I

107TH CONGRESS

1ST SESSION H. R. 1264

To amend the Internal Revenue Code of 1986 to provide individual income

tax rate reductions, tax relief to families with children, marriage penalty

relief, and to immediately eliminate the estate tax for two-thirds of

all decedents currently subject to the estate tax.

IN THE HOUSE OF REPRESENTATIVES

MARCH 28, 2001

Mr. RANGEL (for himself and Mr. PASCRELL) 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 provide

individual income tax rate reductions, tax relief to families with children, marriage penalty relief, and to immediately eliminate the estate tax for two-thirds of all decedents currently subject to the estate tax.

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 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Tax Reduction Act of 2001’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend-
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1 ment or repeal is expressed in terms of an amendment

2 to, or repeal of, a section or other provision, the reference

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986.

5 (c) SECTION 15 NOT TO APPLY.—No amendment

6 made by this Act shall be treated as a change in a rate

7 of tax for purposes of section 15 of the Internal Revenue

8 Code of 1986.

9 TITLE I—INDIVIDUAL INCOME

10 TAX RATE REDUCTIONS; EX11 PANSION OF EARNED INCOME

12 CREDIT ASSISTANCE

13 SEC. 101. INDIVIDUAL INCOME TAX RATE REDUCTIONS.

14 (a) IN GENERAL.—Section 1 is amended by adding

15 at the end the following new subsection:

16 ‘‘(i) 12 PERCENT RATE BRACKET.—

17 ‘‘(1) IN GENERAL.—In the case of taxable years

18 beginning after December 31, 2000—

19 ‘‘(A) the rate of tax under subsections (a),

20 (b), (c), and (d) on taxable income not over the

21 initial bracket amount shall be 12 percent, and

22 ‘‘(B) the 15 percent rate of tax shall apply

23 only to taxable income over the initial bracket

24 amount.
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1 ‘‘(2) INITIAL BRACKET AMOUNT.—For purposes

2 of this subsection—

3 ‘‘(A) IN GENERAL.—Except as provided in

4 subparagraph (B), the initial bracket amount

5 is—

6 ‘‘(i) $20,000 in the case of subsection

7 (a),

8 ‘‘(ii) 80 percent of the dollar amount

9 in clause (i) in the case of subsection (b),

10 and

11 ‘‘(iii) 50 percent of the dollar amount

12 in clause (i) in the case of subsections (c)

13 and (d).

14 ‘‘(B) PHASEIN.—The initial bracket

15 amount is—

‘‘(i) 1 16 ⁄4 the amount otherwise applica17 ble under subparagraph (A) in the case of

18 taxable years beginning during 2001, and

‘‘(ii) 1 19 ⁄2 such amount otherwise appli20 cable under subparagraph (A) in the case

21 of taxable years beginning during 2002.

22 ‘‘(3) INFLATION ADJUSTMENT.—

23 ‘‘(A) IN GENERAL.—In the case of any

24 taxable year beginning in a calendar year after

25 2003, the $20,000 amount under paragraph
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1 (2)(A)(i) shall be increased by an amount equal

2 to—

3 ‘‘(i) such dollar amount, multiplied by

4 ‘‘(ii) the cost-of-living adjustment de5 termined under subsection (f)(3) for the

6 calendar year in which the taxable year be7 gins, determined by substituting ‘calendar

8 year 2002’ for ‘calendar year 1992’ in sub9 paragraph (B) thereof.

10 ‘‘(B) ROUNDING RULES.—If any amount

11 after adjustment under subparagraph (A) is not

12 a multiple of $50, such amount shall be round13 ed to the next lowest multiple of $50.

14 ‘‘(4) ADJUSTMENT OF TABLES.—The Secretary

15 shall adjust the tables prescribed under subsection

16 (f) to carry out this subsection.’’

17 (b) ADJUSTMENT IN COMPUTATION OF ALTER18 NATIVE MINIMUM TAX.—Paragraph (2) of section 55(a)

19 is amended to read as follows:

20 ‘‘(2) the sum of—

21 ‘‘(A) the regular tax for the taxable year,

22 plus

23 ‘‘(B) in the case of an individual, 3 percent

24 of so much of the individual’s taxable income

25 for the taxable year as is taxed at 12 percent.’’
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1 (c) REPEAL OF REDUCTION OF REFUNDABLE TAX

2 CREDITS.—

3 (1) Subsection (d) of section 24 is amended by

4 striking paragraph (2) and redesignating paragraph

5 (3) as paragraph (2).

6 (2) Section 32 is amended by striking sub7 section (h).

8 (d) CONFORMING AMENDMENT.—Subclause (II) of

9 section 1(g)(7)(B)(ii) is amended by striking ‘‘15 percent’’

10 and inserting ‘‘12 percent’’.

11 (e) EFFECTIVE DATE.—The amendments made by

12 this section shall apply to taxable years beginning after

13 December 31, 2000.

14 (f) PROTECTION OF SOCIAL SECURITY AND MEDI15 CARE.—The amounts transferred to any trust fund under

16 the Social Security Act shall be determined as if this Act

17 had not been enacted.

18 SEC. 102. MODIFICATIONS TO EARNED INCOME TAX CRED19 IT.

20 (a) INCREASES IN PERCENTAGES AND AMOUNTS

21 USED TO DETERMINE CREDIT; MARRIAGE PENALTY RE22 LIEF.—

23 (1) IN GENERAL.—Subsection (b) of section 32

24 is amended to read as follows:

25 ‘‘(b) PERCENTAGES AND AMOUNTS.—
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1 ‘‘(1) PERCENTAGES.—The credit percentage,

2 the initial phaseout percentage, and the final phase3 out percentage shall be determined as follows:

‘‘In the case of an eligible individual

with:

The credit percentage is:The initial phaseout percentage is:The final phaseout percentage is:

1 qualifying child ......................... 34 15.98 18.98

2 or more qualifying children ...... 40 21.0624.06

No qualifying children ................. 7.65 7.65 7.65

4 ‘‘(2) AMOUNTS.—

5 ‘‘(A) IN GENERAL.—The earned income

6 amount and the initial phaseout amount shall

7 be determined as follows:

‘‘In the case of an eligible individual with: The earned income amount is:

The initial phaseout amount is:

1 qualifying child ....................................................... $8,140 $13,470

2 or more qualifying children .................................... $10,820 $13,470

No qualifying children ............................................... $4,900 $6,130.

8 In the case of a joint return where there is at

9 least 1 qualifying child, the initial phaseout

10 amount shall be $2,500 greater than the

11 amount otherwise applicable under the pre12 ceding sentence.

13 ‘‘(B) FINAL PHASEOUT AMOUNT.—The

14 final phaseout amount is $26,000 ($28,500 in

15 the case of a joint return).’’

16 (2) MODIFICATION OF COMPUTATION OF

17 PHASEOUT.—Paragraph (2) of section 32(a) is

18 amended to read as follows:
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1 ‘‘(2) PHASEOUT OF CREDIT.—The amount of

2 the credit allowable to a taxpayer under paragraph

3 (1) for any taxable year shall be reduced (but not

4 below zero) by the sum of—

5 ‘‘(A) the initial phaseout percentage of so

6 much of the total income (or, if greater, the

7 earned income) of the taxpayer for the taxable

8 year as exceeds the initial phaseout amount but

9 does not exceed the final phaseout amount, plus

10 ‘‘(B) the final phaseout percentage of so

11 much of the total income (or, if greater, the

12 earned income) of the taxpayer for the taxable

13 year as exceeds the final phaseout amount.’’

14 (3) TOTAL INCOME.—Paragraph (5) of section

15 32(c) is amended to read as follows:

16 ‘‘(5) TOTAL INCOME.—The term ‘total income’

17 means adjusted gross income determined without re18 gard to—

19 ‘‘(A) the deductions referred to in para20 graphs (6), (7), (9), (10), (15), (16), and (17)

21 of section 62(a),

22 ‘‘(B) the deduction allowed by section

23 162(l), and

24 ‘‘(C) the deduction allowed by section

25 164(f).’’
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1 (4) CONFORMING AMENDMENTS.—

2 (A) Subsection (j) of section 32 is amend3 ed to read as follows:

4 ‘‘(j) INFLATION ADJUSTMENT.—

5 ‘‘(1) IN GENERAL.—In the case of any taxable

6 year beginning after 2002, each of the dollar

7 amounts in subsection (b)(2) shall be increased by

8 an amount equal to—

9 ‘‘(A) such dollar amount, multiplied by

10 ‘‘(B) the cost-of-living adjustment deter11 mined under section 1(f)(3), for the calendar

12 year in which the taxable year begins, deter13 mined by substituting ‘calendar year 2001’ for

14 ‘calendar year 1992’ in subparagraph (B)

15 thereof.

16 ‘‘(2) ROUNDING.—If any dollar amount, after

17 being increased under paragraph (1), is not a mul18 tiple of $10, such dollar amount shall be rounded to

19 the nearest multiple of $10.’’

20 (B) Subparagraph (C) of section 32(c)(1)

21 is amended by striking ‘‘modified adjusted

22 gross income’’ and inserting ‘‘total income’’.

23 (C) Paragraph (2) of section 32(f) is

24 amended to read as follows:

25 ‘‘(2) REQUIREMENTS FOR TABLES.—
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1 ‘‘(A) IN GENERAL.—The provisions of sub2 section (a)(1) and the provisions of subsection

3 (a)(2) shall be reflected in separate tables pre4 scribed under paragraph (1).

5 ‘‘(B) SUBSECTION (a)(1) TABLE.—The ta6 bles prescribed under paragraph (1) to reflect

7 the provisions of subsection (a)(1) shall have in8 come brackets of not greater than $50 each for

9 earned income between $0 and the earned in10 come amount.

11 ‘‘(C) SUBSECTION (a)(2) TABLE.—The ta12 bles prescribed under paragraph (1) to reflect

13 the provisions of subsection (a)(2) shall have in14 come brackets of not greater than $50 each for

15 total income (or, if greater, the earned income)

16 above the initial phaseout threshold.’’

17 (b) REPEAL OF DENIAL OF CREDIT WHERE INVEST18 MENT INCOME.—Section 32 is amended by striking sub19 section (i).

20 (c) EARNED INCOME TO INCLUDE ONLY AMOUNTS

21 INCLUDIBLE IN GROSS INCOME.—

22 (1) IN GENERAL.—Section 32(c)(2)(A)(i) (de23 fining earned income) is amended by inserting ‘‘, but

24 only if such amounts are includible in gross income
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1 for the taxable year’’ after ‘‘other employee com2 pensation’’.

3 (2) CONFORMING AMENDMENT.—Section

4 32(c)(2)(B) is amended by striking ‘‘and’’ at the end

5 of clause (iv), by striking the period at the end of

6 clause (v) and inserting ‘‘, and’’, and by adding at

7 the end the following new clause:

8 ‘‘(vi) the requirement under subpara9 graph (A)(i) that an amount be includible

10 in gross income shall not apply if such

11 amount is exempt from tax under section

12 7873 or is derived directly from restricted

13 and allotted land under the Act of Feb14 ruary 8, 1887 (commonly known as the In15 dian General Allotment Act) (25 U.S.C.

16 331 et seq.) or from land held under Acts

17 or treaties containing an exception provi18 sion similar to the Indian General Allot19 ment Act.’’

20 (d) MODIFICATION OF JOINT RETURN REQUIRE21 MENT.—Subsection (d) of section 32 is amended to read

22 as follows:

23 ‘‘(d) MARRIED INDIVIDUALS.—

24 ‘‘(1) IN GENERAL.—If the taxpayer is married

25 at the close of the taxable year, the credit shall be
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1 allowed under subsection (a) only if the taxpayer

2 and his spouse file a joint return for the taxable

3 year.

4 ‘‘(2) MARITAL STATUS.—For purposes of para5 graph (1), an individual legally separated from his

6 spouse under a decree of divorce or of separate

7 maintenance shall not be considered as married.

8 ‘‘(3) CERTAIN MARRIED INDIVIDUALS LIVING

9 APART.—For purposes of paragraph (1), if—

10 ‘‘(A) an individual —

11 ‘‘(i) is married and files a separate re12 turn, and

13 ‘‘(ii) has a qualifying child who is a

14 son, daughter, stepson, or stepdaughter of

15 such individual, and

16 ‘‘(B) during the last 6 months of such tax17 able year, such individual and such individual’s

18 spouse do not have the same principal place of

19 abode,

20 such individual shall not be considered as married.’’

21 (e) EXPANSION OF MATHEMATICAL ERROR AUTHOR22 ITY.—Paragraph (2) of section 6213(g) is amended by

23 striking ‘‘and’’ at the end of subparagraph (K), by striking

24 the period at the end of subparagraph (L) and inserting
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1 ‘‘, and’’, and by inserting after subparagraph (L) the fol2 lowing new subparagraph:

3 ‘‘(M) the entry on the return claiming the

4 credit under section 32 with respect to a child

5 if, according to the Federal Case Registry of

6 Child Support Orders established under section

7 453(h) of the Social Security Act, the taxpayer

8 is a noncustodial parent of such child.’’

9 (f) EFFECTIVE DATE.—The amendments made by

10 this section shall apply to taxable years beginning after

11 December 31, 2001.

12 TITLE II—MARRIAGE PENALTY

13 RELIEF

14 SEC. 201. MARRIAGE PENALTY RELIEF.

15 (a) STANDARD DEDUCTION.—

16 (1) IN GENERAL.—Paragraph (2) of section

17 63(c) (relating to standard deduction) is amended—

18 (A) by striking ‘‘$5,000’’ in subparagraph

19 (A) and inserting ‘‘twice the dollar amount in

20 effect under subparagraph (C) for the taxable

21 year’’,

22 (B) by adding ‘‘or’’ at the end of subpara23 graph (B),
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1 (C) by striking ‘‘in the case of’’ and all

2 that follows in subparagraph (C) and inserting

3 ‘‘in any other case.’’, and

4 (D) by striking subparagraph (D).

5 (2) INCREASE ALLOWED AS DEDUCTION IN DE6 TERMINING MINIMUM TAX.—Subparagraph (E) of

7 section 56(b)(1) is amended by adding at the end

8 the following new sentence: ‘‘The preceding sentence

9 shall not apply to so much of the standard deduction

10 under subparagraph (A) of section 63(c)(2) as ex11 ceeds the amount which would be such deduction but

12 for the amendment made by section 201(a)(1) of the

13 Tax Reduction Act of 2001.’’

14 (3) TECHNICAL AMENDMENTS.—

15 (A) Subparagraph (B) of section 1(f)(6) is

16 amended by striking ‘‘(other than with’’ and all

17 that follows through ‘‘shall be applied’’ and in18 serting ‘‘(other than with respect to sections

19 63(c)(4) and 151(d)(4)(A)) shall be applied’’.

20 (B) Paragraph (4) of section 63(c) is

21 amended by adding at the end the following

22 flush sentence:

23 ‘‘The preceding sentence shall not apply to the

24 amount referred to in paragraph (2)(A).’’.
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 2000.

4 TITLE III—ESTATE TAX RELIEF.

5 SEC. 301. INCREASE IN EXEMPTION EQUIVALENT OF UNI6 FIED CREDIT.

7 (a) IN GENERAL.—Subsection (c) of section 2010

8 (relating to applicable credit amount) is amended by strik9 ing the table and inserting the following new table:

‘‘In the case of estates of decedents The applicable

dying, and gifts made, during: exclusion amount is:

2002 ....................................................................... $2,000,000

2003 and 2004 ...................................................... $2,100,000

2005 and 2006...................................................... $2,200,000

2007 and 2008 ...................................................... $2,300,000

2009 ....................................................................... $2,400,000

2010 or thereafter ................................................. $2,500,000.’’

10 (b) REPEAL OF SPECIAL BENEFIT FOR FAMILY11 OWNED BUSINESS INTERESTS.—

12 (1) Section 2057 is hereby repealed.

13 (2) Paragraph (10) of section 2031(c) is

14 amended by inserting ‘‘(as in effect on the day be15 fore the date of the enactment of this parenthet16 ical)’’ before the period.

17 (3) The table of sections for part IV of sub18 chapter A of chapter 11 is amended by striking the

19 item relating to section 2057.

20 (c) CORRECTION OF TECHNICAL ERROR AFFECTING

21 LARGEST ESTATES.—Paragraph (2) of section 2001(c) is
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1 amended by striking ‘‘$10,000,000’’ and all that follows

2 and inserting ‘‘$10,000,000. The amount of the increase

3 under the preceding sentence shall not exceed the sum of

4 the applicable credit amount under section 2010(c) and

5 $359,200.’’

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

7 this section shall apply to estates of decedents dying, and

8 gifts made, after December 31, 2001.

9 SEC. 302. CREDIT FOR STATE DEATH TAXES REPLACED

10 WITH DEDUCTION FOR SUCH TAXES.

11 (a) REPEAL OF CREDIT.—Section 2011 (relating to

12 credit for State death taxes) is hereby repealed.

13 (b) DEDUCTION FOR STATE DEATH TAXES.—Part

14 IV of subchapter A of chapter 11 is amended by adding

15 at the end the following new section:

16 ‘‘SEC. 2058. STATE DEATH TAXES.

17 ‘‘(a) ALLOWANCE OF DEDUCTION.—For purposes of

18 the tax imposed by section 2001, the value of the taxable

19 estate shall be determined by deducting from the value

20 of the gross estate the amount of any estate, inheritance,

21 legacy, or succession taxes actually paid to any State or

22 the District of Columbia, in respect of any property in23 cluded in the gross estate (not including any such taxes

24 paid with respect to the estate of a person other than the

25 decedent).
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1 ‘‘(b) PERIOD OF LIMITATIONS.—The deduction al2 lowed by this section shall include only such taxes as were

3 actually paid and deduction therefor claimed within 4

4 years after the filing of the return required by section

5 6018, except that—

6 ‘‘(1) If a petition for redetermination of a defi7 ciency has been filed with the Tax Court within the

8 time prescribed in section 6213(a), then within such

9 4-year period or before the expiration of 60 days

10 after the decision of the Tax Court becomes final.

11 ‘‘(2) If, under section 6161 or 6166, an exten12 sion of time has been granted for payment of the tax

13 shown on the return, or of a deficiency, then within

14 such 4-year period or before the date of the expira15 tion of the period of the extension.

16 ‘‘(3) If a claim for refund or credit of an over17 payment of tax imposed by this chapter has been

18 filed within the time prescribed in section 6511, then

19 within such 4-year period or before the expiration of

20 60 days from the date of mailing by certified mail

21 or registered mail by the Secretary to the taxpayer

22 of a notice of the disallowance of any part of such

23 claim, or before the expiration of 60 days after a de24 cision by any court of competent jurisdiction be-
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1 comes final with respect to a timely suit instituted

2 upon such claim, whichever is later.

3 Refund based on the deduction may (despite the provisions

4 of sections 6511 and 6512) be made if claim therefor is

5 filed within the period above provided. Any such refund

6 shall be made without interest.’’

7 (c) CONFORMING AMENDMENTS.—

8 (1) Subsection (a) of section 2012 is amended

9 by striking ‘‘the credit for State death taxes pro10 vided by section 2011 and’’.

11 (2) Subparagraph (A) of section 2013(c)(1) is

12 amended by striking ‘‘2011,’’.

13 (3) Paragraph (2) of section 2014(b) is amend14 ed by striking ‘‘, 2011,’’.

15 (4) Sections 2015 and 2016 are each amended

16 by striking ‘‘2011 or’’.

17 (5) Subsection (d) of section 2053 is amended

18 to read as follows:

19 ‘‘(d) CERTAIN FOREIGN DEATH TAXES.—

20 ‘‘(1) IN GENERAL.—Notwithstanding the provi21 sions of subsection (c)(1)(B) of this section, for pur22 poses of the tax imposed by section 2001, the value

23 of the taxable estate may be determined, if the ex24 ecutor so elects before the expiration of the period

25 of limitation for assessment provided in section
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1 6501, by deducting from the value of the gross es2 tate the amount (as determined in accordance with

3 regulations prescribed by the Secretary) of any es4 tate, succession, legacy, or inheritance tax imposed

5 by and actually paid to any foreign country, in re6 spect of any property situated within such foreign

7 country and included in the gross estate of a citizen

8 or resident of the United States, upon a transfer by

9 the decedent for public, charitable, or religious uses

10 described in section 2055. The determination under

11 this paragraph of the country within which property

12 is situated shall be made in accordance with the

13 rules applicable under subchapter B (sec. 2101 and

14 following) in determining whether property is situ15 ated within or without the United States. Any elec16 tion under this paragraph shall be exercised in ac17 cordance with regulations prescribed by the Sec18 retary.

19 ‘‘(2) CONDITION FOR ALLOWANCE OF DEDUC20 TION.—No deduction shall be allowed under para21 graph (1) for a foreign death tax specified therein

22 unless the decrease in the tax imposed by section

23 2001 which results from the deduction provided in

24 paragraph (1) will inure solely for the benefit of the

25 public, charitable, or religious transferees described
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1 in section 2055 or section 2106(a)(2). In any case

2 where the tax imposed by section 2001 is equitably

3 apportioned among all the transferees of property

4 included in the gross estate, including those de5 scribed in sections 2055 and 2106(a)(2) (taking into

6 account any exemptions, credits, or deductions al7 lowed by this chapter), in determining such decrease,

8 there shall be disregarded any decrease in the Fed9 eral estate tax which any transferees other than

10 those described in sections 2055 and 2106(a)(2) are

11 required to pay.

12 ‘‘(3) EFFECT ON CREDIT FOR FOREIGN DEATH

13 TAXES OF DEDUCTION UNDER THIS SUBSECTION.—

14 ‘‘(A) ELECTION.—An election under this

15 subsection shall be deemed a waiver of the right

16 to claim a credit, against the Federal estate

17 tax, under a death tax convention with any for18 eign country for any tax or portion thereof in

19 respect of which a deduction is taken under this

20 subsection.

21 ‘‘(B) CROSS REFERENCE.—

‘‘See section 2014(f) for the effect of a deduction

taken under this paragraph on the credit for foreign

death taxes.’’

22 (6) Subparagraph (A) of section 2056A(b)(10)

23 is amended—

24 (A) by striking ‘‘2011,’’, and
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1 (B) by inserting ‘‘2058,’’ after ‘‘2056,’’.

2 (7)(A) Subsection (a) of section 2102 is amend3 ed to read as follows:

4 ‘‘(a) IN GENERAL.—The tax imposed by section 2101

5 shall be credited with the amounts determined in accord6 ance with sections 2012 and 2013 (relating to gift tax and

7 tax on prior transfers).’’

8 (B) Section 2102 is amended by striking sub9 section (b) and by redesignating subsection (c) as

10 subsection (b).

11 (C) Section 2102(b)(5) (as redesignated by sub12 paragraph (B)) and section 2107(c)(3) are each

13 amended by striking ‘‘2011 to 2013, inclusive,’’ and

14 inserting ‘‘2012 and 2013’’.

15 (8) Subsection (a) of section 2106 is amended

16 by adding at the end the following new paragraph:

17 ‘‘(4) STATE DEATH TAXES.—The amount which

18 bears the same ratio to the State death taxes as the

19 value of the property, as determined for purposes of

20 this chapter, upon which State death taxes were paid

21 and which is included in the gross estate under sec22 tion 2103 bears to the value of the total gross estate

23 under section 2103. For purposes of this paragraph,

24 the term ‘State death taxes’ means the taxes de25 scribed in section 2011(a).’’
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1 (9) Section 2201 is amended—

2 (A) by striking ‘‘as defined in section

3 2011(d)’’, and

4 (B) by adding at the end the following new

5 flush sentence:

6 ‘‘For purposes of this section, the additional estate tax

7 is the difference between the tax imposed by section 2001

8 or 2101 and the amount equal to 125 percent of the max9 imum credit provided by section 2011(b), as in effect be10 fore its repeal by the Tax Reduction Act of 2001.’’

11 (10) Paragraph (2) of section 6511(i) is amend12 ed by striking ‘‘2011(c), 2014(b),’’ and inserting

13 ‘‘2014(b)’’.

14 (11) Subsection (c) of section 6612 is amended

15 by striking ‘‘section 2011(c) (relating to refunds due

16 to credit for State taxes),’’.

17 (12) The table of sections for part II of sub18 chapter A of chapter 11 is amended by striking the

19 item relating to section 2011.

20 (13) The table of sections for part IV of sub21 chapter A of chapter 11 is amended by adding at

22 the end the following new item:

‘‘Sec. 2058. State death taxes.’’

23 (d) EFFECTIVE DATE.—The amendments made by

24 this section shall apply to estates of decedents dying after

25 December 31, 2001.
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1 SEC. 303. VALUATION RULES FOR CERTAIN TRANSFERS OF

2 NONBUSINESS ASSETS; LIMITATION ON MI3 NORITY DISCOUNTS.

4 (a) IN GENERAL.—Section 2031 (relating to defini5 tion of gross estate) is amended by redesignating sub6 section (d) as subsection (f) and by inserting after sub7 section (c) the following new subsections:

8 ‘‘(d) VALUATION RULES FOR CERTAIN TRANSFERS

9 OF NONBUSINESS ASSETS.—For purposes of this chapter

10 and chapter 12—

11 ‘‘(1) IN GENERAL.—In the case of the transfer

12 of any interest in an entity other than an interest

13 which is actively traded (within the meaning of sec14 tion 1092)—

15 ‘‘(A) the value of any nonbusiness assets

16 held by the entity shall be determined as if the

17 transferor had transferred such assets directly

18 to the transferee (and no valuation discount

19 shall be allowed with respect to such nonbusi20 ness assets), and

21 ‘‘(B) the nonbusiness assets shall not be

22 taken into account in determining the value of

23 the interest in the entity.

24 ‘‘(2) NONBUSINESS ASSETS.—For purposes of

25 this subsection—
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1 ‘‘(A) IN GENERAL.—The term ‘nonbusi2 ness asset’ means any asset which is not used

3 in the active conduct of 1 or more trades or

4 businesses.

5 ‘‘(B) EXCEPTION FOR CERTAIN PASSIVE

6 ASSETS.—Except as provided in subparagraph

7 (C), a passive asset shall not be treated for pur8 poses of subparagraph (A) as used in the active

9 conduct of a trade or business unless—

10 ‘‘(i) the asset is property described in

11 paragraph (1) or (4) of section 1221(a) or

12 is a hedge with respect to such property,

13 or

14 ‘‘(ii) the asset is real property used in

15 the active conduct of 1 or more real prop16 erty trades or businesses (within the mean17 ing of section 469(c)(7)(C)) in which the

18 transferor materially participates and with

19 respect to which the transferor meets the

20 requirements of section 469(c)(7)(B)(ii).

21 For purposes of clause (ii), material participa22 tion shall be determined under the rules of sec23 tion 469(h), except that section 469(h)(3) shall

24 be applied without regard to the limitation to

25 farming activity.
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1 ‘‘(C) EXCEPTION FOR WORKING CAP2 ITAL.—Any asset (including a passive asset)

3 which is held as a part of the reasonably re4 quired working capital needs of a trade or busi5 ness shall be treated as used in the active con6 duct of a trade or business.

7 ‘‘(3) PASSIVE ASSET.—For purposes of this

8 subsection, the term ‘passive asset’ means any—

9 ‘‘(A) cash or cash equivalents,

10 ‘‘(B) except to the extent provided by the

11 Secretary, stock in a corporation or any other

12 equity, profits, or capital interest in any entity,

13 ‘‘(C) evidence of indebtedness, option, for14 ward or futures contract, notional principal con15 tract, or derivative,

16 ‘‘(D) asset described in clause (iii), (iv), or

17 (v) of section 351(e)(1)(B),

18 ‘‘(E) annuity,

19 ‘‘(F) real property used in 1 or more real

20 property trades or businesses (as defined in sec21 tion 469(c)(7)(C)),

22 ‘‘(G) asset (other than a patent, trade23 mark, or copyright) which produces royalty in24 come,

25 ‘‘(H) commodity,
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1 ‘‘(I) collectible (within the meaning of sec2 tion 401(m)), or

3 ‘‘(J) any other asset specified in regula4 tions prescribed by the Secretary.

5 ‘‘(4) LOOK-THRU RULES.—

6 ‘‘(A) IN GENERAL.—If a nonbusiness asset

7 of an entity consists of a 10-percent interest in

8 any other entity, this subsection shall be ap9 plied by disregarding the 10-percent interest

10 and by treating the entity as holding directly its

11 ratable share of the assets of the other entity.

12 This subparagraph shall be applied successively

13 to any 10-percent interest of such other entity

14 in any other entity.

15 ‘‘(B) 10-PERCENT INTEREST.—The term

16 ‘10-percent interest’ means—

17 ‘‘(i) in the case of an interest in a cor18 poration, ownership of at least 10 percent

19 (by vote or value) of the stock in such cor20 poration,

21 ‘‘(ii) in the case of an interest in a

22 partnership, ownership of at least 10 per23 cent of the capital or profits interest in the

24 partnership, and
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1 ‘‘(iii) in any other case, ownership of

2 at least 10 percent of the beneficial inter3 ests in the entity.

4 ‘‘(5) COORDINATION WITH SUBSECTION (b).—

5 Subsection (b) shall apply after the application of

6 this subsection.

7 ‘‘(e) LIMITATION ON MINORITY DISCOUNTS.—For

8 purposes of this chapter and chapter 12, in the case of

9 the transfer of any interest in an entity other than an in10 terest which is actively traded (within the meaning of sec11 tion 1092), no discount shall be allowed by reason of the

12 fact that the transferee does not have control of such enti13 ty if the transferee and members of the family (as defined

14 in section 2032A(e)(2)) of the transferee have control of

15 such entity.’’

16 (b) EFFECTIVE DATE.—The amendments made by

17 this section shall apply to transfers after the date of the

18 enactment of this Act.

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