(2) ADJUSTMENT.—Subsection (b) of section
734 of such Code is amended by inserting ‘‘or unless
there is a substantial downward adjustment’’ after
‘‘section 754 is in effect’’.
(3) SUBSTANTIAL DOWNWARD ADJUSTMENT.—
Section 734 of such Code is amended by adding at
the end the following new subsection:
‘‘(d) SUBSTANTIAL DOWNWARD ADJUSTMENT.—For
purposes of this section, there is a substantial downward
adjustment with respect to a distribution if the sum of
the amounts described in subparagraphs (A) and (B) of
subsection (b)(2) exceeds 10 percent of the aggregate ad-
justed basis of partnership property immediately after the
distribution.’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 734 of
such Code is amended to read as follows:
‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED
PARTNERSHIP PROPERTY WHERE SECTION
754 ELECTION OR SUBSTANTIAL BASIS RE-
DUCTION.’’
(B) The table of sections for subpart B of
part II of subchapter K of chapter 1 of such
Code is amended by striking the item relating
to section 734 and inserting the following new
item:
‘‘Sec. 734. Adjustment to basis of undistributed partnership prop-
erty where section 754 election or substantial basis
reduction.’’
(d) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made
by subsection (a) shall apply to contributions made
after the date of the enactment of this Act.
(2) SUBSECTION (b).—The amendments made
by subsection (a) shall apply to transfers after the
date of the enactment of this Act.
(3) SUBSECTION (c).—The amendments made
by subsection (a) shall apply to distributions after
the date of the enactment of this Act.
PART III—ESTATE AND GIFT TAX OFFSETS
SEC. 276. VALUATION RULES FOR TRANSFERS INVOLVING
NONBUSINESS ASSETS.
(a) IN GENERAL.—Section 2031 of the Internal Rev-
enue Code of 1986 (relating to definition of gross estate)
is amended by redesignating subsection (d) as subsection
(e) and by inserting after subsection (c) the following new
subsection:
‘‘(d) VALUATION RULES FOR CERTAIN TRANSFERS
OF NONBUSINESS ASSETS.—For purposes of this chapter
and chapter 12—
‘‘(1) IN GENERAL.—In the case of the transfer
of any interest in an entity other than an interest
which is actively traded (within the meaning of sec-
tion 1092), the value of such interest shall be deter-
mined by taking into account—
‘‘(A) the value of such interest’s propor-
tionate share of the nonbusiness assets of such
entity (and no valuation discount shall be al-
lowed with respect to such nonbusiness assets),
plus
‘‘(B) the value of such entity determined
without regard to the value taken into account
under subparagraph (A).
‘‘(2) NONBUSINESS ASSETS.—For purposes of
this subsection—
‘‘(A) IN
GENERAL.—The term ‘nonbusi-
ness asset’ means any asset which is not used
in the active conduct of 1 or more trades or
businesses.
‘‘(B) EXCEPTION
FOR
CERTAIN
PASSIVE
ASSETS.—Except as provided in subparagraph
(C), a passive asset shall not be treated for pur-
poses of subparagraph (A) as used in the active
conduct of a trade or business unless—
‘‘(i) the asset is property described in
paragraph (1) or (4) of section 1221(a) or
is a hedge with respect to such property,
or
‘‘(ii) the asset is real property used in
the active conduct of 1 or more real prop-
erty trades or businesses (within the mean-
ing of section 469(c)(7)(C)) in which the
transferor materially participates and with
respect to which the transferor meets the
requirements of section 469(c)(7)(B)(ii).
For purposes of clause (ii), material participa-
tion shall be determined under the rules of sec-
tion 469(h), except that section 469(h)(3) shall
be applied without regard to the limitation to
farming activity.
‘‘(C) EXCEPTION
FOR
WORKING
CAP-
ITAL.—Any asset (including a passive asset)
which is held as a part of the reasonably re-
quired working capital needs of a trade or busi-
ness shall be treated as used in the active con-
duct of a trade or business.
‘‘(3) PASSIVE
ASSET.—For purposes of this
subsection, the term ‘passive asset’ means any—
‘‘(A) cash or cash equivalents,
‘‘(B) except to the extent provided by the
Secretary, stock in a corporation or any other
equity, profits, or capital interest in any entity,
‘‘(C) evidence of indebtedness, option, for-
ward or futures contract, notional principal con-
tract, or derivative,
‘‘(D) asset described in clause (iii), (iv), or
(v) of section 351(e)(1)(B),
‘‘(E) annuity,
‘‘(F) real property used in 1 or more real
property trades or businesses (as defined in sec-
tion 469(c)(7)(C)),
‘‘(G) asset (other than a patent, trade-
mark, or copyright) which produces royalty in-
come,
‘‘(H) commodity,
‘‘(I) collectible (within the meaning of sec-
tion 401(m)), or
‘‘(J) any other asset specified in regula-
tions prescribed by the Secretary.
‘‘(4) LOOK-THRU RULES.—
‘‘(A) IN GENERAL.—If a nonbusiness asset
of an entity consists of a 10-percent interest in
any other entity, this subsection shall be ap-
plied by disregarding the 10-percent interest