To amend the Internal Revenue Code of 1986 to exclude from gross income gain on the sale of a family farming business to a family member.

January 29, 2003

Mr. GREEN of Wisconsin (for himself, Mr. KENNEDY of Minnesota, Mr. NETHERCUTT, Mr. BAKER, Mr. MCHUGH, and Mr. POMEROY) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to exclude from gross income gain on the sale of a family farming business to a family member.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Family Farm Protection Act'.

SEC. 2. EXCLUSION OF GAIN ON SALE OF FAMILY FARMING BUSINESS TO FAMILY MEMBER.

(a) IN GENERAL- Part I of subchapter P of chapter 1 of the Internal Revenue Code of 1986 (relating to treatment of capital gains) is amended by adding at the end the following new section:

`SEC. 1203. EXCLUSION OF GAIN ON SALE OF FAMILY FARM TO FAMILY MEMBER.

`(a) IN GENERAL- At the election of the taxpayer, gross income shall not include any gain from the sale of a qualified family farm interest to a member of the taxpayer's family if--

`(1) at all times during the 5-year period ending on the date of such sale, there was material participation by the taxpayer or a member of the taxpayer's family in the operation of the farming business to which such interest relates, and

`(2)(A) such interest is being acquired by a member of the taxpayer's family, and

`(B) such member agrees--

`(i) for the 5-year period beginning on the day after the date of such sale, to materially participate in the operation of the farming business to which such interest relates, and

`(ii) to the provisions of subsection (b).

`(b) RECAPTURE OF TAX IF INTEREST CEASES TO BE USED IN A FARMING BUSINESS-

`(1) IN GENERAL- If, during any year within the 5-year period beginning on the date of such sale--

`(A) a qualified family farm interest with respect to which an election is made under subsection (a) is disposed of, or otherwise ceases to be a qualified family farm interest of the member of the family who acquired such interest, other than through the bankruptcy or insolvency of such member of the family, or

`(B) the member of the family who acquired such interest fails to materially participate (directly or through a family member of such member) in the operation of the farming business to which such interest relates,

then the tax imposed on such member of the family under this subtitle for the year shall be increased by an amount equal to the recapture percentage of the excluded tax amount, plus interest on the amount of such increase at the underpayment rate established under section 6621 for the period beginning on the date the return of tax for the year of such sale was due under this chapter (without regard to extensions thereof) and ending on the date the increase in tax under this subsection is due (without regard to extensions thereof).

`(2) RECAPTURE PERCENTAGE- For purposes of paragraph (1), the recapture percentage shall be determined under the following table:

The recapture

percentage is:

1

100

2

80

3

60

4

40

5

20.

`(3) EXCLUDED TAX AMOUNT- For purposes of paragraph (1), the term `excluded tax amount' means the excess of--

`(A) the amount of tax that would have been imposed on the taxpayer under this subtitle for the taxable year ending with or within which the sale for which an election was made under subsection (a), over

`(B) the amount of tax imposed on the taxpayer under this subtitle for such taxable year.

This paragraph shall be applied without regard to the installment method of accounting or averaging of farm income under section 1301.

`(c) DEFINITIONS- For purposes of this section--

`(1) QUALIFIED FAMILY FARM INTEREST- The term `qualified family farm interest' means an interest which is a qualified family-owned business interest in a farming business.

`(2) QUALIFIED FAMILY-OWNED BUSINESS INTEREST- The term `qualified family-owned business interest' has the meaning given such term by section 2057(e), determined by substituting `taxpayer' for `decedent' each place it appears.

`(3) FARMING BUSINESS- The term `farming business' has the meaning given such term by section 263A(e)(4).

`(4) MEMBER OF THE FAMILY- The term `member of the family' has the meaning given such term by section 2032A(e).

`(5) MATERIAL PARTICIPATION- The term `material participation' has the meaning given such term by section 2032A(e)(6).'.

(b) CLERICAL AMENDMENT- The table of sections for part I of subchapter P of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

`Sec. 1203. Exclusion of gain on sale of family farm to family member.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to sales occurring on or after the date of enactment of this Act.

END