To amend the Internal Revenue Code of 1986 to provide for the immediate and permanent repeal of the estate tax on family-owned businesses and farms, and for other purposes.

January 7, 2003

Mrs. LINCOLN introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to provide for the immediate and permanent repeal of the estate tax on family-owned businesses and farms, and for other purposes.

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 `Estate Tax Repeal Acceleration (ExTRA) for Family-Owned Businesses and Farms Act'.

SEC. 2. REPEAL OF ESTATE TAX ON FAMILY-OWNED BUSINESSES AND FARMS.

(a) REPEAL OF QUALIFIED FAMILY-OWNED BUSINESS INTEREST- Part IV of subchapter A of chapter 11 of the Internal Revenue Code of 1986 (relating to taxable estate) is amended by striking section 2057.

(b) CARRYOVER BUSINESS INTEREST EXCLUSION- Part IV of subchapter A of chapter 11 of the Internal Revenue Code of 1986 (relating to taxable estate) is amended by inserting after section 2058 the following new section:

`SEC. 2059. CARRYOVER BUSINESS INTERESTS.

`(a) GENERAL RULES-

`(1) ALLOWANCE OF DEDUCTION- For purposes of the tax imposed by section 2001, in the case of an estate of a decedent to which this section applies, the value of the taxable estate shall be determined by deducting from the value of the gross estate the adjusted value of the carryover business interests of the decedent which are described in subsection (b)(2).

`(2) APPLICATION OF CARRYOVER BASIS RULES- With respect to the adjusted value of the carryover business interests of the decedent which are described in subsection (b)(2), the rules of section 1023 shall apply.

`(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 executor elects the application of this section under rules similar to the rules of paragraphs (1) and (3) of section 2032A(d) and files the agreement referred to in subsection (e), 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 during which--

`(i) the carryover business interests described in paragraph (2) 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, a member of the decedent's family, or a qualified heir in the operation of the business to which such interests relate.

`(2) INCLUDIBLE CARRYOVER BUSINESS INTERESTS- The carryover business interests described in this paragraph are the interests which--

`(A) are included in determining the value of the gross estate (other than qualified spousal property with respect to which an aggregate spousal property basis increase is allocated under section 1023(c)),

`(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)), and

`(C) are subject to the election under paragraph (1)(B).

`(3) RULES REGARDING MATERIAL PARTICIPATION- For purposes of paragraph (1)(C)(ii)--

`(A) in the case a surviving spouse, material participation by such spouse may be satisfied under rules similar to the rules under section 2032A(b)(5),

`(B) in the case of a carryover business interest in an entity carrying on multiple trades or businesses, material participation in each trade or business is satisfied by material participation in the entity or in 1 or more of the multiple trades or businesses, and

`(C) in the case of a lending and finance business (as defined in section 6166(b)(10)(B)(ii)), material participation is satisfied under the rules under subclause (I) or (II) of section 6166(b)(10)(B)(i).

`(c) ADJUSTED VALUE OF THE CARRYOVER BUSINESS INTERESTS- For purposes of this section--

`(1) IN GENERAL- The adjusted value of any carryover business interest is the value of such interest for purposes of this chapter (determined without regard to this section), as adjusted under paragraph (2).

`(2) ADJUSTMENT FOR PREVIOUS TRANSFERS- The Secretary may increase the value of any carryover business interest by that portion of those assets transferred from such carryover business interest to the decedent's taxable estate within 3 years before the date of the decedent's death.

`(d) CARRYOVER BUSINESS INTEREST-

`(1) IN GENERAL- For purposes of this section, the term `carryover business interest' 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 decedent'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.

For purposes of the preceding sentence, a decedent shall be treated as engaged in a trade or business if any member of the decedent's family is engaged in such trade or business.

`(2) LENDING AND FINANCE BUSINESS- For purposes of this section, any asset used in a lending and finance business (as defined in section 6166(b)(10)(B)(ii)) shall be treated as an asset which is used in carrying on a trade or business.

`(3) LIMITATION- Such term shall not include--

`(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 entity was a member was readily tradable on an established securities market or secondary market (as defined by the Secretary) at any time,

`(C) that portion of an interest in an entity transferred by gift to such interest within 3 years before the date of the decedent's death, and

`(D) that portion of an interest in an entity which is attributable to cash or marketable securities, or both, in any amount in excess of the reasonably anticipated business needs of such entity.

In any proceeding before the United States Tax Court involving a notice of deficiency based in whole or in part on the allegation that cash or marketable securities, or both, are accumulated in an amount in excess of the reasonably anticipated business needs of such entity, the burden of proof with respect to such allegation shall be on the Secretary to the extent such cash or marketable securities are less than 35 percent of the value of the interest in such entity.

`(4) RULES REGARDING OWNERSHIP-

`(A) OWNERSHIP OF ENTITIES- For purposes 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 decedent, any member of the decedent's family, any qualified heir, or any member of any qualified heir's family is treated as holding an interest in any other trade or business--

`(i) such ownership interest in the other trade or business shall be disregarded in determining if the ownership interest in the first trade or business is a carryover business interest, and

`(ii) this section shall be applied separately in determining if such interest in any other trade or business is a carryover business interest.

`(C) INDIVIDUAL OWNERSHIP RULES- For purposes of this section, an interest owned, directly or indirectly, by or for an entity described in paragraph (1)(B) shall be considered as being owned proportionately by or for the entity'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.

`(e) AGREEMENT- The agreement referred to in this subsection is a written agreement signed by each person in being who has an interest (whether or not in possession) in any property designated in such agreement consenting to the application of this section with respect to such property.

`(f) OTHER DEFINITIONS AND APPLICABLE RULES- For purposes of this section--

`(1) QUALIFIED HEIR- The term `qualified heir' means a United States citizen who is--

`(A) described in section 2032A(e)(1), or

`(B) an active employee of the trade or business to which the carryover 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 decedents who are retired or disabled).

`(B) Section 2032A(e)(10) (relating to community property).

`(C) Section 2032A(e)(14) (relating to treatment of replacement property acquired in section 1031 or 1033 transactions).

`(D) Section 2032A(g) (relating to application to interests in partnerships, corporations, and trusts).

`(4) SAFE HARBOR FOR ACTIVE ENTITIES HELD BY ENTITY CARRYING ON A TRADE OR BUSINESS- For purposes of this section, if--

`(A) an entity carrying on a trade or business owns 20 percent or more in value of the voting interests of another entity, or such other entity has 15 or fewer owners, and

`(B) 80 percent or more of the value of the assets of each such entity is attributable to assets used in an active business operation,

then the requirements under subsections (b)(1)(C)(ii) and (d)(3)(D) shall be met with respect to an interest in such an entity.'.

(c) MODIFICATION OF TREATMENT OF MARITAL DEDUCTION; LIMITATION ON STEP-UP IN BASIS- Section 2056 of the Internal Revenue Code of 1986 (relating to bequests, etc., to surviving spouses) is amended by adding at the end the following new subsection:

`(e) APPLICATION OF CARRYOVER BASIS RULES- With respect to the value of the interests of the decedent which are described in subsection (a), the rules of section 1023 shall apply.'.

(d) CARRYOVER BASIS RULES FOR CARRYOVER BUSINESS INTERESTS AND SPOUSAL PROPERTY- Part II of subchapter O of chapter 1 of the Internal Revenue Code of 1986 (relating to basis rules of general application) is amended by inserting after section 1022 the following new section:

`SEC. 1023. TREATMENT OF CARRYOVER BUSINESS INTERESTS AND SPOUSAL PROPERTY.

`(a) IN GENERAL- Except as otherwise provided in this section--

`(1) qualified property acquired from a decedent shall be treated for purposes of this subtitle as transferred by gift, and

`(2) the basis of the person acquiring qualified property from such a decedent shall be the lesser of--

`(A) the adjusted basis of the decedent, or

`(B) the fair market value of the property at the date of the decedent's death.

`(b) QUALIFIED PROPERTY- For purposes of this section, the term `qualified property' means--

`(1) the carryover business interests of the decedent with respect to which an election is made under section 2059(b)(1)(B), and

`(2) the qualified spousal property.

`(c) ADDITIONAL BASIS INCREASE FOR PROPERTY ACQUIRED BY SURVIVING SPOUSE-

`(1) IN GENERAL- In the case of property to which this subsection applies and which is qualified spousal property, the basis of such property under subsection (a) shall be increased by its spousal property basis increase.

`(2) SPOUSAL PROPERTY BASIS INCREASE- For purposes of this subsection--

`(A) IN GENERAL- The spousal property basis increase for property referred to in paragraph (1) is the portion of the aggregate spousal property basis increase which is allocated to the property pursuant to this section.

`(B) AGGREGATE SPOUSAL PROPERTY BASIS INCREASE- In the case of any estate, the aggregate spousal property basis increase is $3,000,000.

`(3) QUALIFIED SPOUSAL PROPERTY- For purposes of this section, the term `qualified spousal property' means any interest in property which passes or has passed from the decedent to the decedent's surviving spouse with respect to which a deduction is allowed under section 2056.

`(4) DEFINITIONS AND SPECIAL RULES-

`(A) PROPERTY TO WHICH SUBSECTION APPLIES- The basis of property acquired from a decedent may be increased under this subsection only if the property was owned by the decedent at the time of death.

`(B) RULES RELATING TO OWNERSHIP-

`(i) JOINTLY HELD PROPERTY- In the case of property which was owned by the decedent and another person as joint tenants with right of survivorship or tenants by the entirety--

`(I) if the only such other person is the surviving spouse, the decedent shall be treated as the owner of only 50 percent of the property,

`(II) in any case (to which subclause (I) does not apply) in which the decedent furnished consideration for the acquisition of the property, the decedent shall be treated as the owner to the extent of the portion of the property which is proportionate to such consideration, and

`(III) in any case (to which subclause (I) does not apply) in which the

property has been acquired by gift, bequest, devise, or inheritance by the decedent and any other person as joint tenants with right of survivorship and their interests are not otherwise specified or fixed by law, the decedent shall be treated as the owner to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants with right of survivorship.

`(ii) REVOCABLE TRUSTS- The decedent shall be treated as owning property transferred by the decedent during life to a qualified revocable trust (as defined in section 645(b)(1)).

`(iii) POWERS OF APPOINTMENT- The decedent shall not be treated as owning any property by reason of holding a power of appointment with respect to such property.

`(iv) COMMUNITY PROPERTY- Property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State or possession of the United States or any foreign country shall be treated for purposes of this section as owned by, and acquired from, the decedent if at least one-half of the whole of the community interest in such property is treated as owned by, and acquired from, the decedent without regard to this clause.

`(C) PROPERTY ACQUIRED BY DECEDENT BY GIFT WITHIN 3 YEARS OF DEATH-

`(i) IN GENERAL- This subsection shall not apply to property acquired by the decedent by gift or by inter vivos transfer for less than adequate and full consideration in money or money's worth during the 3-year period ending on the date of the decedent's death.

`(ii) EXCEPTION FOR CERTAIN GIFTS FROM SPOUSE- Clause (i) shall not apply to property acquired by the decedent from the decedent's spouse unless, during such 3-year period, such spouse acquired the property in whole or in part by gift or by inter vivos transfer for less than adequate and full consideration in money or money's worth.

`(D) STOCK OF CERTAIN ENTITIES- This subsection shall not apply to--

`(i) stock or securities of a foreign personal holding company,

`(ii) stock of a DISC or former DISC,

`(iii) stock of a foreign investment company, or

`(iv) stock of a passive foreign investment company unless such company is a qualified electing fund (as defined in section 1295) with respect to the decedent.

`(E) FAIR MARKET VALUE LIMITATION- The adjustments under this subsection shall not increase the basis of any interest in property acquired from the decedent above its fair market value in the hands of the decedent as of the date of the decedent's death.

`(d) PROPERTY ACQUIRED FROM THE DECEDENT- For purposes of this section, the following property shall be considered to have been acquired from the decedent:

`(1) Property acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent.

`(2) Property transferred by the decedent during his lifetime--

`(A) to a qualified revocable trust (as defined in section 645(b)(1)), or

`(B) to any other trust with respect to which the decedent reserved the right to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust.

`(3) Any other property passing from the decedent by reason of death to the extent that such property passed without consideration.

`(e) COORDINATION WITH SECTION 691- This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.

`(f) CERTAIN LIABILITIES DISREGARDED-

`(1) IN GENERAL- In determining whether gain is recognized on the acquisition of property--

`(A) from a decedent by a decedent's estate or any beneficiary other than a tax-exempt beneficiary, and

`(B) from the decedent's estate by any beneficiary other than a tax-exempt beneficiary,

and in determining the adjusted basis of such property, liabilities in excess of basis shall be disregarded.

`(2) TAX-EXEMPT BENEFICIARY- For purposes of paragraph (1), the term `tax-exempt beneficiary' means--

`(A) the United States, any State or political subdivision thereof, any possession of the United States, any Indian tribal government (within the meaning of section 7871), or any agency or instrumentality of any of the foregoing,

`(B) an organization (other than a cooperative described in section 521) which is exempt from tax imposed by chapter 1,

`(C) any foreign person or entity (within the meaning of section 168(h)(2)), and

`(D) to the extent provided in regulations, any person to whom property is transferred for the principal purpose of tax avoidance.

`(g) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.'.

(e) CLERICAL AMENDMENTS-

(1) The table of sections for part IV of subchapter A of chapter 11 of the Internal Revenue Code of 1986 is amended by striking the item relating to section 2057 and by inserting after the item relating to section 2058 the following new item:

`Sec. 2059. Carryover business exclusion.'.

(2) The table of sections for part II of subchapter O of chapter 1 of such Code is amended by inserting after the item relating to section 1022 the following new item:

`Sec. 1023. Treatment of carryover business interests and spousal property.'.

(f) EFFECTIVE DATES- The amendments made by this section shall apply to estates of decedents dying, and gifts made--

(1) after December 31, 2003, and before January 1, 2010, and

(2) after December 31, 2011.

END