‘‘(B) there was material participation
(within the meaning of section 2032A(e)(6)) by
the decedent or a member of the decedent’s
family in the operation of the business to which
such interests relate.
‘‘(c) ADJUSTED GROSS ESTATE.—For purposes of
this section, the term ‘adjusted gross estate’ means the
value of the gross estate (determined without regard to
this section)—
‘‘(1) reduced by any amount deductible under
section 2053(a)(4), and
‘‘(2) increased by the sum of—
‘‘(A) the amount taken into account under
subsection (b)(2)(B), plus
‘‘(B) the amount of other gifts from the
decedent to the decedent’s spouse (at the time
of the gift) within 10 years of the date of the
decedent’s death, plus
‘‘(C) the amount of other gifts (not in-
cluded under subparagraph (A) or (B)) from
the decedent within 3 years of such date.
‘‘(d) ADJUSTED VALUE OF THE QUALIFIED FAMILY-
OWNED BUSINESS INTERESTS.—For purposes of this sec-
tion, the adjusted value of any qualified family-owned
business interest is the value of such interest for purposes
of this chapter (determined without regard to this sec-
tion), reduced by the excess of—
‘‘(1) any amount deductible under section
2053(a)(4), over
‘‘(2) the sum of—
‘‘(A) any indebtedness on any qualified
residence of the decedent the interest on which
is deductible under section 163(h)(3), plus
‘‘(B) any indebtedness to the extent the
taxpayer establishes that the proceeds of such
indebtedness were used for the payment of edu-
cational and medical expenses of the decedent,
the decedent’s spouse, or the decedent’s depend-
ents (within the meaning of section 152), plus
‘‘(C) any indebtedness not described in
subparagraph (A) or (B), to the extent such in-
debtedness does not exceed $10,000.
‘‘(e) QUALIFIED FAMILY-OWNED BUSINESS INTER-
EST.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘qualified family-owned business inter-
est’ means—
‘‘(A) an interest as a proprietor in a trade
or business carried on as a proprietorship, or
‘‘(B) an interest as a partner in a partner-
ship, or stock in a corporation, carrying on a
trade or business, if—
‘‘(i) at least—
‘‘(I) 50 percent of such partner-
ship or corporation is owned (directly
or indirectly) by the decedent or mem-
bers of the decedent’s family,
‘‘(II) 70 percent of such partner-
ship or corporation is so owned by 2
families (including the decedent’s fam-
ily), or
‘‘(III) 90 percent of such part-
nership or corporation is so owned by
3 families (including the decedent’s
family), and
‘‘(ii) at least 30 percent of such part-
nership or corporation is so owned by each
family described in subclause (II) or (III)
of clause (i).
‘‘(2) LIMITATION.—Such term shall not in-
clude—
‘‘(A) any interest in a trade or business
the principal place of business of which is not
located in the United States,
‘‘(B) any interest in—
‘‘(i) an entity which had, or
‘‘(ii) an entity which is a member of
a controlled group (as defined in section
267(f)(1)) which had,
readily tradable stock or debt on an established
securities market or secondary market (as de-
fined by the Secretary) within 3 years of the
date of the decedent’s death,
‘‘(C) any interest in a trade or business
not described in section 542(c)(2), if more than
35 percent of the adjusted ordinary gross in-
come of such trade or business for the taxable
year which includes the date of the decedent’s
death would qualify as personal holding com-
pany income (as defined in section 543(a)), and
‘‘(D) that portion of an interest in a trade
or business that is attributable to cash or mar-
ketable securities, or both, in excess of the rea-
sonably expected day-to-day working capital
needs of such trade or business.
‘‘(3) OWNERSHIP RULES.—
‘‘(A) INDIRECT
OWNERSHIP.—For pur-
poses of determining indirect ownership under
paragraph (1), rules similar to the rules of
paragraphs (2) and (3) of section 447(e) shall
apply.
‘‘(B) TIERED ENTITIES.—For purposes of
this section, if—
‘‘(i) a qualified family-owned business
holds an interest in another trade or busi-
ness, and
‘‘(ii) such interest would be a qualified
family-owned business interest if held di-
rectly by the family (or families) holding
interests in the qualified family-owned
business meeting the requirements of para-
graph (1)(B),
then the value of the qualified family-owned
business shall include the portion attributable
to the interest in the other trade or business.
‘‘(f) TAX TREATMENT OF FAILURE TO MATERIALLY
PARTICIPATE IN BUSINESS OR DISPOSITIONS OF INTER-
ESTS.—
‘‘(1) IN GENERAL.—There is imposed an addi-
tional estate tax if, within 10 years after the date
of the decedent’s death and before the date of the
qualified heir’s death—
‘‘(A) the qualified heir ceases to use for
the qualified use (within the meaning of section
2032A(c)(6)(B)) the qualified family-owned
business interest which was acquired (or
passed) from the decedent, or
‘‘(B) the qualified heir disposes of any por-
tion of a qualified family-owned business inter-
est (other than by a disposition to a member of
the qualified heir’s family or through a qualified
conservation 
contribution 
under 
section
170(h)).
‘‘(2) ADDITIONAL ESTATE TAX.—The amount
of the additional estate tax imposed by paragraph
(1) shall be equal to—
‘‘(A) the applicable percentage of adjusted
tax difference attributable to the qualified fam-
ily-owned business interest (as determined
under rules similar to the rules of section
2032A(c)(2)(B)), plus
‘‘(B) interest on the amount determined
under subparagraph (A) at the annual rate of
4 percent for the period beginning on the date
the estate tax liability was due under this chap-
ter and ending on the date such additional es-
tate tax is due.
‘‘(3) APPLICABLE PERCENTAGE.—For purposes
of paragraph (2), the term ‘applicable percentage’
section (a) shall be increased each place it appears
by an amount equal to—
‘‘(A) $1,500,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1995’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
shall be rounded to the nearest multiple of $10,000.
‘‘(4) APPLICABLE RULES.—Rules similar to the
following rules shall apply:
‘‘(A) Section 2032A(b)(4) (relating to de-
cedents who are retired or disabled).
‘‘(B) Section 2032A(b)(5) (relating to spe-
cial rules for surviving spouses).
‘‘(C) Section 2032A(c)(2)(D) (relating to
partial dispositions).
‘‘(D) Section 2032A(c)(3) (relating to only
1 additional tax imposed with respect to any 1
portion).
‘‘(E) Section 2032A(c)(4) (relating to due
date).
‘‘(F) Section 2032A(c)(5) (relating to li-
ability for tax; furnishing of bond).
‘‘(G) Section 2032A(c)(7) (relating to no
tax if use begins within 2 years; active manage-
ment by eligible qualified heir treatment as ma-
terial participation).
‘‘(H) Section 2032A(e)(10) (relating to
community property).
‘‘(I) Section 2032A(e)(14) (relating to
treatment of replacement property acquired in
section 1031 or 1033 transactions).
‘‘(J) Section 2032A(f) (relating to statute
of limitations).
‘‘(K) Section 6166(b)(3) (relating to farm-
houses and certain other structures taken into
account).
‘‘(L) Subparagraphs (B), (C), and (D) of
section 6166(g)(1) (relating to acceleration of
payment).’’
(b) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter A of chapter 11 of the Internal
Revenue Code of 1986 is amended by inserting after the
item relating to section 2033 the following new item:
‘‘Sec. 2033A. Family-owned business exclusion.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying after
December 31, 1995.
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