VALUATION FOR PURPOSES OF THE FEDERAL ESTATE TAX OF CERTAIN REAL PROPERTY DEVOTED TO FARMING OR CLOSELY HELD BUSINESSES.

SEC. 2003. VALUATION FOR PURPOSES OF THE FEDERAL ESTATE TAX OF CERTAIN REAL PROPERTY DEVOTED TO FARMING OR CLOSELY HELD BUSINESSES. (a) General Rule.— Part III of subchapter A of chapter 11 (relating to gross estate) is amended by inserting after section 2032 the following new section: “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.— 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 $500,000. “(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, on the date of the decedent’s death, was being used for a qualified use, but only if— 90 STAT. 1857 “(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, 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, 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). “(c) Tax Treatment of Dispositions and Failures To Use for Qualified Use.— “(1) Imposition of additional estate tax.— If, within 15 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 90 STAT. 1858 “(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 some 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. “(3) Phaseout of additional tax between 10th and 15th tears.— If the date of the disposition or cessation referred to in paragraph (1) occurs more than 120 months and less than 180 months after the date of the death of the decedent, the amount of the ta x imposed by this subsection shall be reduced (but not below zero) by an amount determined by multiplying the amount of such tax (determined without regard to this paragraph) by a fraction— “(A) the numerator of which is the number of full months after such death in excess of 120, and “(B) the denominator of which is 60. “(4) 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 90 STAT. 1859(A) , as the case may be, of paragraph (1) shall not apply with respect to the same portion of such interest. “(5) 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). “(6) Liability for tax.— The qualified heir shall be personally liable for the additional tax imposed by this subsection with respect to his interest. “(7) 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 3 years or more during which— “(i) in the ease 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. “(d) Election; Agreement.— “(1) Election.— 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. “(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. “(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 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. For purposes of the preceding sentence, a legally adopted child of an individual shall be treated as a 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 90 STAT. 1860owner 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) 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 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 pur-90 STAT. 1861poses 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. “(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, 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 632411 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)).” (b) Special Lien.— Subchapter C of chapter 64 (relating to lien for taxes) is amended by inserting after section 6324A the following new section: “SEC. 6324B. SPECIAL LIEN FOR ADDITIONAL ESTATE TAX ATTRIBUTABLE TO FARM, ETC., VALUATION. “(a) General Rule.— In the case of any interest in qualified real property (within the meaning of section 2032A(b)), an amount equal to the-adjusted tax difference attributable to such interest (within the meaning of section 2032A (c)(2)(B)) shall be a lien in favor of the United States on the property in which such interest exists. “(b) Period of Lien.— The lien imposed by this section shall arise at the time an election is filed under section 2032A and shall continue with respect to any interest-in the qualified farm real property— “(1) until the liability for tax under subsection (c) of section 2032A with respect to such interest has been satisfied or has become unenforceable by reason of lapse of time, or “(2) until it is established to the satisfaction of the Secretary that no further tax liability may arise under section 2032A(c) with respect to such interest. “(c) Certain Rules Made Applicable.— The rules set forth in paragraphs (1), (3), and (4) of section 6324A(d) shall apply with respect to the lien imposed by this section as if it were a lien imposed by section 6324A. 90 STAT. 1862 “(d) Substitution of Security for Lien.— To the extent provided in regulations prescribed by the Secretary, the furnishing of security may be substituted for the lien imposed by this section.” (c) Credit for Tax on Prior Transfers.— Section 2013 (relating to credit for tax on prior transfers) is amended by adding at the end thereof the following new subsection: “(f) Treatment of Additional Tax Imposed Under Section 2032A.— If section 2032A applies to any property included in the gross estate of the transferor and an additional tax is imposed with respect to such property under section 2032A (c) before the date which is 2 years after the date of the decedent’s death, for purposes of this section— “(1) the additional tax imposed by section 2032A(c) shall be treated as a Federal estate tax payable with respect to the estate of the transferor; and “(2) the value of such property and the amount of the taxable est ate of the transferor shall be determined as if section 2032A did not apply with respect to such property.” (d) Clerical Amendments.— (1) The table of sections for part III of subchapter A of chapter 11 is amended by inserting after the item relating to section 2032 the following new item: “Sec. 2032A. Valuation of certain farm, etc., real property.” (2) The table of sections for subchapter C of chapter 64 is amended by inserting after the item relating to section 6324A the following new item: “Sec. 6324 B. Special lien for additional estate tax attributable to farm, etc., valuation.” (e) Effective Date.— The amendments made by this section shall apply to the estates of decedents dying after December 31, 1976.