INCLUSION RELATED TO VALUATION FREEZES.

SEC. 10402. INCLUSION RELATED TO VALUATION FREEZES. (a) In General.— Section 2036 (relating to transfers with retained life estate) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: “(c) Inclusion Related to Valuation Freezes.— “(1) In general.— For purposes of subsection (a), if— “(A) any person holds a substantial interest in an enterprise, and “(B) such person in effect transfers after December 17, 1987, property having a disproportionately large share of the potential appreciation in such person’s interest in the enterprise while retaining a disproportionately large share in the income of, or rights in, the enterprise, then the retention of the retained interest shall be considered to be a retention of the enjoyment of the transferred property. “(2) Special rule for sales to family members.— The exception contained in subsection (a) for a bona fide sale shall not apply to a transfer described in paragraph (1) if such transfer is to a member of the transferor’s family. “(3) Definitions.— For purposes of this subsection— “(A) Substantial interest.— A person holds a substantial interest in an enterprise if such person owns (directly or indirectly) 10 percent or more of the voting power or income stream, or both, in such enterprise. For purposes of the preceding sentence, an individual shall be treated as owning any interest in an enterprise which is owned (directly or indirectly) by any member of such individual’s family. “(B) Family.— The term ‘family’ means, with respect to any individual, such individual’s spouse, any lineal descendant of such individual or of such individual’s spouse, any parent or grandparent of such individual, and any spouse of 101 STAT. 1330–432any of the foregoing. For purposes of the preceding sentence, a relationship by legal adoption shall be treated as a relationship by blood. “(C) Treatment of spouse.— An individual and such individual’s spouse shall be treated as 1 person. “(4) Coordination with section 2035.— For purposes of applying section 2035, any transfer of the retained interest referred to in paragraph (1) shall be treated as a transfer of an interest in the transferred property referred to in paragraph (1). “(5) Coordination with section 2043.— In lieu of applying section 2043, appropriate adjustments shall be made for the value of the retained interest. 122122 Copy read “interest.” (b) Effective Date.— The amendment made by subsection (a) shall apply with respect to estates of decedents dying after December 31, 1987, but only in the case of property transferred after December 17, 1987.