Internal Revenue Code:Sec. 2057. Family-owned business interests
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle B - Estate and Gift Taxes
CHAPTER 11 - ESTATE TAX
Subchapter A - Estates of Citizens or Residents
PART IV - TAXABLE ESTATE
Statute
Sec. 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),
(C) the sum of -
(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.
(c) Adjusted gross estate
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
(C) any indebtedness not described in subparagraph (A) or
(B), to the extent such indebtedness does not exceed $10,000.
(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.
(C) Individual ownership rules
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)
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.
(C) Adjusted tax difference
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).
(C) Section 2032A(c)(2)(D) (relating to partial
dispositions).
(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).
Sources
(Added Pub. L. 105-34, title V, Sec. 502(a), Aug. 5, 1997, 111
Stat. 847, Sec. 2033A; renumbered Sec. 2057 and amended Pub. L.
105-206, title VI, Sec. 6007(b)(1)(A)-(D), (2)-(7), July 22, 1998,
112 Stat. 807-809; Pub. L. 107-16, title V, Sec. 521(d), June 7,
2001, 115 Stat. 72.)
Amendment of Section
AMENDMENT OF SECTION
Pub. L. 107-16, title V, Sec. 521(d), (e)(3), title IX, Sec.
901, June 7, 2001, 115 Stat. 72, 150, provided that, applicable
to estates of decedents dying, and generation-skipping transfers,
after Dec. 31, 2003, this section is temporarily amended by
adding at the end the following new subsection:
(j) Termination
This section shall not apply to the estates of decedents dying
after December 31, 2003.
See Effective and Termination Dates of 2001 Amendment note
below.
Miscellaneous
PRIOR PROVISIONS
A prior section 2057, added Pub. L. 99-514, title XI, Sec.
1172(a), Oct. 22, 1986, 100 Stat. 2513; amended Pub. L. 100-203,
title X, Sec. 10411(a), 10412(a), Dec. 22, 1987, 101 Stat.
1330-432, 1330-433; Pub. L. 100-647, title I, Sec. 1011B(g)(3),
Nov. 10, 1988, 102 Stat. 3490, related to sales of employer
securities to employee stock ownership plans or worker-owned
cooperatives, prior to repeal by Pub. L. 101-239, title VII, Sec.
7304(a)(1), (3), Dec. 19, 1989, 103 Stat. 2352, 2353, applicable to
estates of decedents dying after Dec. 19, 1989.
Another prior section 2057, added Pub. L. 94-455, title XX, Sec.
2007(a), Oct. 4, 1976, 90 Stat. 1890; amended Pub. L. 95-600, title
VII, Sec. 702(l)(1), (2), Nov. 6, 1978, 92 Stat. 2934, 2935,
related to bequests, etc., to certain minor children, prior to
repeal by Pub. L. 97-34, title IV, Sec. 427(a), (c), Aug. 13, 1981,
95 Stat. 3181, applicable to estates of decedents dying after Dec.
31, 1981.
AMENDMENTS
2004 - Pub. L. 108-311 Sec. 207(22). Section 2057(d)(2)(B) is
amended by inserting ``, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section 152''.
1998 - Pub. L. 105-206, Sec. 6007(b)(1)(A), (B), renumbered
section 2033A of this title as this section and substituted
''interests'' for ''exclusion'' in section catchline.
Subsec. (a). Pub. L. 105-206, Sec. 6007(b)(1)(B), substituted
''General rule'' for ''In general'' in heading and amended text
generally. Prior to amendment, text read as follows: ''In the case
of an estate of a decedent to which this section applies, the value
of the gross estate shall not include the lesser of -
''(1) the adjusted value of the qualified family-owned business
interests of the decedent otherwise includible in the estate, or
''(2) the excess of $1,300,000 over the applicable exclusion
amount under section 2010(c) with respect to such estate.''
Subsec. (b)(2)(A). Pub. L. 105-206, Sec. 6007(b)(1)(C), struck
out ''(without regard to this section)'' after ''gross estate''.
Subsec. (b)(3). Pub. L. 105-206, Sec. 6007(b)(2), reenacted
heading without change and amended text generally. Prior to
amendment, text read as follows: ''The amount of the gifts of
qualified family-owned business interests determined under this
paragraph is the excess of -
''(A) the sum of -
''(i) the amount of such gifts from the decedent to members
of the decedent's family taken into account under subsection
2001(b)(1)(B), plus
''(ii) 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, over
''(B) the amount of such gifts from the decedent to members of
the decedent's family otherwise included in the gross estate.''
Subsec. (c). Pub. L. 105-206, Sec. 6007(b)(1)(D), struck out
''(determined without regard to this section)'' after ''the gross
estate'' in introductory provisions.
Subsec. (e)(1). Pub. L. 105-206, Sec. 6007(b)(5)(A), inserted
concluding provisions.
Subsec. (e)(2). Pub. L. 105-206, Sec. 6007(b)(3)(C), inserted
concluding provisions.
Subsec. (e)(2)(C). Pub. L. 105-206, Sec. 6007(b)(3)(A),
substituted ''(as defined in section 543(a) without regard to
paragraph (2)(B) thereof) if such trade or business were a
corporation'' for ''(as defined in section 543(a))''.
Subsec. (e)(2)(D)(ii). Pub. L. 105-206, Sec. 6007(b)(3)(B),
substituted ''personal holding company income (as defined in
subparagraph (C)) or income described'' for ''income of which is
described in section 543(a) or''.
Subsec. (f)(2)(A)(i). Pub. L. 105-206, Sec. 6007(b)(4)(A), struck
out ''(as determined under rules similar to the rules of section
2032A(c)(2)(B))'' after ''business interest''.
Subsec. (f)(2)(C). Pub. L. 105-206, Sec. 6007(b)(4)(B), added
subpar. (C).
Subsec. (f)(3). Pub. L. 105-206, Sec. 6007(b)(5)(B), added par.
(3).
Subsec. (g)(1). Pub. L. 105-206, Sec. 6007(b)(6), struck out ''or
(M)'' after ''subparagraph (F)''.
Subsec. (i)(3)(L) to (P). Pub. L. 105-206, Sec. 6007(b)(7), added
subpars. (L) and (M) and redesignated former subpars. (L) to (N) as
(N) to (P), respectively.
EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT
Amendment by Pub. L. 107-16 applicable to estates of decedents
dying, and generation-skipping transfers, after Dec. 31, 2003, see
section 521(e)(3) of Pub. L. 107-16, set out as a note under
section 2010 of this title.
Amendment by Pub. L. 107-16 inapplicable to estates of decedents
dying, gifts made, or generation skipping transfers, after Dec. 31,
2010, and the Internal Revenue Code of 1986 to be applied and
administered to such estates, gifts, and transfers as if such
amendment had never been enacted, see section 901 of Pub. L.
107-16, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1998 AMENDMENT
Amendment by Pub. L. 105-206 effective, except as otherwise
provided, as if included in the provisions of the Taxpayer Relief
Act of 1997, Pub. L. 105-34, to which such amendment relates, see
section 6024 of Pub. L. 105-206, set out as a note under section 1
of this title.
EFFECTIVE DATE
Section 502(c) of Pub. L. 105-34 provided that: ''The amendments
made by this section (enacting this section) shall apply to estates
of decedents dying after December 31, 1997.''
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in section 2031 of this title.
