E. Amendments to Title IV of the 1997 Act Relating to Alternative Minimum Tax

1. Election to use AMT depreciation for regular tax purposes (Sec. 402 of the Act and Sec. 168 of the Code)

Present Law

For regular tax purposes, depreciation deductions for certain shorter-lived tangible property may be determined using the 200-percent declining balance method over 3-, 5-, 7-, or 10-year recovery periods (depending on the type of property). For alternative minimum tax ("AMT") purposes, depreciation on such property placed in service after 1986 and before 1999 is computed by using the 150-percent declining balance method over the longer class lives prescribed by the alternative depreciation system of section 168(g). A taxpayer may elect to use the methods and lives applicable to AMT depreciation for regular tax purposes.

The 1997 Act conformed the recovery periods (but not the methods) used for purposes of the AMT depreciation to the recovery periods used for purposes of the regular tax, for property placed in service after 1998. The 1997 Act did not make a conforming change to the election to use the pre-1998 AMT recovery methods and recovery periods for regular tax purposes.

Description of Proposal

For property placed in service after 1998, a taxpayer would be allowed to elect, for regular tax purposes, to compute depreciation on tangible personal property otherwise qualified for the 200-percent declining balance method by using the 150-percent declining balance method over the recovery periods applicable to the regular tax (rather than the longer class lives of the alternative depreciation system of Sec. 168(g)).

Effective Date

The proposal would be effective for property placed in service after December 31, 1998.

2. Clarification of the small business exemption (Sec. 401 of the Act and Sec. 55 of the Code)

The corporate alternative minimum tax is repealed for small corporations for taxable years beginning after December 31, 1997. A small corporation is one that had average gross receipts of $5 million or less for a prior three-year period. A corporation that meets the $5 million gross receipts test will continue to be treated as a small corporation exempt from the alternative minimum tax so long as its average gross receipts do not exceed $7.5 million.

Description of Proposal

The proposal would clarify the application of the $5 million and $7.5 million gross receipts tests that a corporation must meet to be a small corporation exempt from the AMT. For example, in order for an existing corporation to qualify as a small corporation for its first taxable year beginning after December 31, 1997, (1) the corporation's average gross receipts for the three taxable year period beginning after December 31, 1993 must be $5 million or less and (2) the corporation's average gross receipts for the three-taxable year period beginning after December 31, 1994 must be $7.5 million or less.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1997.

F. Amendments to Title V of the 1997 Act Relating to Estate and Gift Taxes

1. Clarification of phaseout range for 5-percent surtax to phase out the benefits of the unified credit and graduated rates (Sec. 501 of the 1997 Act and Sec. 2001(c)(2) of the Code)

Present Law

Prior to the 1997 Act, a 5-percent surtax was imposed upon cumulative taxable transfers between $10 million and $21,040,000 to phase out the benefits of the graduated rates and the unified credit. The 1997 Act increased the unified credit beginning in 1998, from an effective exemption of $600,000 to an effective exemption of $1,000,000 in 2006. A conforming amendment was made to the 5-percent surtax provision in section 2001(c)(2) that was intended to reflect the increased unified credit. However, the conforming amendment was drafted in a manner that had the effect of phasing out the benefits of the graduated rates but not the unified credit.

Description of Proposal

The proposal would clarify section 2001(c)(2) to properly phase out the benefits of both the graduated rates and the unified credit.

Effective Date

The proposal would be effective for decedents dying, and gifts made, after December 31, 1997.

2. Clarification of effective date for indexing of generation-skipping exemption (Secs. 501(d) and (f) of the 1997 Act and Sec. 2631(c) of the Code)

Present Law

The 1997 Act provided for the indexation of the $1 million exemption from generation skipping transfers effective for decedents dying after December 31, 1998.

Description of Proposal

The proposal would clarify that the indexing of the exemption from generation-skipping transfers would be effective with respect to all generation-skipping transfers (i.e., direct skips, taxable terminations, and taxable distributions) made after 1998.

With respect to existing trusts, transferors would be permitted to make a late allocation of any additional GST exemption amount attributable to indexing adjustments in accordance with the present-law rules applicable to late allocations as set forth in sections 2632 and 2642, and the regulations promulgated thereunder. For example, assume an individual transferred $2 million to a trust in 1995, and allocated his entire $1 million GST exemption to the trust at that time (resulting in an inclusion ratio of .50). Assume further that in 2001, the GST exemption has increased to $1,100,000 as the result of indexing, and that the value of the trust assets is now $3 million. If the individual is still alive in 2001, he would be permitted to make a late allocation of $100,000 of GST exemption to the trust, resulting in a new inclusion ratio of 1-(($1,500,000+100,000)/$3,000,000), or .467.

Effective Date

The proposal would be effective for generation-skipping transfers made after December 31, 1998.

3. Coordination between unified credit and family-owned business exclusion (Sec. 502 of the 1997 Act and Sec. 2033A(a) of the Code)

Present Law

The 1997 Act effectively increased the amount of lifetime gifts and transfers at death that are exempt from unified estate and gift tax from $600,000 to $1,000,000 over the period 1997 to 2006, through increases in an individual's unified credit. In addition, the 1997 Act provided a limited exclusion for certain family-owned business interests. The exclusion for family-owned business interests may be taken only to the extent that the exclusion for family-owned business interests, plus the amount effectively exempted by the unified credit, does not exceed $1.3 million. As a result, for years after 1998, the maximum amount of exclusion for family-owned business interests is reduced by increases in the dollar amount of transfers effectively exempted through the unified credit.

Because the structure of the 1997 Act increases the unified credit over time (until 2006) while decreasing over the same period the benefit of the closely-held business exclusion, the estate tax on estates with family-owned businesses increases over time until 2006. This increase in estate tax results from the fact that increases in the unified credit provide a benefit at the decedent's lowest estate tax brackets, while the exclusion for family-owned businesses provides a benefit at the decedent's highest estate tax brackets.

Description of Proposal

Under the proposal, if an executor elects to utilize the qualified family-owned business exclusion, the estate tax liability would be calculated as if the estate were allowed a maximum qualified family-owned business exclusion of $675,000 and an applicable exclusion amount under section 2010 (i.e., the amount exempted by the unified credit) of $625,000, regardless of the year in which the decedent dies. If the estate includes less than $675,000 of qualified family-owned business interests, the applicable exclusion amount would be increased on a dollar-for-dollar basis, but only up to the applicable exclusion amount generally available for the year of death.

For example, assume the decedent dies in 2005, when the applicable exclusion amount under section 2010 is $800,000. If the estate includes qualified family-owned business interests valued at $675,000 or more, the estate tax liability would be calculated as if the estate were allowed a qualified family-owned business exclusion of $675,000, and the applicable exclusion amount under section 2010 would be limited to $625,000. If the estate includes qualified family-owned business interests of $500,000 or less, all of the qualified family-owned business interests could be excluded from the estate, and the applicable exclusion amount under section 2010 would be $800,000. If the estate includes qualified family-owned business interests valued between $500,000 and $675,000, all of the qualified family-owned business interests could be excluded from the estate, and the applicable exclusion amount under section 2010 would be calculated as the excess of $1.3 million over the amount of qualified family-owned business interests. (For example, if the qualified family-owned business interests were valued at $600,000, the applicable exclusion amount under section 2010 would be $700,000.)

If a recapture event occurs with respect to any qualified family-owned business interest, the total amount of estate taxes potentially subject to recapture would be calculated as the difference between the actual amount of estate tax liability for the estate, and the amount of estate taxes that would have been owed had the qualified family-owned business election not been made.

Effective Date

The proposal would be effective for decedents dying after December 31, 1997.

4. Clarification of businesses eligible for family-owned business exclusion (Sec. 502 of the 1997 Act and Sec. 2033A(b)(3) of the Code)

Present Law

In order to be eligible to exclude from the gross estate a portion of the value of a family owned business, the sum of (1) the adjusted value of family-owned business interests includible in the decedent's estate, and (2) the amount of gifts of family-owned business interests to family members of the decedent that are not included in the decedent's gross estate, must exceed 50 percent of the decedent's adjusted gross estate.

Description of Proposal

The proposal would clarify the formula for determining the amount of gifts of family owned business interests made to members of the decedent's family that are not otherwise includible in the decedent's gross estate.

Effective Date

The proposal would be effective with respect to decedents dying after December 31, 1997.

5. Clarification that interests eligible for family-owned business exclusion must be passed to a qualified heir (Sec. 502 of the Act and Sec. 2033A(a)(1) of the Code)

Present Law

The 1997 Act provided a new exclusion for qualified family-owned business interests. One of the requirements for the exclusion is that such interests must pass to a "qualified heir," which includes members of the decedent's family and any individual who has been actively employed by the trade or business for at least 10 years prior to the date of the decedent's death.

Description of Proposal

The proposal would clarify section 2033A(a)(1) to provide that qualified family-owned business interests must be passed to a qualified heir in order to qualify for the exclusion.

Effective Date

The proposal would be effective with respect to estates of decedents dying after December 31, 1997.

6. Clarification of "trade or business" requirement for family-owned business exclusion (Sec. 502 of the Act and Sec. 2033A(e) of the Code)

Present Law

A qualified family-owned business interest is defined as any interest in a trade or business that meets certain requirements--e.g., the decedent and members of his family must own certain percentages of the trade or business, the decedent or members of his family must have materially participated in the trade or business for five of the eight years preceding the decedent's death, and the qualified heir or members of his family must materially participate in the trade or business for at least five years of any eight-year period within 10 years following the decedent's death.

Description of Proposal

The proposal would clarify that an individual's interest in property used in a trade or business may qualify for the qualified family-owned business exclusion as long as such property is used in a trade or business by the individual or a member of the individual's family. Thus, for example, if a brother and sister inherit farmland upon their father's death, and the sister cash-leases her portion to her brother, who is engaged in the trade or business of farming, the "trade or business" requirement is satisfied with respect to both the brother and the sister.

Effective Date

The proposal would be effective with respect to estates of decedents dying after December 31, 1997.

7. Conversion of qualified family-owned business exclusion into a deduction (Sec. 502 of the Act and Sec. 2033A of the Code)

Present Law

The qualified family-owned business provision in the 1997 Act provides an exclusion from estate taxes for certain qualified family-owned business interests. It is unclear whether the provision provides an exclusion of value or an exclusion of property from the estate, and thus it is unclear how the new provision interacts with other provisions in the Internal Revenue Code (e.g., Secs. 1014, 2032A, 2056, 2612, and 6166).

Description of Proposal

The proposal would convert the qualified family-owned business exclusion into a deduction. The requirements of the provision would otherwise remain unchanged. The qualified family-owned business deduction would not be available for generation-skipping tax purposes.

Effective Date

The proposal would be effective with respect to estates of decedents dying after December 31, 1997.

8. Other modifications to the qualified family-owned business provision (Sec. 502 of the 1997 Act and Sec. 2033A of the Code)

Present Law

The qualified family-owned business provision incorporates by cross-reference several other provisions of the Code, including a number of provisions in section 2032A and the personal holding company rules of section 543(a).

Description of Proposal

The proposal would modify section 2033A(g) (relating to the security requirements for noncitizen qualified heirs) by deleting the cross-reference to section 2033A(i)(3)(M), which does not appear to be appropriate. The proposal also would make rules similar to those set forth in section 2032A(h) and (i) (relating to conversions and exchanges of property under sections 1031 and 1033) applicable for purposes of section 2033A. Finally, the proposal would clarify that, in identifying assets that produce (or are held for the production of) income of a type described in section 543(a), section 543(a) would be applied without regard to section 543(a)(2)(B) (the dividend requirement for corporate entities).

Effective Date

The proposal would be effective with respect to estates of decedents dying after December 31, 1997.

9. Clarification of interest on installment payment of estate tax on holding companies (Sec. 503 of the 1997 Act and Secs. 6166(b)(7)(A) and 6166(b)(8)(A) of the Code)

Present Law

If certain conditions are met, a decedent's estate may elect to pay the estate tax attributable to certain closely-held businesses over a 14-year period. The 1997 Act provided for a 2-percent interest rate on the estate tax on first $1 million in value of interests in qualified closely-held businesses, and a rate equal to 45 percent of the regular deficiency rate on the amount in excess of the portion eligible for the 2-percent rate, but also provided that none of interest on the deferred payment of estate taxes would be deductible for income or estate tax purposes. Interests in holding companies and non-readily-tradeable business interests are not eligible for the 2-percent rate.

Description of Proposal

The proposal would clarify that deferred payments of estate tax on holding companies and non-readily-tradable business interests do not qualify for the 2-percent interest rate, but instead are subject to a rate of 45 percent of the regular deficiency rate. Such interest payments are not deductible for income or estate tax purposes.

Effective Date

The proposal generally would be effective for decedents dying after December 31, 1997.

10. Clarification on declaratory judgment jurisdiction of U.S. Tax Court regarding installment payment of estate tax (Sec. 505 of the 1997 Act and Sec. 7479(a) of the Code)

Present Law

If certain conditions are met, a decedent's estate may elect to pay estate tax attributable to certain closely-held business over a 14-year period. The 1997 Act provided that the U.S. Tax Court would have jurisdiction to determine whether the estate of a decedent qualifies for the 14 year installment payment of estate tax.

Description of Proposal

The proposal would clarify that the jurisdiction of the U.S. Tax Court to determine whether an estate qualifies for installment payment of estate tax on closely-held businesses extends to determining which businesses in an estate are eligible for the deferral.

Effective Date

The proposal would be effective for decedents dying after the date of enactment of the 1997 Act.

11. Clarification of rules governing revaluation of gifts (Sec. 506 of the 1997 Act and Sec. 2504(c) of the Code)

Present Law

The valuation of a gift becomes final for gift tax purposes after the statute of limitations on any gift tax assessed or paid has expired. The 1997 Act extended that rule to apply for estate tax purposes, provided for a lengthened statute of limitations for gift tax purposes if certain information is not disclosed with the gift tax return, and provided jurisdiction to the U.S. Tax Court to determine the value of any gift.

Description of Proposal

The proposal would clarify that in determining the amount of taxable gifts made in preceding calendar periods, the value of prior gifts is the value of such gifts as finally determined, even if no gift tax was assessed or paid on that gift. For this purpose, final determinations would include, e.g., the value reported on the gift tax return (if not challenged by the IRS prior to the expiration of the statute of limitations), the value determined by the IRS (if not challenged through the declaratory judgment procedure by the taxpayer), the value determined by the courts, or the value agreed to by the IRS and the taxpayer in a settlement agreement.

Effective Date

The proposal would be effective with respect to gifts made after the date of enactment of the 1997 Act.

12. Clarification with respect to post-mortem conservation easements (Sec. 506 of the 1997 Act and Sec. 2031(c) of the Code)

Present Law

A deduction is allowed for estate tax purposes for a contribution of a qualified real property interest to a charity (or other qualified organization) exclusively for conservation purposes (Sec. 2055(f)). The 1997 Act also provided an election to exclude from the taxable estate 40 percent of the value of any land subject to a qualified conservation easement that meets certain requirements. The 1997 Act provided that the executor of the decedent's estate, or the trustee of a trust holding the land, could grant a qualifying easement after the decedent's death, as long as the easement is granted prior to the date of the election (generally, within nine months after the date of the decedent's death).

Description of Proposal

The proposal would clarify that, in the case of a qualified conservation contribution made after the date of the decedent's death, an estate tax deduction would be allowed under section 2055(f). However, no income tax deduction would be allowed to the estate or the qualified heirs with respect to such post-mortem conservation easements.

Effective Date

The proposal would be effective with respect to estates of decedents dying after December 31, 1997.