Title V

TITLE V -- ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS

SUBTITLE A -- ESTATE AND GIFT TAX PROVISIONS

SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ESTATE AND GIFT TAX PROVISIONS.

(a) Increase in Unified Estate and Gift Tax Credit. --

(1) Estate tax credit. --

(A) In general. -- Subsection (a) of section 2010 (relating to unified credit against estate tax) is amended by striking "$192,800" and inserting "the applicable credit amount".

(B) Applicable credit amount. -- Section 2010 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

"(c) Applicable Credit Amount. -- For purposes of this section, the applicable credit amount is the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were the applicable exclusion amount determined in accordance with the following table:

"In the case of
estates of decedents                    The applicable
dying, and gifts made, during:        exclusion amount is:

          1998                            $ 625,000
          1999                            $ 650,000
     2000 and 2001                        $ 675,000
     2002 and 2003                        $ 700,000
          2004                            $ 850,000
          2005                            $ 950,000
  2006 or thereafter                     $1,000,000."

(C) Estate tax returns. -- Paragraph (1) of section 6018(a) is amended by striking "$600,000" and inserting "the applicable exclusion amount in effect under section 2010(c) for the calendar year which includes the date of death".

(D) Phaseout of graduated rates and unified credit. -- Paragraph (2) of section 2001(c) is amended by striking "$21,040,000" and inserting "the amount at which the average tax rate under this section is 55 percent".

(E) Estates of nonresidents not citizens. -- Subparagraph (A) of section 2102(c)(3) is amended by striking "$192,800" and inserting "the applicable credit amount in effect under section 2010(c) for the calendar year which includes the date of death".

(2) Unified gift tax credit. -- Paragraph (1) of section 2505(a) is amended by striking "$192,800" and inserting "the applicable credit amount in effect under section 2010(c) for such calendar year".

(b) Alternate Valuation of Certain Farm, Etc., Real Property. -- Subsection (a) of section 2032A is amended by adding at the end the following new paragraph:

"(3) Inflation adjustment. -- In the case of estates of decedents dying in a calendar year after 1998, the $750,000 amount contained in paragraph (2) shall be increased by an amount equal to - -

"(A) $750,000, multiplied by

"(B) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting 'calendar year 1997' for 'calendar year 1992' in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $10,000, such amount shall be rounded to the next lowest multiple of $10,000.".

(c) Annual Gift Tax Exclusion. -- Subsection (b) of section 2503 is amended --

(1) by striking the subsection heading and inserting the following:

"(b) Exclusions From Gifts. --

"(1) In general. -- ",

(2) by moving the text 2 ems to the right, and

(3) by adding at the end the following new paragraph:

"(2) Inflation adjustment. -- In the case of gifts made in a calendar year after 1998, the $10,000 amount contained in paragraph (1) shall be increased by an amount equal to --

"(A) $10,000, multiplied by

"(B) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting 'calendar year 1997' for 'calendar year 1992' in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000.".

(d) Exemption From Generation-Skipping Tax. -- Section 2631 (relating to GST exemption) is amended by adding at the end the following new subsection:

"(c) Inflation Adjustment. -- In the case of an individual who dies in any calendar year after 1998, the $1,000,000 amount contained in subsection (a) shall be increased by an amount equal to --

"(1) $1,000,000, multiplied by

"(2) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting 'calendar year 1997' for 'calendar year 1992' in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $10,000, such amount shall be rounded to the next lowest multiple of $10,000.".

(e) Amount Subject to Reduced Rate Where Extension of Time for Payment of Estate Tax on Closely Held Business. --

Subsection (j) of section 6601 is amended by redesignating paragraph
(3) as paragraph (4) and by inserting after paragraph (2) the
following new paragraph:

"(3) Inflation adjustment. -- In the case of estates of decedents dying in a calendar year after 1998, the $1,000,000 amount contained in paragraph (2)(A) shall be increased by an amount equal to --

"(A) $1,000,000, multiplied by

"(B) tXhe costX-of-living adjustXmentX detXermined under sectXion 1`(f)(3) for such calendar year by substXitXutXing 'calendar year 1`997' for 'calendar year 1`992' in subparagraph (B) tXhereof.

If any amountX as adjustXed under tXhe preceding sentXence is notX a multXiple of $1`0,000, such amountX shall be rounded tXo tXhe nextX lowestX multXiple of $1`0,000.".

(f) EffectXive datXe. -- The amendmentXs made by tXhis sectXion shall apply tXo tXhe estXatXes of decedentXs dying, and giftXs made, aftXer December 31`, 1`997.

SEC. 502. FAMILY-OWNED BUSINESS EXCLUSION.

(a) In General. -- PartX III of subchaptXer A of chaptXer 1`1` (relatXing tXo gross estXatXe) is amended by insertXing aftXer sectXion 2033 tXhe following new sectXion:

"SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.

"(a) In General. -- In tXhe case of an estXatXe of a decedentX tXo which tXhis sectXion applies, tXhe value of tXhe gross estXatXe shall notX include tXhe lesser of --

"(1`) tXhe adjustXed value of tXhe qualified family-owned business intXerestXs of tXhe decedentX otXherwise includible in tXhe estXatXe, or

"(2) tXhe excess of $1`,300,000 over tXhe applicable exclusion amountX under sectXion 201`0(c) witXh respectX tXo such estXatXe.

"(b) EstXatXes tXo Which SectXion Applies. --

"(1`) In general. -- This sectXion shall apply tXo an estXatXe if --

"(A) tXhe decedentX was (atX tXhe datXe of tXhe decedentX's deatXh) a citXizen or residentX of tXhe UnitXed StXatXes,

"(B) tXhe executXor electXs tXhe applicatXion of tXhis sectXion and files tXhe agreementX referred tXo in subsectXion (h),

"(C) tXhe sum of --

"(i) tXhe adjustXed value of tXhe qualified family-owned business intXerestXs described in paragraph (2), plus

"(ii) tXhe amountX of tXhe giftXs of such intXerestXs detXermined under paragraph (3),

exceeds 50 percentX of tXhe adjustXed gross estXatXe, and

"(D) during tXhe 8-year period ending on tXhe datXe of tXhe decedentX's deatXh tXhere have been periods aggregatXing 5 years or more during which --

"(i) such intXerestXs were owned by tXhe decedentX or a member of tXhe decedentX's family, and

"(ii) tXhere was matXerial partXicipatXion (witXhin tXhe meaning of sectXion 2032A(e)(6)) by tXhe decedentX or a member of tXhe decedentX's family in tXhe operatXion of tXhe business tXo which such intXerestXs relatXe.

"(2) Includible qualified family-owned business intXerestXs. -- The qualified family-owned business intXerestXs described in tXhis paragraph are tXhe intXerestXs which --

"(A) are included in detXermining tXhe value of tXhe gross estXatXe (witXhoutX regard tXo tXhis sectXion), and

"(B) are acquired by any qualified heir from, or passed tXo any qualified heir from, tXhe decedentX (witXhin tXhe meaning of sectXion 2032A(e)(9)).

"(3) Includible giftXs of intXerestXs. -- The amountX of tXhe giftXs of qualified family-owned business intXerestXs detXermined under tXhis paragraph is tXhe excess of --

"(A) tXhe sum of --

"(i) tXhe amountX of such giftXs from tXhe decedentX tXo members of tXhe decedentX's family tXaken intXo accountX under subsectXion 2001`(b)(1`)(B), plus

"(ii) tXhe amountX of such giftXs otXherwise excluded under sectXion 2503(b),

tXo tXhe extXentX such intXerestXs are contXinuously held by members of such family (otXher tXhan tXhe decedentX's spouse) betXween tXhe date of the gift and the date of the decedent's death, over

"(B) the amount of such gifts from the decedent to members of the decedent's family otherwise 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 decedent 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 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 --

"(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 educational and medical expenses of the decedent, the decedent's spouse, or the decedent's dependents (within the meaning of section 152), plus

"(C) any indebtedness not described in subparagraph (A) or (B), to the extent such indebtedness does not exceed $10,000.

"(e) Qualified Family-Owned Business Interest. --

"(1) In general. -- For purposes of this section, the term 'qualified family-owned 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.

"(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)),

"(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, income of which is described in section 543(a) or in section 954(c)(1) (determined without regard to subparagraph (A) thereof and by substituting 'trade or business' for 'controlled foreign corporation').

"(3) 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 qualified family-owned business interest, and

"(ii) this section shall be applied separately 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 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)),

"(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 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.

"(g) Security Requirements for Noncitizen Qualified Heirs. --

"(1) In general. -- Except upon the application of subparagraph (F) or (M) 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.

"(2) Qualified trust. -- The term 'qualified trust' means a trust --

"(A) which is organized under, and governed by, the laws of the United States or a State, and

"(B) except as otherwise provided in regulations, with respect to which the trust instrument requires that at least 1 trustee of the trust be an individual citizen of the United States or a domestic corporation.

"(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 --

"(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 decedents who are retired or disabled).

"(B) Section 2032A(b)(5) (relating to special 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 liability for tax; furnishing of bond).

"(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).

"(H) Paragraphs (1) and (3) of section 2032A(d) (relating to election; agreement).

"(I) Section 2032A(e)(10) (relating to community property).

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

"(K) Section 2032A(f) (relating to statute of limitations).

"(L) Section 6166(b)(3) (relating to farmhouses and certain other structures taken into account).

"(M) Subparagraphs (B), (C), and (D) of section 6166(g)(1) (relating to acceleration of payment).

"(N) Section 6324B (relating to special lien for additional estate tax).".

(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.

SEC. 503. MODIFICATIONS TO RATE OF INTEREST ON PORTION OF ESTATE TAX EXTENDED UNDER SECTION 6166.

(a) In General. -- Paragraphs (1) and (2) of section 6601(j) (relating to 4-percent rate on certain portion of estate tax extended under section 6166) are amended to read as follows:

"(1) In general. -- If the time for payment of an amount of tax imposed by chapter 11 is extended as provided in section 6166, then in lieu of the annual rate provided by subsection (a) --

"(A) interest on the 2-percent portion of such amount shall be paid at the rate of 2 percent, and

"(B) interest on so much of such amount as exceeds the 2-percent portion shall be paid at a rate equal to 45 percent of the annual rate provided by subsection (a).

For purposes of this subsection, the amount of any deficiency which
is prorated to installments payable under section 6166 shall be
treated as an amount of tax payable in installments under such
section.

"(2) 2-percent portion. -- For purposes of this subsection, the term '2-percent portion' means the lesser of --

"(A)(i) the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were the sum of $1,000,000 and the applicable exclusion amount in effect under section 2010(c), reduced by

"(ii) the applicable credit amount in effect under section 2010(c), or

"(B) the amount of the tax imposed by chapter 11 which is extended as provided in section 6166.".

(b) Disallowance of Interest Deduction. --

(1) Estate tax. -- Paragraph (1) of section 2053(c) is amended by adding at the end the following new subparagraph:

"(D) Section 6166 interest. -- No deduction shall be allowed under this section for any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6166.".

(2) Income tax. --

(A) Section 163 is amended by redesignating subsection (k) as subsection (l) and by inserting after subsection (j) the following new subsection:

"(k) Section 6166 Interest. -- No deduction shall be allowed under this section for any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6166.".

(B) Subparagraph (E) of section 163(h)(2) is amended by striking "or 6166" and all that follows and inserting a period.

(c) Conforming Amendments. --

(1) Paragraphs (7)(A)(iii) and (8)(A)(iii) of section 6166(b) are amended by striking "4-percent" each place it appears (including the heading) and inserting "2-percent".

(2) Paragraph (4) of section 6601(j), as redesignated by section 501(e), is amended by striking "4-percent" each place it appears and inserting "2-percent".

(3) The subsection heading for section 6601(j) is amended by striking "4-Percent" and inserting "2-Percent".

(d) Effective Date. --

(1) In general. -- The amendments made by this section shall apply to estates of decedents dying after December 31, 1997.

(2) Election. -- In the case of the estate of any decedent dying before January 1, 1998, with respect to which there is an election under section 6166 of the Internal Revenue Code of 1986, the executor of the estate may elect to have the amendments made by this section apply with respect to installments due after the effective date of the election; except that the 2-percent portion of such installments shall be equal to the amount which would be the 4-percent portion of such installments without regard to such election. Such an election shall be made before January 1, 1999 in the manner prescribed by the Secretary of the Treasury and, once made, is irrevocable.

SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS UNDER SECTION 2032A
TO LINEAL DESCENDANTS.

(a) General Rule. -- Paragraph (7) of section 2032A(c) (relating to special rules for tax treatment of dispositions and failures to use for qualified use) is amended by adding at the end the following new subparagraph:

"(E) Certain rents treated as qualified use. -- For purposes of this subsection, a surviving spouse or lineal descendant of the decedent shall not be treated as failing to use qualified real property in a qualified use solely because such spouse or descendant rents such property to a member of the family of such spouse or descendant on a net cash basis. For purposes of the preceding sentence, a legally adopted child of an individual shall be treated as the child of such individual by blood.".

(b) Conforming Amendment. -- Section 2032A(b)(5)(A) is amended by striking the last sentence.

(c) Effective Date. -- The amendments made by this section shall apply with respect to leases entered into after December 31, 1976.

SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGIBILITY FOR
EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX.

(a) In General. -- Part IV of subchapter C of chapter 76 of the Internal Revenue Code of 1986 (relating to declaratory judgments) is amended by adding at the end the following new section:

"SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF ESTATE
WITH RESPECT TO INSTALLMENT PAYMENTS UNDER SECTION 6166.

"(a) Creation of remedy. -- In a case of actual controversy involving a determination by the Secretary of (or a failure by the Secretary to make a determination with respect to) --

"(1) whether an election may be made under section 6166 (relating to extension of time for payment of estate tax where estate consists largely of interest in closely held business) with respect to an estate, or

"(2) whether the extension of time for payment of tax provided in section 6166(a) has ceased to apply with respect to an estate,

upon the filing of an appropriate pleading, the Tax Court may make a
declaration with respect to whether such election may be made or
whether such extension has ceased to apply. Any such declaration
shall have the force and effect of a decision of the Tax Court and
shall be reviewable as such.

"(b) Limitations. --

"(1) Petitioner. -- A pleading may be filed under this section, with respect to any estate, only --

"(A) by the executor of such estate, or

"(B) by any person who has assumed an obligation to make payments under section 6166 with respect to such estate (but only if each other such person is joined as a party).

"(2) Exhaustion of administrative remedies. -- The court shall not issue a declaratory judgment or decree under this section in any proceeding unless it determines that the petitioner has exhausted all available administrative remedies within the Internal Revenue Service. A petitioner shall be deemed to have exhausted its administrative remedies with respect to a failure of the Secretary to make a determination at the expiration of 180 days after the date on which the request for such determination was made if the petitioner has taken, in a timely manner, all reasonable steps to secure such determination.

"(3) Time for bringing action. -- If the Secretary sends by certified or registered mail notice of his determination as described in subsection (a) to the petitioner, no proceeding may be initiated under this section unless the pleading is filed before the 91st day after the date of such mailing.".

(b) Clerical Amendment. -- The table of sections for part IV of subchapter C of chapter 76 of such Code is amended by adding at the end the following new item:

"Sec. 7479. Declaratory judgments relating to eligibility of estate
with respect to installment payments under section 6166.".

(c) Effective Date. -- The amendments made by this section shall apply to the estates of decedents dying after the date of the enactment of this Act.

SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX PURPOSES AFTER EXPIRATION OF STATUTE OF LIMITATIONS.

(a) In General. -- Section 2001 (relating to imposition and rate of estate tax) is amended by adding at the end the following new subsection:

"(f) Valuation of Gifts. -- If --

"(1) the time has expired within which a tax may be assessed under chapter 12 (or under corresponding provisions of prior laws) on the transfer of property by gift made during a preceding calendar period (as defined in section 2502(b)), and

"(2) the value of such gift is shown on the return for such preceding calendar period or is disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such gift,

the value of such gift shall, for purposes of computing the tax under this chapter, be the value of such gift as finally determined for purposes of chapter 12.".

(b) Modification of Application of Statute of Limitations. -- Paragraph (9) of section 6501(c) is amended to read as follows:

"(9) Gift tax on certain gifts not shown on return. -- If any gift of property the value of which (or any increase in taxable gifts required under section 2701(d) which) is required to be shown on a return of tax imposed by chapter 12 (without regard to section 2503(b)), and is not shown on such return, any tax imposed by chapter 12 on such gift may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. The preceding sentence shall not apply to any item which is disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such item. The value of any item which is so disclosed may not be redetermined by the Secretary after the expiration of the period under subsection (a).".

(c) Declaratory Judgment Procedure for Determining Value of Gift. --

(1) In general. -- Part IV of subchapter C of chapter 76 is amended by inserting after section 7476 the following new section:

"SEC. 7477. DECLARATORY JUDGMENTS RELATING TO VALUE OF CERTAIN GIFTS.

"(a) Creation of Remedy. -- In a case of an actual controversy involving a determination by the Secretary of the value of any gift shown on the return of tax imposed by chapter 12 or disclosed on such return or in any statement attached to such return, upon the filing of an appropriate pleading, the Tax Court may make a declaration of the value of such gift. Any such declaration shall have the force and effect of a decision of the Tax Court and shall be reviewable as such.

"(b) Limitations. --

"(1) Petitioner. -- A pleading may be filed under this section only by the donor.

"(2) Exhaustion of administrative remedies. -- The court shall not issue a declaratory judgment or decree under this section in any proceeding unless it determines that the petitioner has exhausted all available administrative remedies within the Internal Revenue Service.

"(3) Time for bringing action. -- If the Secretary sends by certified or registered mail notice of his determination as described in subsection (a) to the petitioner, no proceeding may be initiated under this section unless the pleading is filed before the 91st day after the date of such mailing.".

(2) Clerical amendment. -- The table of sections for such part IV is amended by inserting after the item relating to section 7476 the following new item:

"Sec. 7477. Declaratory judgments relating to value of certain
gifts.".

(d) Conforming Amendment. -- Subsection (c) of section 2504 is amended by striking ", and if a tax under this chapter or under corresponding provisions of prior laws has been assessed or paid for such preceding calendar period".

(e) Effective Dates. --

(1) In general. -- The amendments made by subsections (a) and (c) shall apply to gifts made after the date of the enactment of this Act.

(2) Subsection (b) -- The amendment made by subsection (b) shall apply to gifts made in calendar years ending after the date of the enactment of this Act.

SEC. 507. REPEAL OF THROWBACK RULES APPLICABLE TO CERTAIN DOMESTIC TRUSTS.

(a) Accumulation Distributions. --

(1) In general. -- Section 665 is amended by inserting after subsection (b) the following new subsection:

"(c) Exception for Accumulation Distributions From Certain Domestic Trusts. -- For purposes of this subpart --

"(1) In general. -- In the case of a qualified trust, any distribution in any taxable year beginning after the date of the enactment of this subsection shall be computed without regard to any undistributed net income.

"(2) Qualified trust. -- For purposes of this subsection, the term 'qualified trust' means any trust other than --

"(A) a foreign trust (or, except as provided in regulations, a domestic trust which at any time was a foreign trust), or

"(B) a trust created before March 1, 1984, unless it is established that the trust would not be aggregated with other trusts under section 643(f) if such section applied to such trust.".

(2) Conforming amendments. -- Subsection (b) of section 665 is amended by inserting "except as provided in subsection (c)," after "subpart,".

(b) Repeal of Tax on Transfers to Trusts at Less Than Fair Market Value. --

(1) Subpart A of part I of subchapter J of chapter 1 is amended by striking section 644 and by redesignating section 645 as section 644.

(2) Paragraph (5) of section 706(b) is amended by striking "section 645" and inserting "section 644".

(3) The table of sections for such subpart is amended by striking the last 2 items and inserting the following new item:

"Sec. 644. Taxable year of trusts."

(c) Effective Dates. --

(1) Accumulation distributions. -- The amendments made by subsection (a) shall apply to distributions in taxable years beginning after the date of the enactment of this Act.

(2) Transferred property. -- The amendments made by subsection (b) shall apply to sales or exchanges after the date of the enactment of this Act.

SEC. 508. TREATMENT OF LAND SUBJECT TO A QUALIFIED CONSERVATION EASEMENT.

(a) Estate Tax With Respect to Land Subject to a Qualified Conservation Easement. -- Section 2031 (relating to the definition of gross estate) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

"(c) Estate Tax With Respect to Land Subject to a Qualified Conservation Easement. --

"(1) In general. -- If the executor makes the election described in paragraph (6), then, except as otherwise provided in this subsection, there shall be excluded from the gross estate the lesser of --

"(A) the applicable percentage of the value of land subject to a qualified conservation easement, reduced by the amount of any deduction under section 2055(f) with respect to such land, or

"(B) the exclusion limitation.

"(2) Applicable percentage. -- For purposes of paragraph (1), the term 'applicable percentage' means 40 percent reduced (but not below zero) by 2 percentage points for each percentage point (or fraction thereof) by which the value of the qualified conservation easement is less than 30 percent of the value of the land (determined without regard to the value of such easement and reduced by the value of any retained development right (as defined in paragraph (5)).

"(3) Exclusion limitation. -- For purposes of paragraph (1), the exclusion limitation is the limitation determined in accordance with the following table:

"In the case of estates of                   The exclusion
  decedents dying during:                    limitation is:

          1998                                  $100,000
          1999                                  $200,000
          2000                                  $300,000
          2001                                  $400,000
  2002 or thereafter                            $500,000.

"(4) Treatment of certain indebtedness. --

"(A) In general. -- The exclusion provided in paragraph (1) shall not apply to the extent that the land is debt-financed property.

"(B) Definitions. -- For purposes of this paragraph --

"(i) Debt-financed property. -- The term 'debt-financed property' means any property with respect to which there is an acquisition indebtedness (as defined in clause (ii)) on the date of the decedent's death.

"(ii) Acquisition indebtedness. -- The term 'acquisition indebtedness' means, with respect to debt-financed property, the unpaid amount of --

"(I) the indebtedness incurred by the donor in acquiring such property,

"(II) the indebtedness incurred before the acquisition of such property if such indebtedness would not have been incurred but for such acquisition,

"(III) the indebtedness incurred after the acquisition of such property if such indebtedness would not have been incurred but for such acquisition and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition, and

"(IV) the extension, renewal, or refinancing of an acquisition indebtedness.

"(5) Treatment of retained development right. --

"(A) In general. -- Paragraph (1) shall not apply to the value of any development right retained by the donor in the conveyance of a qualified conservation easement.

"(B) Termination of retained development right. -- If every person in being who has an interest (whether or not in possession) in the land executes an agreement to extinguish permanently some or all of any development rights (as defined in subparagraph (D)) retained by the donor on or before the date for filing the return of the tax imposed by section 2001, then any tax imposed by section 2001 shall be reduced accordingly. Such agreement shall be filed with the return of the tax imposed by section 2001. The agreement shall be in such form as the Secretary shall prescribe.

"(C) Additional tax. -- Any failure to implement the agreement described in subparagraph (B) not later than the earlier of --

"(i) the date which is 2 years after the date of the decedent's death, or

"(ii) the date of the sale of such land subject to the qualified conservation easement,

shall result in the imposition of an additional tax in the amount of the tax which would have been due on the retained development rights subject to such agreement. Such additional tax shall be due and payable on the last day of the 6th month following such date.

"(D) Development right defined. -- For purposes of this paragraph, the term 'development right' means any right to use the land subject to the qualified conservation easement in which such right is retained for any commercial purpose which is not subordinate to and directly supportive of the use of such land as a farm for farming purposes (within the meaning of section 2032A(e)(5)).

"(6) Election. -- The election under this subsection shall be made on the return of the tax imposed by section 2001. Such an election, once made, shall be irrevocable.

"(7) Calculation of estate tax due. -- An executor making the election described in paragraph (6) shall, for purposes of calculating the amount of tax imposed by section 2001, include the value of any development right (as defined in paragraph (5)) retained by the donor in the conveyance of such qualified conservation easement. The computation of tax on any retained development right prescribed in this paragraph shall be done in such manner and on such forms as the Secretary shall prescribe.

"(8) Definitions. -- For purposes of this subsection --

"(A) Land subject to a qualified conservation easement. -- The term 'land subject to a qualified conservation easement' means land - -

"(i) which is located --

"(I) in or within 25 miles of an area which, on the date of the decedent's death, is a metropolitan area (as defined by the Office of Management and Budget),

"(II) in or within 25 miles of an area which, on the date of the decedent's death, is a national park or wilderness area designated as part of the National Wilderness Preservation System (unless it is determined by the Secretary that land in or within 25 miles of such a park or wilderness area is not under significant development pressure), or

"(III) in or within 10 miles of an area which, on the date of the decedent's death, is an Urban National Forest (as designated by the Forest Service),

"(ii) which was owned by the decedent or a member of the decedent's family at all times during the 3-year period ending on the date of the decedent's death, and

"(iii) with respect to which a qualified conservation easement has been made by an individual described in subparagraph (C), as of the date of the election described in paragraph (6).

"(B) Qualified conservation easement. -- The term 'qualified conservation easement' means a qualified conservation contribution (as defined in section 170(h)(1)) of a qualified real property interest (as defined in section 170(h)(2)(C)), except that clause (iv) of section 170(h)(4)(A) shall not apply, and the restriction on the use of such interest described in section 170(h)(2)(C) shall include a prohibition on more than a de minimis use for a commercial recreational activity.

"(C) Individual described. -- An individual is described in this subparagraph if such individual is --

"(i) the decedent,

"(ii) a member of the decedent's family,

"(iii) the executor of the decedent's estate, or

"(iv) the trustee of a trust the corpus of which includes the land to be subject to the qualified conservation easement.

"(D) Member of family. -- The term 'member of the decedent's family' means any member of the family (as defined in section 2032A(e)(2)) of the decedent.

"(9) Application of this section to interests in partnerships, corporations, and trusts. -- This section shall apply to an interest in a partnership, corporation, or trust if at least 30 percent of the entity is owned (directly or indirectly) by the decedent, as determined under the rules described in section 2033A(e)(3).".

(b) Carryover Basis. -- Section 1014(a) (relating to basis of property acquired from a decedent) is amended by striking "or" at the end of paragraphs (1) and (2), by striking the period at the end of paragraph (3) and inserting ", or" and by adding at the end the following new paragraph:

"(4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.".

(c) Qualified Conservation Contribution Is Not a Disposition. -- Subsection (c) of section 2032A (relating to alternative valuation method) is amended by adding at the end the following new paragraph:

"(8) Qualified conservation contribution is not a disposition. - - A qualified conservation contribution (as defined in section 170(h)) by gift or otherwise shall not be deemed a disposition under subsection (c)(1)(A).".

(d) Qualified Conservation Contribution Where Surface and Mineral Rights are Separated. -- Section 170(h)(5)(B)(ii) (relating to special rule) is amended to read as follows:

"(ii) Special rule. -- With respect to any contribution of property in which the ownership of the surface estate and mineral interests has been and remains separated, subparagraph (A) shall be treated as met if the probability of surface mining occurring on such property is so remote as to be negligible.".

(e) Effective Dates. --

(1) Exclusion. -- The amendments made by subsections (a) and (b) shall apply to estates of decedents dying after December 31, 1997.

(2) Easements. -- The amendments made by subsections (c) and (d) shall apply to easements granted after December 31, 1997.

SUBTITLE B -- GENERATION-SKIPPING TAX PROVISION

SEC. 511. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING TRANSFER TAX FOR TRANSFERS TO INDIVIDUALS WITH DECEASED PARENTS.

(a) In General. -- Section 2651 (relating to generation assignment) is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection:

"(e) Special Rule for Persons With a Deceased Parent. --

"(1) In general. -- For purposes of determining whether any transfer is a generation-skipping transfer, if --

"(A) an individual is a descendant of a parent of the transferor (or the transferor's spouse or former spouse), and

"(B) such individual's parent who is a lineal descendant of the parent of the transferor (or the transferor's spouse or former spouse) is dead at the time the transfer (from which an interest of such individual is established or derived) is subject to a tax imposed by chapter 11 or 12 upon the transferor (and if there shall be more than 1 such time, then at the earliest such time),

such individual shall be treated as if such individual were a member of the generation which is 1 generation below the lower of the transferor's generation or the generation assignment of the youngest living ancestor of such individual who is also a descendant of the parent of the transferor (or the transferor's spouse or former spouse), and the generation assignment of any descendant of such individual shall be adjusted accordingly.

"(2) Limited application of subsection to collateral heirs. -- This subsection shall not apply with respect to a transfer to any individual who is not a lineal descendant of the transferor (or the transferor's spouse or former spouse) if, at the time of the transfer, such transferor has any living lineal descendant.".

(b) Conforming Amendments. --

(1) Section 2612(c) (defining direct skip) is amended by striking paragraph (2) and by redesignating paragraph (3) as paragraph (2).

(2) Section 2612(c)(2) (as so redesignated) is amended by striking "section 2651(e)(2)" and inserting "section 2651(f)(2)".

(c) Effective Date. -- The amendments made by this section shall apply to terminations, distributions, and transfers occurring after December 31, 1997.

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