N.Y. Tax Law § 999-a: Appendix to article twenty-six

§ 999-a. Appendix to article twenty-six. The following provisions of

the United States Internal Revenue Code of 1986, with all amendments

enacted on or before January first, two thousand fourteen, shall apply

to the tax imposed by this article, to the extent specified in this

article.

§ 2031. Definition of Gross Estate.

(a) General.--The value of the gross estate of the decedent shall be

determined by including to the extent provided for in this part, the

value at the time of his death of all property, real or personal,

tangible or intangible, wherever situated.

(b) Valuation of unlisted stock and securities.--In the case of stock

and securities of a corporation the value of which, by reason of their

not being listed on an exchange and by reason of the absence of sales

thereof, cannot be determined with reference to bid and asked prices or

with reference to sales prices, the value thereof shall be determined by

taking into consideration, in addition to all other factors, the value

of stock or securities of corporations engaged in the same or a similar

line of business which are listed on an exchange.

(c) Estate tax with respect to land subject to a qualified

conservation easement.--

(1) In general.--If the executor makes the election described in

paragraph (6), then, except as otherwise provided in this subsection,

there shall be excluded from the gross estate the lesser of--

(A) the applicable percentage of the value of land subject to a

qualified conservation easement, reduced by the amount of any deduction

under section 2055(f) with respect to such land, or

(B) the exclusion limitation.

(2) Applicable percentage.--For purposes of paragraph (1), the term

"applicable percentage" means 40 percent reduced (but not below zero) by

2 percentage points for each percentage point (or fraction thereof) by

which the value of the qualified conservation easement is less than 30

percent of the value of the land (determined without regard to the value

of such easement and reduced by the value of any retained development

right (as defined in paragraph (5)). The values taken into account under

the preceding sentence shall be such values as of the date of the

contribution referred to in paragraph (8)(B).

(3) Exclusion limitation.--For purposes of paragraph (1), the

exclusion limitation is the limitation determined in accordance with the

following table:

In the case of estates of decedents dying The exclusion limitation

during: is:

1998..................................... 100,000

1999..................................... 200,000

2000..................................... 300,000

2001..................................... 400,000

2002 or thereafter....................... 500,000

(4) Treatment of certain indebtedness.--

(A) In general.--The exclusion provided in paragraph (1) shall not

apply to the extent that the land is debt-financed property.

(B) Definitions.--For purposes of this paragraph--

(i) Debt-financed property.--The term "debt-financed property" means

any property with respect to which there is an acquisition indebtedness

(as defined in clause (ii)) on the date of the decedent's death.

(ii) Acquisition indebtedness.--The term "acquisition indebtedness"

means, with respect to debt-financed property, the unpaid amount of--

(I) the indebtedness incurred by the donor in acquiring such property,

(II) the indebtedness incurred before the acquisition of such property

if such indebtedness would not have been incurred but for such

acquisition,

(III) the indebtedness incurred after the acquisition of such property

if such indebtedness would not have been incurred but for such

acquisition and the incurrence of such indebtedness was reasonably

foreseeable at the time of such acquisition, and

(IV) the extension, renewal, or refinancing of an acquisition

indebtedness.

(5) Treatment of retained development right.--

(A) In general.--Paragraph (1) shall not apply to the value of any

development right retained by the donor in the conveyance of a qualified

conservation easement.

(B) Termination of retained development right.--If every person in

being who has an interest (whether or not in possession) in the land

executes an agreement to extinguish permanently some or all of any

development rights (as defined in subparagraph (D)) retained by the

donor on or before the date for filing the return of the tax imposed by

section 2001, then any tax imposed by section 2001 shall be reduced

accordingly. Such agreement shall be filed with the return of the tax

imposed by section 2001. The agreement shall be in such form as the

Secretary shall prescribe.

(C) Additional tax.--Any failure to implement the agreement described

in subparagraph (B) not later than the earlier of--

(i) the date which is 2 years after the date of the decedent's death,

or

(ii) the date of the sale of such land subject to the qualified

conservation easement,

shall result in the imposition of an additional tax in the amount of

the tax which would have been due on the retained development rights

subject to such agreement. Such additional tax shall be due and payable

on the last day of the 6th month following such date.

(D) Development right defined.--For purposes of this paragraph, the

term "development right" means any right to use the land subject to the

qualified conservation easement in which such right is retained for any

commercial purpose which is not subordinate to and directly supportive

of the use of such land as a farm for farming purposes (within the

meaning of section 2032A(e)(5)).

(6) Election.--The election under this subsection shall be made on or

before the due date (including extensions) for filing the return of tax

imposed by section 2001 and shall be made on such return. Such an

election, once made, shall be irrevocable.

(7) Calculation of estate tax due.--An executor making the election

described in paragraph (6) shall, for purposes of calculating the amount

of tax imposed by section 2001, include the value of any development

right (as defined in paragraph (5)) retained by the donor in the

conveyance of such qualified conservation easement. The computation of

tax on any retained development right prescribed in this paragraph shall

be done in such manner and on such forms as the Secretary shall

prescribe.

(8) Definitions.--For purposes of this subsection--

(A) Land subject to a qualified conservation easement.--The term "land

subject to a qualified conservation easement" means land--

(i) which is located in the United States or any possession of the

United States,

(ii) which was owned by the decedent or a member of the decedent's

family at all times during the 3-year period ending on the date of the

decedent's death, and

(iii) with respect to which a qualified conservation easement has been

made by an individual described in subparagraph (C), as of the date of

the election described in paragraph (6).

(B) Qualified conservation easement.--The term "qualified conservation

easement" means a qualified conservation contribution (as defined in

section 170(h)(1)) of a qualified real property interest (as defined in

section 170(h)(2)(C)), except that clause (iv) of section 170(h)(4)(A)

shall not apply, and the restriction on the use of such interest

described in section 170(h)(2)(C) shall include a prohibition on more

than a de minimis use for a commercial recreational activity.

(C) Individual described.--An individual is described in this

subparagraph if such individual is--

(i) the decedent,

(ii) a member of the decedent's family,

(iii) the executor of the decedent's estate, or

(iv) the trustee of a trust the corpus of which includes the land to

be subject to the qualified conservation easement.

(D) Member of family.--The term "member of the decedent's family"

means any member of the family (as defined in section 2032A(e)(2)) of

the decedent.

(9) Treatment of easements granted after death.--In any case in which

the qualified conservation easement is granted after the date of the

decedent's death and on or before the due date (including extensions)

for filing the return of tax imposed by section 2001, the deduction

under section 2055(f) with respect to such easement shall be allowed to

the estate but only if no charitable deduction is allowed under chapter

1 to any person with respect to the grant of such easement.

(10) Application of this section to interests in partnerships,

corporations, and trusts.--This section shall apply to an interest in a

partnership, corporation, or trust if at least 30 percent of the entity

is owned (directly or indirectly) by the decedent, as determined under

the rules described in section 2057(e)(3).

(d) Cross reference.--

For executor's right to be furnished on request a statement regarding

any valuation made by the Secretary within the gross estate, see section

7517.

§ 2032. Alternate Valuation.

(a) General.--The value of the gross estate may be determined, if the

executor so elects, by valuing all the property included in the gross

estate as follows:

(1) In the case of property distributed, sold, exchanged, or otherwise

disposed of, within 6 months after the decedent's death such property

shall be valued as of the date of distribution, sale, exchange, or other

disposition.

(2) In the case of property not distributed, sold, exchanged, or

otherwise disposed of, within 6 months after the decedent's death such

property shall be valued as of the date 6 months after the decedent's

death.

(3) Any interest or estate which is affected by mere lapse of time

shall be included at its value as of the time of death (instead of the

later date) with adjustment for any difference in its value as of the

later date not due to mere lapse of time.

(b) Special rules.--No deduction under this chapter of any item shall

be allowed if allowance for such items is in effect given by the

alternate valuation provided by this section. Wherever in any other

subsection or section of this chapter reference is made to the value of

property at the time of the decedent's death, such reference shall be

deemed to refer to the value of such property used in determining the

value of the gross estate. In case of an election made by the executor

under this section, then--

(1) for purposes of the charitable deduction under section 2055 or

2106(a)(2), any bequest, legacy, devise, or transfer enumerated therein,

and

(2) for the purpose of the marital deduction under section 2056, any

interest in property passing to the surviving spouse,

shall be valued as of the date of the decedent's death with adjustment

for any difference in value (not due to mere lapse of time or the

occurrence or nonoccurrence of a contingency) of the property as of the

date 6 months after the decedent's death (substituting, in the case of

property distributed by the executor or trustee, or sold, exchanged, or

otherwise disposed of, during such 6-month period, the date thereof).

(c) Election must decrease gross estate and estate tax.--No election

may be made under this section with respect to an estate unless such

election will decrease--

(1) the value of the gross estate, and

(2) the sum of the tax imposed by this chapter and the tax imposed by

chapter 13 with respect to property includible in the decedent's gross

estate (reduced by credits allowable against such taxes).

(d) Election.--

(1) In general.--The election provided for in this section shall be

made by the executor on the return of the tax imposed by this chapter.

Such election, once made, shall be irrevocable.

(2) Exception.--No election may be made under this section if such

return is filed more than 1 year after the time prescribed by law

(including extensions) for filing such return.

§ 2032A. Valuation of Certain Farm, Etc., Real Property.

(a) Value based on use under which property qualifies.--

(1) General rule.--If--

(A) the decedent was (at the time of his death) a citizen or resident

of the United States, and

(B) the executor elects the application of this section and files the

agreement referred to in subsection (d)(2),

then, for purposes of this chapter, the value of qualified real

property shall be its value for the use under which it qualifies, under

subsection (b), as qualified real property.

(2) Limitation on aggregate reduction in fair market value.--The

aggregate decrease in the value of qualified real property taken into

account for purposes of this chapter which results from the application

of paragraph (1) with respect to any decedent shall not exceed $750,000.

(3) Inflation adjustment.--In the case of estates of decedents dying

in a calendar year after 1998, the $750,000 amount contained in

paragraph (2) shall be increased by an amount equal to--

(A) $750,000, multiplied by

(B) the cost-of-living adjustment determined under section 1(f)(3) for

such calendar year by substituting "calendar year 1997" for "calendar

year 1992" in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a

multiple of $10,000, such amount shall be rounded to the next lowest

multiple of $10,000.

(b) Qualified real property.--

(1) In general.--For purposes of this section, the term "qualified

real property" means real property located in the United States which

was acquired from or passed from the decedent to a qualified heir of the

decedent and which, on the date of the decedent's death, was being used

for a qualified use by the decedent or a member of the decedent's

family, but only if--

(A) 50 percent or more of the adjusted value of the gross estate

consists of the adjusted value of real or personal property which--

(i) on the date of the decedent's death, was being used for a

qualified use by the decedent or a member of the decedent's family, and

(ii) was acquired from or passed from the decedent to a qualified heir

of the decedent.

(B) 25 percent or more of the adjusted value of the gross estate

consists of the adjusted value of real property which meets the

requirements of subparagraphs (A)(ii) and (C),

(C) 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 real property was owned by the decedent or a member of the

decedent's family and used for a qualified use by the decedent or a

member of the decedent's family, and

(ii) there was material participation by the decedent or a member of

the decedent's family in the operation of the farm or other business,

and

(D) such real property is designated in the agreement referred to in

subsection (d)(2).

(2) Qualified use.--For purposes of this section, the term "qualified

use" means the devotion of the property to any of the following:

(A) use as a farm for farming purposes, or

(B) use in a trade or business other than the trade or business of

farming.

(3) Adjusted value.--For purposes of paragraph (1), the term "adjusted

value" means--

(A) in the case of the gross estate, the value of the gross estate for

purposes of this chapter (determined without regard to this section),

reduced by any amounts allowable as a deduction under paragraph (4) of

section 2053(a), or

(B) in the case of any real or personal property, the value of such

property for purposes of this chapter (determined without regard to this

section), reduced by any amounts allowable as a deduction in respect of

such property under paragraph (4) of section 2053(a).

(4) Decedents who are retired or disabled.--

(A) In general.--If, on the date of the decedent's death, the

requirements of paragraph (1)(C)(ii) with respect to the decedent for

any property are not met, and the decedent--

(i) was receiving old-age benefits under title II of the Social

Security Act for a continuous period ending on such date, or

(ii) was disabled for a continuous period ending on such date,

then paragraph (1)(C)(ii) shall be applied with respect to such

property by substituting "the date on which the longer of such

continuous periods began" for "the date of the decedent's death" in

paragraph (1)(C).

(B) Disabled defined.--For purposes of subparagraph (A), an individual

shall be disabled if such individual has a mental or physical impairment

which renders him unable to materially participate in the operation of

the farm or other business.

(C) Coordination with recapture.--For purposes of subsection

(c)(6)(B)(i), if the requirements of paragraph (1)(C)(ii) are met with

respect to any decedent by reason of subparagraph (A), the period ending

on the date on which the continuous period taken into account under

subparagraph (A) began shall be treated as the period immediately before

the decedent's death.

(5) Special rules for surviving spouses.--

(A) In general.--If property is qualified real property with respect

to a decedent (hereinafter in this paragraph referred to as the "first

decedent") and such property was acquired from or passed from the first

decedent to the surviving spouse of the first decedent, for purposes of

applying this subsection and subsection (c) in the case of the estate of

such surviving spouse, active management of the farm or other business

by the surviving spouse shall be treated as material participation by

such surviving spouse in the operation of such farm or business.

(B) Special rule.--For the purposes of subparagraph (A), the

determination of whether property is qualified real property with

respect to the first decedent shall be made without regard to

subparagraph (D) of paragraph (1) and without regard to whether an

election under this section was made.

(C) Coordination with paragraph (4).--In any case in which to do so

will enable the requirements of paragraph (1)(C)(ii) to be met with

respect to the surviving spouse, this subsection and subsection (c)

shall be applied by taking into account any application of paragraph

(4).

(c) Tax treatment of dispositions and failures to use for qualified

use.--

(1) Imposition of additional estate tax.--If, within 10 years after

the decedent's death and before the death of the qualified heir--

(A) the qualified heir disposes of any interest in qualified real

property (other than by a disposition to a member of his family), or

(B) the qualified heir ceases to use for the qualified use the

qualified real property which was acquired (or passed) from the

decedent,

then, there is hereby imposed an additional estate tax.

(2) Amount of additional tax.--

(A) In general.--The amount of the additional tax imposed by paragraph

(1) with respect to any interest shall be the amount equal to the lesser

of--

(i) the adjusted tax difference attributable to such interest, or

(ii) the excess of the amount realized with respect to the interest

(or, in any case other than a sale or exchange at arm's length, the fair

market value of the interest) over the value of the interest determined

under subsection (a).

(B) Adjusted tax difference attributable to interest.--For purposes of

subparagraph (A), the adjusted tax difference attributable to an

interest is the amount which bears the same ratio to the adjusted tax

difference with respect to the estate (determined under subparagraph

(C)) as--

(i) the excess of the value of such interest for purposes of this

chapter (determined without regard to subsection (a)) over the value of

such interest determined under subsection (a), bears to

(ii) a similar excess determined for all qualified real property.

(C) Adjusted tax difference with respect to the estate.--For purposes

of subparagraph (B), the term "adjusted tax difference with respect to

the estate" means the excess of what would have been the estate tax

liability but for subsection (a) over the estate tax liability. For

purposes of this subparagraph, the term "estate tax liability" means the

tax imposed by section 2001 reduced by the credits allowable against

such tax.

(D) Partial dispositions.--For purposes of this paragraph, where the

qualified heir disposes of a portion of the interest acquired by (or

passing to) such heir (or a predecessor qualified heir) or there is a

cessation of use of such a portion--

(i) the value determined under subsection (a) taken into account under

subparagraph (A)(ii) with respect to such portion shall be its pro rata

share of such value of such interest, and

(ii) the adjusted tax difference attributable to the interest taken

into account with respect to the transaction involving the second or any

succeeding portion shall be reduced by the amount of the tax imposed by

this subsection with respect to all prior transactions involving

portions of such interest.

(E) Special rule for disposition of timber.--In the case of qualified

woodland to which an election under subsection (e)(13)(A) applies, if

the qualified heir disposes of (or severs) any standing timber on such

qualified woodland--

(i) such disposition (or severance) shall be treated as a disposition

of a portion of the interest of the qualified heir in such property, and

(ii) the amount of the additional tax imposed by paragraph (1) with

respect to such disposition shall be an amount equal to the lesser of--

(I) the amount realized on such disposition (or, in any case other

than a sale or exchange at arm's length, the fair market value of the

portion of the interest disposed or severed), or

(II) the amount of additional tax determined under this paragraph

(without regard to this subparagraph) if the entire interest of the

qualified heir in the qualified woodland had been disposed of, less the

sum of the amount of the additional tax imposed with respect to all

prior transactions involving such woodland to which this subparagraph

applied.

For purposes of the preceding sentence, the disposition of a right to

sever shall be treated as the disposition of the standing timber. The

amount of additional tax imposed under paragraph (1) in any case in

which a qualified heir disposes of his entire interest in the qualified

woodland shall be reduced by any amount determined under this

subparagraph with respect to such woodland.

(3) Only 1 additional tax imposed with respect to any 1 portion.--In

the case of an interest acquired from (or passing from) any decedent, if

subparagraph (A) or (B) of paragraph (1) applies to any portion of an

interest, subparagraph (B) or (A), as the case may be, of paragraph (1)

shall not apply with respect to the same portion of such interest.

(4) Due date.--The additional tax imposed by this subsection shall

become due and payable on the day which is 6 months after the date of

the disposition or cessation referred to in paragraph (1).

(5) Liability for tax; furnishing of bond.--The qualified heir shall

be personally liable for the additional tax imposed by this subsection

with respect to his interest unless the heir has furnished bond which

meets the requirements of subsection (e)(11).

(6) Cessation of qualified use.--For purposes of paragraph (1)(B),

real property shall cease to be used for the qualified use if--

(A) such property ceases to be used for the qualified use set forth in

subparagraph (A) or (B) of subsection (b)(2) under which the property

qualified under subsection (b), or

(B) during any period of 8 years ending after the date of the

decedent's death and before the date of the death of the qualified heir,

there had been periods aggregating more than 3 years during which--

(i) in the case of periods during which the property was held by the

decedent, there was no material participation by the decedent or any

member of his family in the operation of the farm or other business, and

(ii) in the case of periods during which the property was held by any

qualified heir, there was no material participation by such qualified

heir or any member of his family in the operation of the farm or other

business.

(7) Special rules.--

(A) No tax if use begins within 2 years.--If the date on which the

qualified heir begins to use the qualified real property (hereinafter in

this subparagraph referred to as the commencement date) is before the

date 2 years after the decedent's death--

(i) no tax shall be imposed under paragraph (1) by reason of the

failure by the qualified heir to so use such property before the

commencement date, and

(ii) the 10-year period under paragraph (1) shall be extended by the

period after the decedent's death and before the commencement date.

(B) Active management by eligible qualified heir treated as material

participation.--For purposes of paragraph (6)(B)(ii), the active

management of a farm or other business by--

(i) an eligible qualified heir, or

(ii) a fiduciary of an eligible qualified heir described in clause

(ii) or (iii) of subparagraph (C),

shall be treated as material participation by such eligible qualified

heir in the operation of such farm or business. In the case of an

eligible qualified heir described in clause (ii), (iii), or (iv) of

subparagraph (C), the preceding sentence shall apply only during periods

during which such heir meets the requirements of such clause.

(C) Eligible qualified heir.--For purposes of this paragraph, the term

"eligible qualified heir" means a qualified heir who--

(i) is the surviving spouse of the decedent,

(ii) has not attained the age of 21,

(iii) is disabled (within the meaning of subsection (b)(4)(B)), or

(iv) is a student.

(D) Student.--For purposes of subparagraph (C), an individual shall be

treated as a student with respect to periods during any calendar year if

(and only if) such individual is a student (within the meaning of

section 152(f)(2)) for such calendar year.

(E) Certain rents treated as qualified use.--For purposes of this

subsection, a surviving spouse or lineal descendant of the decedent

shall not be treated as failing to use qualified real property in a

qualified use solely because such spouse or descendant rents such

property to a member of the family of such spouse or descendant on a net

cash basis. For purposes of the preceding sentence, a legally adopted

child of an individual shall be treated as the child of such individual

by blood.

(8) Qualified conservation contribution is not a disposition.--A

qualified conservation contribution (as defined in section 170(h)) by

gift or otherwise shall not be deemed a disposition under subsection

(c)(1)(A).

(d) Election; agreement.--

(1) Election.--The election under this section shall be made on the

return of the tax imposed by section 2001. Such election shall be made

in such manner as the Secretary shall by regulations prescribe. Such an

election, once made, shall be irrevocable.

(2) Agreement.--The agreement referred to in this paragraph 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 (c) with respect

to such property.

(3) Modification of election and agreement to be permitted.--The

Secretary shall prescribe procedures which provide that in any case in

which the executor makes an election under paragraph (1) (and submits

the agreement referred to in paragraph (2)) within the time prescribed

therefor, but--

(A) the notice of election, as filed, does not contain all required

information, or

(B) signatures of 1 or more persons required to enter into the

agreement described in paragraph (2) are not included on the agreement

as filed, or the agreement does not contain all required information,

the executor will have a reasonable period of time (not exceeding 90

days) after notification of such failures to provide such information or

signatures.

(e) Definitions; special rules.--For purposes of this section--

(1) Qualified heir.--The term "qualified heir" means, with respect to

any property, a member of the decedent's family who acquired such

property (or to whom such property passed) from the decedent. If a

qualified heir disposes of any interest in qualified real property to

any member of his family, such member shall thereafter be treated as the

qualified heir with respect to such interest.

(2) Member of family.--The term "member of the family" means, with

respect to any individual, only--

(A) an ancestor of such individual,

(B) the spouse of such individual,

(C) a lineal descendant of such individual, of such individual's

spouse, or of a parent of such individual, or

(D) the spouse of any lineal descendant described in subparagraph (C).

For purposes of the preceding sentence, a legally adopted child of an

individual shall be treated as the child of such individual by blood.

(3) Certain real property included.--In the case of real property

which meets the requirements of subparagraph (C) of subsection (b)(1),

residential buildings and related improvements on such real property

occupied on a regular basis by the owner or lessee of such real property

or by persons employed by such owner or lessee for the purpose of

operating or maintaining such real property, and roads, buildings, and

other structures and improvements functionally related to the qualified

use shall be treated as real property devoted to the qualified use.

(4) Farm.--The term "farm" includes stock, dairy, poultry, fruit,

furbearing animal, and truck farms, plantations, ranches, nurseries,

ranges, greenhouses or other similar structures used primarily for the

raising of agricultural or horticultural commodities, and orchards and

woodlands.

(5) Farming purposes.--The term "farming purposes" means-

(A) cultivating the soil or raising or harvesting any agricultural or

horticultural commodity (including the raising, shearing, feeding,

caring for, training, and management of animals) on a farm;

(B) handling, drying, packing, grading, or storing on a farm any

agricultural or horticultural commodity in its unmanufactured state, but

only if the owner, tenant, or operator of the farm regularly produces

more than one-half of the commodity so treated; and

(C)(i) the planting, cultivating, caring for, or cutting of trees, or

(ii) the preparation (other than milling) of trees for market.

(6) Material participation.--Material participation shall be

determined in a manner similar to the manner used for purposes of

paragraph (1) of section 1402(a) (relating to net earnings from

self-employment).

(7) Method of valuing farms.--

(A) In general.--Except as provided in subparagraph (B), the value of

a farm for farming purposes shall be determined by dividing--

(i) the excess of the average annual gross cash rental for comparable

land used for farming purposes and located in the locality of such farm

over the average annual State and local real estate taxes for such

comparable land, by

(ii) the average annual effective interest rate for all new Federal

Land Bank loans.

For purposes of the preceding sentence, each average annual

computation shall be made on the basis of the 5 most recent calendar

years ending before the date of the decedent's death.

(B) Value based on net share rental in certain cases.--

(i) In general.--If there is no comparable land from which the average

annual gross cash rental may be determined but there is comparable land

from which the average net share rental may be determined, subparagraph

(A)(i) shall be applied by substituting "average annual net share

rental" for "average annual gross cash rental".

(ii) Net share rental.--For purposes of this paragraph, the term "net

share rental" means the excess of--

(I) the value of the produce received by the lessor of the land on

which such produce is grown, over

(II) the cash operating expenses of growing such produce which, under

the lease, are paid by the lessor.

(C) Exception.--The formula provided by subparagraph (A) shall not be

used--

(i) where it is established that there is no comparable land from

which the average annual gross cash rental may be determined, or

(ii) where the executor elects to have the value of the farm for

farming purposes determined and that there is no comparable land from

which the average net share rental may be determined under paragraph

(8).

(8) Method of valuing closely held business interests, etc.--In any

case to which paragraph (7)(A) does not apply, the following factors

shall apply in determining the value of any qualified real property:

(A) The capitalization of income which the property can be expected to

yield for farming or closely held business purposes over a reasonable

period of time under prudent management using traditional cropping

patterns for the area, taking into account soil capacity, terrain

configuration, and similar factors,

(B) The capitalization of the fair rental value of the land for

farmland or closely held business purposes,

(C) Assessed land values in a State which provides a differential or

use value assessment law for farmland or closely held business,

(D) Comparable sales of other farm or closely held business land in

the same geographical area far enough removed from a metropolitan or

resort area so that nonagricultural use is not a significant factor in

the sales price, and

(E) Any other factor which fairly values the farm or closely held

business value of the property.

(9) Property acquired from decedent.--Property shall be considered to

have been acquired from or to have passed from the decedent if--

(A) such property is so considered under section 1014(b) (relating to

basis of property acquired from a decedent),

(B) such property is acquired by any person from the estate, or

(C) such property is acquired by any person from a trust (to the

extent such property is includible in the gross estate of the decedent).

(10) Community property.--If the decedent and his surviving spouse at

any time held qualified real property as community property, the

interest of the surviving spouse in such property shall be taken into

account under this section to the extent necessary to provide a result

under this section with respect to such property which is consistent

with the result which would have obtained under this section if such

property had not been community property.

(11) Bond in lieu of personal liability.--If the qualified heir makes

written application to the Secretary for determination of the maximum

amount of the additional tax which may be imposed by subsection (c) with

respect to the qualified heir's interest, the Secretary (as soon as

possible, and in any event within 1 year after the making of such

application) shall notify the heir of such maximum amount. The qualified

heir, on furnishing a bond in such amount and for such period as may be

required, shall be discharged from personal liability for any additional

tax imposed by subsection (c) and shall be entitled to a receipt or

writing showing such discharge.

(12) Active management.--The term "active management" means the making

of the management decisions of a business (other than the daily

operating decisions).

(13) Special rules for woodlands.--

(A) In general.--In the case of any qualified woodland with respect to

which the executor elects to have this subparagraph apply, trees growing

on such woodland shall not be treated as a crop.

(B) Qualified woodland.--The term "qualified woodland" means any real

property which--

(i) is used in timber operations, and

(ii) is an identifiable area of land such as an acre or other area for

which records are normally maintained in conducting timber operations.

(C) Timber operations.--The term "timber operations" means--

(i) the planting, cultivating, caring for, or cutting of trees, or

(ii) the preparation (other than milling) of trees for market.

(D) Election.--An election under subparagraph (A) shall be made on the

return of the tax imposed by section 2001. Such election shall be made

in such manner as the Secretary shall by regulations prescribe. Such an

election, once made, shall be irrevocable.

(14) Treatment of replacement property acquired in section 1031 or

1033 transactions.--

(A) In general.--In the case of any qualified replacement property,

any period during which there was ownership, qualified use, or material

participation with respect to the replaced property by the decedent or

any member of his family shall be treated as a period during which there

was such ownership, use, or material participation (as the case may be)

with respect to the qualified replacement property.

(B) Limitation.--Subparagraph (A) shall not apply to the extent that

the fair market value of the qualified replacement property (as of the

date of its acquisition) exceeds the fair market value of the replaced

property (as of the date of its disposition).

(C) Definitions.--For purposes of this paragraph--

(i) Qualified replacement property.--The term "qualified replacement

property" means any real property which is--

(I) acquired in an exchange which qualifies under section 1031, or

(II) the acquisition of which results in the nonrecognition of gain

under section 1033.

Such term shall only include property which is used for the same

qualified use as the replaced property was being used before the

exchange.

(ii) Replaced property.--The term "replaced property" means--

(I) the property transferred in the exchange which qualifies under

section 1031, or

(II) the property compulsorily or involuntarily converted (within the

meaning of section 1033).

(f) Statute of limitations.--If qualified real property is disposed of

or ceases to be used for a qualified use, then--

(1) the statutory period for the assessment of any additional tax

under subsection (c) attributable to such disposition or cessation shall

not expire before the expiration of 3 years from the date the Secretary

is notified (in such manner as the Secretary may by regulations

prescribe) of such disposition or cessation (or if later in the case of

an involuntary conversion or exchange to which subsection (h) or (i)

applies, 3 years from the date the Secretary is notified of the

replacement of the converted property or of an intention not to replace

or of the exchange of property), and

(2) such additional tax may be assessed before the expiration of such

3-year period notwithstanding the provisions of any other law or rule of

law which would otherwise prevent such assessment.

(g) Application of this section and section 6324B to interests in

partnerships, corporations, and trusts.--The Secretary shall prescribe

regulations setting forth the application of this section and section

6324B in the case of an interest in a partnership, corporation, or trust

which, with respect to the decedent, is an interest in a closely held

business (within the meaning of paragraph (1) of section 6166(b)). For

purposes of the preceding sentence, an interest in a discretionary trust

all the beneficiaries of which are qualified heirs shall be treated as a

present interest.

(h) Special rules for involuntary conversions of qualified real

property.--

(1) Treatment of converted property.--

(A) In general.--If there is an involuntary conversion of an interest

in qualified real property--

(i) no tax shall be imposed by subsection (c) on such conversion if

the cost of the qualified replacement property equals or exceeds the

amount realized on such conversion, or

(ii) if clause (i) does not apply, the amount of the tax imposed by

subsection (c) on such conversion shall be the amount determined under

subparagraph (B).

(B) Amount of tax where there is not complete reinvestment.--The

amount determined under this subparagraph with respect to any

involuntary conversion is the amount of the tax which (but for this

subsection) would have been imposed on such conversion reduced by an

amount which--

(i) bears the same ratio to such tax, as

(ii) the cost of the qualified replacement property bears to the

amount realized on the conversion.

(2) Treatment of replacement property.--For purposes of subsection

(c)--

(A) any qualified replacement property shall be treated in the same

manner as if it were a portion of the interest in qualified real

property which was involuntarily converted; except that with respect to

such qualified replacement property the 10-year period under paragraph

(1) of subsection (c) shall be extended by any period, beyond the 2-year

period referred to in section 1033(a)(2)(B)(i), during which the

qualified heir was allowed to replace the qualified real property,

(B) any tax imposed by subsection (c) on the involuntary conversion

shall be treated as a tax imposed on a partial disposition, and

(C) paragraph (6) of subsection (c) shall be applied--

(i) by not taking into account periods after the involuntary

conversion and before the acquisition of the qualified replacement

property, and

(ii) by treating material participation with respect to the converted

property as material participation with respect to the qualified

replacement property.

(3) Definitions and special rules.--For purposes of this subsection--

(A) Involuntary conversion.--The term "involuntary conversion" means a

compulsory or involuntary conversion within the meaning of section 1033.

(B) Qualified replacement property.--The term "qualified replacement

property" means--

(i) in the case of an involuntary conversion described in section

1033(a)(1), any real property into which the qualified real property is

converted, or

(ii) in the case of an involuntary conversion described in section

1033(a)(2), any real property purchased by the qualified heir during the

period specified in section 1033(a)(2)(B) for purposes of replacing the

qualified real property.

Such term only includes property which is to be used for the qualified

use set forth in subparagraph (A) or (B) of subsection (b)(2) under

which the qualified real property qualified under subsection (a).

(4) Certain rules made applicable.--The rules of the last sentence of

section 1033(a)(2)(A) shall apply for purposes of paragraph (3)(B)(ii).

(i) Exchanges of qualified real property.--

(1) Treatment of property exchanged.--

(A) Exchanges solely for qualified exchange property.--If an interest

in qualified real property is exchanged solely for an interest in

qualified exchange property in a transaction which qualifies under

section 1031, no tax shall be imposed by subsection (c) by reason of

such exchange.

(B) Exchanges where other property received.--If an interest in

qualified real property is exchanged for an interest in qualified

exchange property and other property in a transaction which qualifies

under section 1031, the amount of the tax imposed by subsection (c) by

reason of such exchange shall be the amount of tax which (but for this

subparagraph) would have been imposed on such exchange under subsection

(c)(1), reduced by an amount which--

(i) bears the same ratio to such tax, as

(ii) the fair market value of the qualified exchange property bears to

the fair market value of the qualified real property exchanged.

For purposes of clause (ii) of the preceding sentence, fair market

value shall be determined as of the time of the exchange.

(2) Treatment of qualified exchange property.--For purposes of

subsection (c)--

(A) any interest in qualified exchange property shall be treated in

the same manner as if it were a portion of the interest in qualified

real property which was exchanged,

(B) any tax imposed by subsection (c) by reason of the exchange shall

be treated as a tax imposed on a partial disposition, and

(C) paragraph (6) of subsection (c) shall be applied by treating

material participation with respect to the exchanged property as

material participation with respect to the qualified exchange property.

(3) Qualified exchange property.--For purposes of this subsection, the

term "qualified exchange property" means real property which is to be

used for the qualified use set forth in subparagraph (A) or (B) of

subsection (b)(2) under which the real property exchanged therefor

originally qualified under subsection (a).

§ 2033. Property in Which the Decedent had an Interest. The value of

the gross estate shall include the value of all property to the extent

of the interest therein of the decedent at the time of his death.

§ 2034. Dower or Curtesy Interests. The value of the gross estate

shall include the value of all property to the extent of any interest

therein of the surviving spouse, existing at the time of the decedent's

death as dower or curtesy, or by virtue of a statute creating an estate

in lieu of dower or curtesy.

§ 2035. Adjustments for Certain Gifts Made Within Three Years of

Decedent's Death. (a) Inclusion of certain property in gross

estate.--If--

(1) the decedent made a transfer (by trust or otherwise) of an

interest in any property, or relinquished a power with respect to any

property, during the 3-year period ending on the date of the decedent's

death, and

(2) the value of such property (or an interest therein) would have

been included in the decedent's gross estate under section 2036, 2037,

2038, or 2042 if such transferred interest or relinquished power had

been retained by the decedent on the date of his death,

the value of the gross estate shall include the value of any property

(or interest therein) which would have been so included.

(b) Inclusion of gift tax on gifts made during 3 years before

decedent's death.--The amount of the gross estate (determined without

regard to this subsection) shall be increased by the amount of any tax

paid under chapter 12 by the decedent or his estate on any gift made by

the decedent or his spouse during the 3-year period ending on the date

of the decedent's death.

(c) Other rules relating to transfers within 3 years of death.--

(1) In general.--For purposes of--

(A) section 303(b) (relating to distributions in redemption of stock

to pay death taxes),

(B) section 2032A (relating to special valuation of certain farms,

etc., real property), and

(C) subchapter C of chapter 64 (relating to lien for taxes),

the value of the gross estate shall include the value of all property

to the extent of any interest therein of which the decedent has at any

time made a transfer, by trust or otherwise, during the 3-year period

ending on the date of the decedent's death.

(2) Coordination with section 6166.--An estate shall be treated as

meeting the 35 percent of adjusted gross estate requirement of section

6166(a)(1) only if the estate meets such requirement both with and

without the application of subsection (a).

(3) Marital and small transfers.--Paragraph (1) shall not apply to any

transfer (other than a transfer with respect to a life insurance policy)

made during a calendar year to any donee if the decedent was not

required by section 6019 (other than by reason of section 6019(2)) to

file any gift tax return for such year with respect to transfers to such

donee.

(d) Exception.--Subsection (a) and paragraph (1) of subsection (c)

shall not apply to any bona fide sale for an adequate and full

consideration in money or money's worth.

(e) Treatment of certain transfers from revocable trusts.--For

purposes of this section and section 2038, any transfer from any portion

of a trust during any period that such portion was treated under section

676 as owned by the decedent by reason of a power in the grantor

(determined without regard to section 672(e)) shall be treated as a

transfer made directly by the decedent.

§ 2036. Transfers with Retained Life Estate. (a) General rule.--The

value of the gross estate shall include the value of all property to the

extent of any interest therein of which the decedent has at any time

made a transfer (except in case of a bona fide sale for an adequate and

full consideration in money or money's worth), by trust or otherwise,

under which he has retained for his life or for any period not

ascertainable without reference to his death or for any period which

does not in fact end before his death--

(1) the possession or enjoyment of, or the right to the income from,

the property, or

(2) the right, either alone or in conjunction with any person, to

designate the persons who shall possess or enjoy the property or the

income therefrom.

(b) Voting rights.--

(1) In general.--For purposes of subsection (a)(1), the retention of

the right to vote (directly or indirectly) shares of stock of a

controlled corporation shall be considered to be a retention of the

enjoyment of transferred property.

(2) Controlled corporation.--For purposes of paragraph (1), a

corporation shall be treated as a controlled corporation if, at any time

after the transfer of the property and during the 3-year period ending

on the date of the decedent's death, the decedent owned (with the

application of section 318), or had the right (either alone or in

conjunction with any person) to vote, stock possessing at least 20

percent of the total combined voting power of all classes of stock.

(3) Coordination with section 2035.--For purposes of applying section

2035 with respect to paragraph (1), the relinquishment or cessation of

voting rights shall be treated as a transfer of property made by the

decedent.

(c) Limitation on application of general rule.--This section shall not

apply to a transfer made before March 4, 1931; nor to a transfer made

after March 3, 1931, and before June 7, 1932, unless the property

transferred would have been includible in the decedent's gross estate by

reason of the amendatory language of the joint resolution of March 3,

1931 (46 Stat. 1516).

§ 2037. Transfers Taking Effect at Death. (a) General rule.--The value

of the gross estate shall include the value of all property to the

extent of any interest therein of which the decedent has at any time

after September 7, 1916, made a transfer (except in case of a bona fide

sale for an adequate and full consideration in money or money's worth),

by trust or otherwise, if--

(1) possession or enjoyment of the property can, through ownership of

such interest, be obtained only by surviving the decedent, and

(2) the decedent has retained a reversionary interest in the property

(but in the case of a transfer made before October 8, 1949, only if such

reversionary interest arose by the express terms of the instrument of

transfer), and the value of such reversionary interest immediately

before the death of the decedent exceeds 5 percent of the value of such

property.

(b) Special rules.--For purposes of this section, the term

"reversionary interest" includes a possibility that property transferred

by the decedent--

(1) may return to him or his estate, or

(2) may be subject to a power of disposition by him,

but such term does not include a possibility that the income alone

from such property may return to him or become subject to a power of

disposition by him. The value of a reversionary interest immediately

before the death of the decedent shall be determined (without regard to

the fact of the decedent's death) by usual methods of valuation,

including the use of tables of mortality and actuarial principles, under

regulations prescribed by the Secretary. In determining the value of a

possibility that property may be subject to a power of disposition by

the decedent, such possibility shall be valued as if it were a

possibility that such property may return to the decedent or his estate.

Notwithstanding the foregoing, an interest so transferred shall not be

included in the decedent's gross estate under this section if possession

or enjoyment of the property could have been obtained by any beneficiary

during the decedent's life through the exercise of a general power of

appointment (as defined in section 2041) which in fact was exercisable

immediately before the decedent's death.

§ 2038. Revocable Transfers. (a) In general.--The value of the gross

estate shall include the value of all property--

(1) Transfers after June 22, 1936.--To the extent of any interest

therein of which the decedent has at any time made a transfer (except in

case of a bona fide sale for an adequate and full consideration in money

or money's worth), by trust or otherwise, where the enjoyment thereof

was subject at the date of his death to any change through the exercise

of a power (in whatever capacity exercisable) by the decedent alone or

by the decedent in conjunction with any other person (without regard to

when or from what source the decedent acquired such power), to alter,

amend, revoke, or terminate, or where any such power is relinquished

during the 3-year period ending on the date of the decedent's death.

(2) Transfers on or before June 22, 1936.--To the extent of any

interest therein of which the decedent has at any time made a transfer

(except in case of a bona fide sale for an adequate and full

consideration in money or money's worth), by trust or otherwise, where

the enjoyment thereof was subject at the date of his death to any change

through the exercise of a power, either by the decedent alone or in

conjunction with any person, to alter, amend, or revoke, or where the

decedent relinquished any such power during the 3-year period ending on

the date of the decedent's death. Except in the case of transfers made

after June 22, 1936, no interest of the decedent of which he has made a

transfer shall be included in the gross estate under paragraph (1)

unless it is includible under this paragraph.

(b) Date of existence of power.--For purposes of this section, the

power to alter, amend, revoke, or terminate shall be considered to exist

on the date of the decedent's death even though the exercise of the

power is subject to a precedent giving of notice or even though the

alteration, amendment, revocation, or termination takes effect only on

the expiration of a stated period after the exercise of the power,

whether or not on or before the date of the decedent's death notice has

been given or the power has been exercised. In such cases proper

adjustment shall be made representing the interests which would have

been excluded from the power if the decedent had lived, and for such

purpose, if the notice has not been given or the power has not been

exercised on or before the date of his death, such notice shall be

considered to have been given, or the power exercised, on the date of

his death.

§ 2039. Annuities. (a) General.--The gross estate shall include the

value of an annuity or other payment receivable by any beneficiary by

reason of surviving the decedent under any form of contract or agreement

entered into after March 3, 1931 (other than as insurance under policies

on the life of the decedent), if, under such contract or agreement, an

annuity or other payment was payable to the decedent, or the decedent

possessed the right to receive such annuity or payment, either alone or

in conjunction with another for his life or for any period not

ascertainable without reference to his death or for any period which

does not in fact end before his death.

(b) Amount includible.--Subsection (a) shall apply to only such part

of the value of the annuity or other payment receivable under such

contract or agreement as is proportionate to that part of the purchase

price therefor contributed by the decedent. For purposes of this

section, any contribution by the decedent's employer or former employer

to the purchase price of such contract or agreement (whether or not to

an employee's trust or fund forming part of a pension, annuity,

retirement, bonus or profit sharing plan) shall be considered to be

contributed by the decedent if made by reason of his employment.

§ 2040. Joint Interests. (a) General rule.--The value of the gross

estate shall include the value of all property to the extent of the

interest therein held as joint tenants with right of survivorship by the

decedent and any other person, or as tenants by the entirety by the

decedent and spouse, or deposited, with any person carrying on the

banking business, in their joint names and payable to either or the

survivor, except such part thereof as may be shown to have originally

belonged to such other person and never to have been received or

acquired by the latter from the decedent for less than an adequate and

full consideration in money or money's worth: Provided, That where such

property or any part thereof, or part of the consideration with which

such property was acquired, is shown to have been at any time acquired

by such other person from the decedent for less than an adequate and

full consideration in money or money's worth, there shall be excepted

only such part of the value of such property as is proportionate to the

consideration furnished by such other person: Provided further, That

where any property has been acquired by gift, bequest, devise, or

inheritance, as a tenancy by the entirety by the decedent and spouse,

then to the extent of one-half of the value thereof, or, where so

acquired by the decedent and any other person as joint tenants with

right of survivorship and their interests are not otherwise specified or

fixed by law, then to the extent of the value of a fractional part to be

determined by dividing the value of the property by the number of joint

tenants with right of survivorship.

(b) Certain joint interests of husband and wife.--

(1) Interests of spouse excluded from gross estate.--Notwithstanding

subsection (a), in the case of any qualified joint interest, the value

included in the gross estate with respect to such interest by reason of

this section is one-half of the value of such qualified joint interest.

(2) Qualified joint interest defined.--For purposes of paragraph (1),

the term "qualified joint interest" means any interest in property held

by the decedent and the decedent's spouse as--

(A) tenants by the entirety, or

(B) joint tenants with right of survivorship, but only if the decedent

and the spouse of the decedent are the only joint tenants.

§ 2041. Powers of Appointment. (a) In general.--The value of the gross

estate shall include the value of all property--

(1) Powers of appointment created on or before October 21, 1942.--To

the extent of any property with respect to which a general power of

appointment created on or before October 21, 1942, is exercised by the

decedent--

(A) by will, or

(B) by a disposition which is of such nature that if it were a

transfer of property owned by the decedent, such property would be

includible in the decedent's gross estate under sections 2035 to 2038,

inclusive;

but the failure to exercise such a power or the complete release of

such a power shall not be deemed an exercise thereof. If a general power

of appointment created on or before October 21, 1942, has been partially

released so that it is no longer a general power of appointment, the

exercise of such power shall not be deemed to be the exercise of a

general power of appointment if--

(i) such partial release occurred before November 1, 1951, or

(ii) the donee of such power was under a legal disability to release

such power on October 21, 1942, and such partial release occurred not

later than 6 months after the termination of such legal disability.

(2) Powers created after October 21, 1942.--To the extent of any

property with respect to which the decedent has at the time of his death

a general power of appointment created after October 21, 1942, or with

respect to which the decedent has at any time exercised or released such

a power of appointment by a disposition which is of such nature that if

it were a transfer of property owned by the decedent, such property

would be includible in the decedent's gross estate under sections 2035

to 2038, inclusive. For purposes of this paragraph (2), the power of

appointment shall be considered to exist on the date of the decedent's

death even though the exercise of the power is subject to a precedent

giving of notice or even though the exercise of the power takes effect

only on the expiration of a stated period after its exercise, whether or

not on or before the date of the decedent's death notice has been given

or the power has been exercised.

(3) Creation of another power in certain cases.--To the extent of any

property with respect to which the decedent--

(A) by will, or

(B) by a disposition which is of such nature that if it were a

transfer of property owned by the decedent such property would be

includible in the decedent's gross estate under section 2035, 2036, or

2037,

exercises a power of appointment created after October 21, 1942, by

creating another power of appointment which under the applicable local

law can be validly exercised so as to postpone the vesting of any estate

or interest in such property, or suspend the absolute ownership or power

of alienation of such property, for a period ascertainable without

regard to the date of the creation of the first power.

(b) Definitions.--For purposes of subsection (a)--

(1) General power of appointment.--The term "general power of

appointment" means a power which is exercisable in favor of the

decedent, his estate, his creditors, or the creditors of his estate;

except that--

(A) A power to consume, invade, or appropriate property for the

benefit of the decedent which is limited by an ascertainable standard

relating to the health, education, support, or maintenance of the

decedent shall not be deemed a general power of appointment.

(B) A power of appointment created on or before October 21, 1942,

which is exercisable by the decedent only in conjunction with another

person shall not be deemed a general power of appointment.

(C) In the case of a power of appointment created after October 21,

1942, which is exercisable by the decedent only in conjunction with

another person--

(i) If the power is not exercisable by the decedent except in

conjunction with the creator of the power--such power shall not be

deemed a general power of appointment.

(ii) If the power is not exercisable by the decedent except in

conjunction with a person having a substantial interest in the property,

subject to the power, which is adverse to exercise of the power in favor

of the decedent--such power shall not be deemed a general power of

appointment. For the purposes of this clause a person who, after the

death of the decedent, may be possessed of a power of appointment (with

respect to the property subject to the decedent's power) which he may

exercise in his own favor shall be deemed as having an interest in the

property and such interest shall be deemed adverse to such exercise of

the decedent's power.

(iii) If (after the application of clauses (i) and (ii)) the power is

a general power of appointment and is exercisable in favor of such other

person--such power shall be deemed a general power of appointment only

in respect of a fractional part of the property subject to such power,

such part to be determined by dividing the value of such property by the

number of such persons (including the decedent) in favor of whom such

power is exercisable.

For purposes of clauses (ii) and (iii), a power shall be deemed to be

exercisable in favor of a person if it is exercisable in favor of such

person, his estate, his creditors, or the creditors of his estate.

(2) Lapse of power.--The lapse of a power of appointment created after

October 21, 1942, during the life of the individual possessing the power

shall be considered a release of such power. The preceding sentence

shall apply with respect to the lapse of powers during any calendar year

only to the extent that the property, which could have been appointed by

exercise of such lapsed powers, exceeded in value, at the time of such

lapse, the greater of the following amounts:

(A) $5,000, or

(B) 5 percent of the aggregate value, at the time of such lapse, of

the assets out of which, or the proceeds of which, the exercise of the

lapsed powers could have been satisfied.

(3) Date of creation of power.--For purposes of this section, a power

of appointment created by a will executed on or before October 21, 1942,

shall be considered a power created on or before such date if the person

executing such will dies before July 1, 1949, without having republished

such will, by codicil or otherwise, after October 21, 1942.

§ 2042. Proceeds of Life Insurance. The value of the gross estate

shall include the value of all property--

(1) Receivable by the executor.--To the extent of the amount

receivable by the executor as insurance under policies on the life of

the decedent.

(2) Receivable by other beneficiaries.--To the extent of the amount

receivable by all other beneficiaries as insurance under policies on the

life of the decedent with respect to which the decedent possessed at his

death any of the incidents of ownership, exercisable either alone or in

conjunction with any other person. For purposes of the preceding

sentence, the term "incident of ownership" includes a reversionary

interest (whether arising by the express terms of the policy or other

instrument or by operation of law) only if the value of such

reversionary interest exceeded 5 percent of the value of the policy

immediately before the death of the decedent. As used in this paragraph,

the term "reversionary interest" includes a possibility that the policy,

or the proceeds of the policy, may return to the decedent or his estate,

or may be subject to a power of disposition by him. The value of a

reversionary interest at any time shall be determined (without regard to

the fact of the decedent's death) by usual methods of valuation,

including the use of tables of mortality and actuarial principles,

pursuant to regulations prescribed by the Secretary. In determining the

value of a possibility that the policy or proceeds thereof may be

subject to a power of disposition by the decedent, such possibility

shall be valued as if it were a possibility that such policy or proceeds

may return to the decedent or his estate.

§ 2043. Transfers for Insufficient Consideration. (a) In general.--If

any one of the transfers, trusts, interests, rights, or powers

enumerated and described in sections 2035 to 2038, inclusive, and

section 2041 is made, created, exercised, or relinquished for a

consideration in money or money's worth, but is not a bona fide sale for

an adequate and full consideration in money or money's worth, there

shall be included in the gross estate only the excess of the fair market

value at the time of death of the property otherwise to be included on

account of such transaction, over the value of the consideration

received therefor by the decedent.

(b) Marital rights not treated as consideration.--

(1) In general.--For purposes of this chapter, a relinquishment or

promised relinquishment of dower or curtesy, or of a statutory estate

created in lieu of dower or curtesy, or of other marital rights in the

decedent's property or estate, shall not be considered to any extent a

consideration "in money or money's worth".

(2) Exception.--For purposes of section 2053 (relating to expenses,

indebtedness, and taxes), a transfer of property which satisfies the

requirements of paragraph (1) of section 2516 (relating to certain

property settlements) shall be considered to be made for an adequate and

full consideration in money or money's worth.

§ 2044. Certain Property for Which Marital Deduction Was Previously

Allowed. (a) General rule.--The value of the gross estate shall include

the value of any property to which this section applies in which the

decedent had a qualifying income interest for life.

(b) Property to which this section applies.--This section applies to

any property if--

(1) a deduction was allowed with respect to the transfer of such

property to the decedent--

(A) under section 2056 by reason of subsection (b)(7) thereof, or

(B) under section 2523 by reason of subsection (f) thereof, and

(2) section 2519 (relating to dispositions of certain life estates)

did not apply with respect to a disposition by the decedent of part or

all of such property.

(c) Property treated as having passed from decedent.--For purposes of

this chapter and chapter 13, property includible in the gross estate of

the decedent under subsection (a) shall be treated as property passing

from the decedent.

§ 2045. Prior Interests. Except as otherwise specifically provided by

law, sections 2034 to 2042, inclusive, shall apply to the transfers,

trusts, estates, interests, rights, powers, and relinquishment of

powers, as severally enumerated and described therein, whenever made,

created, arising, existing, exercised, or relinquished.

§ 2046. Disclaimers. For provisions relating to the effect of a

qualified disclaimer for purposes of this chapter, see section 2518.

§ 2053. Expenses, indebtedness, and taxes. (a) General rule.--For

purposes of the tax imposed by section 2001, the value of the taxable

estate shall be determined by deducting from the value of the gross

estate such amounts--

(1) for funeral expenses,

(2) for administration expenses,

(3) for claims against the estate, and

(4) for unpaid mortgages on, or any indebtedness in respect of,

property where the value of the decedent's interest therein,

undiminished by such mortgage or indebtedness, is included in the value

of the gross estate,

as are allowable by the laws of the jurisdiction, whether within or

without the United States, under which the estate is being administered.

(b) Other administration expenses.--Subject to the limitations in

paragraph (1) of subsection (c), there shall be deducted in determining

the taxable estate amounts representing expenses incurred in

administering property not subject to claims which is included in the

gross estate to the same extent such amounts would be allowable as a

deduction under subsection (a) if such property were subject to claims,

and such amounts are paid before the expiration of the period of

limitation for assessment provided in section 6501.

(c) Limitations.--

(1) Limitations applicable to subsections (a) and (b).--

(A) Consideration for claims.--The deduction allowed by this section

in the case of claims against the estate, unpaid mortgages, or any

indebtedness shall, when founded on a promise or agreement, be limited

to the extent that they were contracted bona fide and for an adequate

and full consideration in money or money's worth; except that in any

case in which any such claim is founded on a promise or agreement of the

decedent to make a contribution or gift to or for the use of any donee

described in section 2055 for the purposes specified therein, the

deduction for such claims shall not be so limited, but shall be limited

to the extent that it would be allowable as a deduction under section

2055 if such promise or agreement constituted a bequest.

(B) Certain taxes.--Any income taxes on income received after the

death of the decedent, or property taxes not accrued before his death,

or any estate, succession, legacy, or inheritance taxes, shall not be

deductible under this section.

(C) Certain claims by remaindermen.--No deduction shall be allowed

under this section for a claim against the estate by a remainderman

relating to any property described in section 2044.

(D) Section 6166 interest.--No deduction shall be allowed under this

section for any interest payable under section 6601 on any unpaid

portion of the tax imposed by section 2001 for the period during which

an extension of time for payment of such tax is in effect under section

6166.

(2) Limitations applicable only to subsection (a).--In the case of the

amounts described in subsection (a), there shall be disallowed the

amount by which the deductions specified therein exceed the value, at

the time of the decedent's death, of property subject to claims, except

to the extent that such deductions represent amounts paid before the

date prescribed for the filing of the estate tax return. For purposes of

this section, the term "property subject to claims" means property

includible in the gross estate of the decedent which, or the avails of

which, would under the applicable law, bear the burden of the payment of

such deductions in the final adjustment and settlement of the estate,

except that the value of the property shall be reduced by the amount of

the deduction under section 2054 attributable to such property.

(d) Certain foreign death taxes.--

(1) In general.--Notwithstanding the provisions of subsection

(c)(1)(B), for purposes of the tax imposed by section 2001, the value of

the taxable estate may be determined, if the executor so elects before

the expiration of the period of limitation for assessment provided in

section 6501, by deducting from the value of the gross estate the amount

(as determined in accordance with regulations prescribed by the

Secretary) of any estate, succession, legacy, or inheritance tax imposed

by and actually paid to any foreign country, in respect of any property

situated within such foreign country and included in the gross estate of

a citizen or resident of the United States, upon a transfer by the

decedent for public, charitable, or religious uses described in section

2055. The determination under this paragraph of the country within which

property is situated shall be made in accordance with the rules

applicable under subchapter B (sec. 2101 and following) in determining

whether property is situated within or without the United States. Any

election under this paragraph shall be exercised in accordance with

regulations prescribed by the Secretary.

(2) Condition for allowance of deduction.--No deduction shall be

allowed under paragraph (1) for a foreign death tax specified therein

unless the decrease in the tax imposed by section 2001 which results

from the deduction provided in paragraph (1) will inure solely for the

benefit of the public, charitable, or religious transferees described in

section 2055 or section 2106(a)(2). In any case where the tax imposed by

section 2001 is equitably apportioned among all the transferees of

property included in the gross estate, including those described in

sections 2055 and 2106(a)(2) (taking into account any exemptions,

credits, or deductions allowed by this chapter), in determining such

decrease, there shall be disregarded any decrease in the Federal estate

tax which any transferees other than those described in sections 2055

and 2106(a)(2) are required to pay.

(3) Effect on credit for foreign death taxes of deduction under this

subsection.--

(A) Election.--An election under this subsection shall be deemed a

waiver of the right to claim a credit, against the Federal estate tax,

under a death tax convention with any foreign country for any tax or

portion thereof in respect of which a deduction is taken under this

subsection.

(B) Cross reference.--

See section 2011(d) for the effect of a deduction taken under this

paragraph on the credit for foreign death taxes.

(e) Marital rights.--

For provisions treating certain relinquishments of marital rights as

consideration in money or money's worth, see section 2043(b)(2).

§ 2054. Losses. For purposes of the tax imposed by section 2001, the

value of the taxable estate shall be determined by deducting from the

value of the gross estate losses incurred during the settlement of

estates arising from fires, storms, shipwrecks, or other casualties, or

from theft, when such losses are not compensated for by insurance or

otherwise.

§ 2055. Transfers for public, charitable, and religious uses.

(a) In general.--For purposes of the tax imposed by section 2001, the

value of the taxable estate shall be determined by deducting from the

value of the gross estate the amount of all bequests, legacies, devises,

or transfers--

(1) to or for the use of the United States, any State, any political

subdivision thereof, or the District of Columbia, for exclusively public

purposes;

(2) to or for the use of any corporation organized and operated

exclusively for religious, charitable, scientific, literary, or

educational purposes, including the encouragement of art, or to foster

national or international amateur sports competition (but only if no

part of its activities involve the provision of athletic facilities or

equipment), and the prevention of cruelty to children or animals, no

part of the net earnings of which inures to the benefit of any private

stockholder or individual, which is not disqualified for tax exemption

under section 501(c)(3) by reason of attempting to influence

legislation, and which does not participate in, or intervene in

(including the publishing or distributing of statements), any political

campaign on behalf of (or in opposition to) any candidate for public

office;

(3) to a trustee or trustees, or a fraternal society, order, or

association operating under the lodge system, but only if such

contributions or gifts are to be used by such trustee or trustees, or by

such fraternal society, order, or association, exclusively for

religious, charitable, scientific, literary, or educational purposes, or

for the prevention of cruelty to children or animals, such trust,

fraternal society, order, or association would not be disqualified for

tax exemption under section 501(c)(3) by reason of attempting to

influence legislation, and such trustee or trustees, or such fraternal

society, order, or association, does not participate in, or intervene in

(including the publishing or distributing of statements), any political

campaign on behalf of (or in opposition to) any candidate for public

office;

(4) to or for the use of any veterans' organization incorporated by

Act of Congress, or of its departments or local chapters or posts, no

part of the net earnings of which inures to the benefit of any private

shareholder or individual; or

(5) to an employee stock ownership plan if such transfer qualifies as

a qualified gratuitous transfer of qualified employer securities within

the meaning of section 664(g).

For purposes of this subsection, the complete termination before the

date prescribed for the filing of the estate tax return of a power to

consume, invade, or appropriate property for the benefit of an

individual before such power has been exercised by reason of the death

of such individual or for any other reason shall be considered and

deemed to be a qualified disclaimer with the same full force and effect

as though he had filed such qualified disclaimer. Rules similar to the

rules of section 501(j) shall apply for purposes of paragraph (2).

(b) Powers of appointment.--Property includible in the decedent's

gross estate under section 2041 (relating to powers of appointment)

received by a donee described in this section shall, for purposes of

this section, be considered a bequest of such decedent.

(c) Death taxes payable out of bequests.--If the tax imposed by

section 2001, or any estate, succession, legacy, or inheritance taxes,

are, either by the terms of the will, by the law of the jurisdiction

under which the estate is administered, or by the law of the

jurisdiction imposing the particular tax, payable in whole or in part

out of the bequests, legacies, or devises otherwise deductible under

this section, then the amount deductible under this section shall be the

amount of such bequests, legacies, or devises reduced by the amount of

such taxes.

(d) Limitation on deduction.--The amount of the deduction under this

section for any transfer shall not exceed the value of the transferred

property required to be included in the gross estate.

(e) Disallowance of deductions in certain cases.--

(1) No deduction shall be allowed under this section for a transfer to

or for the use of an organization or trust described in section 508(d)

or 4948(c)(4) subject to the conditions specified in such sections.

(2) Where an interest in property (other than an interest described in

section 170(f)(3)(B)) passes or has passed from the decedent to a

person, or for a use, described in subsection (a), and an interest

(other than an interest which is extinguished upon the decedent's death)

in the same property passes or has passed (for less than an adequate and

full consideration in money or money's worth) from the decedent to a

person, or for a use, not described in subsection (a), no deduction

shall be allowed under this section for the interest which passes or has

passed to the person, or for the use, described in subsection (a)

unless--

(A) in the case of a remainder interest, such interest is in a trust

which is a charitable remainder annuity trust or a charitable remainder

unitrust (described in section 664) or a pooled income fund (described

in section 642(c)(5)), or

(B) in the case of any other interest, such interest is in the form of

a guaranteed annuity or is a fixed percentage distributed yearly of the

fair market value of the property (to be determined yearly).

(3) Reformations to comply with paragraph (2).--

(A) In general.--A deduction shall be allowed under subsection (a) in

respect of any qualified reformation.

(B) Qualified reformation.--For purposes of this paragraph, the term

"qualified reformation" means a change of a governing instrument by

reformation, amendment, construction, or otherwise which changes a

reformable interest into a qualified interest but only if--

(i) any difference between--

(I) the actuarial value (determined as of the date of the decedent's

death) of the qualified interest, and

(II) the actuarial value (as so determined) of the reformable

interest,

does not exceed 5 percent of the actuarial value (as so determined) of

the reformable interest,

(ii) in the case of--

(I) a charitable remainder interest, the nonremainder interest (before

and after the qualified reformation) terminated at the same time, or

(II) any other interest, the reformable interest and the qualified

interest are for the same period, and

(iii) such change is effective as of the date of the decedent's death.

A nonremainder interest (before reformation) for a term of years in

excess of 20 years shall be treated as satisfying subclause (I) of

clause (ii) if such interest (after reformation) is for a term of 20

years.

(C) Reformable interest.--For purposes of this paragraph--

(i) In general.--The term "reformable interest" means any interest for

which a deduction would be allowable under subsection (a) at the time of

the decedent's death but for paragraph (2).

(ii) Beneficiary's interest must be fixed.--The term "reformable

interest" does not include any interest unless, before the remainder

vests in possession, all payments to persons other than an organization

described in subsection (a) are expressed either in specified dollar

amounts or a fixed percentage of the fair market value of the property.

For purposes of determining whether all such payments are expressed as a

fixed percentage of the fair market value of the property, section

664(d)(3) shall be taken into account.

(iii) Special rule where timely commencement of reformation.--Clause

(ii) shall not apply to any interest if a judicial proceeding is

commenced to change such interest into a qualified interest not later

than the 90th day after--

(I) if an estate tax return is required to be filed, the last date

(including extensions) for filing such return, or

(II) if no estate tax return is required to be filed, the last date

(including extensions) for filing the income tax return for the 1st

taxable year for which such a return is required to be filed by the

trust.

(iv) Special rule for will executed before January 1, 1979, etc.--In

the case of any interest passing under a will executed before January 1,

1979, or under a trust created before such date, clause (ii) shall not

apply.

(D) Qualified interest.--For purposes of this paragraph, the term

"qualified interest" means an interest for which a deduction is

allowable under subsection (a).

(E) Limitation.--The deduction referred to in subparagraph (A) shall

not exceed the amount of the deduction which would have been allowable

for the reformable interest but for paragraph (2).

(F) Special rule where income beneficiary dies.--If (by reason of the

death of any individual, or by termination or distribution of a trust in

accordance with the terms of the trust instrument) by the due date for

filing the estate tax return (including any extension thereof) a

reformable interest is in a wholly charitable trust or passes directly

to a person or for a use described in subsection (a), a deduction shall

be allowed for such reformable interest as if it had met the

requirements of paragraph (2) on the date of the decedent's death. For

purposes of the preceding sentence, the term "wholly charitable trust"

means a charitable trust which, upon the allowance of a deduction, would

be described in section 4947(a)(1).

(G) Statute of limitations.--The period for assessing any deficiency

of any tax attributable to the application of this paragraph shall not

expire before the date 1 year after the date on which the Secretary is

notified that such reformation (or other proceeding pursuant to

subparagraph (J)1 has occurred.

(H) Regulations.--The Secretary shall prescribe such regulations as

may be necessary to carry out the purposes of this paragraph, including

regulations providing such adjustments in the application of the

provisions of section 508 (relating to special rules relating to section

501(c)(3) organizations), subchapter J (relating to estates, trusts,

beneficiaries, and decedents), and chapter 42 (relating to private

foundations) as may be necessary by reason of the qualified reformation.

(I) Reformations permitted in case of remainder interests in residence

or farm, pooled income funds, etc.--The Secretary shall prescribe

regulations (consistent with the provisions of this paragraph)

permitting reformations in the case of any failure--

(i) to meet the requirements of section 170(f)(3)(B) (relating to

remainder interests in personal residence or farm, etc.), or

(ii) to meet the requirements of section 642(c)(5).

(J) Void or reformed trust in cases of insufficient remainder

interests.--In the case of a trust that would qualify (or could be

reformed to qualify pursuant to subparagraph (B)) but for failure to

satisfy the requirement of paragraph (1)(D) or (2)(D) of section 664(d),

such trust may be--

(i) declared null and void ab initio, or

(ii) changed by reformation, amendment, or otherwise to meet such

requirement by reducing the payout rate or the duration (or both) of any

noncharitable beneficiary's interest to the extent necessary to satisfy

such requirement,

pursuant to a proceeding that is commenced within the period required

in subparagraph (C)(iii). In a case described in clause (i), no

deduction shall be allowed under this title for any transfer to the

trust and any transactions entered into by the trust prior to being

declared void shall be treated as entered into by the transferor.

(4) Works of art and their copyrights treated as separate properties

in certain cases.--

(A) In general.--In the case of a qualified contribution of a work of

art, the work of art and the copyright on such work of art shall be

treated as separate properties for purposes of paragraph (2).

(B) Work of art defined.--For purposes of this paragraph, the term

"work of art" means any tangible personal property with respect to which

there is a copyright under Federal law.

(C) Qualified contribution defined.--For purposes of this paragraph,

the term "qualified contribution" means any transfer of property to a

qualified organization if the use of the property by the organization is

related to the purpose or function constituting the basis for its

exemption under section 501.

(D) Qualified organization defined.--For purposes of this paragraph,

the term "qualified organization" means any organization described in

section 501(c)(3) other than a private foundation (as defined in section

509). For purposes of the preceding sentence, a private operating

foundation (as defined in section 4942(j)(3)) shall not be treated as a

private foundation.

(5) Contributions to donor advised funds.--A deduction otherwise

allowed under subsection (a) for any contribution to a donor advised

fund (as defined in section 4966(d)(2)) shall only be allowed if--

(A) the sponsoring organization (as defined in section 4966(d)(1))

with respect to such donor advised fund is not--

(i) described in paragraph (3) or (4) of subsection (a), or

(ii) a type III supporting organization (as defined in section

4943(f)(5)(A)) which is not a functionally integrated type III

supporting organization (as defined in section 4943(f)(5)(B)), and

(B) the taxpayer obtains a contemporaneous written acknowledgment

(determined under rules similar to the rules of section 170(f)(8)(C))

from the sponsoring organization (as so defined) of such donor advised

fund that such organization has exclusive legal control over the assets

contributed.

(f) Special rule for irrevocable transfers of easements in real

property.--A deduction shall be allowed under subsection (a) in respect

of any transfer of a qualified real property interest (as defined in

section 170(h)(2)(C)) which meets the requirements of section 170(h)

(without regard to paragraph (4)(A) thereof).

(g) Cross references.--

(1) For option as to time for valuation for purpose of deduction under

this section, see section 2032.

(2) For treatment of certain organizations providing child care, see

section 501(k).

(3) For exemption of gifts and bequests to or for the benefit of

Library of Congress, see section 5 of the Act of March 3, 1925, as

amended (2 U.S.C. 161).

(4) For treatment of gifts and bequests for the benefit of the Naval

Historical Center as gifts or bequests to or for the use of the United

States, see section 7222 of Title 10, United States Code.

(5) For treatment of gifts and bequests to or for the benefit of

National Park Foundation as gifts or bequests to or for the use of the

United States, see section 8 of the Act of December 18, 1967 (16 U.S.C.

191).

(6) For treatment of gifts, devises, or bequests accepted by the

Secretary of State, the Director of the International Communication

Agency, or the Director of the United States International Development

Cooperation Agency as gifts, devises, or bequests to or for the use of

the United States, see section 25 of the State Department Basic

Authorities Act of 1956.

(7) For treatment of gifts or bequests of money accepted by the

Attorney General for credit to "Commissary Funds, Federal Prisons" as

gifts or bequests to or for the use of the United States, see section

4043 of Title 18, United States Code.

(8) For payment of tax on gifts and bequests of United States

obligations to the United States, see section 3113(e) of Title 31,

United States Code.

(9) For treatment of gifts and bequests for benefit of the Naval

Academy as gifts or bequests to or for the use of the United States, see

section 6973 of Title 10, United States Code.

(10) For treatment of gifts and bequests for benefit of the Naval

Academy Museum as gifts or bequests to or for the use of the United

States, see section 6974 of Title 10, United States Code.

(11) For exemption of gifts and bequests received by National Archives

Trust Fund Board, see section 2308 of Title 44, United States Code.

(12) For treatment of gifts and bequests to or for the use of Indian

tribal governments (or their subdivisions), see section 7871.

§ 2056. Bequests, etc., to surviving spouse. (a) Allowance of marital

deduction.--For purposes of the tax imposed by section 2001, the value

of the taxable estate shall, except as limited by subsection (b), be

determined by deducting from the value of the gross estate an amount

equal to the value of any interest in property which passes or has

passed from the decedent to his surviving spouse, but only to the extent

that such interest is included in determining the value of the gross

estate.

(b) Limitation in the case of life estate or other terminable

interest.--

(1) General rule.--Where, on the lapse of time, on the occurrence of

an event or contingency, or on the failure of an event or contingency to

occur, an interest passing to the surviving spouse will terminate or

fail, no deduction shall be allowed under this section with respect to

such interest--

(A) if an interest in such property passes or has passed (for less

than an adequate and full consideration in money or money's worth) from

the decedent to any person other than such surviving spouse (or the

estate of such spouse); and

(B) if by reason of such passing such person (or his heirs or assigns)

may possess or enjoy any part of such property after such termination or

failure of the interest so passing to the surviving spouse;

and no deduction shall be allowed with respect to such interest (even

if such deduction is not disallowed under subparagraphs (A) and (B))--

(C) if such interest is to be acquired for the surviving spouse,

pursuant to directions of the decedent, by his executor or by the

trustee of a trust.

For purposes of this paragraph, an interest shall not be considered as

an interest which will terminate or fail merely because it is the

ownership of a bond, note, or similar contractual obligation, the

discharge of which would not have the effect of an annuity for life or

for a term.

(2) Interest in unidentified assets.--Where the assets (included in

the decedent's gross estate) out of which, or the proceeds of which, an

interest passing to the surviving spouse may be satisfied include a

particular asset or assets with respect to which no deduction would be

allowed if such asset or assets passed from the decedent to such spouse,

then the value of such interest passing to such spouse shall, for

purposes of subsection (a), be reduced by the aggregate value of such

particular assets.

(3) Interest of spouse conditional on survival for limited

period.--For purposes of this subsection, an interest passing to the

surviving spouse shall not be considered as an interest which will

terminate or fail on the death of such spouse if--

(A) such death will cause a termination or failure of such interest

only if it occurs within a period not exceeding 6 months after the

decedent's death, or only if it occurs as a result of a common disaster

resulting in the death of the decedent and the surviving spouse, or only

if it occurs in the case of either such event; and

(B) such termination or failure does not in fact occur.

(4) Valuation of interest passing to surviving spouse.--In determining

for purposes of subsection (a) the value of any interest in property

passing to the surviving spouse for which a deduction is allowed by this

section--

(A) there shall be taken into account the effect which the tax imposed

by section 2001, or any estate, succession, legacy, or inheritance tax,

has on the net value to the surviving spouse of such interest; and

(B) where such interest or property is encumbered in any manner, or

where the surviving spouse incurs any obligation imposed by the decedent

with respect to the passing of such interest, such encumbrance or

obligation shall be taken into account in the same manner as if the

amount of a gift to such spouse of such interest were being determined.

(5) Life estate with power of appointment in surviving spouse.--In the

case of an interest in property passing from the decedent, if his

surviving spouse is entitled for life to all the income from the entire

interest, or all the income from a specific portion thereof, payable

annually or at more frequent intervals, with power in the surviving

spouse to appoint the entire interest, or such specific portion

(exercisable in favor of such surviving spouse, or of the estate of such

surviving spouse, or in favor of either, whether or not in each case the

power is exercisable in favor of others), and with no power in any other

person to appoint any part of the interest, or such specific portion, to

any person other than the surviving spouse--

(A) the interest or such portion thereof so passing shall, for

purposes of subsection (a), be considered as passing to the surviving

spouse, and

(B) no part of the interest so passing shall, for purposes of

paragraph (1)(A), be considered as passing to any person other than the

surviving spouse.

This paragraph shall apply only if such power in the surviving spouse

to appoint the entire interest, or such specific portion thereof,

whether exercisable by will or during life, is exercisable by such

spouse alone and in all events.

(6) Life insurance or annuity payments with power of appointment in

surviving spouse.--In the case of an interest in property passing from

the decedent consisting of proceeds under a life insurance, endowment,

or annuity contract, if under the terms of the contract such proceeds

are payable in installments or are held by the insurer subject to an

agreement to pay interest thereon (whether the proceeds, on the

termination of any interest payments, are payable in a lump sum or in

annual or more frequent installments), and such installment or interest

payments are payable annually or at more frequent intervals, commencing

not later than 13 months after the decedent's death, and all amounts, or

a specific portion of all such amounts, payable during the life of the

surviving spouse are payable only to such spouse, and such spouse has

the power to appoint all amounts, or such specific portion, payable

under such contract (exercisable in favor of such surviving spouse, or

of the estate of such surviving spouse, or in favor of either, whether

or not in each case the power is exercisable in favor of others), with

no power in any other person to appoint such amounts to any person other

than the surviving spouse--

(A) such amounts shall, for purposes of subsection (a), be considered

as passing to the surviving spouse, and

(B) no part of such amounts shall, for purposes of paragraph (1)(A),

be considered as passing to any person other than the surviving spouse.

This paragraph shall apply only if, under the terms of the contract,

such power in the surviving spouse to appoint such amounts, whether

exercisable by will or during life, is exercisable by such spouse alone

and in all events.

(7) Election with respect to life estate for surviving spouse.--

(A) In general.--In the case of qualified terminable interest

property--

(i) for purposes of subsection (a), such property shall be treated as

passing to the surviving spouse, and

(ii) for purposes of paragraph (1)(A), no part of such property shall

be treated as passing to any person other than the surviving spouse.

(B) Qualified terminable interest property defined.--For purposes of

this paragraph--

(i) In general.--The term "qualified terminable interest property"

means property--

(I) which passes from the decedent,

(II) in which the surviving spouse has a qualifying income interest

for life, and

(III) to which an election under this paragraph applies.

(ii) Qualifying income interest for life.--The surviving spouse has a

qualifying income interest for life if--

(I) the surviving spouse is entitled to all the income from the

property, payable annually or at more frequent intervals, or has a

usufruct interest for life in the property, and

(II) no person has a power to appoint any part of the property to any

person other than the surviving spouse.

Subclause (II) shall not apply to a power exercisable only at or after

the death of the surviving spouse. To the extent provided in

regulations, an annuity shall be treated in a manner similar to an

income interest in property (regardless of whether the property from

which the annuity is payable can be separately identified).

(iii) Property includes interest therein.--The term "property"

includes an interest in property.

(iv) Specific portion treated as separate property.--A specific

portion of property shall be treated as separate property.

(v) Election.--An election under this paragraph with respect to any

property shall be made by the executor on the return of tax imposed by

section 2001. Such an election, once made, shall be irrevocable.

(C) Treatment of survivor annuities.--In the case of an annuity

included in the gross estate of the decedent under section 2039 (or, in

the case of an interest in an annuity arising under the community

property laws of a State, included in the gross estate of the decedent

under section 2033) where only the surviving spouse has the right to

receive payments before the death of such surviving spouse--

(i) the interest of such surviving spouse shall be treated as a

qualifying income interest for life, and

(ii) the executor shall be treated as having made an election under

this subsection with respect to such annuity unless the executor

otherwise elects on the return of tax imposed by section 2001.

An election under clause (ii), once made, shall be irrevocable.

(8) Special rule for charitable remainder trusts.--

(A) In general.--If the surviving spouse of the decedent is the only

beneficiary of a qualified charitable remainder trust who is not a

charitable beneficiary nor an ESOP beneficiary, paragraph (1) shall not

apply to any interest in such trust which passes or has passed from the

decedent to such surviving spouse.

(B) Definitions.--For purposes of subparagraph (A)--

(i) Charitable beneficiary.--The term "charitable beneficiary" means

any beneficiary which is an organization described in section 170(c).

(ii) ESOP beneficiary.--The term "ESOP beneficiary" means any

beneficiary which is an employee stock ownership plan (as defined in

section 4975(e)(7)) that holds a remainder interest in qualified

employer securities (as defined in section 664(g)(4)) to be transferred

to such plan in a qualified gratuitous transfer (as defined in section

664(g)(1)).

(iii) Qualified charitable remainder trust.--The term "qualified

charitable remainder trust" means a charitable remainder annuity trust

or a charitable remainder unitrust (described in section 664).

(9) Denial of double deduction.--Nothing in this section or any other

provision of this chapter shall allow the value of any interest in

property to be deducted under this chapter more than once with respect

to the same decedent.

(10) Specific portion.--For purposes of paragraphs (5), (6), and

(7)(B)(iv), the term "specific portion" only includes a portion

determined on a fractional or percentage basis.

(c) Definition.--For purposes of this section, an interest in property

shall be considered as passing from the decedent to any person if and

only if--

(1) such interest is bequeathed or devised to such person by the

decedent;

(2) such interest is inherited by such person from the decedent;

(3) such interest is the dower or curtesy interest (or statutory

interest in lieu thereof) of such person as surviving spouse of the

decedent;

(4) such interest has been transferred to such person by the decedent

at any time;

(5) such interest was, at the time of the decedent's death, held by

such person and the decedent (or by them and any other person) in joint

ownership with right of survivorship;

(6) the decedent had a power (either alone or in conjunction with any

person) to appoint such interest and if he appoints or has appointed

such interest to such person, or if such person takes such interest in

default on the release or nonexercise of such power; or

(7) such interest consists of proceeds of insurance on the life of the

decedent receivable by such person.

Except as provided in paragraph (5) or (6) of subsection (b), where at

the time of the decedent's death it is not possible to ascertain the

particular person or persons to whom an interest in property may pass

from the decedent, such interest shall, for purposes of subparagraphs

(A) and (B) of subsection (b)(1), be considered as passing from the

decedent to a person other than the surviving spouse.

§ 2103. Definition of Gross Estate. For the purpose of the tax imposed

by section 2101, the value of the gross estate of every decedent

nonresident not a citizen of the United States shall be that part of his

gross estate (determined as provided in section 2031) which at the time

of his death is situated in the United States.

§ 2104. Property Within the United States. (a) Stock in

corporation.--For purposes of this subchapter shares of stock owned and

held by a nonresident not a citizen of the United States shall be deemed

property within the United States only if issued by a domestic

corporation.

(b) Revocable transfers and transfers within 3 years of death.--For

purposes of this subchapter, any property of which the decedent has made

a transfer, by trust or otherwise, within the meaning of sections 2035

to 2038, inclusive, shall be deemed to be situated in the United States,

if so situated either at the time of the transfer or at the time of the

decedent's death.

(c) Debt obligations.--For purposes of this subchapter, debt

obligations of-

(1) a United States person, or

(2) the United States, a State or any political subdivision thereof,

or the District of Columbia,

owned and held by a nonresident not a citizen of the United States

shall be deemed property within the United States. With respect to

estates of decedents dying after December 31, 1969, deposits with a

domestic branch of a foreign corporation, if such branch is engaged in

the commercial banking business, shall, for purposes of this subchapter,

be deemed property within the United States. This subsection shall not

apply to a debt obligation to which section 2105(b) applies.

§ 2105. Property Without the United States. (a) Proceeds of life

insurance.--For purposes of this subchapter, the amount receivable as

insurance on the life of a nonresident not a citizen of the United

States shall not be deemed property within the United States.

(b) Bank deposits and certain other debt obligations.--For purposes of

this subchapter, the following shall not be deemed property within the

United States--

(1) amounts described in section 871(i)(3), if any interest thereon

would not be subject to tax by reason of section 871(i)(1) were such

interest received by the decedent at the time of his death,

(2) deposits with a foreign branch of a domestic corporation or

domestic partnership, if such branch is engaged in the commercial

banking business,

(3) debt obligations, if, without regard to whether a statement

meeting the requirements of section 871(h)(5) has been received, any

interest thereon would be eligible for the exemption from tax under

section 871(h)(1) were such interest received by the decedent at the

time of his death, and

(4) obligations which would be original issue discount obligations as

defined in section 871(g)(1) but for subparagraph (B)(i) thereof, if any

interest thereon (were such interest received by the decedent at the

time of his death) would not be effectively connected with the conduct

of a trade or business within the United States.

Notwithstanding the preceding sentence, if any portion of the interest

on an obligation referred to in paragraph (3) would not be eligible for

the exemption referred to in paragraph (3) by reason of section

871(h)(4) if the interest were received by the decedent at the time of

his death, then an appropriate portion (as determined in a manner

prescribed by the Secretary) of the value (as determined for purposes of

this chapter) of such debt obligation shall be deemed property within

the United States.

(c) Works of art on loan for exhibition.--For purposes of this

subchapter, works of art owned by a nonresident not a citizen of the

United States shall not be deemed property within the United States if

such works of art are--

(1) imported into the United States solely for exhibition purposes,

(2) loaned for such purposes, to a public gallery or museum, no part

of the net earnings of which inures to the benefit of any private

stockholder or individual, and

(3) at the time of the death of the owner, on exhibition, or enroute

to or from exhibition, in such a public gallery or museum.

§ 2503. (a) General Definition - The term "taxable gifts" means the

total amount of gifts made during the calendar year, less deductions

provided in subchapter C (section 2522 and following).

(b) Exclusions from gifts. (1) In general.--In the case of gifts

(other than gifts of future interests in property) made to any person by

the donor during the calendar year, the first $10,000 of such gifts to

such person shall not, for purposes of subsection (a), be included in

the total amount of gifts made during such year. Where there has been a

transfer to any person of a present interest in property, the

possibility that such interest may be diminished by the exercise of a

power shall be disregarded in applying this subsection, if no part of

such interest will at any time pass to any other person.

(2) Inflation adjustment.--In the case of gifts made in a calendar

year after 1998, the $10,000 amount contained in paragraph (1) shall be

increased by an amount equal to--

(A) $10,000, multiplied by

(B) the cost-of-living adjustment determined under section 1(f)(3) for

such calendar year by substituting "calendar year 1997" for "calendar

year 1992" in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a

multiple of $1,000, such amount shall be rounded to the next lowest

multiple of $1,000.

(c) Transfer for the benefit of minor. -- No part of a gift to an

individual who has not attained the age of 21 years on the date of such

transfer shall be considered a gift of a future interest in property for

purposes of subsection (b) if the property and the income therefrom-

(1) may be expended by, or for the benefit of, the donee before his

attaining the age of 21 years, and

(2) will to the extent not so expended-

(A) pass to the donee on his attaining the age of 21 years, and

(B) in the event the donee dies before attaining the age of 21 years,

be payable to the estate of the donee or as he may appoint under a

general power of appointment as defined in section 2514(c).

{(d) Repealed. Pub. L. 97-34, title III, § 311(h)(5), Aug. 13, 1981,

95 Stat. 282}

(e) Exclusion for certain transfers for educational expenses or

medical expenses. (1) In general. Any qualified transfer shall not be

treated as a transfer of property by gift for purposes of this chapter.

(2) Qualified transfer. For purposes of this subsection, the term

"qualified transfer" means any amount paid on behalf of an individual-

(A) as tuition to an educational organization described in section

170(b)(1)(A)(ii) for the education or training of such individual, or

(B) to any person who provides medical care (as defined in section

213(d)) with respect to such individual as payment for such medical

care.

(f) Waiver of certain pension rights. If any individual waives, before

the death of a participant, any survivor benefit, or right to such

benefit, under section 401(a)(11) or 417, such waiver shall not be

treated as a transfer of property by gift for purposes of this chapter.

(g) Treatment of certain loans of artworks. (1) In general. For

purposes of this subtitle, any loan of a qualified work of art shall not

be treated as a transfer (and the value of such qualified work of art

shall be determined as if such loan had not been made) if-

(A) such loan is to an organization described in section 501(c)(3) and

exempt from tax under section 501(c) (other than a private foundation),

and

(B) the use of such work by such organization is related to the

purpose or function constituting the basis for its exemption under

section 501.

(2) Definitions. For purposes of this section-

(A) Qualified work of art. The term "qualified work of art" means any

archaeological, historic, or creative tangible personal property.

(B) Private foundation. The term "private foundation" has the meaning

given such term by section 509, except that such term shall not include

any private operating foundation (as defined in section 4942(j)(3)).

§ 2511. Transfers in general. (a) Scope. Subject to the limitations

contained in this chapter, the tax imposed by section 2501 shall apply

whether the transfer is in trust or otherwise, whether the gift is

direct or indirect, and whether the property is real or personal,

tangible or intangible; but in the case of a nonresident not a citizen

of the United States, shall apply to a transfer only if the property is

situated within the United States.

(b) Intangible property. For purposes of this chapter, in the case of

a nonresident not a citizen of the United States who is excepted from

the application of section 2501(a)(2)-

(1) shares of stock issued by a domestic corporation, and

(2) debt obligations of-

--(A) a United States person, or

--(B) the United States, a State or any political subdivision thereof,

or the District of Columbia,

--which are owned and held by such nonresident shall be deemed to be

property situated within the United States.

§ 2512. Valuation of gifts. (a) If the gift is made in property, the

value thereof at the date of the gift shall be considered the amount of

the gift.

(b) Where property is transferred for less than an adequate and full

consideration in money or money's worth, then the amount by which the

value of the property exceeded the value of the consideration shall be

deemed a gift, and shall be included in computing the amount of gifts

made during the calendar year.

§ 2513. Gift by husband or wife to third party. (a) Considered as made

one-half by each. (1) In general. A gift made by one spouse to any

person other than his spouse shall, for the purposes of this chapter, be

considered as made one-half by him and one-half by his spouse, but only

if at the time of the gift each spouse is a citizen or resident of the

United States. This paragraph shall not apply with respect to a gift by

a spouse of an interest in property if he creates in his spouse a

general power of appointment, as defined in section 2514(c), over such

interest. For purposes of this section, an individual shall be

considered as the spouse of another individual only if he is married to

such individual at the time of the gift and does not remarry during the

remainder of the calendar year.

(2) Consent of both spouses. Paragraph (1) shall apply only if both

spouses have signified (under the regulations provided for in subsection

(b)) their consent to the application of paragraph (1) in the case of

all such gifts made during the calendar year by either while married to

the other.

(b) Manner and time of signifying consent. (1) Manner. A consent under

this section shall be signified in such manner as is provided under

regulations prescribed by the Secretary.

(2) Time. Such consent may be so signified at any time after the close

of the calendar year in which the gift was made, subject to the

following limitations-

--(A) The consent may not be signified after the 15th day of April

following the close of such year, unless before such 15th day no return

has been filed for such year by either spouse, in which case the consent

may not be signified after a return for such year is filed by either

spouse.

--(B) The consent may not be signified after a notice of deficiency with

respect to the tax for such year has been sent to either spouse in

accordance with section 6212(a).

(c) Revocation of consent. Revocation of a consent previously

signified shall be made in such manner as in provided under regulations

prescribed by the Secretary, but the right to revoke a consent

previously signified with respect to a calendar year-

(1) shall not exist after the 15th day of April following the close of

such year if the consent was signified on or before such 15th day; and

(2) shall not exist if the consent was not signified until after such

15th day.

(d) Joint and several liability for tax. If the consent required by

subsection (a)(2) is signified with respect to a gift made in any

calendar year, the liability with respect to the entire tax imposed by

this chapter of each spouse for such year shall be joint and several.

§ 2514. Powers of appointment. (a) Powers created on or before October

21, 1942. An exercise of a general power of appointment created on or

before October 21, 1942, shall be deemed a transfer of property by the

individual possessing such power; but the failure to exercise such a

power or the complete release of such a power shall not be deemed an

exercise thereof. If a general power of appointment created on or before

October 21, 1942, has been partially released so that it is no longer a

general power of appointment, the subsequent exercise of such power

shall not be deemed to be the exercise of a general power of appointment

if-

(1) such partial release occurred before November 1, 1951, or

(2) the donee of such power was under a legal disability to release

such power on October 21, 1942, and such partial release occurred not

later than six months after the termination of such legal disability.

(b) Powers created after October 21, 1942. The exercise or release of

a general power of appointment created after October 21, 1942, shall be

deemed a transfer of property by the individual possessing such power.

(c) Definition of general power of appointment. For purposes of this

section, the term "general power of appointment" means a power which is

exercisable in favor of the individual possessing the power (hereafter

in this subsection referred to as the "possessor"), his estate, his

creditors, or the creditors of his estate; except that-

(1) A power to consume, invade, or appropriate property for the

benefit of the possessor which is limited by an ascertainable standard

relating to the health, education, support, or maintenance of the

possessor shall not be deemed a general power of appointment.

(2) A power of appointment created on or before October 21, 1942,

which is exercisable by the possessor only in conjunction with another

person shall not be deemed a general power of appointment.

(3) In the case of a power of appointment created after October 21,

1942, which is exercisable by the possessor only in conjunction with

another person-

--(A) if the power is not exercisable by the possessor except in

conjunction with the creator of the power-such power shall not be deemed

a general power of appointment;

--(B) if the power is not exercisable by the possessor except in

conjunction with a person having a substantial interest, in the property

subject to the power, which is adverse to exercise of the power in favor

of the possessor-such power shall not be deemed a general power of

appointment. For the purposes of this subparagraph a person who, after

the death of the possessor, may be possessed of a power of appointment

(with respect to the property subject to the possessor's power) which he

may exercise in his own favor shall be deemed as having an interest in

the property and such interest shall be deemed adverse to such exercise

of the possessor's power;

--(C) if (after the application of subparagraphs (A) and (B)) the power

is a general power of appointment and is exercisable in favor of such

other person-such power shall be deemed a general power of appointment

only in respect of a fractional part of the property subject to such

power, such part to be determined by dividing the value of such property

by the number of such persons (including the possessor) in favor of whom

such power is exercisable.

--For purposes of subparagraphs (B) and (C), a power shall be deemed to

be exercisable in favor of a person if it is exercisable in favor of

such person, his estate, his creditors, or the creditors of his estate.

(d) Creation of another power in certain cases. If a power of

appointment created after October 21, 1942, is exercised by creating

another power of appointment which, under the applicable local law, can

be validly exercised so as to postpone the vesting of any estate or

interest in the property which was subject to the first power, or

suspend the absolute ownership or power of alienation of such property,

for a period ascertainable without regard to the date of the creation of

the first power, such exercise of the first power shall, to the extent

of the property subject to the second power, be deemed a transfer of

property by the individual possessing such power.

(e) Lapse of power. The lapse of a power of appointment created after

October 21, 1942, during the life of the individual possessing the power

shall be considered a release of such power. The rule of the preceding

sentence shall apply with respect to the lapse of powers during any

calendar year only to the extent that the property which could have been

appointed by exercise of such lapsed powers exceeds in value the greater

of the following amounts:

(1) $5,000, or

(2) 5 percent of the aggregate value of the assets out of which, or

the proceeds of which, the exercise of the lapsed powers could be

satisfied.

(f) Date of creation of power. For purposes of this section a power of

appointment created by a will executed on or before October 21, 1942,

shall be considered a power created on or before such date if the person

executing such will dies before July 1, 1949, without having republished

such will, by codicil or otherwise, after October 21, 1942.

§ 2516. Certain property settlements. Where a husband and wife enter

into a written agreement relative to their marital and property rights

and divorce occurs within the 3-year period beginning on the date 1 year

before such agreement is entered into (whether or not such agreement is

approved by the divorce decree), any transfers of property or interests

in property made pursuant to such agreement-

(1) to either spouse in settlement of his or her marital or property

rights, or

(2) to provide a reasonable allowance for the support of issue of the

marriage during minority,

--shall be deemed to be transfers made for a full and adequate

consideration in money or money's worth.

§ 2518. Disclaimers. (a) General Rule. - For purposes of this

subtitle, if a person makes a qualified disclaimer with respect to any

interest in property, this subtitle shall apply with respect to such

interest as if the interest had never been transferred to such person.

(b) Qualified Disclaimer Defined. - For purposes of subsection (a),

the term "qualified disclaimer" means an irrevocable and unqualified

refusal by a person to accept an interest in property but only if -

(1) such refusal is in writing,

(2) such writing is received by the transferor of the interest, his

legal representative, or the holder of the legal title to the property

to which the interest relates not later than the date which is 9 months

after the later of -

(A) the date on which the transfer creating the interest in such

person is made, or

(B) the day on which such person attains age 21,

(3) such person has not accepted the interest or any of its benefits,

and

(4) as a result of such refusal, the interest passes without any

direction on the part of the person making the disclaimer and passes

either -

(A) to the spouse of the decedent, or

(B) to a person other than the person making the disclaimer.

(c) Other rules. For purposes of subsection (a)-

(1) Disclaimer of undivided portion of interest. A disclaimer with

respect to an undivided portion of an interest which meets the

requirements of the preceding sentence shall be treated as a qualified

disclaimer of such portion of the interest.

(2) Powers. A power with respect to property shall be treated as an

interest in such property.

(3) Certain transfers treated as disclaimers. A written transfer of

the transferor's entire interest in the property-

(A) which meets requirements similar to the requirements of paragraphs

(2) and (3) of subsection (b), and

(B) which is to a person or persons who would have received the

property had the transferor made a qualified disclaimer (within the

meaning of subsection (b)),

--shall be treated as a qualified disclaimer.

§ 2519. Dispositions of certain life estates. (a) General rule

--For purposes of this chapter and chapter 11, any disposition of all

or part of a qualifying income interest for life in any property to

which this section applies shall be treated as a transfer of all

interests in such property other than the qualifying income interest.

(b) Property to which this subsection applies. This section applies to

any property if a deduction was allowed with respect to the transfer of

such property to the donor-

(1) under section 2056 by reason of subsection (b)(7) thereof, or

(2) under section 2523 by reason of subsection (f) thereof.

(c) Cross reference

--For right of recovery for gift tax in the case of property treated as

transferred under this section, see section 2207A(b).

§ 2522. Charitable and similar gifts. (a) Citizens or residents. In

computing taxable gifts for the calendar year, there shall be allowed as

a deduction in the case of a citizen or resident the amount of all gifts

made during such year to or for the use of-

(1) the United States, any State, or any political subdivision

thereof, or the District of Columbia, for exclusively public purposes;

(2) a corporation, or trust, or community chest, fund, or foundation,

organized and operated exclusively for religious, charitable,

scientific, literary, or educational purposes, or to foster national or

international amateur sports competition (but only if no part of its

activities involve the provision of athletic facilities or equipment),

including the encouragement of art and the prevention of cruelty to

children or animals, no part of the net earnings of which inures to the

benefit of any private shareholder or individual, which is not

disqualified for tax exemption under section 501(c)(3) by reason of

attempting to influence legislation, and which does not participate in,

or intervene in (including the publishing or distributing of

statements), any political campaign on behalf of (or in opposition to)

any candidate for public office;

(3) a fraternal society, order, or association, operating under the

lodge system, but only if such gifts are to be used exclusively for

religious, charitable, scientific, literary, or educational purposes,

including the encouragement of art and the prevention of cruelty to

children or animals;

(4) posts or organizations of war veterans, or auxiliary units or

societies of any such posts or organizations, if such posts,

organizations, units, or societies are organized in the United States or

any of its possessions, and if no part of their net earnings insures to

the benefit of any private shareholder or individual.

Rules similar to the rules of section 501(j) shall apply for purposes

of paragraph (2).

(b) Nonresidents. In the case of a nonresident not a citizen of the

United States, there shall be allowed as a deduction the amount of all

gifts made during such year to or for the use of-

(1) the United States, any State, or any political subdivision

thereof, or the District of Columbia, for exclusively public purposes;

(2) a domestic corporation organized and operated exclusively for

religious, charitable, scientific, literary, or educational purposes,

including the encouragement of art and the prevention of cruelty to

children or animals, no part of the net earnings of which inures to the

benefit of any private shareholder or individual, which is not

disqualified for tax exemption under section 501(c)(3) by reason of

attempting to influence legislation, and which does not participate in,

or intervene in (including the publishing or distributing of

statements), any political campaign on behalf of (or in opposition to)

any candidate for public office;

(3) a trust, or community chest, fund, or foundation, organized and

operated exclusively for religious, charitable, scientific, literary, or

educational purposes, including the encouragement of art and the

prevention of cruelty to children or animals, no substantial part of the

activities of which is carrying on propaganda, or otherwise attempting,

to influence legislation, and which does not participate in, or

intervene in (including the publishing or distributing of statements),

any political campaign on behalf of (or in opposition to) any candidate

for public office; but only if such gifts are to be used within the

United States exclusively for such purposes;

(4) a fraternal society, order, or association, operating under the

lodge system, but only if such gifts are to be used within the United

States exclusively for religious, charitable, scientific, literary, or

educational purposes, including the encouragement of art and the

prevention of cruelty to children or animals;

(5) posts or organizations of war veterans, or auxiliary units or

societies of any such posts or organizations, if such posts,

organizations, units, or societies are organized in the United States or

any of its possessions, and if no part of their net earnings inures to

the benefit of any private shareholder or individual.

(c) Disallowance of deductions in certain cases. (1) No deduction

shall be allowed under this section for a gift to of 1 for the use of an

organization or trust described in section 508(d) or 4948(c)(4) subject

to the conditions specified in such sections.

(2) Where a donor transfers an interest in property (other than an

interest described in section 170(f)(3)(B)) to a person, or for a use,

described in subsection (a) or (b) and an interest in the same property

is retained by the donor, or is transferred or has been transferred (for

less than an adequate and full consideration in money or money's worth)

from the donor to a person, or for a use, not described in subsection

(a) or (b), no deduction shall be allowed under this section for the

interest which is, or has been transferred to the person, or for the

use, described in subsection (a) or (b), unless-

(A) in the case of a remainder interest, such interest is in a trust

which is a charitable remainder annuity trust or a charitable remainder

unitrust (described in section 664) or a pooled income fund (described

in section 642(c)(5)), or

(B) in the case of any other interest, such interest is in the form of

a guaranteed annuity or is a fixed percentage distributed yearly of the

fair market value of the property (to be determined yearly).

(3) Rules similar to the rules of section 2055(e)(4) shall apply for

purposes of paragraph (2).

(4) Reformations to comply with paragraph (2). (A) In general -- A

deduction shall be allowed under subsection (a) in respect of any

qualified reformation (within the meaning of section 2055(e)(3)(B)).

(B) Rules similar to section 2055(e)(3) to apply -- For purposes of

this paragraph, rules similar to the rules of section 2055(e)(3) shall

apply.

(5) Contributions to donor advised funds. A deduction otherwise

allowed under subsection (a) for any contribution to a donor advised

fund (as defined in section 4966(d)(2)) shall only be allowed if-

--(A) the sponsoring organization (as defined in section 4966(d)(1))

with respect to such donor advised fund is not-

--(i) described in paragraph (3) or (4) of subsection (a), or

--(ii) a type III supporting organization (as defined in section

4943(f)(5)(A)) which is not a functionally integrated type III

supporting organization (as defined in section 4943(f)(5)(B)), and

--(B) the taxpayer obtains a contemporaneous written acknowledgment

(determined under rules similar to the rules of section 170(f)(8)(C))

from the sponsoring organization (as so defined) of such donor advised

fund that such organization has exclusive legal control over the assets

contributed.

(d) Special rule for irrevocable transfers of easements in real

property. A deduction shall be allowed under subsection (a) in respect

of any transfer of a qualified real property interest (as defined in

section 170(h)(2)(C)) which meets the requirements of section 170(h)

(without regard to paragraph (4)(A) thereof).

(e) Special rules for fractional gifts

(1) Denial of deduction in certain cases

(A) In general

--No deduction shall be allowed for a contribution of an undivided

portion of a taxpayer's entire interest in tangible personal property

unless all interests in the property are held immediately before such

contribution by-

--(i) the taxpayer, or

--(ii) the taxpayer and the donee.

(B) Exceptions

--The Secretary may, by regulation, provide for exceptions to

subparagraph (A) in cases where all persons who hold an interest in the

property make proportional contributions of an undivided portion of the

entire interest held by such persons.

(2) Recapture of deduction in certain cases; addition to tax

(A) In general. The Secretary shall provide for the recapture of an

amount equal to any deduction allowed under this section (plus interest)

with respect to any contribution of an undivided portion of a taxpayer's

entire interest in tangible personal property-

--(i) in any case in which the donor does not contribute all of the

remaining interests in such property to the donee (or, if such donee is

no longer in existence, to any person described in section 170(c)) on or

before the earlier of-

--(I) the date that is 10 years after the date of the initial fractional

contribution, or

--(II) the date of the death of the donor, and

--(ii) in any case in which the donee has not, during the period

beginning on the date of the initial fractional contribution and ending

on the date described in clause (i)-

--(I) had substantial physical possession of the property, and

--(II) used the property in a use which is related to a purpose or

function constituting the basis for the organizations' exemption under

section 501.

(B) Addition to tax. The tax imposed under this chapter for any

taxable year for which there is a recapture under subparagraph (A) shall

be increased by 10 percent of the amount so recaptured.

(C) Initial fractional contribution. For purposes of this paragraph,

the term "initial fractional contribution" means, with respect to any

donor, the first gift of an undivided portion of the donor's entire

interest in any tangible personal property for which a deduction is

allowed under subsection (a) or (b).

(f) Cross references

--(1) For treatment of certain organizations providing child care, see

section 501(k).

--(2) For exemption of certain gifts to or for the benefit of the United

States and for rules of construction with respect to certain bequests,

see section 2055(f).

--(3) For treatment of gifts to or for the use of Indian tribal

governments (or their subdivisions), see section 7871.

§ 2523. Gift to spouse (a) Allowance of deduction. Where a donor

transfers during the calendar year by gift an interest in property to a

donee who at the time of the gift is the donor's spouse, there shall be

allowed as a deduction in computing taxable gifts for the calendar year

an amount with respect to such interest equal to its value.

(b) Life estate or other terminable interest. Where, on the lapse of

time, on the occurrence of an event or contingency, or on the failure of

an event or contingency to occur, such interest transferred to the

spouse will terminate or fail, no deduction shall be allowed with

respect to such interest-

(1) if the donor retains in himself, or transfers or has transferred

(for less than an adequate and full consideration in money or money's

worth) to any person other than such donee spouse (or the estate of such

spouse), an interest in such property, and if by reason of such

retention or transfer the donor (or his heirs or assigns) or such person

(or his heirs or assigns) may possess or enjoy any part of such property

after such termination or failure of the interest transferred to the

donee spouse; or

(2) if the donor immediately after the transfer to the donee spouse

has a power to appoint an interest in such property which he can

exercise (either alone or in conjunction with any person) in such manner

that the appointee may possess or enjoy any part of such property after

such termination or failure of the interest transferred to the donee

spouse. For purposes of this paragraph, the donor shall be considered

as having immediately after the transfer to the donee spouse such power

to appoint even though such power cannot be exercised until after the

lapse of time, upon the occurrence of an event or contingency, or on the

failure of an event or contingency to occur.

An exercise or release at any time by the donor, either alone or in

conjunction with any person, of a power to appoint an interest in

property, even though not otherwise a transfer, shall, for purposes of

paragraph (1), be considered as a transfer by him. Except as provided in

subsection (e), where at the time of the transfer it is impossible to

ascertain the particular person or persons who may receive from the

donor an interest in property so transferred by him, such interest

shall, for purposes of paragraph (1), be considered as transferred to a

person other than the donee spouse.

(c) Interest in unidentified assets. Where the assets out of which, or

the proceeds of which, the interest transferred to the donee spouse may

be satisfied include a particular asset or assets with respect to which

no deduction would be allowed if such asset or assets were transferred

from the donor to such spouse, then the value of the interest

transferred to such spouse shall, for purposes of subsection (a), be

reduced by the aggregate value of such particular assets.

(d) Joint interests. If the interest is transferred to the donee

spouse as sole joint tenant with the donor or as tenant by the entirety,

the interest of the donor in the property which exists solely by reason

of the possibility that the donor may survive the donee spouse, or that

there may occur a severance of the tenancy, shall not be considered for

purposes of subsection (b) as an interest retained by the donor in

himself.

(e) Life estate with power of appointment in donee spouse. Where the

donor transfers an interest in property, if by such transfer his spouse

is entitled for life to all of the income from the entire interest, or

all the income from a specific portion thereof, payable annually or at

more frequent intervals, with power in the donee spouse to appoint the

entire interest, or such specific portion (exercisable in favor of such

donee spouse, or of the estate of such donee spouse, or in favor of

either, whether or not in each case the power is exercisable in favor of

others), and with no power in any other person to appoint any part of

such interest, or such portion, to any person other than the donee

spouse-

(1) the interest, or such portion, so transferred shall, for purposes

of subsection (a) be considered as transferred to the donee spouse, and

(2) no part of the interest, or such portion, so transferred shall,

for purposes of subsection (b)(1), be considered as retained in the

donor or transferred to any person other than the donee spouse.

This subsection shall apply only if, by such transfer, such power in

the donee spouse to appoint the interest, or such portion, whether

exercisable by will or during life, is exercisable by such spouse alone

and in all events. For purposes of this subsection, the term "specific

portion" only includes a portion determined on a fractional or

percentage basis.

(f) Election with respect to life estate for donee spouse. (1) In

general

In the case of qualified terminable interest property-

(A) for purposes of subsection (a), such property shall be treated as

transferred to the donee spouse, and

(B) for purposes of subsection (b)(1), no part of such property shall

be considered as retained in the donor or transferred to any person

other than the donee spouse.

(2) Qualified terminable interest property. For purposes of this

subsection, the term "qualified terminable interest property" means any

property-

(A) which is transferred by the donor spouse,

(B) in which the donee spouse has a qualifying income interest for

life, and

(C) to which an election under this subsection applies.

(3) Certain rules made applicable. For purposes of this subsection,

rules similar to the rules of clauses (ii), (iii), and (iv) of section

2056(b)(7)(B) shall apply and the rules of section 2056(b)(10) shall

apply.

(4) Election. (A) Time and manner. An election under this subsection

with respect to any property shall be made on or before the date

prescribed by section 6075(b) for filing a gift tax return with respect

to the transfer (determined without regard to section 6019(2)) and shall

be made in such manner as the Secretary shall by regulations prescribe.

(B) Election irrevocable. An election under this subsection, once

made, shall be irrevocable.

(5) Treatment of interest retained by donor spouse. (A) In general. In

the case of any qualified terminable interest property-

(i) such property shall not be includible in the gross estate of the

donor spouse, and

(ii) any subsequent transfer by the donor spouse of an interest in

such property shall not be treated as a transfer for purposes of this

chapter.

(B) Subparagraph (A) not to apply after transfer by donee spouse.

Subparagraph (A) shall not apply with respect to any property after the

donee spouse is treated as having transferred such property under

section 2519, or such property is includible in the donee spouse's gross

estate under section 2044.

(6) Treatment of joint and survivor annuities. In the case of a joint

and survivor annuity where only the donor spouse and donee spouse have

the right to receive payments before the death of the last spouse to

die-

--(A) the donee spouse's interest shall be treated as a qualifying

income interest for life,

--(B) the donor spouse shall be treated as having made an election under

this subsection with respect to such annuity unless the donor spouse

otherwise elects on or before the date specified in paragraph (4)(A),

--(C) paragraph (5) and section 2519 shall not apply to the donor

spouse's interest in the annuity, and

--(D) if the donee spouse dies before the donor spouse, no amount shall

be includible in the gross estate of the donee spouse under section 2044

with respect to such annuity.

An election under subparagraph (B), once made, shall be irrevocable.

(g) Special rule for charitable remainder trusts. (1) In general. If,

after the transfer, the donee spouse is the only noncharitable

beneficiary (other than the donor) of a qualified charitable remainder

trust, subsection (b) shall not apply to the interest in such trust

which is transferred to the donee spouse.

(2) Definitions. For purposes of paragraph (1), the term

"noncharitable beneficiary" and "qualified charitable remainder trust"

have the meanings given to such terms by section 2056(b)(8)(B).

(h) Denial of double deduction. Nothing in this section or any other

provision of this chapter shall allow the value of any interest in

property to be deducted under this chapter more than once with respect

to the same donor.

§ 2524. Extent of deductions. The deductions provided in sections 2522

and 2523 shall be allowed only to the extent that the gifts therein

specified are included in the amount of gifts against which such

deductions are applied.

§ 2701. Special valuation rules in case of transfers of certain

interests in corporations or partnerships. (a) Valuation rules. (1) In

general. Solely for purposes of determining whether a transfer of an

interest in a corporation or partnership to (or for the benefit of) a

member of the transferor's family is a gift (and the value of such

transfer), the value of any right-

--(A) which is described in subparagraph (A) or (B) of subsection

(b)(1), and

--(B) which is with respect to any applicable retained interest that is

held by the transferor or an applicable family member immediately after

the transfer,

--shall be determined under paragraph (3). This paragraph shall not

apply to the transfer of any interest for which market quotations are

readily available (as of the date of transfer) on an established

securities market.

(2) Exceptions for marketable retained interests, etc. Paragraph (1)

shall not apply to any right with respect to an applicable retained

interest if-

--(A) market quotations are readily available (as of the date of the

transfer) for such interest on an established securities market,

--(B) such interest is of the same class as the transferred interest, or

--(C) such interest is proportionally the same as the transferred

interest, without regard to nonlapsing differences in voting power (or,

for a partnership, nonlapsing differences with respect to management and

limitations on liability).

--Subparagraph (C) shall not apply to any interest in a partnership if

the transferor or an applicable family member has the right to alter the

liability of the transferee of the transferred property. Except as

provided by the Secretary, any difference described in subparagraph (C)

which lapses by reason of any Federal or State law shall be treated as a

nonlapsing difference for purposes of such subparagraph.

(3) Valuation of rights to which paragraph (1) applies. (A) In

general. The value of any right described in paragraph (1), other than

a distribution right which consists of a right to receive a qualified

payment, shall be treated as being zero.

(B) Valuation of certain qualified payments. If-

--(i) any applicable retained interest confers a distribution right

which consists of the right to a qualified payment, and

--(ii) there are 1 or more liquidation, put, call, or conversion rights

with respect to such interest, the value of all such rights shall be

determined as if each liquidation, put, call, or conversion right were

exercised in the manner resulting in the lowest value being determined

for all such rights.

(C) Valuation of qualified payments where no liquidation, etc. rights.

In the case of an applicable retained interest which is described in

subparagraph (B)(i) but not subparagraph (B)(ii), the value of the

distribution right shall be determined without regard to this section.

(4) Minimum valuation of junior equity. (A) In general. In the case of

a transfer described in paragraph (1) of a junior equity interest in a

corporation or partnership, such interest shall in no event be valued at

an amount less than the value which would be determined if the total

value of all of the junior equity interests in the entity were equal to

10 percent of the sum of-

--(i) the total value of all of the equity interests in such entity,

plus

--(ii) the total amount of indebtedness of such entity to the transferor

(or an applicable family member).

(B) Definitions. For purposes of this paragraph-

(i) Junior equity interest. The term "junior equity interest" means

common stock or, in the case of a partnership, any partnership interest

under which the rights as to income and capital (or, to the extent

provided in regulations, the rights as to either income or capital) are

junior to the rights of all other classes of equity interests.

(ii) Equity interest. The term "equity interest" means stock or any

interest as a partner, as the case may be.

(b) Applicable retained interests. For purposes of this section-

(1) In general. The term "applicable retained interest" means any

interest in an entity with respect to which there is-

--(A) a distribution right, but only if, immediately before the transfer

described in subsection (a)(1), the transferor and applicable family

members hold (after application of subsection (e)(3)) control of the

entity, or

--(B) a liquidation, put, call, or conversion right.

(2) Control. For purposes of paragraph (1)-

(A) Corporations. In the case of a corporation, the term "control"

means the holding of at least 50 percent (by vote or value) of the stock

of the corporation.

(B) Partnerships. In the case of a partnership, the term "control"

means-

--(i) the holding of at least 50 percent of the capital or profits

interests in the partnership, or

--(ii) in the case of a limited partnership, the holding of any interest

as a general partner.

(C) Applicable family member. For purposes of this subsection, the

term "applicable family member" includes any lineal descendant of any

parent of the transferor or the transferor's spouse.

(c) Distribution and other rights; qualified payments. For purposes of

this section-

(1) Distribution right. (A) In general. The term "distribution right"

means-

--(i) a right to distributions from a corporation with respect to its

stock, and

--(ii) a right to distributions from a partnership with respect to a

partner's interest in the partnership.

(B) Exceptions. The term "distribution right" does not include-

--(i) a right to distributions with respect to any interest which is

junior to the rights of the transferred interest,

--(ii) any liquidation, put, call, or conversion right, or

--(iii) any right to receive any guaranteed payment described in section

707(c) of a fixed amount.

(2) Liquidation, etc. rights. (A) In general. The term "liquidation,

put, call, or conversion right" means any liquidation, put, call, or

conversion right, or any similar right, the exercise or nonexercise of

which affects the value of the transferred interest.

(B) Exception for fixed rights. (i) In general. The term "liquidation,

put, call, or conversion right" does not include any right which must be

exercised at a specific time and at a specific amount.

(ii) Treatment of certain rights. If a right is assumed to be

exercised in a particular manner under subsection (a)(3)(B), such right

shall be treated as so exercised for purposes of clause (i).

(C) Exception for certain rights to convert. The term "liquidation,

put, call, or conversion right" does not include any right which-

--(i) is a right to convert into a fixed number (or a fixed percentage)

of shares of the same class of stock in a corporation as the transferred

stock in such corporation under subsection (a)(1) (or stock which would

be of the same class but for nonlapsing differences in voting power),

--(ii) is nonlapsing,

--(iii) is subject to proportionate adjustments for splits,

combinations, reclassifications, and similar changes in the capital

stock, and

--(iv) is subject to adjustments similar to the adjustments under

subsection (d) for accumulated but unpaid distributions.

--A rule similar to the rule of the preceding sentence shall apply for

partnerships.

(3) Qualified payment. (A) In general. Except as otherwise provided in

this paragraph, the term "qualified payment" means any dividend payable

on a periodic basis under any cumulative preferred stock (or a

comparable payment under any partnership interest) to the extent that

such dividend (or comparable payment) is determined at a fixed rate.

(B) Treatment of variable rate payments. For purposes of subparagraph

(A), a payment shall be treated as fixed as to rate if such payment is

determined at a rate which bears a fixed relationship to a specified

market interest rate.

(C) Elections. (i) In general. Payments under any interest held by a

transferor which (without regard to this subparagraph) are qualified

payments shall be treated as qualified payments unless the transferor

elects not to treat such payments as qualified payments. Payments

described in the preceding sentence which are held by an applicable

family member shall be treated as qualified payments only if such member

elects to treat such payments as qualified payments.

(ii) Election to have interest treated as qualified payment. A

transferor or applicable family member holding any distribution right

which (without regard to this subparagraph) is not a qualified payment

may elect to treat such right as a qualified payment, to be paid in the

amounts and at the times specified in such election. The preceding

sentence shall apply only to the extent that the amounts and times so

specified are not inconsistent with the underlying legal instrument

giving rise to such right.

(iii) Elections irrevocable. Any election under this subparagraph with

respect to an interest shall, once made, be irrevocable.

(d) Transfer tax treatment of cumulative but unpaid distributions. (1)

In general. If a taxable event occurs with respect to any distribution

right to which subsection (a)(3)(B) or (C) applied, the following shall

be increased by the amount determined under paragraph (2):

--(A) The taxable estate of the transferor in the case of a taxable

event described in paragraph (3)(A)(i).

--(B) The taxable gifts of the transferor for the calendar year in which

the taxable event occurs in the case of a taxable event described in

paragraph (3)(A)(ii) or (iii).

(2) Amount of increase. (A) In general. The amount of the increase

determined under this paragraph shall be the excess (if any) of-

--(i) the value of the qualified payments payable during the period

beginning on the date of the transfer under subsection (a)(1) and ending

on the date of the taxable event determined as if-

--(I) all such payments were paid on the date payment was due, and

--(II) all such payments were reinvested by the transferor as of the

date of payment at a yield equal to the discount rate used in

determining the value of the applicable retained interest described in

subsection (a)(1), over

(ii) the value of such payments paid during such period computed under

clause (i) on the basis of the time when such payments were actually

paid.

(B) Limitation on amount of increase. (i) In general. The amount of

the increase under subparagraph (A) shall not exceed the applicable

percentage of the excess (if any) of-

--(I) the value (determined as of the date of the taxable event) of all

equity interests in the entity which are junior to the applicable

retained interest, over

--(II) the value of such interests (determined as of the date of the

transfer to which subsection (a)(1) applied).

(ii) Applicable percentage. For purposes of clause (i), the applicable

percentage is the percentage determined by dividing-

--(I) the number of shares in the corporation held (as of the date of

the taxable event) by the transferor which are applicable retained

interests of the same class, by

--(II) the total number of shares in such corporation (as of such date)

which are of the same class as the class described in subclause (I).

--A similar percentage shall be determined in the case of interests in a

partnership.

(iii) Definition. For purposes of this subparagraph, the term "equity

interest" has the meaning given such term by subsection (a)(4)(B).

(C) Grace period. For purposes of subparagraph (A), any payment of any

distribution during the 4-year period beginning on its due date shall be

treated as having been made on such due date.

(3) Taxable events. For purposes of this subsection-

(A) In general. The term "taxable event" means any of the following:

--(i) The death of the transferor if the applicable retained interest

conferring the distribution right is includible in the estate of the

transferor.

--(ii) The transfer of such applicable retained interest.

--(iii) At the election of the taxpayer, the payment of any qualified

payment after the period described in paragraph (2)(C), but only with

respect to such payment.

(B) Exception where spouse is transferee. (i) Deathtime transfers

--Subparagraph (A)(i) shall not apply to any interest includible in the

gross estate of the transferor if a deduction with respect to such

interest is allowable under section 2056 or 2106(a)(3).

(ii) Lifetime transfers. A transfer to the spouse of the transferor

shall not be treated as a taxable event under subparagraph (A)(ii) if

such transfer does not result in a taxable gift by reason of-

--(I) any deduction allowed under section 2523, or the exclusion under

section 2503(b), or

--(II) consideration for the transfer provided by the spouse.

(iii) Spouse succeeds to treatment of transferor. If an event is not

treated as a taxable event by reason of this subparagraph, the

transferee spouse or surviving spouse (as the case may be) shall be

treated in the same manner as the transferor in applying this subsection

with respect to the interest involved.

(4) Special rules for applicable family members. (A) Family member

treated in same manner as transferor. For purposes of this subsection,

an applicable family member shall be treated in the same manner as the

transferor with respect to any distribution right retained by such

family member to which subsection (a)(3)(B) or (C) applied.

(B) Transfer to applicable family member. In the case of a taxable

event described in paragraph (3)(A)(ii) involving the transfer of an

applicable retained interest to an applicable family member (other than

the spouse of the transferor), the applicable family member shall be

treated in the same manner as the transferor in applying this subsection

to distributions accumulating with respect to such interest after such

taxable event.

(C) Transfer to transferors. In the case of a taxable event described

in paragraph (3)(A)(ii) involving a transfer of an applicable retained

interest from an applicable family member to a transferor, this

subsection shall continue to apply to the transferor during any period

the transferor holds such interest.

(5) Transfer to include termination. For purposes of this subsection,

any termination of an interest shall be treated as a transfer.

(e) Other definitions and rules. For purposes of this section-

(1) Member of the family. The term "member of the family" means, with

respect to any transferor-

--(A) the transferor's spouse,

--(B) a lineal descendant of the transferor or the transferor's spouse,

and

--(C) the spouse of any such descendant.

(2) Applicable family member. The term "applicable family member"

means, with respect to any transferor-

--(A) the transferor's spouse,

--(B) an ancestor of the transferor or the transferor's spouse, and

--(C) the spouse of any such ancestor.

(3) Attribution of indirect holdings and transfers. An individual

shall be treated as holding any interest to the extent such interest is

held indirectly by such individual through a corporation, partnership,

trust, or other entity. If any individual is treated as holding any

interest by reason of the preceding sentence, any transfer which results

in such interest being treated as no longer held by such individual

shall be treated as a transfer of such interest.

(4) Effect of adoption. A relationship by legal adoption shall be

treated as a relationship by blood.

(5) Certain changes treated as transfers. Except as provided in

regulations, a contribution to capital or a redemption,

recapitalization, or other change in the capital structure of a

corporation or partnership shall be treated as a transfer of an interest

in such entity to which this section applies if the taxpayer or an

applicable family member-

--(A) receives an applicable retained interest in such entity pursuant

to such transaction, or

--(B) under regulations, otherwise holds, immediately after such

transaction, an applicable retained interest in such entity.

--This paragraph shall not apply to any transaction (other than a

contribution to capital) if the interests in the entity held by the

transferor, applicable family members, and members of the transferor's

family before and after the transaction are substantially identical.

(6) Adjustments. Under regulations prescribed by the Secretary, if

there is any subsequent transfer, or inclusion in the gross estate, of

any applicable retained interest which was valued under the rules of

subsection (a), appropriate adjustments shall be made for purposes of

chapter 11, 12, or 13 to reflect the increase in the amount of any prior

taxable gift made by the transferor or decedent by reason of such

valuation or to reflect the application of subsection (d).

(7) Treatment as separate interests. The Secretary may by regulation

provide that any applicable retained interest shall be treated as 2 or

more separate interests for purposes of this section.

§ 2702. Special valuation rules in case of transfers of interests in

trusts. (a) Valuation rules. (1) In general. Solely for purposes of

determining whether a transfer of an interest in trust to (or for the

benefit of) a member of the transferor's family is a gift (and the value

of such transfer), the value of any interest in such trust retained by

the transferor or any applicable family member (as defined in section

2701(e)(2)) shall be determined as provided in paragraph (2).

(2) Valuation of retained interests. (A) In general. The value of any

retained interest which is not a qualified interest shall be treated as

being zero.

(B) Valuation of qualified interest. The value of any retained

interest which is a qualified interest shall be determined under section

7520.

(3) Exceptions. (A) In general. This subsection shall not apply to any

transfer-

--(i) if such transfer is an incomplete gift,

--(ii) if such transfer involves the transfer of an interest in trust

all the property in which consists of a residence to be used as a

personal residence by persons holding term interests in such trust, or

--(iii) to the extent that regulations provide that such transfer is not

inconsistent with the purposes of this section.

(B) Incomplete gift. For purposes of subparagraph (A), the term

"incomplete gift" means any transfer which would not be treated as a

gift whether or not consideration was received for such transfer.

(b) Qualified interest. For purposes of this section, the term

"qualified interest" means-

(1) any interest which consists of the right to receive fixed amounts

payable not less frequently than annually,

(2) any interest which consists of the right to receive amounts which

are payable not less frequently than annually and are a fixed percentage

of the fair market value of the property in the trust (determined

annually), and

(3) any noncontingent remainder interest if all of the other interests

in the trust consist of interests described in paragraph (1) or (2).

(c) Certain property treated as held in trust. For purposes of this

section- (1) In general. The transfer of an interest in property with

respect to which there is 1 or more term interests shall be treated as a

transfer of an interest in a trust.

(2) Joint purchases. If 2 or more members of the same family acquire

interests in any property described in paragraph (1) in the same

transaction (or a series of related transactions), the person (or

persons) acquiring the term interests in such property shall be treated

as having acquired the entire property and then transferred to the other

persons the interests acquired by such other persons in the transaction

(or series of transactions). Such transfer shall be treated as made in

exchange for the consideration (if any) provided by such other persons

for the acquisition of their interests in such property.

(3) Term interest. The term "term interest" means-

(A) a life interest in property, or

(B) an interest in property for a term of years.

(4) Valuation rule for certain term interests. If the nonexercise of

rights under a term interest in tangible property would not have a

substantial effect on the valuation of the remainder interest in such

property-

(A) subparagraph (A) of subsection (a)(2) shall not apply to such term

interest, and

(B) the value of such term interest for purposes of applying

subsection (a)(1) shall be the amount which the holder of the term

interest establishes as the amount for which such interest could be sold

to an unrelated third party.

(d) Treatment of transfers of interests in portion of trust. In the

case of a transfer of an income or remainder interest with respect to a

specified portion of the property in a trust, only such portion shall be

taken into account in applying this section to such transfer.

(e) Member of the family. For purposes of this section, the term

"member of the family" shall have the meaning given such term by section

2704(c)(2).

§ 2703. Certain rights and restrictions disregarded

(a) General rule. For purposes of this subtitle, the value of any

property shall be determined without regard to-

(1) any option, agreement, or other right to acquire or use the

property at a price less than the fair market value of the property

(without regard to such option, agreement, or right), or

(2) any restriction on the right to sell or use such property.

(b) Exceptions. Subsection (a) shall not apply to any option,

agreement, right, or restriction which meets each of the following

requirements:

(1) It is a bona fide business arrangement.

(2) It is not a device to transfer such property to members of the

decedent's family for less than full and adequate consideration in money

or money's worth.

(3) Its terms are comparable to similar arrangements entered into by

persons in an arms' length transaction

§ 2704. Treatment of certain lapsing rights and restrictions. (a)

Treatment of lapsed voting or liquidation rights. (1) In general. For

purposes of this subtitle, if-

--(A) there is a lapse of any voting or liquidation right in a

corporation or partnership, and

--(B) the individual holding such right immediately before the lapse and

members of such individual's family hold, both before and after the

lapse, control of the entity,

such lapse shall be treated as a transfer by such individual by gift,

or a transfer which is includible in the gross estate of the decedent,

whichever is applicable, in the amount determined under paragraph (2).

(2) Amount of transfer. For purposes of paragraph (1), the amount

determined under this paragraph is the excess (if any) of-

--(A) the value of all interests in the entity held by the individual

described in paragraph (1) immediately before the lapse (determined as

if the voting and liquidation rights were nonlapsing), over

--(B) the value of such interests immediately after the lapse.

(3) Similar rights. The Secretary may by regulations apply this

subsection to rights similar to voting and liquidation rights.

(b) Certain restrictions on liquidation disregarded. (1) In general.

For purposes of this subtitle, if-

--(A) there is a transfer of an interest in a corporation or partnership

to (or for the benefit of) a member of the transferor's family, and

--(B) the transferor and members of the transferor's family hold,

immediately before the transfer, control of the entity,

--any applicable restriction shall be disregarded in determining the

value of the transferred interest.

(2) Applicable restriction. For purposes of this subsection, the term

"applicable restriction" means any restriction-

(A) which effectively limits the ability of the corporation or

partnership to liquidate, and

(B) with respect to which either of the following applies:

--(i) The restriction lapses, in whole or in part, after the transfer

referred to in paragraph (1).

--(ii) The transferor or any member of the transferor's family, either

alone or collectively, has the right after such transfer to remove, in

whole or in part, the restriction.

(3) Exceptions. The term "applicable restriction" shall not include-

--(A) any commercially reasonable restriction which arises as part of

any financing by the corporation or partnership with a person who is not

related to the transferor or transferee, or a member of the family of

either, or

--(B) any restriction imposed, or required to be imposed, by any Federal

or State law.

(4) Other restrictions. The Secretary may by regulations provide that

other restrictions shall be disregarded in determining the value of the

transfer of any interest in a corporation or partnership to a member of

the transferor's family if such restriction has the effect of reducing

the value of the transferred interest for purposes of this subtitle but

does not ultimately reduce the value of such interest to the transferee.

(c) Definitions and special rules. For purposes of this section-

(1) Control. The term "control" has the meaning given such term by

section 2701(b)(2).

(2) Member of the family. The term "member of the family" means, with

respect to any individual-

(A) such individual's spouse,

(B) any ancestor or lineal descendant of such individual or such

individual's spouse,

(C) any brother or sister of the individual, and

(D) any spouse of any individual described in subparagraph (B) or

(C).

(3) Attribution. The rule of section 2701(e)(3) shall apply for

purposes of determining the interests held by any individual.

§ 7872. Treatment of loans with below-market interest rates

(a) Treatment of gift loans and demand loans. (1) In general. For

purposes of this title, in the case of any below-market loan to which

this section applies and which is a gift loan or a demand loan, the

forgone interest shall be treated as-

--(A) transferred from the lender to the borrower, and

--(B) retransferred by the borrower to the lender as interest.

(2) Time when transfers made. Except as otherwise provided in

regulations prescribed by the Secretary, any forgone interest

attributable to periods during any calendar year shall be treated as

transferred (and retransferred) under paragraph (1) on the last day of

such calendar year.

(b) Treatment of other below-market loans. (1) In general. For

purposes of this title, in the case of any below-market loan to which

this section applies and to which subsection (a)(1) does not apply, the

lender shall be treated as having transferred on the date the loan was

made (or, if later, on the first day on which this section applies to

such loan), and the borrower shall be treated as having received on such

date, cash in an amount equal to the excess of-

--(A) the amount loaned, over

--(B) the present value of all payments which are required to be made

under the terms of the loan.

(2) Obligation treated as having original issue discount. For purposes

of this title-

(A) In general. Any below-market loan to which paragraph (1) applies

shall be treated as having original issue discount in an amount equal to

the excess described in paragraph (1).

(B) Amount in addition to other original issue discount. Any original

issue discount which a loan is treated as having by reason of

subparagraph (A) shall be in addition to any other original issue

discount on such loan (determined without regard to subparagraph (A)).

(c) Below-market loans to which section applies. (1) In general.

Except as otherwise provided in this subsection and subsection (g), this

section shall apply to-

(A) Gifts. Any below-market loan which is a gift loan.

(B) Compensation-related loans. Any below-market loan directly or

indirectly between-

--(i) an employer and an employee, or

--(ii) an independent contractor and a person for whom such independent

contractor provides services.

(C) Corporation-shareholder loans. Any below-market loan directly or

indirectly between a corporation and any shareholder of such

corporation.

(D) Tax avoidance loans. Any below-market loan 1 of the principal

purposes of the interest arrangements of which is the avoidance of any

Federal tax.

(E) Other below-market loans. To the extent provided in regulations,

any below-market loan which is not described in subparagraph (A), (B),

(C), or (F) if the interest arrangements of such loan have a significant

effect on any Federal tax liability of the lender or the borrower.

(F) Loans to qualified continuing care facilities. Any loan to any

qualified continuing care facility pursuant to a continuing care

contract.

(2) $10,000 de minimis exception for gift loans between individuals.

(A) In general. In the case of any gift loan directly between

individuals, this section shall not apply to any day on which the

aggregate outstanding amount of loans between such individuals does not

exceed $10,000.

(B) De minimis exception not to apply to loans attributable to

acquisition of income-producing assets.

--Subparagraph (A) shall not apply to any gift loan directly

attributable to the purchase or carrying of income-producing assets.

(C) Cross reference. For limitation on amount treated as interest

where loans do not exceed $100,000, see subsection (d)(1).

(3) $10,000 de minimis exception for compensation-related and

corporate-shareholder loans. (A) In general. In the case of any loan

described in subparagraph (B) or (C) of paragraph (1), this section

shall not apply to any day on which the aggregate outstanding amount of

loans between the borrower and lender does not exceed $10,000.

(B) Exception not to apply where 1 of principal purposes is tax

avoidance. Subparagraph (A) shall not apply to any loan the interest

arrangements of which have as 1 of their principal purposes the

avoidance of any Federal tax.

(d) Special rules for gift loans. (1) Limitation on interest accrual

for purposes of income taxes where loans do not exceed $100,000. (A) In

general. For purposes of subtitle A, in the case of a gift loan directly

between individuals, the amount treated as retransferred by the borrower

to the lender as of the close of any year shall not exceed the

borrower's net investment income for such year.

(B) Limitation not to apply where 1 of principal purposes is tax

avoidance. Subparagraph (A) shall not apply to any loan the interest

arrangements of which have as 1 of their principal purposes the

avoidance of any Federal tax.

(C) Special rule where more than 1 gift loan outstanding. For purposes

of subparagraph (A), in any case in which a borrower has outstanding

more than 1 gift loan, the net investment income of such borrower shall

be allocated among such loans in proportion to the respective amounts

which would be treated as retransferred by the borrower without regard

to this paragraph.

(D) Limitation not to apply where aggregate amount of loans exceed

$100,000. This paragraph shall not apply to any loan made by a lender to

a borrower for any day on which the aggregate outstanding amount of

loans between the borrower and lender exceeds $100,000.

(E) Net investment income. For purposes of this paragraph-

(i) In general. The term "net investment income" has the meaning given

such term by section 163(d)(4).

(ii) De minimis rule. If the net investment income of any borrower for

any year does not exceed $1,000, the net investment income of such

borrower for such year shall be treated as zero.

(iii) Additional amounts treated as interest. In determining the net

investment income of a person for any year, any amount which would be

included in the gross income of such person for such year by reason of

section 1272 if such section applied to all deferred payment obligations

shall be treated as interest received by such person for such year.

(iv) Deferred payment obligations. The term "deferred payment

obligation" includes any market discount bond, short-term obligation,

United States savings bond, annuity, or similar obligation.

(2) Special rule for gift tax. In the case of any gift loan which is a

term loan, subsection (b)(1) (and not subsection (a)) shall apply for

purposes of chapter 12.

(e) Definitions of below-market loan and forgone interest. For

purposes of this section-

(1) Below-market loan. The term "below-market loan" means any loan if-

--(A) in the case of a demand loan, interest is payable on the loan at a

rate less than the applicable Federal rate, or

--(B) in the case of a term loan, the amount loaned exceeds the present

value of all payments due under the loan.

(2) Forgone interest. The term "forgone interest" means, with respect

to any period during which the loan is outstanding, the excess of-

--(A) the amount of interest which would have been payable on the loan

for the period if interest accrued on the loan at the applicable Federal

rate and were payable annually on the day referred to in subsection

(a)(2), over

--(B) any interest payable on the loan properly allocable to such

period.

(f) Other definitions and special rules. For purposes of this section-

(1) Present value. The present value of any payment shall be

determined in the manner provided by regulations prescribed by the

Secretary-

--(A) as of the date of the loan, and

--(B) by using a discount rate equal to the applicable Federal rate.

(2) Applicable Federal rate. (A) Term loans. In the case of any term

loan, the applicable Federal rate shall be the applicable Federal rate

in effect under section 1274(d) (as of the day on which the loan was

made), compounded semiannually.

(B) Demand loans. In the case of a demand loan, the applicable Federal

rate shall be the Federal short-term rate in effect under section

1274(d) for the period for which the amount of forgone interest is being

determined, compounded semiannually.

(3) Gift loan. The term "gift loan" means any below-market loan where

the forgoing of interest is in the nature of a gift.

(4) Amount loaned. The term "amount loaned" means the amount received

by the borrower.

(5) Demand loan. The term "demand loan" means any loan which is

payable in full at any time on the demand of the lender. Such term also

includes (for purposes other than determining the applicable Federal

rate under paragraph (2)) any loan if the benefits of the interest

arrangements of such loan are not transferable and are conditioned on

the future performance of substantial services by an individual. To the

extent provided in regulations, such term also includes any loan with an

indefinite maturity.

(6) Term loan. The term "term loan" means any loan which is not a

demand loan.

(7) Husband and wife treated as 1 person. A husband and wife shall be

treated as 1 person.

(8) Loans to which section 483, 643(i), or 1274 applies. This section

shall not apply to any loan to which section 483, 643(i), or 1274

applies.

(9) No withholding. No amount shall be withheld under chapter 24 with

respect to-

--(A) any amount treated as transferred or retransferred under

subsection (a), and

--(B) any amount treated as received under subsection (b).

(10) Special rule for term loans. If this section applies to any term

loan on any day, this section shall continue to apply to such loan

notwithstanding paragraphs (2) and (3) of subsection (c). In the case of

a gift loan, the preceding sentence shall only apply for purposes of

chapter 12.

(11) Time for determining rate applicable to employee relocation

loans. (A) In general. In the case of any term loan made by an employer

to an employee the proceeds of which are used by the employee to

purchase a principal residence (within the meaning of section 121), the

determination of the applicable Federal rate shall be made as of the

date the written contract to purchase such residence was entered into.

(B) Paragraph only to apply to cases to which section 217 applies.

Subparagraph (A) shall only apply to the purchase of a principal

residence in connection with the commencement of work by an employee or

a change in the principal place of work of an employee to which section

217 applies.

(g) Exception for certain loans to qualified continuing care

facilities. (1) In general. This section shall not apply for any

calendar year to any below-market loan made by a lender to a qualified

continuing care facility pursuant to a continuing care contract if the

lender (or the lender's spouse) attains age 65 before the close of such

year.

(2) $90,000 limit. Paragraph (1) shall apply only to the extent that

the aggregate outstanding amount of any loan to which such paragraph

applies (determined without regard to this paragraph), when added to the

aggregate outstanding amount of all other previous loans between the

lender (or the lender's spouse) and any qualified continuing care

facility to which paragraph (1) applies, does not exceed $90,000.

(3) Continuing care contract. For purposes of this section, the term

"continuing care contract" means a written contract between an

individual and a qualified continuing care facility under which-

--(A) the individual or individual's spouse may use a qualified

continuing care facility for their life or lives,

--(B) the individual or individual's spouse-

--(i) will first-

--(I) reside in a separate, independent living unit with additional

facilities outside such unit for the providing of meals and other

personal care, and

--(II) not require long-term nursing care, and

--(ii) then will be provided long-term and skilled nursing care as the

health of such individual or individual's spouse requires, and

--(C) no additional substantial payment is required if such individual

or individual's spouse requires increased personal care services or

long-term and skilled nursing care.

(4) Qualified continuing care facility. (A) In general. For purposes

of this section, the term "qualified continuing care facility" means 1

or more facilities-

--(i) which are designed to provide services under continuing care

contracts, and

--(ii) substantially all of the residents of which are covered by

continuing care contracts.

(B) Substantially all facilities must be owned or operated by

borrower. A facility shall not be treated as a qualified continuing

care facility unless substantially all facilities which are used to

provide services which are required to be provided under a continuing

care contract are owned or operated by the borrower.

(C) Nursing homes excluded. The term "qualified continuing care

facility" shall not include any facility which is of a type which is

traditionally considered a nursing home.

(5) Adjustment of limit for inflation. (A) In general. In the case of

any loan made during any calendar year after 1986 to which paragraph (1)

applies, the dollar amount in paragraph (2) shall be increased by the

inflation adjustment for such calendar year. Any increase under the

preceding sentence shall be rounded to the nearest multiple of $100 (or,

if such increase is a multiple of $50, such increase shall be increased

to the nearest multiple of $100).

(B) Inflation adjustment. For purposes of subparagraph (A), the

inflation adjustment for any calendar year is the percentage (if any) by

which-

--(i) the CPI for the preceding calendar year exceeds

--(ii) the CPI for calendar year 1985.

1. For purposes of the preceding sentence, the CPI for any calendar

year is the average of the Consumer Price Index as of the close of the

12-month period ending on September 30 of such calendar year.

(6) Suspension of application. Paragraph (1) shall not apply for any

calendar year to which subsection (h) applies.

(h) Exception for loans to qualified continuing care facilities. (1)

In general. This section shall not apply for any calendar year to any

below-market loan owed by a facility which on the last day of such year

is a qualified continuing care facility, if such loan was made pursuant

to a continuing care contract and if the lender (or the lender's spouse)

attains age 62 before the close of such year.

(2) Continuing care contract. For purposes of this section, the term

"continuing care contract" means a written contract between an

individual and a qualified continuing care facility under which-

--(A) the individual or individual's spouse may use a qualified

continuing care facility for their life or lives,

--(B) the individual or individual's spouse will be provided with

housing, as appropriate for the health of such individual or

individual's spouse-

--(i) in an independent living unit (which has additional available

facilities outside such unit for the provision of meals and other

personal care), and

--(ii) in an assisted living facility or a nursing facility, as is

available in the continuing care facility, and

--(C) the individual or individual's spouse will be provided assisted

living or nursing care as the health of such individual or individual's

spouse requires, and as is available in the continuing care facility.

--The Secretary shall issue guidance which limits such term to contracts

which provide only facilities, care, and services described in this

paragraph.

(3) Qualified continuing care facility. (A) In general. For purposes

of this section, the term "qualified continuing care facility" means 1

or more facilities-

--(i) which are designed to provide services under continuing care

contracts,

--(ii) which include an independent living unit, plus an assisted living

or nursing facility, or both, and

--(iii) substantially all of the independent living unit residents of

which are covered by continuing care contracts.

(B) Nursing homes excluded. The term "qualified continuing care

facility" shall not include any facility which is of a type which is

traditionally considered a nursing home.

(i) Regulations. (1) In general. The Secretary shall prescribe such

regulations as may be necessary or appropriate to carry out the purposes

of this section, including-

--(A) regulations providing that where, by reason of varying rates of

interest, conditional interest payments, waivers of interest,

disposition of the lender's or borrower's interest in the loan, or other

circumstances, the provisions of this section do not carry out the

purposes of this section, adjustments to the provisions of this section

will be made to the extent necessary to carry out the purposes of this

section,

--(B) regulations for the purpose of assuring that the positions of the

borrower and lender are consistent as to the application (or

nonapplication) of this section, and

--(C) regulations exempting from the application of this section any

class of transactions the interest arrangements of which have no

significant effect on any Federal tax liability of the lender or the

borrower.

(2) Estate tax coordination. Under regulations prescribed by the

Secretary, any loan which is made with donative intent and which is a

term loan shall be taken into account for purposes of chapter 11 in a

manner consistent with the provisions of subsection (b).

§ 6166. Extension of Time for Payment of Estate Tax Where Estate

Consists Largely of Interest in Closely Held Business. (a) 5-year

deferral; 10-year installment payment.--

(1) In general.--If the value of an interest in a closely held

business which is included in determining the gross estate of a decedent

who was (at the date of his death) a citizen or resident of the United

States exceeds 35 percent of the adjusted gross estate, the executor may

elect to pay part or all of the tax imposed by section 2001 in 2 or more

(but not exceeding 10) equal installments.

(2) Limitation.--The maximum amount of tax which may be paid in

installments under this subsection shall be an amount which bears the

same ratio to the tax imposed by section 2001 (reduced by the credits

against such tax) as--

(A) the closely held business amount, bears to

(B) the amount of the adjusted gross estate.

(3) Date for payment of installments.--If an election is made under

paragraph (1), the first installment shall be paid on or before the date

selected by the executor which is not more than 5 years after the date

prescribed by section 6151(a) for payment of the tax, and each

succeeding installment shall be paid on or before the date which is 1

year after the date prescribed by this paragraph for payment of the

preceding installment.

(b) Definitions and special rules.--

(1) Interest in closely held business.--For purposes of this section,

the term "interest in a closely held business" 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--

(i) 20 percent or more of the total capital interest in such

partnership is included in determining the gross estate of the decedent,

or

(ii) such partnership had 45 or fewer partners; or

(C) stock in a corporation carrying on a trade or business if--

(i) 20 percent or more in value of the voting stock of such

corporation is included in determining the gross estate of the decedent,

or

(ii) such corporation had 45 or fewer shareholders.

(2) Rules for applying paragraph (1).--For purposes of paragraph (1)--

(A) Time for testing.--Determinations shall be made as of the time

immediately before the decedent's death.

(B) Certain interests held by husband and wife.--Stock or a

partnership interest which--

(i) is community property of a husband and wife (or the income from

which is community income) under the applicable community property law

of a State, or

(ii) is held by a husband and wife as joint tenants, tenants by the

entirety, or tenants in common, shall be treated as owned by one

shareholder or one partner, as the case may be.

(C) Indirect ownership.--Property owned, directly or indirectly, by or

for a corporation, partnership, estate, or trust shall be considered as

being owned proportionately by or for its shareholders, partners, or

beneficiaries. For purposes of the preceding sentence, a person shall be

treated as a beneficiary of any trust only if such person has a present

interest in the trust.

(D) Certain interests held by members of decedent's family.--All stock

and all partnership interests held by the decedent or by any member of

his family (within the meaning of section 267(c)(4)) shall be treated as

owned by the decedent.

(3) Farmhouses and certain other structures taken into account.--For

purposes of the 35-percent requirement of subsection (a)(1), an interest

in a closely held business which is the business of farming includes an

interest in residential buildings and related improvements on the farm

which are occupied on a regular basis by the owner or lessee of the farm

or by persons employed by such owner or lessee for purposes of operating

or maintaining the farm.

(4) Value.--For purposes of this section, value shall be value

determined for purposes of chapter 11 (relating to estate tax).

(5) Closely held business amount.--For purposes of this section, the

term "closely held business amount" means the value of the interest in a

closely held business which qualifies under subsection (a)(1).

(6) Adjusted gross estate.--For purposes of this section, the term,

"adjusted gross estate" means the value of the gross estate reduced by

the sum of the amounts allowable as a deduction under section 2053 or

2054. Such sum shall be determined on the basis of the facts and

circumstances in existence on the date (including extensions) for filing

the return of tax imposed by section 2001 (or, if earlier, the date on

which such return is filed).

(7) Partnership interests and stock which is not readily tradable.--

(A) In general.--If the executor elects the benefits of this paragraph

(at such time and in such manner as the Secretary shall by regulations

prescribe), then--

(i) for purposes of paragraph (1)(B)(i) or (1)(C)(i) (whichever is

appropriate) and for purposes of subsection (c), any capital interest in

a partnership and any non-readily-tradable stock which (after the

application of paragraph (2)) is treated as owned by the decedent shall

be treated as included in determining the value of the decedent's gross

estate,

(ii) the executor shall be treated as having selected under subsection

(a)(3) the date prescribed by section 6151(a), and

(iii) for purposes of applying section 6601(j), the 2-percent portion

(as defined in such section) shall be treated as being zero.

(B) Non-readily-tradable stock defined.--For purposes of this

paragraph, the term "non-readily-tradable stock" means stock for which,

at the time of the decedent's death, there was no market on a stock

exchange or in an over-the-counter market.

(8) Stock in holding company treated as business company stock in

certain cases.--

(A) In general.--If the executor elects the benefits of this

paragraph, then--

(i) Holding company stock treated as business company stock.--For

purposes of this section, the portion of the stock of any holding

company which represents direct ownership (or indirect ownership through

1 or more other holding companies) by such company in a business company

shall be deemed to be stock in such business company.

(ii) 5-year deferral for principal not to apply.--The executor shall

be treated as having selected under subsection (a)(3) the date

prescribed by section 6151(a).

(iii) 2-percent interest rate not to apply.--For purposes of applying

section 6601(j), the 2-percent portion (as defined in such section)

shall be treated as being zero.

(B) All stock must be non-readily-tradable stock.--

(i) In general.--No stock shall be taken into account for purposes of

applying this paragraph unless it is non-readily-tradable stock

(within the meaning of paragraph (7)(B)).

(ii) Special application where only holding company stock is

non-readily-tradable stock.--If the requirements of clause (i) are not

met, but all of the stock of each holding company taken into account is

non-readily-tradable, then this paragraph shall apply, but subsection

(a)(1) shall be applied by substituting "5" for "10".

(C) Application of voting stock requirement of paragraph

(1)(C)(i).--For purposes of clause (i) of paragraph (1)(C), the deemed

stock resulting from the application of subparagraph (A) shall be

treated as voting stock to the extent that voting stock in the holding

company owns directly (or through the voting stock of 1 or more other

holding companies) voting stock in the business company.

(D) Definitions.--For purposes of this paragraph--

(i) Holding company.--The term "holding company" means any corporation

holding stock in another corporation.

(ii) Business company.--The term "business company" means any

corporation carrying on a trade or business.

(9) Deferral not available for passive assets.--

(A) In general.--For purposes of subsection (a)(1) and determining the

closely held business amount (but not for purposes of subsection (g)),

the value of any interest in a closely held business shall not include

the value of that portion of such interest which is attributable to

passive assets held by the business.

(B) Passive asset defined.--For purposes of this paragraph--

(i) In general.--The term "passive asset" means any asset other than

an asset used in carrying on a trade or business.

(ii) Stock treated as passive asset.--The term "passive asset"

includes any stock in another corporation unless--

(I) such stock is treated as held by the decedent by reason of an

election under paragraph (8), and

(II) such stock qualified under subsection (a)(1).

(iii) Exception for active corporations.--If--

(I) a corporation owns 20 percent or more in value of the voting stock

of another corporation, or such other corporation has 45 or fewer

shareholders, and

(II) 80 percent or more of the value of the assets of each such

corporation is attributable to assets used in carrying on a trade or

business, then such corporations shall be treated as 1 corporation for

purposes of clause (ii). For purposes of applying subclause (II) to the

corporation holding the stock of the other corporation, such stock shall

not be taken into account.

(10) Stock in qualifying lending and finance business treated as stock

in an active trade or business company.--

(A) In general.--If the executor elects the benefits of this

paragraph, then--

(i) Stock in qualifying lending and finance business treated as stock

in an active trade or business company.--For purposes of this section,

any asset used in a qualifying lending and finance business shall be

treated as an asset which is used in carrying on a trade or business.

(ii) 5-year deferral for principal not to apply.--The executor shall

be treated as having selected under subsection (a)(3) the date

prescribed by section 6151(a).

(iii) 5 equal installments allowed.--For purposes of applying

subsection

(a)(1), "5" shall be substituted for "10".

(B) Definitions.--For purposes of this paragraph--

(i) Qualifying lending and finance business.--The term "qualifying

lending and finance business" means a lending and finance business, if--

(I) based on all the facts and circumstances immediately before the

date of the decedent's death, there was substantial activity with

respect to the lending and finance business, or

(II) during at least 3 of the 5 taxable years ending before the date

of the decedent's death, such business had at least 1 full-time employee

substantially all of whose services were the active management of such

business, 10 full-time, nonowner employees substantially all of whose

services were directly related to such business, and $5,000,000 in gross

receipts from activities described in clause (ii).

(ii) Lending and finance business.--The term "lending and finance

business" means a trade or business of--

(I) making loans,

(II) purchasing or discounting accounts receivable, notes, or

installment obligations,

(III) engaging in rental and leasing of real and tangible personal

property, including entering into leases and purchasing, servicing, and

disposing of leases and leased assets,

(IV) rendering services or making facilities available in the ordinary

course of a lending or finance business, and

(V) rendering services or making facilities available in connection

with activities described in subclauses (I) through (IV) carried on by

the corporation rendering services or making facilities available, or

another corporation which is a member of the same affiliated group (as

defined in section 1504 without regard to section 1504(b)(3)).

(iii) Limitation.--The term "qualifying lending and finance business"

shall not include 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 before the date of the decedent's death.

(c) Special rule for interest in 2 or more closely held

businesses.--For purposes of this section, interest in 2 or more closely

held businesses, with respect to each of which there is included in

determining the value of the decedent's gross estate 20 percent or more

of the total value of each such business, shall be treated as an

interest in a single closely held business. For purposes of the

20-percent requirement of the preceding sentence, an interest in a

closely held business which represents the surviving spouse's interest

in property held by the decedent and the surviving spouse as community

property or as joint tenants, tenants by the entirety, or tenants in

common shall be treated as having been included in determining the value

of the decedent's gross estate.

(d) Election.--Any election under subsection (a) shall be made not

later than the time prescribed by section 6075(a) for filing the return

of tax imposed by section 2001 (including extensions thereof), and shall

be made in such manner as the Secretary shall by regulations prescribe.

If an election under subsection (a) is made, the provisions of this

subtitle shall apply as though the Secretary were extending the time for

payment of the tax.

(e) Proration of deficiency to installments.--If an election is made

under subsection (a) to pay any part of the tax imposed by section 2001

in installments and a deficiency has been assessed, the deficiency shall

(subject to the limitation provided by subsection (a)(2)) be prorated to

the installments payable under subsection (a). The part of the

deficiency so prorated to any installment the date for payment of which

has not arrived shall be collected at the same time as, and as a part

of, such installment. The part of the deficiency so prorated to any

installment the date for payment of which has arrived shall be paid upon

notice and demand from the Secretary. This subsection shall not apply if

the deficiency is due to negligence, to intentional disregard of rules

and regulations, or to fraud with intent to evade tax.

(f) Time for payment of interest.--If the time for payment of any

amount of tax has been extended under this section--

(1) Interest for first 5 years.--Interest payable under section 6601

of any unpaid portion of such amount attributable to the first 5 years

after the date prescribed by section 6151(a) for payment of the tax

shall be paid annually.

(2) Interest for periods after first 5 years.--Interest payable under

section 6601 on any unpaid portion of such amount attributable to any

period after the 5-year period referred to in paragraph (1) shall be

paid annually at the same time as, and as a part of, each installment

payment of the tax.

(3) Interest in the case of certain deficiencies.--In the case of a

deficiency to which subsection (e) applies which is assessed after the

close of the 5-year period referred to in paragraph (1), interest

attributable to such 5-year period, and interest assigned under

paragraph (2) to any installment the date for payment of which has

arrived on or before the date of the assessment of the deficiency, shall

be paid upon notice and demand from the Secretary.

(4) Selection of shorter period.--If the executor has selected a

period shorter than 5 years under subsection (a)(3), such shorter period

shall be substituted for 5 years in paragraphs (1), (2), and (3) of this

subsection.

(g) Acceleration of payment.--

(1) Disposition of interest; withdrawal of funds from business.--

(A) If--

(i)(I) any portion of an interest in a closely held business which

qualifies under subsection (a)(1) 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

(ii) the aggregate of such distributions, sales, exchanges, or other

dispositions and withdrawals equals or exceeds 50 percent of the value

of such interest, then the extension of time for payment of tax provided

in subsection (a) shall cease to apply, and the unpaid portion of the

tax payable in installments shall be paid upon notice and demand from

the Secretary.

(B) In the case of a distribution in redemption of stock to which

section 303 (or so much of section 304 as relates to section 303)

applies--

(i) the redemption of such stock, and the withdrawal of money and

other property distributed in such redemption, shall not be treated as a

distribution or withdrawal for purposes of subparagraph (A), and

(ii) for purposes of subparagraph (A), the value of the interest in

the closely held business shall be considered to be such value reduced

by the value of the stock redeemed.

This subparagraph shall apply only if, on or before the date

prescribed by subsection (a)(3) for the payment of the first installment

which becomes due after the date of the distribution (or, if earlier, on

or before the day which is 1 year after the date of the distribution),

there is paid an amount of the tax imposed by section 2001 not less than

the amount of money and other property distributed.

(C) Subparagraph (A)(i) does not apply to an exchange of stock

pursuant to a plan of reorganization described in subparagraph (D), (E),

or (F) of section 368(a)(1) nor to an exchange to which section 355 (or

so much of section 356 as relates to section 355) applies; but any stock

received in such an exchange shall be treated for purposes of

subparagraph (A)(i) as an interest qualifying under subsection (a)(1).

(D) Subparagraph (A)(i) does not apply to a transfer of property of

the decedent to a person entitled by reason of the decedent's death to

receive such property under the decedent's will, the applicable law of

descent and distribution, or a trust created by the decedent. A similar

rule shall apply in the case of a series of subsequent transfers of the

property by reason of death so long as each transfer is to a member of

the family (within the meaning of section 267(c)(4)) of the transferor

in such transfer.

(E) Changes in interest in holding company.--If any stock in a holding

company is treated as stock in a business company by reason of

subsection (b)(8)(A)--

(i) any disposition of any interest in such stock in such holding

company which was included in determining the gross estate of the

decedent, or

(ii) any withdrawal of any money or other property from such holding

company attributable to any interest included in determining the gross

estate of the decedent,

shall be treated for purposes of subparagraph (A) as a disposition of

(or a withdrawal with respect to) the stock qualifying under subsection

(a)(1).

(F) Changes in interest in business company.--If any stock in a

holding company is treated as stock in a business company by reason of

subsection (b)(8)(A)--

(i) any disposition of any interest in such stock in the business

company by such holding company, or

(ii) any withdrawal of any money or other property from such business

company attributable to such stock by such holding company owning such

stock,

shall be treated for purposes of subparagraph (A) as a disposition of

(or a withdrawal with respect to) the stock qualifying under subsection

(a)(1).

(2) Undistributed income of estate.--

(A) If an election is made under this section and the estate has

undistributed net income for any taxable year ending on or after the due

date for the first installment, the executor shall, on or before the

date prescribed by law for filing the income tax return for such taxable

year (including extensions thereof), pay an amount equal to such

undistributed net income in liquidation of the unpaid portion of the tax

payable in installments.

(B) For purposes of subparagraph (A), the undistributed net income of

the estate for any taxable year is the amount by which the distributable

net income of the estate for such taxable year (as defined in section

643) exceeds the sum of--

(i) the amounts for such taxable year specified in paragraphs (1) and

(2) of section 661(a) (relating to deductions for distributions, etc.);

(ii) the amount of tax imposed for the taxable year on the estate

under chapter 1; and

(iii) the amount of the tax imposed by section 2001 (including

interest) paid by the executor during the taxable year (other than any

amount paid pursuant to this paragraph).

(C) For purposes of this paragraph, if any stock in a corporation is

treated as stock in another corporation by reason of subsection

(b)(8)(A), any dividends paid by such other corporation to the

corporation shall be treated as paid to the estate of the decedent to

the extent attributable to the stock qualifying under subsection (a)(1).

(3) Failure to make payment of principal or interest.--

(A) In general.--Except as provided in subparagraph (B), if any

payment of principal or interest under this section is not paid on or

before the date fixed for its payment by this section (including any

extension of time), the unpaid portion of the tax payable in

installments shall be paid upon notice and demand from the Secretary.

(B) Payment within 6 months.--If any payment of principal or interest

under this section is not paid on or before the date determined under

subparagraph (A) but is paid within 6 months of such date--

(i) the provisions of subparagraph (A) shall not apply with respect to

such payment,

(ii) the provisions of section 6601(j) shall not apply with respect to

the determination of interest on such payment, and

(iii) there is imposed a penalty in an amount equal to the product

of--

(I) 5 percent of the amount of such payment, multiplied by

(II) the number of months (or fractions thereof) after such date and

before payment is made. The penalty imposed under clause (iii) shall be

treated in the same manner as a penalty imposed under subchapter B of

chapter 68.

(h) Election in case of certain deficiencies.--

(1) In general.--If--

(A) a deficiency in the tax imposed by section 2001 is assessed,

(B) the estate qualifies under subsection (a)(1), and

(C) the executor has not made an election under subsection (a), the

executor may elect to pay the deficiency in installments. This

subsection shall not apply if the deficiency is due to negligence, to

intentional disregard of rules and regulations, or to fraud with intent

to evade tax.

(2) Time of election.--An election under this subsection shall be made

not later than 60 days after issuance of notice and demand by the

Secretary for the payment of the deficiency, and shall be made in such

manner as the Secretary shall by regulations prescribe.

(3) Effect of election on payment.--If an election is made under this

subsection, the deficiency shall (subject to the limitation provided by

subsection (a)(2)) be prorated to the installments which would have been

due if an election had been timely made under subsection (a) at the time

the estate tax return was filed. The part of the deficiency so prorated

to any installment the date for payment of which would have arrived

shall be paid at the time of the making of the election under this

subsection. The portion of the deficiency so prorated to installments

the date for payment of which would not have so arrived shall be paid at

the time such installments would have been due if such an election had

been made.

(i) Special rule for certain direct skips.--To the extent that an

interest in a closely held business is the subject of a direct skip

(within the meaning of section 2612(c)) occurring at the same time as

and as a result of the decedent's death, then for purposes of this

section any tax imposed by section 2601 on the transfer of such interest

shall be treated as if it were additional tax imposed by section 2001.

(j) Regulations.--The Secretary shall prescribe such regulations as

may be necessary to the application of this section.

(k) Cross references.--

(1) Security.-- For authority of the Secretary to require security in

the case of an extension under this section, see section 6165.

(2) Lien.--For special lien (in lieu of bond) in the case of an

extension under this section, see section 6324A.

(3) Period of limitation.--For extension of the period of limitation

in the case of an extension under this section, see section 6503(d).

(4) Interest.--For provisions relating to interest on tax payable in

installments under this section, see subsection (j) of section 6601.

(5) Transfers within 3 years of death.--For special rule for

qualifying an estate under this section where property has been

transferred within 3 years of decedent's death, see section 2035(c)(2).