
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document affected by Public Law 107-16 Section 581]
[CITE: 26USC2032A]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                    Subtitle B--Estate and Gift Taxes
 
                         CHAPTER 11--ESTATE TAX
 
             Subchapter A--Estates of Citizens or Residents
 
                         PART III--GROSS ESTATE
 
Sec. 2032A. Valuation of certain farm, etc., real property


(a) Value based on use under which property qualifies

                          (1) General rule

        If--
            (A) the decedent was (at the time of his death) a citizen or 
        resident of the United States, and
            (B) the executor elects the application of this section and 
        files the agreement referred to in subsection (d)(2),

    then, for purposes of this chapter, the value of qualified real 
    property shall be its value for the use under which it qualifies, 
    under subsection (b), as qualified real property.

     (2) Limitation on aggregate reduction in fair market value

        The aggregate decrease in the value of qualified real property 
    taken into account for purposes of this chapter which results from 
    the application of paragraph (1) with respect to any decedent shall 
    not exceed $750,000.

                      (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.

(b) Qualified real property

                           (1) In general

        For purposes of this section, the term ``qualified real 
    property'' means real property located in the United States which 
    was acquired from or passed from the decedent to a qualified heir of 
    the decedent and which, on the date of the decedent's death, was 
    being used for a qualified use by the decedent or a member of the 
    decedent's family, but only if--
            (A) 50 percent or more of the adjusted value of the gross 
        estate consists of the adjusted value of real or personal 
        property which--
                (i) on the date of the decedent's death, was being used 
            for a qualified use by the decedent or a member of the 
            decedent's family, and
                (ii) was acquired from or passed from the decedent to a 
            qualified heir of the decedent.

            (B) 25 percent or more of the adjusted value of the gross 
        estate consists of the adjusted value of real property which 
        meets the requirements of subparagraphs (A)(ii) and (C),
            (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) such real property was owned by the decedent or a 
            member of the decedent's family and used for a qualified use 
            by the decedent or a member of the decedent's family, and
                (ii) there was material participation by the decedent or 
            a member of the decedent's family in the operation of the 
            farm or other business, and

            (D) such real property is designated in the agreement 
        referred to in subsection (d)(2).

                          (2) Qualified use

        For purposes of this section, the term ``qualified use'' means 
    the devotion of the property to any of the following:
            (A) use as a farm for farming purposes, or
            (B) use in a trade or business other than the trade or 
        business of farming.

                         (3) Adjusted value

        For purposes of paragraph (1), the term ``adjusted value'' 
    means--
            (A) in the case of the gross estate, the value of the gross 
        estate for purposes of this chapter (determined without regard 
        to this section), reduced by any amounts allowable as a 
        deduction under paragraph (4) of section 2053(a), or
            (B) in the case of any real or personal property, the value 
        of such property for purposes of this chapter (determined 
        without regard to this section), reduced by any amounts 
        allowable as a deduction in respect of such property under 
        paragraph (4) of section 2053(a).

              (4) Decedents who are retired or disabled

        (A) In general

            If, on the date of the decedent's death, the requirements of 
        paragraph (1)(C)(ii) with respect to the decedent for any 
        property are not met, and the decedent--
                (i) was receiving old-age benefits under title II of the 
            Social Security Act for a continuous period ending on such 
            date, or
                (ii) was disabled for a continuous period ending on such 
            date,

        then paragraph (1)(C)(ii) shall be applied with respect to such 
        property by substituting ``the date on which the longer of such 
        continuous periods began'' for ``the date of the decedent's 
        death'' in paragraph (1)(C).

        (B) Disabled defined

            For purposes of subparagraph (A), an individual shall be 
        disabled if such individual has a mental or physical impairment 
        which renders him unable to materially participate in the 
        operation of the farm or other business.

        (C) Coordination with recapture

            For purposes of subsection (c)(6)(B)(i), if the requirements 
        of paragraph (1)(C)(ii) are met with respect to any decedent by 
        reason of subparagraph (A), the period ending on the date on 
        which the continuous period taken into account under 
        subparagraph (A) began shall be treated as the period 
        immediately before the decedent's death.

               (5) Special rules for surviving spouses

        (A) In general

            If property is qualified real property with respect to a 
        decedent (hereinafter in this paragraph referred to as the 
        ``first decedent``) and such property was acquired from or 
        passed from the first decedent to the surviving spouse of the 
        first decedent, for purposes of applying this subsection and 
        subsection (c) in the case of the estate of such surviving 
        spouse, active management of the farm or other business by the 
        surviving spouse shall be treated as material participation by 
        such surviving spouse in the operation of such farm or business.

        (B) Special rule

            For the purposes of subparagraph (A), the determination of 
        whether property is qualified real property with respect to the 
        first decedent shall be made without regard to subparagraph (D) 
        of paragraph (1) and without regard to whether an election under 
        this section was made.

        (C) Coordination with paragraph (4)

            In any case in which to do so will enable the requirements 
        of paragraph (1)(C)(ii) to be met with respect to the surviving 
        spouse, this subsection and subsection (c) shall be applied by 
        taking into account any application of paragraph (4).

(c) Tax treatment of dispositions and failures to use for qualified use

               (1) Imposition of additional estate tax

        If, within 10 years after the decedent's death and before the 
    death of the qualified heir--
            (A) the qualified heir disposes of any interest in qualified 
        real property (other than by a disposition to a member of his 
        family), or
            (B) the qualified heir ceases to use for the qualified use 
        the qualified real property which was acquired (or passed) from 
        the decedent,

    then, there is hereby imposed an additional estate tax.

                    (2) Amount of additional tax

        (A) In general

            The amount of the additional tax imposed by paragraph (1) 
        with respect to any interest shall be the amount equal to the 
        lesser of--
                (i) the adjusted tax difference attributable to such 
            interest, or
                (ii) the excess of the amount realized with respect to 
            the interest (or, in any case other than a sale or exchange 
            at arm's length, the fair market value of the interest) over 
            the value of the interest determined under subsection (a).

        (B) Adjusted tax difference attributable to interest

            For purposes of subparagraph (A), the adjusted tax 
        difference attributable to an interest is the amount which bears 
        the same ratio to the adjusted tax difference with respect to 
        the estate (determined under subparagraph (C)) as--
                (i) the excess of the value of such interest for 
            purposes of this chapter (determined without regard to 
            subsection (a)) over the value of such interest determined 
            under subsection (a), bears to
                (ii) a similar excess determined for all qualified real 
            property.

        (C) Adjusted tax difference with respect to the estate

            For purposes of subparagraph (B), the term ``adjusted tax 
        difference with respect to the estate'' means the excess of what 
        would have been the estate tax liability but for subsection (a) 
        over the estate tax liability. For purposes of this 
        subparagraph, the term ``estate tax liability'' means the tax 
        imposed by section 2001 reduced by the credits allowable against 
        such tax.

        (D) Partial dispositions

            For purposes of this paragraph, where the qualified heir 
        disposes of a portion of the interest acquired by (or passing 
        to) such heir (or a predecessor qualified heir) or there is a 
        cessation of use of such a portion--
                (i) the value determined under subsection (a) taken into 
            account under subparagraph (A)(ii) with respect to such 
            portion shall be its pro rata share of such value of such 
            interest, and
                (ii) the adjusted tax difference attributable to the 
            interest taken into account with respect to the transaction 
            involving the second or any succeeding portion shall be 
            reduced by the amount of the tax imposed by this subsection 
            with respect to all prior transactions involving portions of 
            such interest.

        (E) Special rule for disposition of timber

            In the case of qualified woodland to which an election under 
        subsection (e)(13)(A) applies, if the qualified heir disposes of 
        (or severs) any standing timber on such qualified woodland--
                (i) such disposition (or severance) shall be treated as 
            a disposition of a portion of the interest of the qualified 
            heir in such property, and
                (ii) the amount of the additional tax imposed by 
            paragraph (1) with respect to such disposition shall be an 
            amount equal to the lesser of--
                    (I) the amount realized on such disposition (or, in 
                any case other than a sale or exchange at arm's length, 
                the fair market value of the portion of the interest 
                disposed or severed), or
                    (II) the amount of additional tax determined under 
                this paragraph (without regard to this subparagraph) if 
                the entire interest of the qualified heir in the 
                qualified woodland had been disposed of, less the sum of 
                the amount of the additional tax imposed with respect to 
                all prior transactions involving such woodland to which 
                this subparagraph applied.

        For purposes of the preceding sentence, the disposition of a 
        right to sever shall be treated as the disposition of the 
        standing timber. The amount of additional tax imposed under 
        paragraph (1) in any case in which a qualified heir disposes of 
        his entire interest in the qualified woodland shall be reduced 
        by any amount determined under this subparagraph with respect to 
        such woodland.

      (3) Only 1 additional tax imposed with respect to any 1 
                                   portion

        In the case of an interest acquired from (or passing from) any 
    decedent, if subparagraph (A) or (B) of paragraph (1) applies to any 
    portion of an interest, subparagraph (B) or (A), as the case may be, 
    of paragraph (1) shall not apply with respect to the same portion of 
    such interest.

                            (4) Due date

        The additional tax imposed by this subsection shall become due 
    and payable on the day which is 6 months after the date of the 
    disposition or cessation referred to in paragraph (1).

              (5) Liability for tax; furnishing of bond

        The qualified heir shall be personally liable for the additional 
    tax imposed by this subsection with respect to his interest unless 
    the heir has furnished bond which meets the requirements of 
    subsection (e)(11).

                   (6) Cessation of qualified use

        For purposes of paragraph (1)(B), real property shall cease to 
    be used for the qualified use if--
            (A) such property ceases to be used for the qualified use 
        set forth in subparagraph (A) or (B) of subsection (b)(2) under 
        which the property qualified under subsection (b), or
            (B) during any period of 8 years ending after the date of 
        the decedent's death and before the date of the death of the 
        qualified heir, there had been periods aggregating more than 3 
        years during which--
                (i) in the case of periods during which the property was 
            held by the decedent, there was no material participation by 
            the decedent or any member of his family in the operation of 
            the farm or other business, and
                (ii) in the case of periods during which the property 
            was held by any qualified heir, there was no material 
            participation by such qualified heir or any member of his 
            family in the operation of the farm or other business.

                          (7) Special rules

        (A) No tax if use begins within 2 years

            If the date on which the qualified heir begins to use the 
        qualified real property (hereinafter in this subparagraph 
        referred to as the commencement date) is before the date 2 years 
        after the decedent's death--
                (i) no tax shall be imposed under paragraph (1) by 
            reason of the failure by the qualified heir to so use such 
            property before the commencement date, and
                (ii) the 10-year period under paragraph (1) shall be 
            extended by the period after the decedent's death and before 
            the commencement date.

        (B) Active management by eligible qualified heir treated as 
                material participation

            For purposes of paragraph (6)(B)(ii), the active management 
        of a farm or other business by--
                (i) an eligible qualified heir, or
                (ii) a fiduciary of an eligible qualified heir described 
            in clause (ii) or (iii) of subparagraph (C),

        shall be treated as material participation by such eligible 
        qualified heir in the operation of such farm or business. In the 
        case of an eligible qualified heir described in clause (ii), 
        (iii), or (iv) of subparagraph (C), the preceding sentence shall 
        apply only during periods during which such heir meets the 
        requirements of such clause.

        (C) Eligible qualified heir

            For purposes of this paragraph, the term ``eligible 
        qualified heir'' means a qualified heir who--
                (i) is the surviving spouse of the decedent,
                (ii) has not attained the age of 21,
                (iii) is disabled (within the meaning of subsection 
            (b)(4)(B)), or
                (iv) is a student.

        (D) Student

            For purposes of subparagraph (C), an individual shall be 
        treated as a student with respect to periods during any calendar 
        year if (and only if) such individual is a student (within the 
        meaning of section 151(c)(4)) for such calendar year.

        (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.

    (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) Election; agreement

                            (1) Election

        The election under this section shall be made on the return of 
    the tax imposed by section 2001. Such election shall be made in such 
    manner as the Secretary shall by regulations prescribe. Such an 
    election, once made, shall be irrevocable.

                            (2) Agreement

        The agreement referred to in this paragraph 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 (c) with 
    respect to such property.

     (3) Modification of election and agreement to be permitted

        The Secretary shall prescribe procedures which provide that in 
    any case in which the executor makes an election under paragraph (1) 
    (and submits the agreement referred to in paragraph (2)) within the 
    time prescribed therefor, but--
            (A) the notice of election, as filed, does not contain all 
        required information, or
            (B) signatures of 1 or more persons required to enter into 
        the agreement described in paragraph (2) are not included on the 
        agreement as filed, or the agreement does not contain all 
        required information,

    the executor will have a reasonable period of time (not exceeding 90 
    days) after notification of such failures to provide such 
    information or signatures.

(e) Definitions; special rules

    For purposes of this section--

                         (1) Qualified heir

        The term ``qualified heir'' means, with respect to any property, 
    a member of the decedent's family who acquired such property (or to 
    whom such property passed) from the decedent. If a qualified heir 
    disposes of any interest in qualified real property to any member of 
    his family, such member shall thereafter be treated as the qualified 
    heir with respect to such interest.

                        (2) Member of family

        The term ``member of the family'' means, with respect to any 
    individual, only--
            (A) an ancestor of such individual,
            (B) the spouse of such individual,
            (C) a lineal descendant of such individual, of such 
        individual's spouse, or of a parent of such individual, or
            (D) the spouse of any lineal descendant described in 
        subparagraph (C).

    For purposes of the preceding sentence, a legally adopted child of 
    an individual shall be treated as the child of such individual by 
    blood.

                 (3) Certain real property included

        In the case of real property which meets the requirements of 
    subparagraph (C) of subsection (b)(1), residential buildings and 
    related improvements on such real property occupied on a regular 
    basis by the owner or lessee of such real property or by persons 
    employed by such owner or lessee for the purpose of operating or 
    maintaining such real property, and roads, buildings, and other 
    structures and improvements functionally related to the qualified 
    use shall be treated as real property devoted to the qualified use.

                              (4) Farm

        The term ``farm'' includes stock, dairy, poultry, fruit, 
    furbearing animal, and truck farms, plantations, ranches, nurseries, 
    ranges, greenhouses or other similar structures used primarily for 
    the raising of agricultural or horticultural commodities, and 
    orchards and woodlands.

                        (5) Farming purposes

        The term ``farming purposes'' means--
            (A) cultivating the soil or raising or harvesting any 
        agricultural or horticultural commodity (including the raising, 
        shearing, feeding, caring for, training, and management of 
        animals) on a farm;
            (B) handling, drying, packing, grading, or storing on a farm 
        any agricultural or horticultural commodity in its 
        unmanufactured state, but only if the owner, tenant, or operator 
        of the farm regularly produces more than one-half of the 
        commodity so treated; and
            (C)(i) the planting, cultivating, caring for, or cutting of 
        trees, or
            (ii) the preparation (other than milling) of trees for 
        market.

                     (6) Material participation

        Material participation shall be determined in a manner similar 
    to the manner used for purposes of paragraph (1) of section 1402(a) 
    (relating to net earnings from self-employment).

                     (7) Method of valuing farms

        (A) In general

            Except as provided in subparagraph (B), the value of a farm 
        for farming purposes shall be determined by dividing--
                (i) the excess of the average annual gross cash rental 
            for comparable land used for farming purposes and located in 
            the locality of such farm over the average annual State and 
            local real estate taxes for such comparable land, by
                (ii) the average annual effective interest rate for all 
            new Federal Land Bank loans.

        For purposes of the preceding sentence, each average annual 
        computation shall be made on the basis of the 5 most recent 
        calendar years ending before the date of the decedent's death.

        (B) Value based on net share rental in certain cases

            (i) In general

                If there is no comparable land from which the average 
            annual gross cash rental may be determined but there is 
            comparable land from which the average net share rental may 
            be determined, subparagraph (A)(i) shall be applied by 
            substituting ``average annual net share rental'' for 
            ``average annual gross cash rental''.
            (ii) Net share rental

                For purposes of this paragraph, the term ``net share 
            rental'' means the excess of--
                    (I) the value of the produce received by the lessor 
                of the land on which such produce is grown, over
                    (II) the cash operating expenses of growing such 
                produce which, under the lease, are paid by the lessor.

        (C) Exception

            The formula provided by subparagraph (A) shall not be used--
                (i) where it is established that there is no comparable 
            land from which the average annual gross cash rental may be 
            determined, or
                (ii) where the executor elects to have the value of the 
            farm for farming purposes determined and that there is no 
            comparable land from which the average net share rental may 
            be determined under paragraph (8).

     (8) Method of valuing closely held business interests, etc.

        In any case to which paragraph (7)(A) does not apply, the 
    following factors shall apply in determining the value of any 
    qualified real property:
            (A) The capitalization of income which the property can be 
        expected to yield for farming or closely held business purposes 
        over a reasonable period of time under prudent management using 
        traditional cropping patterns for the area, taking into account 
        soil capacity, terrain configuration, and similar factors,
            (B) The capitalization of the fair rental value of the land 
        for farm land or closely held business purposes,
            (C) Assessed land values in a State which provides a 
        differential or use value assessment law for farmland or closely 
        held business,
            (D) Comparable sales of other farm or closely held business 
        land in the same geographical area far enough removed from a 
        metropolitan or resort area so that nonagricultural use is not a 
        significant factor in the sales price, and
            (E) Any other factor which fairly values the farm or closely 
        held business value of the property.

                 (9) Property acquired from decedent

        Property shall be considered to have been acquired from or to 
    have passed from the decedent if--
            (A) such property is so considered under section 1014(b) 
        (relating to basis of property acquired from a decedent),
            (B) such property is acquired by any person from the estate, 
        or
            (C) such property is acquired by any person from a trust (to 
        the extent such property is includible in the gross estate of 
        the decedent).

                       (10) Community property

        If the decedent and his surviving spouse at any time held 
    qualified real property as community property, the interest of the 
    surviving spouse in such property shall be taken into account under 
    this section to the extent necessary to provide a result under this 
    section with respect to such property which is consistent with the 
    result which would have obtained under this section if such property 
    had not been community property.

               (11) Bond in lieu of personal liability

        If the qualified heir makes written application to the Secretary 
    for determination of the maximum amount of the additional tax which 
    may be imposed by subsection (c) with respect to the qualified 
    heir's interest, the Secretary (as soon as possible, and in any 
    event within 1 year after the making of such application) shall 
    notify the heir of such maximum amount. The qualified heir, on 
    furnishing a bond in such amount and for such period as may be 
    required, shall be discharged from personal liability for any 
    additional tax imposed by subsection (c) and shall be entitled to a 
    receipt or writing showing such discharge.

                       (12) Active management

        The term ``active management'' means the making of the 
    management decisions of a business (other than the daily operating 
    decisions).

                  (13) Special rules for woodlands

        (A) In general

            In the case of any qualified woodland with respect to which 
        the executor elects to have this subparagraph apply, trees 
        growing on such woodland shall not be treated as a crop.

        (B) Qualified woodland

            The term ``qualified woodland'' means any real property 
        which--
                (i) is used in timber operations, and
                (ii) is an identifiable area of land such as an acre or 
            other area for which records are normally maintained in 
            conducting timber operations.

        (C) Timber operations

            The term ``timber operations'' means--
                (i) the planting, cultivating, caring for, or cutting of 
            trees, or
                (ii) the preparation (other than milling) of trees for 
            market.

        (D) Election

            An election under subparagraph (A) shall be made on the 
        return of the tax imposed by section 2001. Such election shall 
        be made in such manner as the Secretary shall by regulations 
        prescribe. Such an election, once made, shall be irrevocable.

     (14) Treatment of replacement property acquired in section 
                          1031 or 1033 transactions

        (A) In general

            In the case of any qualified replacement property, any 
        period during which there was ownership, qualified use, or 
        material participation with respect to the replaced property by 
        the decedent or any member of his family shall be treated as a 
        period during which there was such ownership, use, or material 
        participation (as the case may be) with respect to the qualified 
        replacement property.

        (B) Limitation

            Subparagraph (A) shall not apply to the extent that the fair 
        market value of the qualified replacement property (as of the 
        date of its acquisition) exceeds the fair market value of the 
        replaced property (as of the date of its disposition).

        (C) Definitions

            For purposes of this paragraph--
            (i) Qualified replacement property

                The term ``qualified replacement property'' means any 
            real property which is--
                    (I) acquired in an exchange which qualifies under 
                section 1031, or
                    (II) the acquisition of which results in the 
                nonrecognition of gain under section 1033.

          Such term shall only include property which is used for the 
            same qualified use as the replaced property was being used 
            before the exchange.
            (ii) Replaced property

                The term ``replaced property means--
                    (I) the property transferred in the exchange which 
                qualifies under section 1031, or
                    (II) the property compulsorily or involuntarily 
                converted (within the meaning of section 1033).

(f) Statute of limitations

    If qualified real property is disposed of or ceases to be used for a 
qualified use, then--
        (1) the statutory period for the assessment of any additional 
    tax under subsection (c) attributable to such disposition or 
    cessation shall not expire before the expiration of 3 years from the 
    date the Secretary is notified (in such manner as the Secretary may 
    by regulations prescribe) of such disposition or cessation (or if 
    later in the case of an involuntary conversion or exchange to which 
    subsection (h) or (i) applies, 3 years from the date the Secretary 
    is notified of the replacement of the converted property or of an 
    intention not to replace or of the exchange of property), and
        (2) such additional tax may be assessed before the expiration of 
    such 3-year period notwithstanding the provisions of any other law 
    or rule of law which would otherwise prevent such assessment.

(g) Application of this section and section 6324B to interests in 
        partnerships, corporations, and trusts

    The Secretary shall prescribe regulations setting forth the 
application of this section and section 6324B in the case of an interest 
in a partnership, corporation, or trust which, with respect to the 
decedent, is an interest in a closely held business (within the meaning 
of paragraph (1) of section 6166(b)). For purposes of the preceding 
sentence, an interest in a discretionary trust all the beneficiaries of 
which are qualified heirs shall be treated as a present interest.

(h) Special rules for involuntary conversions of qualified real property

                 (1) Treatment of converted property

        (A) In general

            If there is an involuntary conversion of an interest in 
        qualified real property--
                (i) no tax shall be imposed by subsection (c) on such 
            conversion if the cost of the qualified replacement property 
            equals or exceeds the amount realized on such conversion, or
                (ii) if clause (i) does not apply, the amount of the tax 
            imposed by subsection (c) on such conversion shall be the 
            amount determined under subparagraph (B).

        (B) Amount of tax where there is not complete reinvestment

            The amount determined under this subparagraph with respect 
        to any involuntary conversion is the amount of the tax which 
        (but for this subsection) would have been imposed on such 
        conversion reduced by an amount which--
                (i) bears the same ratio to such tax, as
                (ii) the cost of the qualified replacement property 
            bears to the amount realized on the conversion.

                (2) Treatment of replacement property

        For purposes of subsection (c)--
            (A) any qualified replacement property shall be treated in 
        the same manner as if it were a portion of the interest in 
        qualified real property which was involuntarily converted; 
        except that with respect to such qualified replacement property 
        the 10-year period under paragraph (1) of subsection (c) shall 
        be extended by any period, beyond the 2-year period referred to 
        in section 1033(a)(2)(B)(i), during which the qualified heir was 
        allowed to replace the qualified real property,
            (B) any tax imposed by subsection (c) on the involuntary 
        conversion shall be treated as a tax imposed on a partial 
        disposition, and
            (C) paragraph (6) of subsection (c) shall be applied--
                (i) by not taking into account periods after the 
            involuntary conversion and before the acquisition of the 
            qualified replacement property, and
                (ii) by treating material participation with respect to 
            the converted property as material participation with 
            respect to the qualified replacement property.

                  (3) Definitions and special rules

        For purposes of this subsection--

        (A) Involuntary conversion

            The term ``involuntary conversion'' means a compulsory or 
        involuntary conversion within the meaning of section 1033.

        (B) Qualified replacement property

            The term ``qualified replacement property'' means--
                (i) in the case of an involuntary conversion described 
            in section 1033(a)(1), any real property into which the 
            qualified real property is converted, or
                (ii) in the case of an involuntary conversion described 
            in section 1033(a)(2), any real property purchased by the 
            qualified heir during the period specified in section 
            1033(a)(2)(B) for purposes of replacing the qualified real 
            property.

    Such term only includes property which is to be used for the 
    qualified use set forth in subparagraph (A) or (B) of subsection 
    (b)(2) under which the qualified real property qualified under 
    subsection (a).

                  (4) Certain rules made applicable

        The rules of the last sentence of section 1033(a)(2)(A) shall 
    apply for purposes of paragraph (3)(B)(ii).

(i) Exchanges of qualified real property

                 (1) Treatment of property exchanged

        (A) Exchanges solely for qualified exchange property

            If an interest in qualified real property is exchanged 
        solely for an interest in qualified exchange property in a 
        transaction which qualifies under section 1031, no tax shall be 
        imposed by subsection (c) by reason of such exchange.

        (B) Exchanges where other property received

            If an interest in qualified real property is exchanged for 
        an interest in qualified exchange property and other property in 
        a transaction which qualifies under section 1031, the amount of 
        the tax imposed by subsection (c) by reason of such exchange 
        shall be the amount of tax which (but for this subparagraph) 
        would have been imposed on such exchange under subsection 
        (c)(1), reduced by an amount which--
                (i) bears the same ratio to such tax, as
                (ii) the fair market value of the qualified exchange 
            property bears to the fair market value of the qualified 
            real property exchanged.

        For purposes of clause (ii) of the preceding sentence, fair 
        market value shall be determined as of the time of the exchange.

            (2) Treatment of qualified exchange property

        For purposes of subsection (c)--
            (A) any interest in qualified exchange property shall be 
        treated in the same manner as if it were a portion of the 
        interest in qualified real property which was exchanged,
            (B) any tax imposed by subsection (c) by reason of the 
        exchange shall be treated as a tax imposed on a partial 
        disposition, and
            (C) paragraph (6) of subsection (c) shall be applied by 
        treating material participation with respect to the exchanged 
        property as material participation with respect to the qualified 
        exchange property.

                   (3) Qualified exchange property

        For purposes of this subsection, the term ``qualified exchange 
    property'' means real property which is to be used for the qualified 
    use set forth in subparagraph (A) or (B) of subsection (b)(2) under 
    which the real property exchanged therefor originally qualified 
    under subsection (a).

(Added Pub. L. 94-455, title XX, Sec. 2003(a), Oct. 4, 1976, 90 Stat. 
1856; amended Pub. L. 95-472, Sec. 4(a), (c), Oct. 17, 1978, 92 Stat. 
1334, 1336; Pub. L. 95-600, title VII, Sec. 702(d)(1), (2), (4), (5), 
Nov. 6, 1978, 92 Stat. 2928, 2929; Pub. L. 97-34, title IV, Sec. 421(a)-
(d)(2)(A), (e), (f), (h)-(j)(2)(A), (3), (4), Aug. 13, 1981, 95 Stat. 
306-313; Pub. L. 97-448, title I, Sec. 104(b)(1), (2), Jan. 12, 1983, 96 
Stat. 2381; Pub. L. 98-369, div. A, title X, Sec. 1025(a), July 18, 
1984, 98 Stat. 1030; Pub. L. 99-514, title I, Sec. 104(b)(3), Oct. 22, 
1986, 100 Stat. 2105; Pub. L. 100-647, title VI, Sec. 6151(a), Nov. 10, 
1988, 102 Stat. 3724; Pub. L. 101-508, title XI, Sec. 11802(f)(5), Nov. 
5, 1990, 104 Stat. 1388-530; Pub. L. 105-34, title V, Secs. 501(b), 
504(a), (b), 508(c), title XIII, Sec. 1313(a), Aug. 5, 1997, 111 Stat. 
845, 853, 854, 860, 1045.)

Adjustment of Decrease in Value of Qualified Real Property for Decedents 
                       Dying in Calendar Year 2001

        For adjustment of aggregate decrease in value of qualified real 
    property resulting from election under this section for estates of 
    decedents dying in calendar year 2001, see section 3.16 of Revenue 
    Procedure 2001-13, set out as a note under section 1 of this title.

                       References in Text

    The Social Security Act, referred to in subsec. (b)(4)(A)(i), is act 
Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Title II of the Social 
Security Act is classified generally to subchapter II (Sec. 401 et seq.) 
of chapter 7 of Title 42, The Public Health and Welfare. For complete 
classification of this Act to the Code, see section 1305 of Title 42 and 
Tables.


                               Amendments

    1997--Subsec. (a)(3). Pub. L. 105-34, Sec. 501(b), added par. (3).
    Subsec. (b)(5)(A). Pub. L. 105-34, Sec. 504(b), struck out at end 
``For purposes of subsection (c), such surviving spouse shall not be 
treated as failing to use such property in a qualified use solely 
because such spouse rents such property to a member of such spouse's 
family on a net cash basis.''
    Subsec. (c)(7)(E). Pub. L. 105-34, Sec. 504(a), added subpar. (E).
    Subsec. (c)(8). Pub. L. 105-34, Sec. 508(c), added par. (8).
    Subsec. (d)(3). Pub. L. 105-34, Sec. 1313(a), amended heading and 
text of par. (3) generally. Prior to amendment, text read as follows: 
``The Secretary shall prescribe procedures which provide that in any 
case in which--
        ``(A) the executor makes an election under paragraph (1) within 
    the time prescribed for filing such election, and
        ``(B) substantially complies with the regulations prescribed by 
    the Secretary with respect to such election, but--
            ``(i) the notice of election, as filed, does not contain all 
        required information, or
            ``(ii) signatures of 1 or more persons required to enter 
        into the agreement described in paragraph (2) are not included 
        on the agreement as filed, or the agreement does not contain all 
        required information,
the executor will have a reasonable period of time (not exceeding 90 
days) after notification of such failures to provide such information or 
agreements.''
    1990--Subsec. (a)(2). Pub. L. 101-508 amended par. (2) generally, 
substituting present provisions for provisions which established 
graduated increase in applicable limit on aggregate reduction in fair 
market value from $600,000 in the case of decedents dying in 1981 to 
$750,000 in the case of decedents dying in 1983 or thereafter.
    1988--Subsec. (b)(5)(A). Pub. L. 100-647 inserted at end ``For 
purposes of subsection (c), such surviving spouse shall not be treated 
as failing to use such property in a qualified use solely because such 
spouse rents such property to a member of such spouse's family on a net 
cash basis.''
    1986--Subsec. (c)(7)(D). Pub. L. 99-514 substituted ``section 
151(c)(4)'' for ``section 151(e)(4)''.
    1984--Subsec. (d)(3). Pub. L. 98-369 added par. (3).
    1983--Subsec. (b)(5)(C). Pub. L. 97-448, Sec. 104(b)(1), added 
subpar. (C).
    Subsec. (i)(1)(B)(ii). Pub. L. 97-448, Sec. 104(b)(2)(A), 
substituted ``the qualified exchange property'' for ``the other 
property''.
    Subsec. (i)(3). Pub. L. 97-448, Sec. 104(b)(2)(B), substituted 
``subparagraph (A) or (B)'' for ``subparagraph (A), (B), or (C)''.
    1981--Subsec. (a)(2). Pub. L. 97-34, Sec. 421(a), substituted 
``Limit on aggregate reduction in fair market value'' for ``Limitation'' 
in heading ``shall not exceed the applicable limit set forth in the 
following table:'' for ``shall not exceed $500,000'' in text, and 
inserted table.
    Subsec. (b)(1). Pub. L. 97-34, Sec. 421(b)(1), substituted 
``qualified use by the decedent or a member of the decedent's family'' 
for ``qualified use'' in provision preceding subpar. (A), and in 
subpars. (A)(i) and (C)(i).
    Subsec. (b)(4), (5). Pub. L. 97-34, Sec. 421(b)(2), added pars. (4) 
and (5).
    Subsec. (c)(1). Pub. L. 97-34, Sec. 421(c)(1)(A), substituted ``10 
years'' for ``15 years''.
    Subsec. (c)(2)(E). Pub. L. 97-34, Sec. 421(h)(2), added subpar. (E).
    Subsec. (c)(3). Pub. L. 97-34, Sec. 421(c)(1)(B)(i), redesignated 
par. (4) as (3) and struck out former par. (3), which provided for a 
phaseout of additional tax between the 10th and 15th years.
    Subsec. (c)(4), (5). Pub. L. 97-34, Sec. 421(c)(1)(B)(i), 
redesignated pars. (5) and (6) as (4) and (5), respectively. Former par. 
(4) redesignated (3).
    Subsec. (c)(6). Pub. L. 97-34, Sec. 421(c)(2)(B)(ii), in subpar. (B) 
substituted ``more than 3 years'' for ``3 years or more''.
    Pub. L. 97-34, Sec. 421(c)(1)(B)(i), redesignated par. (7) as (6). 
Former par. (6) redesignated (5).
    Subsec. (c)(7). Pub. L. 97-34, Sec. 421(c)(1)(B)(i), (2)(A), added 
par. (7). Former par. (7) redesignated (6).
    Subsec. (d)(1). Pub. L. 97-34, Sec. 421(j)(3), substituted ``The 
election under this section shall be made on the return of the tax 
imposed by section 2001. Such election shall be made in such manner as 
the Secretary shall by regulations prescribe. Such an election, once 
made, shall be irrevocable.'' for ``The election under this section 
shall be made not later than the time prescribed by section 6075(a) for 
filing the return of tax imposed by section 2001 (including extensions 
thereof), and shall be made in such manner as the Secretary shall by 
regulations prescribe.''
    Subsec. (e)(2). Pub. L. 97-34, Sec. 421(i), substituted provisions 
designated subpars. (A) through (D) for ``such individual's ancestor or 
lineal descendant, a lineal descendant of a grandparent of such 
individual, the spouse of such individual, or the spouse of any such 
descendant''.
    Subsec. (e)(7). Pub. L. 97-34, Sec. 421(f), added subpar. (B), 
redesignated former subpar. (B) as (C), and inserted ``and that there is 
no comparable land from which the average net share rental may be 
determined'' after ``determined'' in subpar. (C), without specifying 
whether the language was to be inserted in cl. (i) or (ii) of subpar. 
(C). In view of H. Rept. No. 97-201, 97th Cong., July 14, 1981, p. 492, 
the language was inserted in cl. (ii) as the probable intent of 
Congress.
    Subsec. (e)(9). Pub. L. 97-34, Sec. 421(j)(2)(A), struck out from 
subpar. (B) ``in satisfaction of the right of such person to a pecuniary 
bequest'' after ``from the estate'' and in subpar. (C) substituted ``(to 
the extent such property is includible in the gross estate of the 
decedent)'' for ``in satisfaction of a right (which such person has by 
reason of the death of the decedent) to receive from the trust a 
specific dollar amount which is the equivalent of a pecuniary bequest''.
    Subsec. (e)(12). Pub. L. 97-34, Sec. 421(c)(2)(B)(i), added par. 
(12).
    Subsec. (e)(13), (14). Pub. L. 97-34, Sec. 421(h)(1), (j)(4), added 
pars. (13) and (14).
    Subsec. (f)(1). Pub. L. 97-34, Sec. 421(e)(2), substituted ``to 
which subsection (h)'' for ``to which an election under subsection 
(h)''.
    Pub. L. 97-34, Sec. 421(d)(2)(A), substituted ``conversion or 
exchange'', ``(h) or (i)'', and ``replace or of the exchange of 
property'' for ``conversion'', ``(h)'', and ``replace''.
    Subsec. (g). Pub. L. 97-34, Sec. 421(j)(1), inserted provision that 
for purposes of the preceding sentence, an interest in a discretionary 
trust all the beneficiaries of which are qualified heirs shall be 
treated as a present interest.
    Subsec. (h)(1)(A). Pub. L. 97-34, Sec. 421(e)(1)(A), struck out 
``and the qualified heir makes an election under this subsection'' after 
``qualified real property''.
    Subsec. (h)(2)(A). Pub. L. 97-34, Sec. 421(c)(1)(B)(ii), substituted 
``; except that'' for ``, except that'' and ``the 10-year period'' for 
``the 15-year period'', deleted cl. (i) designation, and struck out cl. 
(ii), which provided the phaseout period under par. (3) of subsec. (c) 
be appropriately adjusted to take into account the extension referred to 
in cl. (i).
    Subsec. (h)(2)(C). Pub. L. 97-34, Sec. 421(c)(1)(B)(iii), 
substituted ``(6)'' for ``(7)'' in provisions preceding cl. (i).
    Subsec. (h)(5). Pub. L. 97-34, Sec. 421(e)(1)(B), struck out par. 
(5) which provided for making a subsec. (h) election at such time and in 
such manner as the Secretary may by regulations prescribe.
    Subsec. (i). Pub. L. 97-34, Sec. 421(d)(1), added subsec. (i).
    1978--Subsec. (b)(1). Pub. L. 95-600, Sec. 702(d)(1), inserted 
``which was acquired from or passed from the decedent to a qualified 
heir of the decedent and'' after ``located in the United States''.
    Subsec. (c)(6). Pub. L. 95-600, Sec. 702(d)(5)(A), inserted ``unless 
the heir has furnished bond which meets the requirements of subsection 
(e)(11)'' after ``respect to his interest''.
    Subsec. (e)(9). Pub. L. 95-600, Sec. 702(d)(2), added par. (9).
    Subsec. (e)(10). Pub. L. 95-600, Sec. 702(d)(4), added par. (10).
    Subsec. (e)(11). Pub. L. 95-600, Sec. 702(d)(5)(B), added par. (11).
    Subsec. (f)(1). Pub. L. 95-472, Sec. 4(c), inserted provision 
relating to the expiration of the statutory period for the assessment of 
additional tax due under subsec. (c) in the case of an involuntary 
conversion to which an election under subsec. (h) is applicable.
    Subsec. (h). Pub. L. 95-472, Sec. 4(a), added subsec. (h).


                    Effective Date of 1997 Amendment

    Amendment by section 501(b) of Pub. L. 105-34 applicable to estates 
of decedents dying, and gifts made, after Dec. 31, 1997, see section 
501(f) of Pub. L. 105-34, set out as a note under section 2001 of this 
title.
    Section 504(c) of Pub. L. 105-34 provided that: ``The amendments 
made by this section [amending this section] shall apply with respect to 
leases entered into after December 31, 1976.''
    Amendment by section 508(c) of Pub. L. 105-34 applicable to 
easements granted after Dec. 31, 1997, see section 508(e)(2) of Pub. L. 
105-34, set out as a note under section 170 of this title.
    Section 1313(b) of Pub. L. 105-34 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to the 
estates of decedents dying after the date of the enactment of this Act 
[Aug. 5, 1997].''


                    Effective Date of 1988 Amendment

    Section 6151(b) of Pub. L. 100-647 provided that:
    ``(1) In general.--The amendment made by subsection (a) [amending 
this section] shall apply with respect to rentals occurring after 
December 31, 1976.
    ``(2) Waiver of statute of limitations.--If on the date of the 
enactment of this Act [Nov. 10, 1988] (or at any time within 1 year 
after such date of enactment) refund or credit of any overpayment of tax 
resulting from the application of the amendment made by subsection (a) 
is barred by any law or rule of law, refund or credit of such 
overpayment shall, nevertheless, be made or allowed if claim therefore 
is filed before the date 1 year after the date of the enactment of this 
Act.''


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 applicable to taxable years beginning 
after Dec. 31, 1986, see section 151(a) of Pub. L. 99-514, set out as a 
note under section 1 of this title.


                    Effective Date of 1984 Amendment

    Section 1025(b) of Pub. L. 98-369, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In general.--The amendment made by this section [amending this 
section] shall apply to estates of decedents dying after December 31, 
1976.
    ``(2) Refund or credit of overpayment barred by statute of 
limitations.--Notwithstanding section 6511(a) of the Internal Revenue 
Code of 1986 [formerly I.R.C. 1954] or any other period of limitation or 
lapse of time, a claim for credit or refund of overpayment of the tax 
imposed by such Code which arises by reason of this section may be filed 
by any person at any time within the 1-year period beginning on the date 
of the enactment of this Act [July 18, 1984]. Sections 6511(b) and 6514 
of such Code shall not apply to any claim for credit or refund filed 
under this subsection within such 1-year period.''


                    Effective Date of 1983 Amendment

    Amendment by Pub. L. 97-448 effective, except as otherwise provided, 
as if it had been included in the provision of the Economic Recovery Tax 
Act of 1981, Pub. L. 97-34, to which such amendment relates, see section 
109 of Pub. L. 97-448, set out as a note under section 1 of this title.


                    Effective Date of 1981 Amendment

    Section 421(k) of Pub. L. 97-34, as amended by Pub. L. 97-448, title 
I, Sec. 104(b)(4), Jan. 12, 1983, 96 Stat. 2382; Pub. L. 99-514, Sec. 2, 
Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In general.--Except as otherwise provided in this subsection, 
the amendments made by this section [amending this section and sections 
1016, 1040, and 6324B of this title] shall apply with respect to the 
estates of decedents dying after December 31, 1981.
    ``(2) Increase in limitation.--The amendment made by subsection (a) 
[amending this section] shall apply with respect to the estates of 
decedents dying after December 31, 1980.
    ``(3) Subsection (d).--The amendments made by subsection (d) 
[amending this section and section 6324B of this title] shall apply with 
respect to exchanges after December 31, 1981.
    ``(4) Subsection (e).--The amendments made by subsection (e) 
[amending this section] shall apply with respect to involuntary 
conversions after December 31, 1981.
    ``(5) Certain amendments made retroactive to 1976.--
        ``(A) In general.--The amendments made by subsections (b)(1), 
    (j)(1), and (j)(2) [amending this section and section 1040 of this 
    title] and the provisions of subparagraph (A) of section 2032A(c)(7) 
    of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as 
    added by subsection (c)(2)) shall apply with respect to the estates 
    of decedents dying after December 31, 1976.
        ``(B) Timely election required.--Subparagraph (A) shall only 
    apply in the case of an estate if a timely election under section 
    2032A was made with respect to such estate. If the estate of any 
    decedent would not qualify under section 2032A of the Internal 
    Revenue Code of 1986 but for the amendments described in 
    subparagraph (A) and the time for making an election under section 
    2032A with respect to such estate would (but for this sentence) 
    expire after July 28, 1980, the time for making such election shall 
    not expire before the close of February 16, 1982.
        ``(C) Reinstatement of elections.--If any election under section 
    2032A was revoked before the date of the enactment of this Act [Aug. 
    13, 1981], such election may be reinstated at any time before 
    February 17, 1982.
        ``(D) Statute of limitations.--If on the date of the enactment 
    of this Act [Aug. 13, 1981] (or at any time before February 17, 
    1982) the making of a credit or refund of any overpayment of tax 
    resulting from the amendments described in subparagraph (A) is 
    barred by any law or rule of law, such credit or refund shall 
    nevertheless be made if claim therefor is made before February 17, 
    1982.''


                    Effective Date of 1978 Amendments

    Section 702(d)(6) of Pub. L. 95-600 provided that: ``The amendments 
made by this subsection [amending this section and section 1040 of this 
title] shall apply to the estates of decedents dying after December 31, 
1976.''
    Amendment of section by Pub. L. 95-472 applicable with respect to 
involuntary conversions after Dec. 31, 1976, see section 4(d) of Pub. L. 
95-472, set out as a note under section 1016 of this title.


                             Effective Date

    Section 2003(e) of Pub. L. 94-455 provided that: ``The amendments 
made by this section [enacting this section and section 6324B of this 
title and amending section 2013 of this title] shall apply to the 
estates of decedents dying after December 31, 1976.''


                            Savings Provision

    For provisions that nothing in amendment by Pub. L. 101-508 be 
construed to affect treatment of certain transactions occurring, 
property acquired, or items of income, loss, deduction, or credit taken 
into account prior to Nov. 5, 1990, for purposes of determining 
liability for tax for periods ending after Nov. 5, 1990, see section 
11821(b) of Pub. L. 101-508, set out as a note under section 29 of this 
title.


     Information Necessary for Valid Special Use Valuation Election

    Section 1421 of Pub. L. 99-514, as amended by Pub. L. 100-647, title 
I, Sec. 1014(f), Nov. 10, 1988, 102 Stat. 3562, provided that:
    ``(a) In General.--In the case of any decedent dying before January 
1, 1986, if the executor--
        ``(1) made an election under section 2032A of the Internal 
    Revenue Code of 1954 [now 1986] on the return of tax imposed by 
    section 2001 of such Code, and
        ``(2) provided substantially all the information with respect to 
    such election required on such return of tax,
such election shall be a valid election for purposes of section 2032A of 
such Code.
    ``(b) Executor Must Provide Information.--An election described in 
subsection (a) shall not be valid if the Secretary of the Treasury or 
his delegate after the date of the enactment of this Act [Oct. 22, 1986] 
requests information from the executor with respect to such election and 
the executor does not provide such information within 90 days of receipt 
of such request.
    ``(c) Effective Date.--The provisions of this section shall not 
apply to the estate of any decedent if before the date of the enactment 
of this Act [Oct. 22, 1986] the statute of limitations has expired with 
respect to--
        ``(1) the return of tax imposed by section 2001 of the Internal 
    Revenue Code of 1954 [now 1986], and
        ``(2) the period during which a claim for credit or refund may 
    be timely filed.
    ``(d) Special Rule for Certain Estate.--Notwithstanding subsection 
(a)(2), the provisions of this section shall apply to the estate of an 
individual who died on January 30, 1984, and with respect to which--
        ``(1) a Federal estate tax return was filed on October 30, 1984, 
    electing current use valuation, and
        ``(2) the agreement required under section 2032A was filed on 
    November 9, 1984.''


            Land Diverted Under 1983 Payment-in-Kind Program

    Land diverted from production of agricultural commodities under a 
1983 payment-in-kind program to be treated, for purposes of this 
section, as used during the 1983 crop year by qualified taxpayers in the 
active conduct of the trade or business of farming, with qualified 
taxpayers who materially participate in the diversion and devotion to 
conservation uses under a 1983 payment-in-kind program to be treated as 
materially participating in the operation of such land during the 1983 
crop year, see section 3 of Pub. L. 98-4, set out as a note under 
section 61 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 263A, 453, 453A, 469, 664, 
1014, 1016, 1040, 1223, 1396, 1397C, 2013, 2031, 2035, 2056A, 2057, 
2624, 2663, 6324B of this title.
