any amount deductible under paragraph

5 (3) or (4) of section 2053(a), over

6 ‘‘(2) the sum of—

7 ‘‘(A) any indebtedness on any qualified

8 residence of the decedent the interest on which

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

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

11 taxpayer establishes that the proceeds of such

12 indebtedness were used for the payment of edu13 cational and medical expenses of the decedent,

14 the decedent’s spouse, or the decedent’s depend15 ents (within the meaning of section 152), plus

16 ‘‘(C) any indebtedness not described in

17 clause (i) or (ii), to the extent such indebted18 ness does not exceed $10,000.

19 ‘‘(e) QUALIFIED FAMILY-OWNED BUSINESS INTER20 EST.—

21 ‘‘(1) IN GENERAL.—For purposes of this sec22 tion, the term ‘qualified family-owned business inter23 est’ means—

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

25 or business carried on as a proprietorship, or
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1 ‘‘(B) an interest in an entity carrying on

2 a trade or business, if—

3 ‘‘(i) at least—

4 ‘‘(I) 50 percent of such entity is

5 owned (directly or indirectly) by the

6 decedent and members of the dece7 dent’s family,

8 ‘‘(II) 70 percent of such entity is

9 so owned by members of 2 families, or

10 ‘‘(III) 90 percent of such entity

11 is so owned by members of 3 families,

12 and

13 ‘‘(ii) for purposes of subclause (II) or

14 (III) of clause (i), at least 30 percent of

15 such entity is so owned by the decedent

16 and members of the decedent’s family.

17 ‘‘(2) LIMITATION.—Such term shall not in18 clude—

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

20 the principal place of business of which is not

21 located in the United States,

22 ‘‘(B) any interest in an entity, if the stock

23 or debt of such entity or a controlled group (as

24 defined in section 267(f)(1)) of which such en25 tity was a member was readily tradable on an
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1 established securities market or secondary mar2 ket (as defined by the Secretary) at any time

3 within 3 years of the date of the decedent’s

4 death,

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

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

7 35 percent of the adjusted ordinary gross in8 come of such trade or business for the taxable

9 year which includes the date of the decedent’s

10 death would qualify as personal holding com11 pany income (as defined in section 543(a)),

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

13 or business that is attributable to—

14 ‘‘(i) cash or marketable securities, or

15 both, in excess of the reasonably expected

16 day-to-day working capital needs of such

17 trade or business, and

18 ‘‘(ii) any other assets of the trade or

19 business (other than assets used in the ac20 tive conduct of a trade or business de21 scribed in section 542(c)(2)), the income of

22 which is described in section 543(a) or in

23 subparagraph (B), (C), (D), or (E) of sec24 tion 954(c)(1) (determined by substituting
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1 ‘trade or business’ for ‘controlled foreign

2 corporation’).

3 ‘‘(3) RULES REGARDING OWNERSHIP.—

4 ‘‘(A) OWNERSHIP OF ENTITIES.—For pur5 poses of paragraph (1)(B)—

6 ‘‘(i) CORPORATIONS.—Ownership of a

7 corporation shall be determined by the

8 holding of stock possessing the appropriate

9 percentage of the total combined voting

10 power of all classes of stock entitled to vote

11 and the appropriate percentage of the total

12 value of shares of all classes of stock.

13 ‘‘(ii) PARTNERSHIPS.—Ownership of a

14 partnership shall be determined by the

15 owning of the appropriate percentage of

16 the capital interest in such partnership.

17 ‘‘(B) OWNERSHIP OF TIERED ENTITIES.—

18 For purposes of this section, if by reason of

19 holding an interest in a trade or business, a de20 cedent, any member of the decedent’s family,

21 any qualified heir, or any member of any quali22 fied heir’s family is treated as holding an inter23 est in any other trade or business—

24 ‘‘(i) such ownership interest in the

25 other trade or business shall be dis-
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1 regarded in determining if the ownership

2 interest in the first trade or business is a

3 qualified family-owned business interest,

4 and

5 ‘‘(ii) this section shall be applied sepa6 rately in determining if such interest in

7 any other trade or business is a qualified

8 family-owned business interest.

9 ‘‘(C) INDIVIDUAL OWNERSHIP RULES.—

10 For purposes of this section, an interest owned,

11 directly or indirectly, by or for an entity de12 scribed in paragraph (1)(B) shall be considered

13 as being owned proportionately by or for the en14 tity’s shareholders, partners, or beneficiaries. A

15 person shall be treated as a beneficiary of any

16 trust only if such person has a present interest

17 in such trust.

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

19 PARTICIPATE IN BUSINESS OR DISPOSITIONS OF INTER20 ESTS.—

21 ‘‘(1) IN GENERAL.—There is imposed an addi22 tional estate tax if, within 10 years after the date

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

24 qualified heir’s death—
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1 ‘‘(A) the material participation require2 ments described in section 2032A(c)(6)(B) are

3 not met with respect to the qualified family4 owned business interest which was acquired (or

5 passed) from the decedent,

6 ‘‘(B) the qualified heir disposes of any por7 tion of a qualified family-owned business inter8 est (other than by a disposition to a member of

9 the qualified heir’s family or through a qualified

10 conservation contribution under section

11 170(h)),

12 ‘‘(C) the qualified heir loses United States

13 citizenship (within the meaning of section 877)

14 or with respect to whom an event described in

15 subparagraph (A) or (B) of section 877(e)(1)

16 occurs, and such heir does not comply with the

17 requirements of subsection (g), or

18 ‘‘(D) the principal place of business of a

19 trade or business of the qualified family-owned

20 business interest ceases to be located in the

21 United States.

22 ‘‘(2) ADDITIONAL ESTATE TAX.—

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

24 additional estate tax imposed by paragraph (1)

25 shall be equal to—
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1 ‘‘(i) the applicable percentage of the

2 adjusted tax difference attributable to the

3 qualified family-owned business interest

4 (as determined under rules similar to the

5 rules of section 2032A(c)(2)(B)), plus

6 ‘‘(ii) interest on the amount deter7 mined under clause (i) at the underpay8 ment rate established under section 6621

9 for the period beginning on the date the

10 estate tax liability was due under this

11 chapter and ending on the date such addi12 tional estate tax is due.

13 ‘‘(B) APPLICABLE PERCENTAGE.—For

14 purposes of this paragraph, the applicable per15 centage shall be determined under the following

16 table:

‘‘If the event described in

paragraph (1) occurs in

the following year of The applicable

material participation: percentage is:

1 through 6 .............................................................................. 100

7 ............................................................................................... 80

8 ............................................................................................... 60

9 ............................................................................................... 40

10 ............................................................................................. 20.

17 ‘‘(g) SECURITY REQUIREMENTS FOR NONCITIZEN

18 QUALIFIED HEIRS.—

19 ‘‘(1) IN GENERAL.—Except upon the applica20 tion of subparagraph (F) or (M) of subsection

21 (h)(3), if a qualified heir is not a citizen of the Unit-
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1 ed States, any interest under this section passing to

2 or acquired by such heir (including any interest held

3 by such heir at a time described in subsection

4 (f)(1)(C)) shall be treated as a qualified family5 owned business interest only if the interest passes or

6 is acquired (or is held) in a qualified trust.

7 ‘‘(2) QUALIFIED TRUST.—The term ‘qualified

8 trust’ means a trust—

9 ‘‘(A) which is organized under, and gov10 erned by, the laws of the United States or a

11 State, and

12 ‘‘(B) except as otherwise provided in regu13 lations, with respect to which the trust instru14 ment requires that at least 1 trustee of the

15 trust be an individual citizen of the United

16 States or a domestic corporation.

17 ‘‘(h) OTHER DEFINITIONS AND APPLICABLE

18 RULES.—For purposes of this section—

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

20 heir’—

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

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

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

24 trade or business to which the qualified family25 owned business interest relates if such employee
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1 has been employed by such trade or business

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

3 of the decedent’s death.

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

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

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

7 ‘‘(3) APPLICABLE RULES.—Rules similar to the

8 following rules shall apply:

9 ‘‘(A) Section 2032A(b)(4) (relating to de10 cedents who are retired or disabled).

11 ‘‘(B) Section 2032A(b)(5) (relating to spe12 cial rules for surviving spouses).

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

14 partial dispositions).

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

16 1 additional tax imposed with respect to any 1

17 portion).

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

19 date).

20 ‘‘(F) Section 2032A(c)(5) (relating to li21 ability for tax; furnishing of bond).

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

23 tax if use begins within 2 years; active manage24 ment by eligible qualified heir treated as mate25 rial participation).
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1 ‘‘(H) Section 2032A(e)(10) (relating to

2 community property).

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

4 treatment of replacement property acquired in

5 section 1031 or 1033 transactions).

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

7 of limitations).

8 ‘‘(K) Section 6166(b)(3) (relating to farm9 houses and certain other structures taken into

10 account).

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

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

13 payment).

14 ‘‘(M) Section 6324B (relating to special

15 lien for additional estate tax).’’.

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

17 for part III of subchapter A of chapter 11 is amended

18 by inserting after the item relating to section 2033 the

19 following new item:

‘‘Sec. 2033A. Family-owned business exclusion.’’.

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

21 this section shall apply to estates of decedents dying after

22 December 31, 1996.
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1 SEC. 3. PORTION OF ESTATE TAX SUBJECT TO 4-PERCENT

2 INTEREST RATE INCREASED TO $1,600,000.

3 (a) IN GENERAL.—Subparagraph (B) of section

4 6601(j)(2) of the Internal Revenue Code of 1986 (defining

5 4-percent portion) is amended by striking ‘‘$345,800’’ and

6 inserting ‘‘$600,800’’.

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

8 this section shall apply to estates of decedents dying after

9 December 31, 1996.

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