§ 2057. Family-owned business interests
(a)
General rule
(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 qualified family-owned business interests of the decedent which are described in subsection (b)(2).
(3)
Coordination with unified credit
(A)
In general
Except as provided in subparagraph (B), if this section applies to an estate, the applicable exclusion amount under section
2010 shall be $625,000.
(B)
Increase in unified credit if deduction is less than $675,000
If the deduction allowed by this section is less than $675,000, the amount of the applicable exclusion amount under section
2010 shall be increased (but not above the amount which would apply to the estate without regard to this section) by the excess of $675,000 over the amount of the deduction allowed.
(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 and files the agreement referred to in subsection (h),
(C)
the sum of—
(i)
the adjusted value of the qualified family-owned business interests described in paragraph (2), plus
exceeds 50 percent of the adjusted gross estate, and
(2)
Includible qualified family-owned business interests
The qualified family-owned business interests described in this paragraph are the interests which—
(3)
Includible gifts of interests
The amount of the gifts of qualified family-owned business interests determined under this paragraph is the sum of—
(A)
the amount of such gifts from the decedent to members of the decedent’s family taken into account under section
2001
(b)(1)(B), plus
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.
(c)
Adjusted gross estate
For purposes of this section, the term “adjusted gross estate” means the value of the gross estate—
(2)
increased by the excess of—
(A)
the sum of—
(B)
the sum of the amounts described in clauses (i), (ii), and (iii) of subparagraph (A) which are otherwise includible in the gross estate.
For purposes of the preceding sentence, the Secretary may provide that de minimis gifts to persons other than members of the decedent’s family shall not be taken into account.
(d)
Adjusted value of the qualified family-owned business interests
For purposes of this section, 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 section), reduced by the excess of—
(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 educational and medical expenses of the decedent, the decedent’s spouse, or the decedent’s dependents (within the meaning of section
152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), plus
(e)
Qualified family-owned business interest
(1)
In general
For purposes of this section, the term “qualified family-owned business interest” means—
(B)
an interest in an entity carrying on a trade or business, if—
(i)
at least—
(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)
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 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 income of such trade or business for the taxable year which includes the date of the decedent’s death would qualify as personal holding company income (as defined in section
543
(a) without regard to paragraph (2)(B) thereof) if such trade or business were a corporation,
(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 active conduct of a trade or business described in section
542
(c)(2)), which produce, or are held for the production of, personal holding company income (as defined in subparagraph (C)) or income described in section
954
(c)(1) (determined without regard to subparagraph (A) thereof and by substituting “trade or business” for “controlled foreign corporation”).
In the case of a lease of property on a net cash basis by the decedent to a member of the decedent’s family, income from such lease shall not be treated as personal holding company income for purposes of subparagraph (C), and such property shall not be treated as an asset described in subparagraph (D)(ii), if such income and property would not be so treated if the lessor had engaged directly in the activities engaged in by the lessee with respect to such property.
(3)
Rules regarding ownership
(A)
Ownership of entities
For purposes of paragraph (1)(B)—
(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—
(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.
(f)
Tax treatment of failure to materially participate in business or dispositions of interests
(1)
In general
There is imposed an additional 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 requirements 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 portion of a qualified family-owned business interest (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
(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, plus
(ii)
interest on the amount determined under clause (i) at the underpayment 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 additional estate tax is due.
(B)
Applicable percentage
For purposes of this paragraph, the applicable percentage 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
80
8
60
9
40
10
20.
(C)
Adjusted tax difference
For purposes of subparagraph (A)—
(i)
In general
The adjusted tax difference attributable to a qualified family-owned business interest is the amount which bears the same ratio to the adjusted tax difference with respect to the estate (determined under clause (ii)) as the value of such interest bears to the value of all qualified family-owned business interests described in subsection (b)(2).
(ii)
Adjusted tax difference with respect to the estate
For purposes of clause (i), the term “adjusted tax difference with respect to the estate” means the excess of what would have been the estate tax liability but for the election under this section over the estate tax liability. For purposes of this clause, the term “estate tax liability” means the tax imposed by section
2001 reduced by the credits allowable against such tax.
(3)
Use in trade or business by family members
A qualified heir shall not be treated as disposing of an interest described in subsection (e)(1)(A) by reason of ceasing to be engaged in a trade or business so long as the property to which such interest relates is used in a trade or business by any member of such individual’s family.
(g)
Security requirements for noncitizen qualified heirs
(1)
In general
Except upon the application of subparagraph (F) of subsection (i)(3), if a qualified heir is not a citizen of the United 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.
(h)
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 subsection (f) with respect to such property.
(i)
Other definitions and applicable rules
For purposes of this section—
(3)
Applicable rules
Rules similar to the following rules shall apply:
(G)
Section
2032A
(c)(7) (relating to no tax if use begins within 2 years; active management by eligible qualified heir treated as material participation).
(J)
Section
2032A
(e)(14) (relating to treatment of replacement property acquired in section
1031 or
1033 transactions).
(j)
Termination
This section shall not apply to the estates of decedents dying after December 31, 2003.
[1] See References in Text note below.