
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 521(d)]
[CITE: 26USC2057]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                    Subtitle B--Estate and Gift Taxes
 
                         CHAPTER 11--ESTATE TAX
 
             Subchapter A--Estates of Citizens or Residents
 
                         PART IV--TAXABLE ESTATE
 
Sec. 2057. Family-owned business interests


(a) General rule

                     (1) Allowance of deduction

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

                        (2) Maximum deduction

        The deduction allowed by this section shall not exceed $675,000.

                (3) Coordination with unified credit

        (A) In general

            Except as provided in subparagraph (B), if this section 
        applies to an estate, the applicable exclusion amount under 
        section 2010 shall be $625,000.

        (B) Increase in unified credit if deduction is less than 
                $675,000

            If the deduction allowed by this section is less than 
        $675,000, the amount of the applicable exclusion amount under 
        section 2010 shall be increased (but not above the amount which 
        would apply to the estate without regard to this section) by the 
        excess of $675,000 over the amount of the deduction allowed.

(b) Estates to which section applies

                           (1) In general

        This section shall apply to an estate if--
            (A) the decedent was (at the date of the decedent's death) a 
        citizen or resident of the United States,
            (B) the executor elects the application of this section and 
        files the agreement referred to in subsection (h),
            (C) the sum of--
                (i) the adjusted value of the qualified family-owned 
            business interests described in paragraph (2), plus
                (ii) the amount of the gifts of such interests 
            determined under paragraph (3),

        exceeds 50 percent of the adjusted gross estate, and
            (D) 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 interests were owned by the decedent or a 
            member of the decedent's family, and
                (ii) there was material participation (within the 
            meaning of section 2032A(e)(6)) by the decedent or a member 
            of the decedent's family in the operation of the business to 
            which such interests relate.

      (2) Includible qualified family-owned business interests

        The qualified family-owned business interests described in this 
    paragraph are the interests which--
            (A) are included in determining the value of the gross 
        estate, and
            (B) are acquired by any qualified heir from, or passed to 
        any qualified heir from, the decedent (within the meaning of 
        section 2032A(e)(9)).

                  (3) Includible gifts of interests

        The amount of the gifts of qualified family-owned business 
    interests determined under this paragraph is the sum of--
            (A) the amount of such gifts from the decedent to members of 
        the decedent's family taken into account under section 
        2001(b)(1)(B), plus
            (B) the amount of such gifts otherwise excluded under 
        section 2503(b),

    to the extent such interests are continuously held by members of 
    such family (other than the decedent's spouse) between the date of 
    the gift and the date of the decedent's death.

(c) Adjusted gross estate

    For purposes of this section, the term ``adjusted gross estate'' 
means the value of the gross estate--
        (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.

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

                           (2) Limitation

        Such term shall not include--
            (A) any interest in a trade or business the principal place 
        of business of which is not located in the United States,
            (B) any interest in an entity, if the stock or debt of such 
        entity or a controlled group (as defined in section 267(f)(1)) 
        of which such entity was a member was readily tradable on an 
        established securities market or secondary market (as defined by 
        the Secretary) at any time within 3 years of the date of the 
        decedent's death,
            (C) any interest in a trade or business not described in 
        section 542(c)(2), if more than 35 percent of the adjusted 
        ordinary gross income of such trade or business for the taxable 
        year which includes the date of the decedent's death would 
        qualify as personal holding company income (as defined in 
        section 543(a) without regard to paragraph (2)(B) thereof) if 
        such trade or business were a corporation,
            (D) that portion of an interest in a trade or business that 
        is attributable to--
                (i) cash or marketable securities, or both, in excess of 
            the reasonably expected day-to-day working capital needs of 
            such trade or business, and
                (ii) any other assets of the trade or business (other 
            than assets used in the active conduct of a trade or 
            business described in section 542(c)(2)), which produce, or 
            are held for the production of, personal holding company 
            income (as defined in subparagraph (C)) or income described 
            in section 954(c)(1) (determined without regard to 
            subparagraph (A) thereof and by substituting ``trade or 
            business'' for ``controlled foreign corporation'').

    In the case of a lease of property on a net cash basis by the 
    decedent to a member of the decedent's family, income from such 
    lease shall not be treated as personal holding company income for 
    purposes of subparagraph (C), and such property shall not be treated 
    as an asset described in subparagraph (D)(ii), if such income and 
    property would not be so treated if the lessor had engaged directly 
    in the activities engaged in by the lessee with respect to such 
    property.

                    (3) Rules regarding ownership

        (A) Ownership of entities

            For purposes of paragraph (1)(B)--
            (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, plus
                (ii) interest on the amount determined under clause (i) 
            at the underpayment rate established under section 6621 for 
            the period beginning on the date the estate tax liability 
            was due under this chapter and ending on the date such 
            additional estate tax is due.

        (B) Applicable percentage

            For purposes of this paragraph, the applicable percentage 
        shall be determined under the following table:

  If the event described in
    paragraph (1) occurs in
    the following year of                                 The applicable
    material participation:                               percentage is:
  1 through 6...........................                            100 
  7.....................................                             80 
  8.....................................                             60 
  9.....................................                             40 
  10....................................                             20.

        (C) Adjusted tax difference

            For purposes of subparagraph (A)--
            (i) In general

                The adjusted tax difference attributable to a qualified 
            family-owned business interest is the amount which bears the 
            same ratio to the adjusted tax difference with respect to 
            the estate (determined under clause (ii)) as the value of 
            such interest bears to the value of all qualified family-
            owned business interests described in subsection (b)(2).
            (ii) Adjusted tax difference with respect to the 
                    estate

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

           (3) Use in trade or business by family members

        A qualified heir shall not be treated as disposing of an 
    interest described in subsection (e)(1)(A) by reason of ceasing to 
    be engaged in a trade or business so long as the property to which 
    such interest relates is used in a trade or business by any member 
    of such individual's family.

(g) Security requirements for noncitizen qualified heirs

                           (1) In general

        Except upon the application of subparagraph (F) of subsection 
    (i)(3), if a qualified heir is not a citizen of the United States, 
    any interest under this section passing to or acquired by such heir 
    (including any interest held by such heir at a time described in 
    subsection (f)(1)(C)) shall be treated as a qualified family-owned 
    business interest only if the interest passes or is acquired (or is 
    held) in a qualified trust.

                         (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 2032A(g) (relating to application to interests 
        in partnerships, corporations, and trusts).
            (M) Subsections (h) and (i) of section 2032A.
            (N) Section 6166(b)(3) (relating to farmhouses and certain 
        other structures taken into account).
            (O) Subparagraphs (B), (C), and (D) of section 6166(g)(1) 
        (relating to acceleration of payment).
            (P) Section 6324B (relating to special lien for additional 
        estate tax).

(Added Pub. L. 105-34, title V, Sec. 502(a), Aug. 5, 1997, 111 Stat. 
847, Sec. 2033A; renumbered Sec. 2057 and amended Pub. L. 105-206, title 
VI, Sec. 6007(b)(1)(A)-(D), (2)-(7), July 22, 1998, 112 Stat. 807-809.)


                            Prior Provisions

    A prior section 2057, added Pub. L. 99-514, title XI, Sec. 1172(a), 
Oct. 22, 1986, 100 Stat. 2513; amended Pub. L. 100-203, title X, 
Secs. 10411(a), 10412(a), Dec. 22, 1987, 101 Stat. 1330-432, 1330-433; 
Pub. L. 100-647, title I, Sec. 1011B(g)(3), Nov. 10, 1988, 102 Stat. 
3490, related to sales of employer securities to employee stock 
ownership plans or worker-owned cooperatives, prior to repeal by Pub. L. 
101-239, title VII, Sec. 7304(a)(1), (3), Dec. 19, 1989, 103 Stat. 2352, 
2353, applicable to estates of decedents dying after Dec. 19, 1989.
    Another prior section 2057, added Pub. L. 94-455, title XX, 
Sec. 2007(a), Oct. 4, 1976, 90 Stat. 1890; amended Pub. L. 95-600, title 
VII, Sec. 702(l)(1), (2), Nov. 6, 1978, 92 Stat. 2934, 2935, related to 
bequests, etc., to certain minor children, prior to repeal by Pub. L. 
97-34, title IV, Sec. 427(a), (c), Aug. 13, 1981, 95 Stat. 3181, 
applicable to estates of decedents dying after Dec. 31, 1981.


                               Amendments

    1998--Pub. L. 105-206, Sec. 6007(b)(1)(A), (B), renumbered section 
2033A of this title as this section and substituted ``interests'' for 
``exclusion'' in section catchline.
    Subsec. (a). Pub. L. 105-206, Sec. 6007(b)(1)(B), substituted 
``General rule'' for ``In general'' in heading and amended text 
generally. Prior to amendment, text read as follows: ``In the case of an 
estate of a decedent to which this section applies, the value of the 
gross estate shall not include the lesser of--
        ``(1) the adjusted value of the qualified family-owned business 
    interests of the decedent otherwise includible in the estate, or
        ``(2) the excess of $1,300,000 over the applicable exclusion 
    amount under section 2010(c) with respect to such estate.''
    Subsec. (b)(2)(A). Pub. L. 105-206, Sec. 6007(b)(1)(C), struck out 
``(without regard to this section)'' after ``gross estate''.
    Subsec. (b)(3). Pub. L. 105-206, Sec. 6007(b)(2), reenacted heading 
without change and amended text generally. Prior to amendment, text read 
as follows: ``The amount of the gifts of qualified family-owned business 
interests determined under this paragraph is the excess of--
        ``(A) the sum of--
            ``(i) the amount of such gifts from the decedent to members 
        of the decedent's family taken into account under subsection 
        2001(b)(1)(B), plus
            ``(ii) the amount of such gifts otherwise excluded under 
        section 2503(b),
    to the extent such interests are continuously held by members of 
    such family (other than the decedent's spouse) between the date of 
    the gift and the date of the decedent's death, over
        ``(B) the amount of such gifts from the decedent to members of 
    the decedent's family otherwise included in the gross estate.''
    Subsec. (c). Pub. L. 105-206, Sec. 6007(b)(1)(D), struck out 
``(determined without regard to this section)'' after ``the gross 
estate'' in introductory provisions.
    Subsec. (e)(1). Pub. L. 105-206, Sec. 6007(b)(5)(A), inserted 
concluding provisions.
    Subsec. (e)(2). Pub. L. 105-206, Sec. 6007(b)(3)(C), inserted 
concluding provisions.
    Subsec. (e)(2)(C). Pub. L. 105-206, Sec. 6007(b)(3)(A), substituted 
``(as defined in section 543(a) without regard to paragraph (2)(B) 
thereof) if such trade or business were a corporation'' for ``(as 
defined in section 543(a))''.
    Subsec. (e)(2)(D)(ii). Pub. L. 105-206, Sec. 6007(b)(3)(B), 
substituted ``personal holding company income (as defined in 
subparagraph (C)) or income described'' for ``income of which is 
described in section 543(a) or''.
    Subsec. (f)(2)(A)(i). Pub. L. 105-206, Sec. 6007(b)(4)(A), struck 
out ``(as determined under rules similar to the rules of section 
2032A(c)(2)(B))'' after ``business interest''.
    Subsec. (f)(2)(C). Pub. L. 105-206, Sec. 6007(b)(4)(B), added 
subpar. (C).
    Subsec. (f)(3). Pub. L. 105-206, Sec. 6007(b)(5)(B), added par. (3).
    Subsec. (g)(1). Pub. L. 105-206, Sec. 6007(b)(6), struck out ``or 
(M)'' after ``subparagraph (F)''.
    Subsec. (i)(3)(L) to (P). Pub. L. 105-206, Sec. 6007(b)(7), added 
subpars. (L) and (M) and redesignated former subpars. (L) to (N) as (N) 
to (P), respectively.


                    Effective Date of 1998 Amendment

    Amendment by Pub. L. 105-206 effective, except as otherwise 
provided, as if included in the provisions of the Taxpayer Relief Act of 
1997, Pub. L. 105-34, to which such amendment relates, see section 6024 
of Pub. L. 105-206, set out as a note under section 1 of this title.


                             Effective Date

    Section 502(c) of Pub. L. 105-34 provided that: ``The amendments 
made by this section [enacting this section] shall apply to estates of 
decedents dying after December 31, 1997.''

                  Section Referred to in Other Sections

    This section is referred to in section 2031 of this title.
