§ 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),

(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.

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, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), plus

(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.

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) ^[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.

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).

(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).

(j) Termination

This section shall not apply to the estates of decedents dying after December 31, 2003.

[1] See References in Text note below.

U.S. Code

§ 2057. Family-owned business interests