ESTATE TAX VALUATION FREEZES.

SEC. 3031. ESTATE TAX VALUATION FREEZES. (a) Deemed Gift.— (1) In general.— Paragraph (4) of section 2036(c) of the 1986 Code is amended to read as follows: “(4) Treatment of certain transfers.— “(A) In general.— For purposes of this subtitle, if, before the death of the original transferor— “(i) the original transferor transfers all (or any portion of) the retained interest referred to in paragraph (1), or “(ii) the original transferee transfers all (or any portion of) the transferred property referred to in paragraph (1) to a person who is not a member of the original transferor’s family, the original transferor shall be treated as having made a transfer by gift of property to the original transferee equal to the paragraph (1) inclusion (or proportionate amount thereof). Proper adjustments shall be made in the amount treated as a gift by reason of the preceding sentence to take into account prior transfers to which this subparagraph applied and take into account any right of recovery (whether or not exercised) under section 2207B. “(B) Coordination with paragraph (1).— In any case to which subparagraph (A) applies, nothing in paragraph (1) or section 2035(d)(2) shall require the inclusion of the transferred property (or proportionate amount thereof). “(C) Special rule where property retransferred.— In the case of a transfer described in subparagraph (A)(ii) from the original transferee to the original transferor, the paragraph (1) inclusion (or proportion thereof) shall be reduced by the excess (if any) of— “(i) the fair market value of the property so transferred, over “(ii) the amount of the consideration paid by the original transferor in exchange for such property. “(D) Definitions.— For purposes of this paragraph— “(i) Original transferor.— The term ‘original transferor’ means the person making the transfer referred to in paragraph (1). “(ii) Original transferee.— The term ‘original transferee’ means the person to whom the transfer referred to in paragraph (1) is made. Such term in-102 STAT. 3635eludes any member of the original transferor’s family to whom the property is subsequently transferred. “(iii) Paragraph (1) inclusion.— The term ‘paragraph (1) inclusion’ means the amount which would have been included in the gross estate of the original transferor under subsection (a) by reason of paragraph (1) (determined without regard to sections 2032 and 2032A) if the original transferor died immediately before the transfer referred to in subparagraph (A). The amount determined under the preceding sentence shall be reduced by the amount (if any) of the taxable gift resulting from the transfer referred to in paragraph (1)(B). “(iv) Transfers to include terminations, etc.— Terminations, lapses, and other changes in any interest in property of the original transferor or original transferee shall be treated as transfers. “(E) Continuing interest in transferred property may not be retained.— A transfer (to which subparagraph (A) would otherwise apply) shall not be taken into account under subparagraph (A) if the original transferor or the original transferee (as the case may be) retains a direct or indirect continuing interest in the property transferred in such transfer.” (2) Cross reference.— Subsection (d) of section 2501 of the 1986 Code is amended by adding at the end thereof the following: (3) For treatment of certain transfers related to estate tax valuation freezes as gifts to which this chapter applies, see section 2036(c)(4).” (b) Treatment of Certain Grantor Retained Income Trusts.— Subsection (c) of section 2036 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(6) Treatment of certain grantor retained interest trusts.— “(A) In general.— For purposes of this subsection, any retention of a qualified trust income interest shall be disregarded and the property with respect to which such interest exists shall be treated as held by the transferor while such income interest continues. “(B) Qualified trust income interest.— For purposes of subparagraph (A), the term ‘qualified trust income interest’ means any right to receive amounts determined solely by reference to the income from property held in trust if— “(i) such right is for a period not exceeding 10 years, “(ii) the person holding such right transferred the property to the trust, and “(iii) such person is not a trustee of such trust.” (b) Exceptions.— Subsection (c) of section 2036 of the 1986 Code is amended by adding at the end thereof the following new paragraphs: “(7) Exceptions.— “(A) In general.— Paragraph (1) shall not apply to a transaction solely by reason of 1 or more of the following: “(i) The receipt (or retention) of qualified debt. “(ii) Except as provided in regulations, the existence of an agreement for the sale or lease of goods or other102 STAT. 3636 property to be used in the enterprise or the providing of services and— “(I) the agreement is an arm’s length agreement for fair market value, and “(II) the agreement does not otherwise involve any change in interests in the enterprise. “(iii) An option or other agreement to buy or sell property at the fair market value of such property as of the time the option is (or the rights under the agreement are) exercised. “(B) Limitations.— “(i) Services performed after transfer.— In the case of compensation for services performed after the transfer referred to in paragraph (1)(B), clause (ii) of subparagraph (A) shall not apply if such services were performed under an agreement providing for the performance of services over a period greater than 3 years after the date of the transfer. For purposes of the preceding sentence, the term of any agreement includes any period for which the agreement may be extended at the option of the service provider. “(ii) Amounts must not be contingent on profits, etc.— Clause (ii) of subparagraph (A) shall not apply to any amount determined (in whole or in part) by reference to gross receipts, income, profits, or similar items of the enterprise. “(C) Qualified debt.— For purposes of this paragraph, except as provided in subparagraph (D), the term ‘qualified debt’ means any indebtedness if— “(i) such indebtedness— “(I) unconditionally requires the payment of a sum certain in money in 1 or more fixed payments on specified dates, and “(II) has a fixed maturity date not more than 15 years from the date of issue (or, in the case of indebtedness secured by real property, not more than 30 years from the date of issue). “(ii) the only other amount payable under such indebtedness is interest determined at— “(I) a fixed rate, or “(II) a rate which bears a fixed relationship to a specified market interest rate, (iii) the interest payment dates are fixed, “(iv) such indebtedness is not by its terms subordinated to the claims of general creditors, “(v) except in a case where such indebtedness is in default as to interest or principal, such indebtedness does not grant voting rights to the person to whom the debt is owed or place any limitation on the exercise of voting rights by others, and “(vi) such indebtedness— “(I) is not (directly or indirectly) convertible into an interest in the enterprise which would not be qualified debt, and “(II) does not otherwise grant any right to acquire such an interest. 102 STAT. 3637 The requirement of clause (i)(I) that the principal be payable on 1 or more specified dates and the requirement of clause (i)(II) shall not apply to indebtedness payable on demand if such indebtedness is issued in return for cash to be used to meet normal business needs of the enterprise. “(D) Special rule for startup debt.— “(i) In general.— For purposes of this paragraph, the term ‘qualified debt’ includes any qualified startup debt. “(ii) Qualified startup debt.— For purposes of clause (i), the term ‘qualified startup debt’ means any indebtedness if— “(I) such indebtedness unconditionally requires the payment of a sum certain in money, “(II) such indebtedness was received in exchange for cash to be used in any enterprise involving the active conduct of a trade or business, “(III) the person to whom the indebtedness is owed has not at any time (whether before, on, or after the exchange referred to in subclause (II)) transferred any property (including goodwill) which was not cash to the enterprise or transferred customers or other business opportunities to the enterprise, “(IV) the person to whom the indebtedness is owed has not at any time (whether before, on, or after the exchange referred to in subclause (II)) held any interest in the enterprise (including an interest as an officer, director, or employee) which was not qualified startup debt, “(V) any person who (but for subparagraph (A)(i)) would have been an original transferee (as defined in paragraph (4)(C)) participates in the active management (as defined in section 2032A(e)(12)) of the enterprise, and “(VI) such indebtedness meets the requirements of clauses (v) and (vi) of subparagraph (C). “(8) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including such regulations as may be necessary or appropriate to prevent avoidance of the purposes of this subsection through distributions or otherwise.” (d) Treatment of Spouse.— Subparagraph (C) of section 2036(c)(3) of the 1986 Code is amended by striking out “An individual” and inserting in lieu thereof “Except as provided in regulations, an individual”. (e) Clarification of Retention Test.— Subparagraph (B) of section 2036(c)(1) of the 1986 Code is amended by striking out “while” and all that follows down through the comma at the end of such subparagraph and inserting in lieu thereof “while retaining an interest in the income of, or rights in, the enterprise,”. (f) Right of Recovery.— (1) In general.— Subchapter C of chapter 11 of the 1986 Code is amended by inserting after section 2207A the following new section: 102 STAT. 3638 “SEC. 2207B. RIGHT OF RECOVERY WHERE DECEDENT RETAINED INTEREST. “(a) Estate Tax.— “(1) In general.— If any part of the gross estate on which tax has been paid consists of the value of property included in the gross estate by reason of section 2036 (relating to transfers with retained life estate), the decedent’s estate shall be entitled to recover from the person receiving the property the amount which bears the same ratio to the total tax under this chapter which has been paid as— “(A) the value of such property, bears to “(B) the taxable estate. “(2) Decedent may otherwise direct by will.— Paragraph (1) shall not apply if the decedent otherwise directs in a provision of his will (or a revocable trust) specifically referring to this section. “(b) Gift Tax.— If for any calendar year tax is paid under chapter 12 with respect to any person by reason of property treated as transferred by such person under section 2036(c)(4), such person shall be entitled to recover from the original transferee (as defined in section 2036(c)(4)(C)(ii)) the amount which bears the same ratio to the total tax for such year under chapter 12 as— “(1) the value of such property for purposes of chapter 12, bears to “(2) the total amount of the taxable gifts for such year. “(c) More Than One Recipient.— For purposes of this section, if there is more than 1 person receiving the property, the right of recovery shall be against each such person. “(d) Penalties and Interest.— In the case of penalties and interest attributable to the additional taxes described in subsections (a) and (b), rules similar to the rules of subsections (a), (b), and (c) shall apply. “(e) No Right of Recovery Against Charitable Remainder Trusts.— No person shall be entitled to recover any amount by reason of this section from a trust to which section 664 applies (determined without regard to this section).” (2) Conforming amendment.— The table of sections for subchapter C of chapter 11 of the 1986 Code is amended by inserting after the item relating to section 2207A the following new item: “Sec. 2207B. Right of recovery where decedent retained interest.” (g) Treatment of Consideraton.— (1) Paragraph (2) of section 2036(c) of the 1986 Code is amended to read as follows: “(2) Special rules for consideration furnished by family members.— “(A) In general.— 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. “(B) Treatment of consideration.— (i) In general.— In the case of a transfer described in paragraph (1), if— “(I) a member of the transferor’s family provides consideration in money or money’s worth for such member’s interest in the enterprise, and 102 STAT. 3639 “(II) it is established to the satisfaction of the Secretary that such consideration originally belonged to such member and was never received or acquired (directly or indirectly) by such member from the transferor for less than full and adequate consideration in money or money’s worth, paragraph (1) shall not apply to the applicable fraction of the portion of the enterprise which would (but for this subparagraph) have been included in the gross estate of the transferor by reason of this subsection (determined without regard to any reduction under paragraph (5) for the value of the retained interest). “(ii) Applicable fraction.— For purposes of clause (i), the applicable fraction is a fraction— “(I) the numerator of which is the amount of the consideration referred to in clause (i), and “(II) the denominator of which is the value of the portion referred to in clause (i) immediately after the transfer described in paragraph (1). “(iii) Section 2043 not to apply.—The provisions of this subparagraph shall be in lieu of any adjustment under section 2043.” (2) Paragraph (5) of section 2036(c) of the 1986 Code is amended to read as follows: “(5) Adjustments.— Appropriate adjustments shall be made in the amount included in the gross estate by reason of this subsection for the value of the retained interest, extraordinary distributions, and changes in the capital structure of the enterprise after the transfer described in paragraph (1). (h) Effective Date.— (1) In general.— Except as provided in this subsection, any amendment made by this section shall take effect as if included in the provisions of the Revenue Act of 1987 to which such amendment relates. (2) Subsection (a).— The amendments made by subsection (a) shall apply in cases where the transfer referred to in section 2O36(c)(1)(B) of the 1986 Code is on or after June 21, 1988. (3) Subsection (f).— If an amount is included in the gross estate of a decedent under section 2036 of the 1986 Code other than solely by reason of section 2036(c) of the 1986 Code, the amendments made by subsection (f) shall apply to such amount only with respect to property transferred after the date of the enactment of this Act. (4) Correction period.— If section 2036(c)(1) of the 1986 Code would (but for this paragraph) apply to any interest arising from a transaction entered into during the period beginning after December 17, 1987, and ending before January 1, 1990, such section shall not apply to such interest if— (A) during such period, such actions are taken as are necessary to have such section 2036(c)(1) not apply to such transaction (and any such interest), or (B) the original transferor and his spouse on January 1, 1990 (or, if earlier, the date of the original transferor’s death), does not hold any interest in the enterprise involved. 102 STAT. 3640 (5) Clarification of effective date.— For purposes of section 10402(h) of the Revenue Act of 1987, with respect to property transferred on or before December 17, 1987— (A) any failure to exercise a right of conversion, (B) any failure to pay dividends, and (c) failures to exercise other rights specified in regulations, shall not be treated as a subsequent transfer.