article: SECTION 1. SHORT TITLE. This Act may be cited as the ``American Family Business Preservation Act''. SEC. 2. REDUCED ESTATE TAX RATE ON FAMILY-OWNED BUSINESS INTERESTS. (a) In General.--Part I of subchapter A of chapter 11 of the Internal Revenue Code of 1986 (relating to tax imposed) is amended by adding at the end the following new section: ``SEC. 2003. REDUCED RATE ON FAMILY-OWNED BUSINESS INTERESTS. ``(a) In General.--In the case of an estate of a decedent to which this section applies, the tax imposed by section 2001 shall not exceed the sum of-- ``(1) a tax computed at the rates and in the manner as if this section had not been enacted on the greater of-- ``(A) the sum described in section 2001(c)(1) reduced by the qualified family-owned business interests, or ``(B) the sum (if any) described in section 2001(c)(1) taxed at a rate below the applicable rate, plus ``(2) a tax equal to the applicable rate of the portion of the taxable estate in excess of the amount determined under paragraph (1). ``(b) Estates to Which Section Applies.--This section shall apply to an estate if-- ``(1) the decedent was (at the date of his or her death) a citizen of the United States, ``(2) the sum of-- ``(A) the value of the qualified family-owned business interests which are included in determining the gross estate and which are acquired from or passed from the decedent to a qualified heir of the decedent, and ``(B) the amount (taken into account under subsection 2001(b)(1)(B)) of the adjusted taxable gifts of such interests to members of the decedent's family, exceeds 50 percent of the adjusted gross estate, and ``(3) 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-- ``(A) such interests were owned by the decedent or a member of the decedent's family, and ``(B) there was material participation by the decedent or a member of the decedent's family in the operation of the business to which such interests relate. ``(c) Applicable Rate.--For purposes of this section, the applicable rate is-- ``(1) 15 percent if the requirement of subsection (b)(3)(B) is met by a member of the decedent's family, and ``(2) 20 percent in any other case. ``(d) 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; ``(B) an interest as a partner in a partnership carrying on a trade or business, if such partnership had 15 or fewer partners; or ``(C) stock in a corporation carrying on a trade or business if such corporation had not more than the number of shareholders specified in section 1361(b)(1)(A). Such term shall not include any interest which is readily tradable on an established securities market or otherwise. ``(2) Rules for applying paragraph (1).--For purposes of paragraph (1), rules similar to the rules of paragraphs (2), (3), (4), and (6) of section 6166(b) shall apply. ``(e) Recapture of Tax Benefit if Interests Not Held for 10 Years.-- ``(1) In general.--If-- ``(A) during the 10-year period beginning on the date of death of the decedent-- ``(i)(I) any portion of a qualified family- owned business interest is distributed, sold, exchanged, or otherwise disposed of, or ``(II) money and other property attributable to such an interest is withdrawn from such trade or business, and ``(B) the aggregate of such distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds 20 percent of the value of such interest, or there is hereby imposed an additional estate tax. ``(2) Additional estate tax.-- ``(A) In general.--The amount of the additional estate tax imposed by paragraph (1) shall be the applicable percentage of the excess of what would have been the estate tax liability but for subsection (a) over the adjusted estate tax liability. ``(B) Applicable percentage.--For purposes of subparagraph (A), the term `applicable percentage' means 100 percent reduced (but not below zero) by the product of-- ``(i) 10 percentage points, and ``(ii) the number of years (if any) after the date of the decedent's death which the year during which the additional estate tax is imposed by paragraph (1) is after the 1st year after the date of the decedent's death. ``(C) Adjusted estate tax liability.--For purposes of subparagraph (A), the term `adjusted estate tax liability' means the estate tax liability increased by the amount (if any) of any prior additional estate tax imposed by subsection (f). ``(D) Estate tax liability.--For purposes of this paragraph, the term `estate tax liability' means the tax imposed by section 2001 reduced by the credits allowable against such tax. ``(3) Certain rules to apply.--For purposes of this subsection, rules similar to the rules of subparagraphs (B), (C), and (D) of section 6166(g)(1) shall apply. ``(f) Recapture of Portion of Tax Benefit if Heirs Cease to Materially Participate During 10 Years After Death.-- ``(1) In general.--If-- ``(A) the applicable rate which applied under subsection (a) to the estate of the decedent was 15 percent, ``(B) at any time during the 10-year period beginning on the date of death of the decedent, no qualified heir materially participates in the operation of the business to which the qualified family-owned business interests relate, and ``(C) there is no recapture under subsection (e) on or before the earliest date during such 10-year period that no qualified heir so materially participated, there is hereby imposed an additional estate tax. ``(2) Additional estate tax.--The amount of the additional estate tax imposed by paragraph (1) shall be the applicable percentage of the excess of what would have been the estate tax liability but for subsection (c)(1) over the estate tax liability. ``(3) Definitions.--For purposes of paragraph (2), the terms `applicable percentage' and `estate tax liability' have the meanings given to such terms by subsection (e). ``(g) Other Definitions.--For purposes of this section, the terms `qualified heir' and `member of the family' have the meanings given to such terms by section 2032A(e).'' (b) Clerical Amendment.--The table of sections for part I of subchapter A of chapter 11 of such Code is amended by adding at the end the following new item: ``Sec. 2003. Reduced rate on family-owned business interests.'' (c) Effective Date.--The amendments made by this section shall apply to estates of decedents dying after the date of the enactment of this section. SEC. 3. LIMITATION ON 4 PERCENT RATE OF INTEREST ON ESTATE TAX EXTENDED UNDER SECTION 6166 NOT TO APPLY TO ESTATE TAX ATTRIBUTABLE TO QUALIFIED FAMILY-OWNED BUSINESS INTERESTS. (a) In General.--Paragraph (2) of section 6601(j) of the Internal Revenue Code of 1986 (relating to 4-percent portion) is amended by adding at the end the following new flush sentence: ``Subparagraph (B) shall not take into account the amount of the tax imposed by chapter 11 which is attributable to qualified family-owned business interests (as defined in section 2003(b)) unless an election is in effect under section 2032A with respect to the estate.''. (b) Effective Date.--The amendment made by this section shall apply to estates of decedents dying after the date of the enactment of this section. SEC. 4. EXTENSION OF ALTERNATE VALUATION DATE TO 40 MONTHS WITH RESPECT TO ESTATE CONSISTING LARGELY OF QUALIFIED FAMILY-OWNED BUSINESS INTERESTS. (a) In General.--Section 2032 of the Internal Revenue Code of 1986 (relating to alternate valuation) is amended by redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and by inserting after subsection (b) the following new subsection: ``(c) Estates Largely Consisting of Qualified Family-Owned Business Interests.--In the case of an estate to which section 2003 applies-- ``(1) subsection (a) shall be applied by substituting `40 months' for `6 months' each place it appears, and ``(2) section 6075(a) (relating to time for filing estate tax return) shall be applied by substituting `43 months' for `9 months'.'' (b) Effective Date.--The amendment made by this section shall apply to estates of decedents dying after the date of the enactment of this section. SEC. 5. INCREASE IN GIFT TAX EXCLUSION. (a) In General.--Subsection (b) of section 2503 of the Internal Revenue Code of 1986 (relating to taxable gifts) is amended by adding at the end the following new sentence: ``In the case of gifts made during a calendar year by a donor to ancestors or lineal descendents of the donor, the aggregate amount of such gifts which are not included in the total amount of gifts by reason of this subsection shall not be less than 15 percent of the donor's earned income (as defined in section 32(c)(2)) for the taxable year ending with or within such calendar year.'' (b) Effective Date.--The amendment made by subsection (a) shall apply to gifts made in calendar years beginning after the date of the enactment of this section. SEC. 6. INCREASE IN UNIFIED ESTATE AND GIFT TAX CREDITS. (a) Estate Tax Credit.-- (1) Subsection (a) of section 2010 of the Internal Revenue Code of 1986 (relating to unified credit against estate tax) is amended by striking ``$192,800'' and inserting ``the applicable credit amount''. (2) Section 2010 of such Code is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: ``(c) Applicable Credit Amount.--For purposes of this section-- ``(1) In general.--The applicable credit amount is the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were $600,000. ``(2) Cost-of-living adjustments.--In the case of any decedent dying in a calendar year after December 31, 1995, the $600,000 amount set forth in paragraph (1) shall be increased by an amount equal to-- ``(A) $600,000, multiplied by ``(B) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting `calendar year 1996' for `calendar year 1992' in subparagraph (B) thereof. Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $1,000.'' (3) Paragraph (1) of section 6018(a) of such Code is amended by striking ``$600,000'' and inserting ``$600,000 (adjusted as provided in section 2010(c)(2)''. (b) Unified Gift Tax Credit.--Paragraph (1) of section 2505(a) of such Code is amended by striking ``$192,800'' and inserting ``the applicable credit amount in effect under section 2010(c) for such calendar year''. (c) Effective Date.--The amendments made by this section shall apply to the estates of decedents dying, and gifts made, after December 31, 1995.
summary: American Family Business Preservation Act - Amends the Internal Revenue Code to reduce the rate of estate tax on certain family-owned businesses. Provides for a recapture of tax benefits if the business is not held for at least ten years by the heirs or the heirs do not materially participate during such ten years. Provides that the limitation on the four percent rate of interest on estate tax extended for estates consisting largely of a closely held business is not applicable to estate tax attributable to qualified family-owned business interests. Extends the alternate valuation date from six months to 40 months for estates consisting largely of qualified family-owned business interests. Increases the tax exclusion for gifts to ancestors or descendants. Increases the unified estate and gift tax credits.