I
105TH CONGRESS
1ST SESSION
H. R. 1583
To amend the Internal Revenue Code of 1986 to provide an exclusion from
estate tax for family-owned businesses.
IN THE HOUSE OF REPRESENTATIVES
MAY 13, 1997
Ms. HOOLEY of Oregon (for herself and Mr. COOKSEY) 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
an exclusion from estate tax for family-owned businesses.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Family Business Pres-
ervation Act’’.
SEC. 2. FAMILY-OWNED BUSINESS EXCLUSION.
(a) IN GENERAL.—Part III of subchapter A of chap-
ter 11 (relating to gross estate) is amended by inserting
after section 2033 the following new section:
‘‘SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.
‘‘(a) IN GENERAL.—In the case of an estate of a de-
cedent to which this section applies, the value of the gross
estate shall not include the lesser of—
‘‘(1) the adjusted value of the qualified family-
owned business interests of the decedent otherwise
includible in the estate, or
‘‘(2) $1,200,000.
‘‘(b) ESTATES TO WHICH SECTION APPLIES.—
‘‘(1) IN GENERAL.—This section shall apply to
an estate if—
‘‘(A) the decedent was (at the date of the
decedent’s death) a citizen or resident of the
United States,
‘‘(B) the sum of—
‘‘(i) the adjusted value of the qualified
family-owned business interests described
in paragraph (2), plus
‘‘(ii) the amount of the gifts of such
interests determined under paragraph (3),
exceeds 50 percent of the adjusted gross estate,
and
‘‘(C) during the 8-year period ending on
the date of the decedent’s death there have
been periods aggregating 5 years or more dur-
ing which—
‘‘(i) such interests were owned by the
decedent or a member of the decedent’s
family, and
‘‘(ii) 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.
‘‘(2) INCLUDIBLE
QUALIFIED
FAMILY-OWNED
BUSINESS INTERESTS.—The qualified family-owned
business interests described in this paragraph are
the interests which—
‘‘(A) are included in determining the value
of the gross estate (without regard to this sec-
tion), and
‘‘(B) are acquired by any qualified heir
from, or passed to any qualified heir from, the
decedent (within the meaning of section
2032A(e)(9)).
‘‘(3) INCLUDIBLE GIFTS OF INTERESTS.—The
amount of the gifts of qualified family-owned busi-
ness interests determined under this paragraph is
the excess of—
‘‘(A) the sum of—
‘‘(i) the amount of such gifts from the
decedent to members of the decedent’s
family taken into account under subsection
2001(b)(1)(B), plus
‘‘(ii) the amount of such gifts other-
wise excluded under section 2503(b),
to the extent such interests are continuously
held by members of such family (other than the
decedent’s spouse) between the date of the gift
and the date of the decedent’s death, over
‘‘(B) the amount of such gifts from the de-
cedent to members of the decedent’s family oth-
erwise included in the gross estate.
‘‘(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
paragraph (3) or (4) of section 2053(a), and
‘‘(2) increased by the excess of—
‘‘(A) the sum of—
‘‘(i) the amount of gifts determined
under subsection (b)(3), plus
‘‘(ii) the amount (if more than de
minimis) of other transfers from the dece-
dent to the decedent’s spouse (at the time
of the transfer) within 10 years of the date
of the decedent’s death, plus
‘‘(iii) the amount of other gifts (not
included under clause (i) or (ii)) from the
decedent within 3 years of such date, other
than gifts to members of the decedent’s
family otherwise excluded under section
2503(b), over
‘‘(B) the sum of the amounts described in
clauses (i), (ii), and (iii) of subparagraph (A)
which are otherwise includible in the gross es-
tate.
For purposes of the preceding sentence, the Secretary may
provide that de minimis gifts to persons other than mem-
bers of the decedent’s family shall not be taken into ac-
count.
‘‘(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 paragraph
(3) or (4) of section 2053(a), 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
clause (i) or (ii), to the extent such indebted-
ness 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 in an entity carrying on
a trade or business, if—
‘‘(i) at least—
‘‘(I) 50 percent of such entity is
owned (directly or indirectly) by the
decedent and members of the dece-
dent’s family,
‘‘(II) 70 percent of such entity is
so owned by members of 2 families, or
‘‘(III) 90 percent of such entity
is so owned by members of 3 families,
and
‘‘(ii) for purposes of subclause (II) or
(III) of clause (i), at least 30 percent of
such entity is so owned by the decedent
and members of the decedent’s family.
‘‘(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 an entity, if the stock
or debt of such entity or a controlled group (as
defined in section 267(f)(1)) of which such en-
tity was a member was readily tradable on an
established securities market or secondary mar-
ket (as defined by the Secretary) at any time
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)),
‘‘(D) that portion of an interest in a trade
or business that is attributable to—
‘‘(i) cash or marketable securities, or
both, in excess of the reasonably expected
day-to-day working capital needs of such
trade or business, and
‘‘(ii) any other assets of the trade or
business (other than assets used in the ac-
tive conduct of a trade or business de-
scribed in section 542(c)(2)), the income of
which is described in section 543(a) or in
subparagraph (B), (C), (D), or (E) of sec-
tion 954(c)(1) (determined by substituting
‘trade or business’ for ‘controlled foreign
corporation’).
‘‘(3) RULES REGARDING OWNERSHIP.—
‘‘(A) OWNERSHIP OF ENTITIES.—For pur-
poses of paragraph (1)(B)—
‘‘(i) CORPORATIONS.—Ownership of a
corporation shall be determined by the
holding of stock possessing the appropriate
percentage of the total combined voting
power of all classes of stock entitled to vote
and the appropriate percentage of the total
value of shares of all classes of stock.
‘‘(ii) PARTNERSHIPS.—Ownership of a
partnership shall be determined by the
owning of the appropriate percentage of
the capital interest in such partnership.
‘‘(B) OWNERSHIP OF TIERED ENTITIES.—
For purposes of this section, if by reason of
holding an interest in a trade or business, a de-
cedent, any member of the decedent’s family,
any qualified heir, or any member of any quali-
fied heir’s family is treated as holding an inter-
est in any other trade or business—
‘‘(i) such ownership interest in the
other trade or business shall be dis-
regarded in determining if the ownership
interest in the first trade or business is a
qualified family-owned business interest,
and
‘‘(ii) this section shall be applied sepa-
rately in determining if such interest in
any other trade or business is a qualified
family-owned business interest.
‘‘(C) INDIVIDUAL
OWNERSHIP
RULES.—
For purposes of this section, an interest owned,
directly or indirectly, by or for an entity de-
scribed in paragraph (1)(B) shall be considered
as being owned proportionately by or for the en-
tity’s shareholders, partners, or beneficiaries. A
person shall be treated as a beneficiary of any
trust only if such person has a present interest
in such trust.
‘‘(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 material participation require-
ments described in section 2032A(c)(6)(B) are
not met with respect to the qualified family-
owned business interest which was acquired (or
passed) from the decedent,
‘‘(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)),
‘‘(C) the qualified heir loses United States
citizenship (within the meaning of section 877)
or with respect to whom an event described in
subparagraph (A) or (B) of section 877(e)(1)
occurs, and such heir does not comply with the
requirements of subsection (g), or
‘‘(D) the principal place of business of a
trade or business of the qualified family-owned
business interest ceases to be located in the
United States.
‘‘(2) ADDITIONAL ESTATE TAX.—
‘‘(A) IN
GENERAL.—The amount of the
additional estate tax imposed by paragraph (1)
shall be equal to—
‘‘(i) the applicable percentage of the
adjusted tax difference attributable to the
qualified family-owned business interest
(as determined under rules similar to the
rules of section 2032A(c)(2)(B)), plus
‘‘(ii) interest on the amount deter-
mined under clause (i) at the underpay-
ment rate established under section 6621
for the period beginning on the date the
estate tax liability was due under this
chapter and ending on the date such addi-
tional estate tax is due.
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of this paragraph, the applicable per-
centage shall be determined under the following
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 ...............................................................................................
8 ...............................................................................................
9 ...............................................................................................
10 .............................................................................................
20.
‘‘(g) SECURITY REQUIREMENTS
FOR NONCITIZEN
QUALIFIED HEIRS.—
‘‘(1) IN GENERAL.—Except upon the applica-
tion of subparagraph (F) or (M) of subsection
(h)(3), if a qualified heir is not a citizen of the Unit-
ed States, any interest under this section passing to
or acquired by such heir (including any interest held
by such heir at a time described in subsection
(f)(1)(C)) shall be treated as a qualified family-
owned business interest only if the interest passes or
is acquired (or is held) in a qualified trust.
‘‘(2) QUALIFIED TRUST.—The term ‘qualified
trust’ means a trust—
‘‘(A) which is organized under, and gov-
erned by, the laws of the United States or a
State, and
‘‘(B) except as otherwise provided in regu-
lations, with respect to which the trust instru-
ment requires that at least 1 trustee of the
trust be an individual citizen of the United
States or a domestic corporation.
‘‘(h) 
OTHER
DEFINITIONS
AND
APPLICABLE
RULES.—For purposes of this section—
‘‘(1) QUALIFIED
HEIR.—The term ‘qualified
heir’—
‘‘(A) has the meaning given to such term
by section 2032A(e)(1), and
‘‘(B) includes any active employee of the
trade or business to which the qualified family-
owned business interest relates if such employee
has been employed by such trade or business
for a period of at least 10 years before the date
of the decedent’s death.
‘‘(2) MEMBER
OF
THE
FAMILY.—The term
‘member of the family’ has the meaning given to
such term by section 2032A(e)(2).
‘‘(3) 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 treated as mate-
rial 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).
‘‘(M) Section 6324B (relating to special
lien for additional estate tax).
‘‘(4) COORDINATION WITH OTHER ESTATE TAX
BENEFITS.—If there is a reduction in the value of
the gross estate under this section—
‘‘(A) the dollar limitation applicable under
section 2032A(a)(2), and
‘‘(B) the $1,000,000 amount under section
6601(j)(3) (as adjusted),
shall each be reduced (but not below zero) by the
amount of such reduction.
‘‘(i) 
INFLATION
ADJUSTMENT
OF
EXCLUSION
AMOUNT.—
‘‘(1) IN GENERAL.—In the case of a taxable
year beginning after December 31, 1998, the dollar
amount in subsection (a)(2) shall be increased by an
amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, deter-
mined by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
‘‘(2) ROUNDING.—If any amount as adjusted
under paragraph (1) is not a multiple of $1,000
such amount shall be rounded to the next lowest
multiple of $1,000.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter A of chapter 11 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, 1997.
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