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106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     106-651

======================================================================



 
                   DEATH TAX ELIMINATION ACT OF 2000
                                _______
                                

  June 6, 2000.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                         [To accompany H.R. 8]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 8) to amend the Internal Revenue Code of 1986 to 
phase out the estate and gift taxes over a 10-year period, 
having considered the same, report favorably thereon with an 
amendment and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
 I. Summary and Background...........................................10
        A. Purpose and Summary...................................    10
        B. Background and Need for Legislation...................    12
        C. Legislative History...................................    12
II. Explanation of the Bill..........................................12
        A. Phase-In Repeal of Estate, Gift, and Generation-
            Skipping Transfer Taxes (secs. 101-301)..............    12
        B. Modify Generation-Skipping Transfer Taxes (secs. 401-
            404).................................................    14
        C. Expand Estate Tax Rule for Conservation Easements 
            (sec. 501)...........................................    22
III.Votes of the Committee...........................................23

IV. Budget Effects of the Bill.......................................24
        A. Committee Estimates of Budgetary Effects..............    24
        B. Budget Authority and Tax Expenditures.................    26
        C. Cost Estimate Prepared by the Congressional Budget 
            Office...............................................    26
 V. Other Matters To Be Discussed Under the Rules of the House.......27
        A. Committee Oversight Findings and Recommendations......    27
        B. Summary of Findings and Recommendations of the 
            Committee on Government Reform and Oversight.........    27
        C. Constitutional Authority Statement....................    27
        D. Information Relating to Unfunded Mandates.............    28
        E. Applicability of House Rule XXI5(b)...................    28
        F. Tax Complexity Analysis...............................    28
VI. Changes in Existing Law Made by the Bill as Reported.............28

      The amendment is as follows:
      Strike out all after the enacting clause and insert in 
lieu thereof the following:

SECTION 1. SHORT TITLE; ETC.

  (a) Short Title.--This Act may be cited as the ``Death Tax 
Elimination Act of 2000''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.

TITLE I--REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING TAXES; REPEAL 
                      OF STEP UP IN BASIS AT DEATH

SEC. 101. REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING TAXES.

  (a) In General.--Subtitle B is hereby repealed.
  (b) Effective Date.--The repeal made by subsection (a) shall apply to 
the estates of decedents dying, and gifts and generation-skipping 
transfers made, after December 31, 2009.

SEC. 102. TERMINATION OF STEP UP IN BASIS AT DEATH.

  (a) Termination of Application of Section 1014.--Section 1014 
(relating to basis of property acquired from a decedent) is amended by 
adding at the end the following:
  ``(f ) Termination.--In the case of a decedent dying after December 
31, 2009, this section shall not apply to property for which basis is 
provided by section 1022.''.
  (b) Conforming Amendment.--Subsection (a) of section 1016 (relating 
to adjustments to basis) is amended by striking ``and'' at the end of 
paragraph (26), by striking the period at the end of paragraph (27) and 
inserting ``, and'', and by adding at the end the following:
          ``(28) to the extent provided in section 1022 (relating to 
        basis for certain property acquired from a decedent dying after 
        December 31, 2009).''.

SEC. 103. CARRYOVER BASIS AT DEATH.

  (a) General Rule.--Part II of subchapter O of chapter 1 (relating to 
basis rules of general application) is amended by inserting after 
section 1021 the following new section:

``SEC. 1022. CARRYOVER BASIS FOR CERTAIN PROPERTY ACQUIRED FROM A 
                    DECEDENT DYING AFTER DECEMBER 31, 2009.

  ``(a) Carryover Basis.--Except as otherwise provided in this section, 
the basis of carryover basis property in the hands of a person 
acquiring such property from a decedent shall be determined under 
section 1015.
  ``(b) Carryover Basis Property Defined.--
          ``(1) In general.--For purposes of this section, the term 
        `carryover basis property' means any property--
                  ``(A) which is acquired from or passed from a 
                decedent who died after December 31, 2009, and
                  ``(B) which is not excluded pursuant to paragraph 
                (2).
        The property taken into account under subparagraph (A) shall be 
        determined under section 1014(b) without regard to subparagraph 
        (A) of the last sentence of paragraph (9) thereof.
          ``(2) Certain property not carryover basis property.--The 
        term `carryover basis property' does not include--
                  ``(A) any item of gross income in respect of a 
                decedent described in section 691,
                  ``(B) property of the decedent to the extent that the 
                aggregate adjusted fair market value of such property 
                does not exceed $1,300,000, and
                  ``(C) property which was acquired from the decedent 
                by the surviving spouse of the decedent (and which 
                would be carryover basis property without regard to 
                this subparagraph) but only if the value of such 
                property would have been deductible from the value of 
                the taxable estate of the decedent under section 2056, 
                as in effect on the day before the date of the 
                enactment of the Death Tax Elimination Act of 2000.
        For purposes of this subsection, the term `adjusted fair market 
        value' means, with respect to any property, fair market value 
        reduced by any indebtedness secured by such property.
          ``(3) Limitation on exception for property acquired by 
        surviving spouse.--The adjusted fair market value of property 
        which is not carryover basis property by reason of paragraph 
        (2)(C) shall not exceed $3,000,000.
          ``(4) Allocation of excepted amounts.--The executor shall 
        allocate the limitations under paragraphs (2)(B) and (3).
          ``(5) Inflation adjustment of excepted amounts.--In the case 
        of decedents dying in a calendar year after 2010, the dollar 
        amounts in paragraphs (2)(B) and (3) shall each be increased by 
        an amount equal to the product of--
                  ``(A) such dollar amount, and
                  ``(B) the cost-of-living adjustment determined under 
                section 1(f)(3) for such calendar year, determined by 
                substituting `2009' for `1992' in subparagraph (B) 
                thereof.
        If any increase determined under the preceding sentence is not 
        a multiple of $10,000, such increase shall be rounded to the 
        nearest multiple of $10,000.
  ``(c) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary to carry out the purposes of this section.''.
  (b) Miscellaneous Amendments Related To Carryover Basis.--
          (1) Capital gain treatment for inherited art work or similar 
        property.--
                  (A) In general.--Subparagraph (C) of section 
                1221(a)(3) (defining capital asset) is amended by 
                inserting ``(other than by reason of section 1022)'' 
                after ``is determined''.
                  (B) Coordination with section 170.--Paragraph (1) of 
                section 170(e) (relating to certain contributions of 
                ordinary income and capital gain property) is amended 
                by adding at the end the following: ``For purposes of 
                this paragraph, the determination of whether property 
                is a capital asset shall be made without regard to the 
                exception contained in section 1221(a)(3)(C) for basis 
                determined under section 1022.''.
          (2) Definition of Executor.--Section 7701(a) (relating to 
        definitions) is amended by adding at the end the following:
          ``(47) Executor.--The term `executor' means the executor or 
        administrator of the decedent, or, if there is no executor or 
        administrator appointed, qualified, and acting within the 
        United States, then any person in actual or constructive 
        possession of any property of the decedent.''.
          (3) Clerical amendment.--The table of sections for part II of 
        subchapter O of chapter 1 is amended by adding at the end the 
        following new item:

                              ``Sec. 1022. Carryover basis for certain 
                                        property acquired from a 
                                        decedent dying after December 
                                        31, 2009.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to estates of decedents dying after December 31, 2009.

   TITLE II--REDUCTIONS OF ESTATE AND GIFT TAX RATES PRIOR TO REPEAL

SEC. 201. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

  (a) Maximum Rate of Tax Reduced to 50 Percent.--
          (1) In general.--The table contained in section 2001(c)(1) is 
        amended by striking the two highest brackets and inserting the 
        following:

    ``Over $2,500,000
                                        $1,025,800, plus 50% of the 
                                                excess over 
                                                $2,500,000.''.

          (2) Phase-in of reduced rate.--Subsection (c) of section 2001 
        is amended by adding at the end the following new paragraph:
          ``(3) Phase-in of reduced rate.--In the case of decedents 
        dying, and gifts made, during 2001, the last item in the table 
        contained in paragraph (1) shall be applied by substituting 
        `53%' for `50%'.''.
  (b) Repeal of Phaseout of Graduated Rates.--Subsection (c) of section 
2001 is amended by striking paragraph (2) and redesignating paragraph 
(3), as added by subsection (a), as paragraph (2).
  (c) Additional Reductions of Rates of Tax.--Subsection (c) of section 
2001, as so amended, is amended by adding at the end the following new 
paragraph:
          ``(3) Phasedown of tax.--In the case of estates of decedents 
        dying, and gifts made, during any calendar year after 2002 and 
        before 2010--
                  ``(A) In general.--Except as provided in subparagraph 
                (C), the tentative tax under this subsection shall be 
                determined by using a table prescribed by the Secretary 
                (in lieu of using the table contained in paragraph (1)) 
                which is the same as such table; except that--
                          ``(i) each of the rates of tax shall be 
                        reduced by the number of percentage points 
                        determined under subparagraph (B), and
                          ``(ii) the amounts setting forth the tax 
                        shall be adjusted to the extent necessary to 
                        reflect the adjustments under clause (i).
                  ``(B) Percentage points of reduction.--

                  
                                                        The number of  
                ``For calendar year:
                                                  percentage points is:
                  2003.....................................        1.0 
                  2004.....................................        2.0 
                  2005.....................................        3.0 
                  2006.....................................        4.0 
                  2007.....................................        5.5 
                  2008.....................................        7.5 
                  2009.....................................        9.5.

                  ``(C) Coordination with income tax rates.--The 
                reductions under subparagraph (A)--
                          ``(i) shall not reduce any rate under 
                        paragraph (1) below the lowest rate in section 
                        1(c), and
                          ``(ii) shall not reduce the highest rate 
                        under paragraph (1) below the highest rate in 
                        section 1(c).
                  ``(D) Coordination with credit for state death 
                taxes.--Rules similar to the rules of subparagraph (A) 
                shall apply to the table contained in section 2011(b) 
                except that the Secretary shall prescribe percentage 
                point reductions which maintain the proportionate 
                relationship (as in effect before any reduction under 
                this paragraph) between the credit under section 2011 
                and the tax rates under subsection (c).''.
  (d) Effective Dates.--
          (1) Subsections (a) and (b).--The amendments made by 
        subsections (a) and (b) shall apply to estates of decedents 
        dying, and gifts made, after December 31, 2000.
          (2) Subsection (c).--The amendment made by subsection (c) 
        shall apply to estates of decedents dying, and gifts made, 
        after December 31, 2002.

    TITLE III--UNIFIED CREDIT REPLACED WITH UNIFIED EXEMPTION AMOUNT

SEC. 301. UNIFIED CREDIT AGAINST ESTATE AND GIFT TAXES REPLACED WITH 
                    UNIFIED EXEMPTION AMOUNT.

  (a) In General.--
          (1) Estate tax.--Subsection (b) of section 2001 (relating to 
        computation of tax) is amended to read as follows:
  ``(b) Computation of Tax.--
          ``(1) In general.--The tax imposed by this section shall be 
        the amount equal to the excess (if any) of--
                  ``(A) the tentative tax determined under paragraph 
                (2), over
                  ``(B) the aggregate amount of tax which would have 
                been payable under chapter 12 with respect to gifts 
                made by the decedent after December 31, 1976, if the 
                provisions of subsection (c) (as in effect at the 
                decedent's death) had been applicable at the time of 
                such gifts.
          ``(2) Tentative tax.--For purposes of paragraph (1), the 
        tentative tax determined under this paragraph is a tax computed 
        under subsection (c) on the excess of--
                  ``(A) the sum of--
                          ``(i) the amount of the taxable estate, and
                          ``(ii) the amount of the adjusted taxable 
                        gifts, over
                  ``(B) the exemption amount for the calendar year in 
                which the decedent died.
          ``(3) Exemption amount.--For purposes of paragraph (2), the 
        term `exemption amount' means the amount determined in 
        accordance with the following table:

        ``In the case of
                                                          The exemption
          calendar year:
                                                             amount is:
                2001.................................         $675,000 
                2002 and 2003........................         $700,000 
                2004.................................         $850,000 
                2005.................................         $950,000 
                2006 or thereafter...................       $1,000,000.

          ``(4) Adjusted taxable gifts.--For purposes of paragraph (2), 
        the term `adjusted taxable gifts' means the total amount of the 
        taxable gifts (within the meaning of section 2503) made by the 
        decedent after December 31, 1976, other than gifts which are 
        includible in the gross estate of the decedent.''
          (2) Gift tax.--Subsection (a) of section 2502 (relating to 
        computation of tax) is amended to read as follows:
  ``(a) Computation of Tax.--
          ``(1) In general.--The tax imposed by section 2501 for each 
        calendar year shall be the amount equal to the excess (if any) 
        of--
                  ``(A) the tentative tax determined under paragraph 
                (2), over
                  ``(B) the tax paid under this section for all prior 
                calendar periods.
          ``(2) Tentative tax.--For purposes of paragraph (1), the 
        tentative tax determined under this paragraph for a calendar 
        year is a tax computed under section 2001(c) on the excess of--
                  ``(A) the aggregate sum of the taxable gifts for such 
                calendar year and for each of the preceding calendar 
                periods, over
                  ``(B) the exemption amount under section 2001(b)(3) 
                for such calendar year.''
  (b) Repeal of Unified Credits.--
          (1) Section 2010 (relating to unified credit against estate 
        tax) is hereby repealed.
          (2) Section 2505 (relating to unified credit against gift 
        tax) is hereby repealed.
  (c) Conforming Amendments.--
          (1)(A) Subsection (b) of section 2011 is amended--
                  (i) by striking ``adjusted'' in the table, and
                  (ii) by striking the last sentence.
          (B) Subsection (f ) of section 2011 is amended by striking 
        ``, reduced by the amount of the unified credit provided by 
        section 2010''.
          (2) Subsection (a) of section 2012 is amended by striking 
        ``and the unified credit provided by section 2010''.
          (3) Subparagraph (A) of section 2013(c)(1) is amended by 
        striking ``2010,''.
          (4) Paragraph (2) of section 2014(b) is amended by striking 
        ``2010, 2011,'' and inserting ``2011''.
          (5) Clause (ii) of section 2056A(b)(12)(C) is amended to read 
        as follows:
                          ``(ii) to treat any reduction in the tax 
                        imposed by paragraph (1)(A) by reason of the 
                        credit allowable under section 2010 (as in 
                        effect on the day before the date of the 
                        enactment of the Death Tax Elimination Act of 
                        2000) or the exemption amount allowable under 
                        section 2001(b) with respect to the decedent as 
                        a credit under section 2505 (as so in effect) 
                        or exemption under section 2521 (as the case 
                        may be) allowable to such surviving spouse for 
                        purposes of determining the amount of the 
                        exemption allowable under section 2521 with 
                        respect to taxable gifts made by the surviving 
                        spouse during the year in which the spouse 
                        becomes a citizen or any subsequent year,''.
          (6) Subsection (a) of section 2057 is amended by striking 
        paragraphs (2) and (3) and inserting the following new 
        paragraph:
          ``(2) Maximum deduction.--The deduction allowed by this 
        section shall not exceed the excess of $1,300,000 over the 
        exemption amount (as defined in section 2001(b)(3)).''
          (7)(A) Subsection (b) of section 2101 is amended to read as 
        follows:
  ``(b) Computation of Tax.--
          ``(1) In general.--The tax imposed by this section shall be 
        the amount equal to the excess (if any) of--
                  ``(A) the tentative tax determined under paragraph 
                (2), over
                  ``(B) a tentative tax computed under section 2001(c) 
                on the amount of the adjusted taxable gifts.
          ``(2) Tentative tax.--For purposes of paragraph (1), the 
        tentative tax determined under this paragraph is a tax computed 
        under section 2001(c) on the excess of--
                  ``(A) the sum of--
                          ``(i) the amount of the taxable estate, and
                          ``(ii) the amount of the adjusted taxable 
                        gifts, over
                  ``(B) the exemption amount for the calendar year in 
                which the decedent died.
          ``(3) Exemption amount.--
                  ``(A) In general.--The term `exemption amount' means 
                $60,000.
                  ``(B) Residents of possessions of the united 
                states.--In the case of a decedent who is considered to 
                be a nonresident not a citizen of the United States 
                under section 2209, the exemption amount under this 
                paragraph shall be the greater of--
                          ``(i) $60,000, or
                          ``(ii) that proportion of $175,000 which the 
                        value of that part of the decedent's gross 
                        estate which at the time of his death is 
                        situated in the United States bears to the 
                        value of his entire gross estate wherever 
                        situated.
                  ``(C) Special rules.--
                          ``(i) Coordination with treaties.--To the 
                        extent required under any treaty obligation of 
                        the United States, the exemption amount allowed 
                        under this paragraph shall be equal to the 
                        amount which bears the same ratio to the 
                        exemption amount under section 2001(b)(3) (for 
                        the calendar year in which the decedent died) 
                        as the value of the part of the decedent's 
                        gross estate which at the time of his death is 
                        situated in the United States bears to the 
                        value of his entire gross estate wherever 
                        situated. For purposes of the preceding 
                        sentence, property shall not be treated as 
                        situated in the United States if such property 
                        is exempt from the tax imposed by this 
                        subchapter under any treaty obligation of the 
                        United States.
                          ``(ii) Coordination with gift tax exemption 
                        and unified credit.--If an exemption has been 
                        allowed under section 2521 (or a credit has 
                        been allowed under section 2505 as in effect on 
                        the day before the date of the enactment of the 
                        Death Tax Elimination Act of 2000) with respect 
                        to any gift made by the decedent, each dollar 
                        amount contained in subparagraph (A) or (B) or 
                        the exemption amount applicable under clause 
                        (i) of this subparagraph (whichever applies) 
                        shall be reduced by the exemption so allowed 
                        under 2521 (or, in the case of such a credit, 
                        by the amount of the gift for which the credit 
                        was so allowed).''.
          (8) Section 2102 is amended by striking subsection (c).
          (9)(A) Subsection (a) of section 2107 is amended by adding at 
        the end the following new paragraph:
          ``(3) Limitation on exemption amount.--Subparagraphs (B) and 
        (C) of section 2101(b)(3) shall not apply in applying section 
        2101 for purposes of this section.''.
          (B) Subsection (c) of section 2107 is amended--
                          (i) by striking paragraph (1) and by 
                        redesignating paragraphs (2) and (3) as 
                        paragraphs (1) and (2), respectively, and
                          (ii) by striking the second sentence of 
                        paragraph (2) (as so redesignated).
          (10) Paragraph (1) of section 6018(a) is amended by striking 
        ``the applicable exclusion amount in effect under section 
        2010(c)'' and inserting ``the exemption amount under section 
        2001(b)(3)''.
          (11) Subparagraph (A) of section 6601( j)(2) is amended to 
        read as follows:
                  ``(A) the amount of the tentative tax which would be 
                determined under the rate schedule set forth in section 
                2001(c) if the amount with respect to which such 
                tentative tax is to be computed were $1,000,000, or''.
          (12) The table of sections for part II of subchapter A of 
        chapter 11 is amended by striking the item relating to section 
        2010.
          (13) The table of sections for subchapter A of chapter 12 is 
        amended by striking the item relating to section 2505.
  (d) Effective Date.--The amendments made by this section--
          (1) insofar as they relate to the tax imposed by chapter 11 
        of the Internal Revenue Code of 1986, shall apply to estates of 
        decedents dying after December 31, 2000, and
          (2) insofar as they relate to the tax imposed by chapter 12 
        of such Code, shall apply to gifts made after December 31, 
        2000.

      TITLE IV--MODIFICATIONS OF GENERATION-SKIPPING TRANSFER TAX

SEC. 401. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO 
                    TRUSTS; RETROACTIVE ALLOCATIONS.

  (a) In General.--Section 2632 (relating to special rules for 
allocation of GST exemption) is amended by redesignating subsection (c) 
as subsection (e) and by inserting after subsection (b) the following 
new subsections:
  ``(c) Deemed Allocation to Certain Lifetime Transfers to GST 
Trusts.--
          ``(1) In general.--If any individual makes an indirect skip 
        during such individual's lifetime, any unused portion of such 
        individual's GST exemption shall be allocated to the property 
        transferred to the extent necessary to make the inclusion ratio 
        for such property zero. If the amount of the indirect skip 
        exceeds such unused portion, the entire unused portion shall be 
        allocated to the property transferred.
          ``(2) Unused portion.--For purposes of paragraph (1), the 
        unused portion of an individual's GST exemption is that portion 
        of such exemption which has not previously been--
                  ``(A) allocated by such individual,
                  ``(B) treated as allocated under subsection (b) with 
                respect to a direct skip occurring during or before the 
                calendar year in which the indirect skip is made, or
                  ``(C) treated as allocated under paragraph (1) with 
                respect to a prior indirect skip.
          ``(3) Definitions.--
                  ``(A) Indirect skip.--For purposes of this 
                subsection, the term `indirect skip' means any transfer 
                of property (other than a direct skip) subject to the 
                tax imposed by chapter 12 made to a GST trust.
                  ``(B) GST trust.--The term `GST trust' means a trust 
                that could have a generation-skipping transfer with 
                respect to the transferor unless--
                          ``(i) the trust instrument provides that more 
                        than 25 percent of the trust corpus must be 
                        distributed to or may be withdrawn by 1 or more 
                        individuals who are non-skip persons--
                                  ``(I) before the date that the 
                                individual attains age 46,
                                  ``(II) on or before one or more dates 
                                specified in the trust instrument that 
                                will occur before the date that such 
                                individual attains age 46, or
                                  ``(III) upon the occurrence of an 
                                event that, in accordance with 
                                regulations prescribed by the 
                                Secretary, may reasonably be expected 
                                to occur before the date that such 
                                individual attains age 46;
                          ``(ii) the trust instrument provides that 
                        more than 25 percent of the trust corpus must 
                        be distributed to or may be withdrawn by one or 
                        more individuals who are non-skip persons and 
                        who are living on the date of death of another 
                        person identified in the instrument (by name or 
                        by class) who is more than 10 years older than 
                        such individuals;
                          ``(iii) the trust instrument provides that, 
                        if one or more individuals who are non-skip 
                        persons die on or before a date or event 
                        described in clause (i) or (ii), more than 25 
                        percent of the trust corpus either must be 
                        distributed to the estate or estates of one or 
                        more of such individuals or is subject to a 
                        general power of appointment exercisable by one 
                        or more of such individuals;
                          ``(iv) the trust is a trust any portion of 
                        which would be included in the gross estate of 
                        a non-skip person (other than the transferor) 
                        if such person died immediately after the 
                        transfer;
                          ``(v) the trust is a charitable lead annuity 
                        trust (within the meaning of section 
                        2642(e)(3)(A)) or a charitable remainder 
                        annuity trust or a charitable remainder 
                        unitrust (within the meaning of section 
                        664(d)); or
                          ``(vi) the trust is a trust with respect to 
                        which a deduction was allowed under section 
                        2522 for the amount of an interest in the form 
                        of the right to receive annual payments of a 
                        fixed percentage of the net fair market value 
                        of the trust property (determined yearly) and 
                        which is required to pay principal to a non-
                        skip person if such person is alive when the 
                        yearly payments for which the deduction was 
                        allowed terminate.
                For purposes of this subparagraph, the value of 
                transferred property shall not be considered to be 
                includible in the gross estate of a non-skip person or 
                subject to a right of withdrawal by reason of such 
                person holding a right to withdraw so much of such 
                property as does not exceed the amount referred to in 
                section 2503(b) with respect to any transferor, and it 
                shall be assumed that powers of appointment held by 
                non-skip persons will not be exercised.
          ``(4) Automatic allocations to certain gst trusts.--For 
        purposes of this subsection, an indirect skip to which section 
        2642(f ) applies shall be deemed to have been made only at the 
        close of the estate tax inclusion period. The fair market value 
        of such transfer shall be the fair market value of the trust 
        property at the close of the estate tax inclusion period.
          ``(5) Applicability and effect.--
                  ``(A) In general.--An individual--
                          ``(i) may elect to have this subsection not 
                        apply to--
                                  ``(I) an indirect skip, or
                                  ``(II) any or all transfers made by 
                                such individual to a particular trust, 
                                and
                          ``(ii) may elect to treat any trust as a GST 
                        trust for purposes of this subsection with 
                        respect to any or all transfers made by such 
                        individual to such trust.
                  ``(B) Elections.--
                          ``(i) Elections with respect to indirect 
                        skips.--An election under subparagraph 
                        (A)(i)(I) shall be deemed to be timely if filed 
                        on a timely filed gift tax return for the 
                        calendar year in which the transfer was made or 
                        deemed to have been made pursuant to paragraph 
                        (4) or on such later date or dates as may be 
                        prescribed by the Secretary.
                          ``(ii) Other elections.--An election under 
                        clause (i)(II) or (ii) of subparagraph (A) may 
                        be made on a timely filed gift tax return for 
                        the calendar year for which the election is to 
                        become effective.
  ``(d) Retroactive Allocations.--
          ``(1) In general.--If--
                  ``(A) a non-skip person has an interest or a future 
                interest in a trust to which any transfer has been 
                made,
                  ``(B) such person--
                          ``(i) is a lineal descendant of a grandparent 
                        of the transferor or of a grandparent of the 
                        transferor's spouse or former spouse, and
                          ``(ii) is assigned to a generation below the 
                        generation assignment of the transferor, and
                  ``(C) such person predeceases the transferor,
        then the transferor may make an allocation of any of such 
        transferor's unused GST exemption to any previous transfer or 
        transfers to the trust on a chronological basis.
          ``(2) Special rules.--If the allocation under paragraph (1) 
        by the transferor is made on a gift tax return filed on or 
        before the date prescribed by section 6075(b) for gifts made 
        within the calendar year within which the non-skip person's 
        death occurred--
                  ``(A) the value of such transfer or transfers for 
                purposes of section 2642(a) shall be determined as if 
                such allocation had been made on a timely filed gift 
                tax return for each calendar year within which each 
                transfer was made,
                  ``(B) such allocation shall be effective immediately 
                before such death, and
                  ``(C) the amount of the transferor's unused GST 
                exemption available to be allocated shall be determined 
                immediately before such death.
          ``(3) Future interest.--For purposes of this subsection, a 
        person has a future interest in a trust if the trust may permit 
        income or corpus to be paid to such person on a date or dates 
        in the future.''.
  (b) Conforming Amendment.--Paragraph (2) of section 2632(b) is 
amended by striking ``with respect to a direct skip'' and inserting 
``or subsection (c)(1)''.
  (c) Effective Dates.--
          (1) Deemed allocation.--Section 2632(c) of the Internal 
        Revenue Code of 1986 (as added by subsection (a)), and the 
        amendment made by subsection (b), shall apply to transfers 
        subject to chapter 11 or 12 made after December 31, 1999, and 
        to estate tax inclusion periods ending after December 31, 1999.
          (2) Retroactive allocations.--Section 2632(d) of the Internal 
        Revenue Code of 1986 (as added by subsection (a)) shall apply 
        to deaths of non-skip persons occurring after December 31, 
        1999.

SEC. 402. SEVERING OF TRUSTS.

  (a) In General.--Subsection (a) of section 2642 (relating to 
inclusion ratio) is amended by adding at the end the following new 
paragraph:
          ``(3) Severing of trusts.--
                  ``(A) In general.--If a trust is severed in a 
                qualified severance, the trusts resulting from such 
                severance shall be treated as separate trusts 
                thereafter for purposes of this chapter.
                  ``(B) Qualified severance.--For purposes of 
                subparagraph (A)--
                          ``(i) In general.--The term `qualified 
                        severance' means the division of a single trust 
                        and the creation (by any means available under 
                        the governing instrument or under local law) of 
                        two or more trusts if--
                                  ``(I) the single trust was divided on 
                                a fractional basis, and
                                  ``(II) the terms of the new trusts, 
                                in the aggregate, provide for the same 
                                succession of interests of 
                                beneficiaries as are provided in the 
                                original trust.
                          ``(ii) Trusts with inclusion ratio greater 
                        than zero.--If a trust has an inclusion ratio 
                        of greater than zero and less than 1, a 
                        severance is a qualified severance only if the 
                        single trust is divided into two trusts, one of 
                        which receives a fractional share of the total 
                        value of all trust assets equal to the 
                        applicable fraction of the single trust 
                        immediately before the severance. In such case, 
                        the trust receiving such fractional share shall 
                        have an inclusion ratio of zero and the other 
                        trust shall have an inclusion ratio of 1.
                          ``(iii) Regulations.--The term `qualified 
                        severance' includes any other severance 
                        permitted under regulations prescribed by the 
                        Secretary.
                  ``(C) Timing and manner of severances.--A severance 
                pursuant to this paragraph may be made at any time. The 
                Secretary shall prescribe by forms or regulations the 
                manner in which the qualified severance shall be 
                reported to the Secretary.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to severances after December 31, 1999.

SEC. 403. MODIFICATION OF CERTAIN VALUATION RULES.

  (a) Gifts for Which Gift Tax Return Filed or Deemed Allocation 
Made.--Paragraph (1) of section 2642(b) (relating to valuation rules, 
etc.) is amended to read as follows:
          ``(1) Gifts for which gift tax return filed or deemed 
        allocation made.--If the allocation of the GST exemption to any 
        transfers of property is made on a gift tax return filed on or 
        before the date prescribed by section 6075(b) for such transfer 
        or is deemed to be made under section 2632 (b)(1) or (c)(1)--
                  ``(A) the value of such property for purposes of 
                subsection (a) shall be its value as finally determined 
                for purposes of chapter 12 (within the meaning of 
                section 2001(f )(2)), or, in the case of an allocation 
                deemed to have been made at the close of an estate tax 
                inclusion period, its value at the time of the close of 
                the estate tax inclusion period, and
                  ``(B) such allocation shall be effective on and after 
                the date of such transfer, or, in the case of an 
                allocation deemed to have been made at the close of an 
                estate tax inclusion period, on and after the close of 
                such estate tax inclusion period.''.
  (b) Transfers at Death.--Subparagraph (A) of section 2642(b)(2) is 
amended to read as follows:
                  ``(A) Transfers at death.--If property is transferred 
                as a result of the death of the transferor, the value 
                of such property for purposes of subsection (a) shall 
                be its value as finally determined for purposes of 
                chapter 11; except that, if the requirements prescribed 
                by the Secretary respecting allocation of post-death 
                changes in value are not met, the value of such 
                property shall be determined as of the time of the 
                distribution concerned.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to transfers subject to chapter 11 or 12 of the Internal Revenue Code 
of 1986 made after December 31, 1999.

SEC. 404. RELIEF PROVISIONS.

  (a) In General.--Section 2642 is amended by adding at the end the 
following new subsection:
  ``(g) Relief Provisions.--
          ``(1) Relief from late elections.--
                  ``(A) In general.--The Secretary shall by regulation 
                prescribe such circumstances and procedures under which 
                extensions of time will be granted to make--
                          ``(i) an allocation of GST exemption 
                        described in paragraph (1) or (2) of subsection 
                        (b), and
                          ``(ii) an election under subsection (b)(3) or 
                        (c)(5) of section 2632.
                Such regulations shall include procedures for 
                requesting comparable relief with respect to transfers 
                made before the date of the enactment of this 
                paragraph.
                  ``(B) Basis for determinations.--In determining 
                whether to grant relief under this paragraph, the 
                Secretary shall take into account all relevant 
                circumstances, including evidence of intent contained 
                in the trust instrument or instrument of transfer and 
                such other factors as the Secretary deems relevant. For 
                purposes of determining whether to grant relief under 
                this paragraph, the time for making the allocation (or 
                election) shall be treated as if not expressly 
                prescribed by statute.
          ``(2) Substantial compliance.--An allocation of GST exemption 
        under section 2632 that demonstrates an intent to have the 
        lowest possible inclusion ratio with respect to a transfer or a 
        trust shall be deemed to be an allocation of so much of the 
        transferor's unused GST exemption as produces the lowest 
        possible inclusion ratio. In determining whether there has been 
        substantial compliance, all relevant circumstances shall be 
        taken into account, including evidence of intent contained in 
        the trust instrument or instrument of transfer and such other 
        factors as the Secretary deems relevant.''.
  (b) Effective Dates.--
          (1) Relief from late elections.--Section 2642(g)(1) of the 
        Internal Revenue Code of 1986 (as added by subsection (a)) 
        shall apply to requests pending on, or filed after, December 
        31, 1999.
          (2) Substantial compliance.--Section 2642(g)(2) of such Code 
        (as so added) shall apply to transfers subject to chapter 11 or 
        12 of the Internal Revenue Code of 1986 made after December 31, 
        1999. No implication is intended with respect to the 
        availability of relief from late elections or the application 
        of a rule of substantial compliance on or before such date.

                    TITLE V--CONSERVATION EASEMENTS

SEC. 501. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION EASEMENTS.

  (a) Where Land Is Located.--
          (1) In general.--Clause (i) of section 2031(c)(8)(A) 
        (defining land subject to a conservation easement) is amended--
                  (A) by striking ``25 miles'' both places it appears 
                and inserting ``50 miles'', and
                  (B) striking ``10 miles'' and inserting ``25 miles''.
          (2) Effective date.--The amendments made by this subsection 
        shall apply to estates of decedents dying after December 31, 
        1999.
  (b) Clarification of Date for Determining Value of Land and 
Easement.--
          (1) In general.--Section 2031(c)(2) (defining applicable 
        percentage) is amended by adding at the end the following new 
        sentence: ``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).''.
          (2) Effective date.--The amendment made by this subsection 
        shall apply to estates of decedents dying after December 31, 
        1997.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary


                                Purpose

    The bill, H.R. 8, as amended (``The Death Tax Elimination 
Act of 2000'') repeals the estate, gift, and generation-
skipping transfer taxes.
    The bill provides net tax reductions of over $28.3 billion 
over fiscal years 2001-2005.

                                Summary

Phase in repeal of estate, gift, and generation-skipping transfer taxes

    Phaseout and repeal of estate, gift, and generation-
skipping transfer taxes.--The estate and gift tax rates above 
53 percent and the 5-percent surtax, which phases out the 
benefit of the graduated rates, are repealed for decedents 
dying and gifts and generation-skipping transfers made after 
December 31, 2000. The rate in excess of 50 percent is repealed 
for decedents dying and gifts and generation-skipping transfers 
made after December 31, 2001. Each estate and gift tax rate is 
reduced by 1 percentage point for decedents dying and gifts and 
generation-skipping transfers made after December 31, 2002, and 
before January 1, 2007. Each estate and gift tax rate is 
reduced by 1.5 percentage points for decedents dying and gifts 
and generation-skipping transfers made after December 31, 2006, 
and before January 1, 2008. Each estate and gift tax rate is 
reduced by 2 percentage points for decedents dying and gifts 
and generation-skipping transfers made after December 31, 2007, 
and before January 1, 2010. The estate, gift, and generation-
skipping transfer taxes are repealed, and a carryover basis 
regime takes effect, for decedents dying and gifts and 
generation-skipping transfers made after December 31, 2009.
    Replace unified credit with unified exemption.--The bill 
replaces the unified credit with a unified exemption for 
decedents dying and gifts and generation-skipping transfers 
made after December 31, 2000.
    Carryover basis.--After repeal, the basis of assets 
received from a decedent generally will be the basis of the 
decedent (i.e., carryover basis). However, $1.3 million of 
transfers from decedents to any beneficiaries will receive a 
step up in basis. An additional $3 million of transfers from 
decedents to surviving spouses also will receive a step up in 
basis. For these purposes, the executor will elect which assets 
receive a step up in basis.

Modify generation-skipping transfer tax rules

    The bill deems there to have been generation-skipping 
transfer tax exemption allocated to transfers made during life 
that are ``indirect skips,'' which are transfers to generation-
skipping transfer trusts that are not direct skips. The bill 
also allows the retroactive allocation of generation-skipping 
transfer tax exemption when there is an unnatural order of 
death. Moreover, the bill allows a trust holding property with 
an inclusion ratio greater than zero to be severed at any time 
in a ``qualified severance.'' In addition, the valuation rules 
are modified such that, for timely and automatic allocations of 
generation-skipping transfer tax exemption, the value of the 
property for purposes of determining the inclusion ratio is its 
finally determined gift tax value or estate tax value depending 
on the circumstances of the transfer. The bill also authorizes 
and directs the Treasury Secretary to grant extensions of time 
to make the election to allocate generation-skipping transfer 
tax exemption and to grant exceptions to the time requirement. 
Finally, the bill provides that substantial compliance with the 
statutory and regulatory requirements for allocating 
generation-skipping transfer tax exemption suffice to establish 
that generation-skipping transfer tax exemption was allocated 
to a particular transfer or trust. The generation-skipping 
transfer tax provisions generally are effective after December 
31, 1999.

Expand estate tax rule for conservation easements

    The bill expands the availability of qualified conservation 
easements by modifying the distance requirements. Under the 
bill, the distance within which the land must be situated from 
a metropolitan area, national park, or wilderness area is 
increased from 25 to 50 miles, and the distance from which the 
land must be situated from an Urban National Forest is 
increased from 10 to 25 miles. The expanded distance provisions 
are effective for estates of decedents dying after December 31, 
1999. The bill also clarifies that the date for determining 
easement compliance is the date on which the donation was made, 
effective for estates of decedents dying after December 31, 
1997.

                 B. Background and Need for Legislation

    The provisions approved by the Committee reflect the need 
for tax relief all decedents' estates, decedents' heirs, and 
businesses, including small businesses, family-owned 
businesses, and farming businesses. This will provide needed 
tax relief for these taxpayers from the unduly burdensome 
estate, gift, and generation-skipping transfer taxes. The 
estimated revenue effects of the provisions comply with the 
most recent Congressional Budget Office revisions of budget 
surplus projections, and represent a prudent first step in 
reducing overall levels of Federal taxation.

                         C. Legislative History


                            Committee Action

    The bill, H.R. 8, was introduced by Ms. Dunn on February 
25, 1999. The Committee on Ways and Means marked up the bill on 
May 25, 2000, and approved the bill with a Chairman's amendment 
in the nature of a substitute, by a roll call vote of 24 yeas 
and 11 nays, with a quorum present.

                      II. EXPLANATION OF THE BILL


 A. Phase in Repeal of Estate, Gift, and Generation-Skipping Transfer 
Taxes (Secs. 101-103, 201, and 301 of the Bill, Secs. 2001-2704 of the 
                  Code, and New Sec. 1022 of the Code)


                              present law

    A gift tax is imposed on lifetime transfers and an estate 
tax is imposed on transfers at death. The gift tax and the 
estate tax are unified so that a single graduated rate schedule 
applies to cumulative taxable transfers made by a taxpayer 
during his or her lifetime and at death. The unified estate and 
gift tax rates begin at 18 percent on the first $10,000 in 
cumulative taxable transfers and reach 55 percent on cumulative 
taxable transfers over $3 million. In addition, a 5-percent 
surtax is imposed on cumulative taxable transfers between $10 
million and the amount necessary to phase out the benefits of 
the graduated rates. Thus, estates between $10 million and 
$17,184,000 are subject to a marginal rate of 60 percent. 
Estates over $17,184,000 are subject to a top marginal rate of 
55 percent, as the benefit of the graduated rates has been 
phased out.
    A unified credit is available with respect to taxable 
transfers by gift and at death. The unified credit amount 
effectively exempts from tax a total of $675,000 in 2000 and 
2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 
2005, and $1 million in 2006 and thereafter. The benefit of the 
unified credit applies at the lowest estate and gift tax rates. 
For example, in 2000, the unified credit applies between the 
18-percent and 37-percent estate and gift tax rates. Thus, in 
2000, taxable transfers, after application of the unified 
credit, are subject to estate and gift tax rates beginning at 
37 percent.
    A generation-skipping transfer tax generally is imposed on 
transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. The generation-skipping transfer tax is 
imposed at a flat rate of 55 percent (i.e., the top estate and 
gift tax rate) on cumulative generation-skipping transfers in 
excess of $1 million, which is indexed for inflation.
    The basis of property acquired or passing from a decedent 
generally is its fair market value on the date of the 
decedent's death (or, if the alternative valuation date is 
elected, the earlier of six months after death or the date the 
property is sold or distributed by the estate). This step up 
(or step down) in basis eliminates the recognition of any 
income on the appreciation of the property that occurred prior 
to the decedent's death, and it has the effect of eliminating 
any tax benefit from any unrealized loss. The basis of property 
acquired by gift generally is the same as it was in the hands 
of the donor (i.e., carryover basis). However, if the donor's 
basis was greater than the fair market value of the property at 
the time of gift, then, for purposes of determining loss on the 
disposition of the property, the basis is its fair market value 
at the time of gift.

                           reasons for change

    The Committee finds that the estate, gift, and generation-
skipping transfer taxes are unduly burdensome on all taxpayers, 
and particularly decedents' estates, decedents' heirs, and 
businesses, such as small businesses, family-owned businesses, 
and farming businesses. The Committee further believes it is 
inappropriate to impose a tax by reason of the death of a 
taxpayer.

                        explanation of provision

    Beginning in 2010, the estate, gift, and generation-
skipping transfer taxes are repealed. After repeal, the basis 
of assets received from a decedent generally will be the basis 
of the decedent (i.e., carryover basis). However, $1.3 million 
of transfers from decedents to any beneficiaries will receive a 
step up in basis. An additional $3 million of transfers from 
decedents to surviving spouses also will receive a step up in 
basis. For these purposes, the executor will elect which assets 
receive a step up in basis. The $1.3 million and $3 million 
amounts are adjusted annually for inflation incurring after 
December 31, 2010.
    Prior to repeal of the estate, gift, and generation-
skipping transfer taxes, the estate and gift tax rates are 
reduced as follows. Beginning in 2001, the estate and gift tax 
rate above 53 percent (i.e., the 55-percent rate) and the 5-
percent surtax, which phases out the benefit of the graduated 
rates, are repealed. Beginning in 2002, the rate in excess of 
50 percent (i.e., the 53-percent rate) is repealed. In 2003 
through 2006, each of the estate and gift tax rates are reduced 
by 1 percentage point, per year. In 2007, each of the estate 
and gift tax rates are reduced by 1.5 percentage points. In 
2008 and 2009, each of the estate and gift tax rates are 
reduced by 2 percentage points, per year. No estate and gift 
tax rate is reduced below the lowest individual income tax rate 
for unmarried individuals (other than surviving spouses and 
heads of households), and the highest estate and gift tax rate 
is not reduced below the highest individual income tax rate for 
unmarried individuals (other than surviving spouses and heads 
of households). The highest estate and gift tax rate in effect 
for a given year is the generation-skipping transfer tax rate 
for that year. From 2003 through 2009, the State death tax 
credit rates are reduced in proportion to the reduction in the 
estate and gift tax rates.
    Beginning in 2001, the unified credit is replaced with a 
unified exemption amount. The unified exemption amount is 
determined as follows: in 2001, $675,000; in 2002 and 2003, 
$700,000; in 2004, $850,000; in 2005, $950,000; and in 2006 and 
thereafter, $1 million. For decedents who are not residents and 
not citizens of the United States, the exemption will be the 
greater of (1) $60,000 or (2) the portion of $175,000 which the 
value of the decedent's U.S.-situs property bears to the value 
of the decedent's worldwide gross estate.

                             effective date

    The unified credit is replaced with a unified exemption, 
the 5-percent surtax is repealed,and the rate in excess of 53 
percent (i.e., the 55-percent rate) are repealed for estates of 
decedents dying and gifts and generation-skipping transfers made after 
December 31, 2000. The estate and gift tax rate in excess of 50 percent 
(i.e., the 53-percent rate) is repealed for estates of decedents dying 
and gifts and generation-skipping transfers made after December 31, 
2001.
    The additional reductions of estate and gift tax rates and 
of the State death tax credit occurs in 2003 through 2009.
    The estate, gift, and generation-skipping transfer taxes 
are repealed and the carryover basis regime takes effect for 
estates of decedents dying and gifts and generation-skipping 
transfers made after December 31, 2009.

            B. Modify Generation-Skipping Transfer Tax Rules


1. Deemed allocation of the generation-skipping transfer tax exemption 
        to lifetime transfers to trusts that are not direct skips (sec. 
        401 of the bill and sec. 2632 of the Code)

                              present law

    A generation-skipping transfer tax generally is imposed on 
transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. An exemption of $1 million (indexed 
beginning in 1999) is provided for each person making 
generation-skipping transfers. The exemption may be allocated 
by a transferor (or his or her executor) to transferred 
property.
    A direct skip is any transfer subject to estate or gift tax 
of an interest in property to a skip person. A skip person may 
be a natural person or certain trusts. All persons assigned to 
the second or more remote generation below the transferor are 
skip persons (e.g., grandchildren and great-grandchildren). 
Trusts are skip persons if (1) all interests in the trust are 
held by skip persons, or (2) no person holds an interest in the 
trust and at no time after the transfer may a distribution 
(including distributions and terminations) be made to a non-
skip person.
    A taxable termination is a termination (by death, lapse of 
time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip).
    The tax rate on generation-skipping transfers is a flat 
rate of tax equal to the maximum estate and gift tax rate in 
effect at the time of the transfer (55 percent under present 
law) multiplied by the ``inclusion ratio.'' The inclusion ratio 
with respect to any property transferred in a generation-
skipping transfer indicates the amount of ``generation-skipping 
transfer tax exemption'' allocated to a trust. The allocation 
of generation-skipping transfer tax exemption reduces the 55-
percent tax rate on a generation-skipping transfer.
    If an individual makes a direct skip during his or her 
lifetime, any unused generation-skipping transfer tax exemption 
is automatically allocated to a direct skip to the extent 
necessary to make the inclusion ratio for such property equal 
to zero. An individual may elect out of the automatic 
allocation for lifetime direct skips.
    For lifetime transfers made to a trust that are not direct 
skips, the transferor must allocate generation-skipping 
transfer tax exemption--the allocation is not automatic. If 
generation-skipping transfer tax exemption is allocated on a 
timely-filed gift tax return, then the portion of the trust 
which is exempt from generation-skipping transfer tax is based 
on the value of the property at the time of the transfer. If, 
however, the allocation is not made on a timely-filed gift tax 
return, then the portion of the trust which is exempt from 
generation-skipping transfer tax is based on the value of the 
property at the time the allocation of generation-skipping 
transfer tax exemption was made.
    Treas. Reg. sec. 26.2632-1(d) further provides that any 
unused generation-skipping transfer tax exemption, which has 
not been allocated to transfers made during an individual's 
life, is automatically allocated on the due date for filing the 
decedent's estate tax return. Unused generation-skipping 
transfer tax exemption is allocated pro rata on the basis of 
the value of the property as finally determined for estate tax 
purposes, first to direct skips treated as occurring at the 
transferor's death. The balance, if any, of unused generation-
skipping transfer tax exemption is allocated pro rata, on the 
basis of the estate tax value of the nonexempt portion of the 
trust property (or in the case of trusts that are not included 
in the gross estate, on the basis of the date of death value of 
the trust) to trusts with respect to which a taxable 
termination may occur or from which a taxable distribution may 
be made.

                           reasons for change

    The Committee recognizes that there are situations where a 
taxpayer would desire allocation of generation-skipping 
transfer tax exemption, yet the taxpayer had missed allocating 
generation-skipping transfer tax exemption to an indirect skip, 
e.g., because the taxpayer or the taxpayer's advisor 
inadvertently omitted making the election on a timely-filed 
gift tax return or the taxpayer submitted a defective election. 
Thus, the Committee believes that automatic allocation is 
appropriate for transfers to a trust from which generation-
skipping transfers are likely to occur.

                        explanation of provision

    Under the bill, generation-skipping transfer tax exemption 
will be automatically allocatedto transfers made during life 
that are ``indirect skips.'' An indirect skip is any transfer of 
property (that is not a direct skip) subject to the gift tax that is 
made to a generation-skipping transfer trust.
    A generation-skipping transfer trust is defined as a trust 
that could have a generation-skipping transfer with respect to 
the transferor (e.g., a taxable termination or taxable 
distribution), unless:
          The trust instrument provides that more than 25 
        percent of the trust corpus must be distributed to or 
        may be withdrawn by 1 or more individuals who are non-
        skip persons (a) before the date that the individual 
        attains age 46, (b) on or before 1 or more dates 
        specified in the trust instrument that will occur 
        before the date that such individual attains age 46, or 
        (c) upon the occurrence of an event that, in accordance 
        with regulations prescribed by the Treasury Secretary, 
        may reasonably be expected to occur before the date 
        that such individual attains age 46;
          The trust instrument provides that more than 25 
        percent of the trust corpus must be distributed to or 
        may be withdrawn by 1 or more individuals who are non-
        skip persons and who are living on the date of death of 
        another person identified in the instrument (by name or 
        by class) who is more than 10 years older than such 
        individuals;
          The trust instrument provides that, if 1 or more 
        individuals who are non-skip persons die on or before a 
        date or event described in clause (1) or (2), more than 
        25 percent of the trust corpus either must be 
        distributed to the estate or estates of 1 or more of 
        such individuals or is subject to a general power of 
        appointment exercisable by 1 or more of such 
        individuals;
          The trust is a trust any portion of which would be 
        included in the gross estate of a non-skip person 
        (other than the transferor) if such person died 
        immediately after the transfer;
          The trust is a charitable lead annuity trust or a 
        charitable remainder annuity trust or a charitable 
        unitrust; or
          The trust is a trust with respect to which a 
        deduction was allowed under section 2522 for the amount 
        of an interest in the form of the right to receive 
        annual payments of a fixed percentage of the net fair 
        market value of the trust property (determined yearly) 
        and which is required to pay principal to a non-skip 
        person if such person is alive when the yearly payments 
        for which the deduction was allowed terminate.
    If any individual makes an indirect skip during the 
individual's lifetime, then any unused portion of such 
individual's generation-skipping transfer tax exemption is 
allocated to the property transferred to the extent necessary 
to produce the lowest possible inclusion ratio for such 
property.
    An individual may elect not to have the automatic 
allocation rules apply to an indirect skip, and such elections 
will be deemed timely if filed on a timely-filed gift tax 
return for the calendar year in which the transfer was made or 
deemed to have been made or on such later date or dates as may 
be prescribed by the Treasury Secretary. An individual may 
elect not to have the automatic allocation rules apply to any 
or all transfers made by such individual to a particular trust 
and may elect to treat any trust as a generation-skipping 
transfer trust with respect to any or all transfers made by the 
individual to such trust, and such election may be made on a 
timely-filed gift tax return for the calendar year for which 
the election is to become effective.

                             Effective Date

    The provision applies to transfers subject to estate or 
gift tax made after December 31, 1999, and to estate tax 
inclusion periods ending after December 31, 1999.

2. Retroactive allocation of the generation-skipping transfer tax 
        exemption (sec. 401 of the bill and sec. 2632 of the Code)

                              Present Law

    A taxable termination is a termination (by death, lapse of 
time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip). If a transferor allocates 
generation-skipping transfer tax exemption to a trust prior to 
the taxable termination or taxable distribution, generation-
skipping transfer tax may be avoided.
    A transferor likely will not allocate generation-skipping 
transfer tax exemption to a trust that the transferor expects 
will benefit only non-skip persons. However, if a taxable 
termination occurs because, for example, the transferor's child 
unexpectedly dies such that the trust terminates in favor of 
the transferor's grandchild, and generation-skipping transfer 
tax exemption had not been allocated to the trust, then 
generation-skipping transfer tax would be due even if the 
transferor had unused generation-skipping transfer tax 
exemption.

                           Reasons for Change

    The Committee recognizes that when a transferor does not 
expect the second generation (e.g., the transferor's child) to 
die before the termination of a trust, the transferor likely 
will not allocate generation-skipping transfer tax exemption to 
the transfer to the trust. If a transferor knew, however, that 
the transferor's child might predecease the transferor and that 
there could be a taxable termination as a result thereof, the 
transferor likely would have allocated generation-skipping 
transfer tax exemption at the time of the transfer to the 
trust. The Committee believes itis appropriate to provide that 
when there is an unnatural order of death (e.g., when the second 
generation dies before the first generation transferor), the transferor 
may allocate generation-skipping transfer tax exemption retroactively 
to the date of the respective transfer to trust.

                        Explanation of Provision

    Under the bill, generation-skipping transfer tax exemption 
may be allocated retroactively when there is an unnatural order 
of death. If a lineal descendant of the transferor predeceases 
the transferor, then the transferor may allocate any unused 
generation-skipping transfer exemption to any previous transfer 
or transfers to the trust on a chronological basis. The 
provision allows a transferor to retroactively allocate 
generation-skipping transfer exemption to a trust where a 
beneficiary (a) is a non-skip person, (b) is a lineal 
descendant of the transferor's grandparent or a grandparent of 
the transferor's spouse, (c) is a generation younger than the 
generation of the transferor, and (d) dies before the 
transferor. Exemption is allocated under this rule 
retroactively, and the applicable fraction and inclusion ratio 
would be determined based on the value of the property on the 
date that the property was transferred to trust.

                             Effective Date

    The provision applies to deaths of non-skip persons 
occurring after December 31, 1999.

3. Severing of trusts holding property having an inclusion ratio of 
        greater than zero (sec. 402 of the bill and sec. 2642 of the 
        Code)

                              Present Law

    A generation-skipping transfer tax generally is imposed on 
transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. An exemption of $1 million (indexed 
beginning in 1999) is provided for each person making 
generation-skipping transfers. The exemption may be allocated 
by a transferor (or his or her executor) to transferred 
property.
    If the value of transferred property exceeds the amount of 
the generation-skipping transfer tax exemption allocated to 
that property, then the generation-skipping transfer tax 
generally is determined by multiplying a flat tax rate equal to 
the highest estate tax rate (which is currently 55 percent) by 
the ``inclusion ratio'' and the value of the taxable property 
at the time of the taxable event. The ``inclusion ratio'' is 
the number one minus the ``applicable fraction.'' The 
applicable fraction is a fraction calculated by dividing the 
amount of the generation-skipping transfer tax exemption 
allocated to the property by the value of the property.
    Under Treas. Reg. 26.2654-1(b), a trust may be severed into 
two or more trusts (e.g., one with an inclusion ratio of zero 
and one with an inclusion ratio of one) only if (1) the trust 
is severed according to a direction in the governing instrument 
or (2) the trust is severed pursuant to the trustee's 
discretionary powers, but only if certain other conditions are 
satisfied (e.g., the severance occurs or a reformation 
proceeding begins before the estate tax return is due). Under 
current Treasury regulations, however, a trustee cannot 
establish inclusion ratios of zero and one by severing a trust 
that is subject to the generation-skipping transfer tax after 
the trust has been created.

                           Reasons for Change

    Complexity can be reduced if a generation-skipping transfer 
trust is treated as two separate trusts for generation-skipping 
transfer tax purposes--one with an inclusion ratio of zero and 
one with an inclusion ratio of one. This result can be achieved 
by drafting complex documents in order to meet the specific 
requirements of severance. The Committee believes it is 
appropriate to make the rules regarding severance less 
burdensome and less complex.

                        Explanation of Provision

    Under the bill, a trust may be severed in a ``qualified 
severance.'' A qualified severance is defined as the division 
of a single trust and the creation of two or more trusts if (1) 
the single trust was divided on a fractional basis, and (2) the 
terms of the new trusts, in the aggregate, provide for the same 
succession of interests of beneficiaries as are provided in the 
original trust. If a trust has an inclusion ratio of greater 
than zero and less than one, a severance is a qualified 
severance only if the single trust is divided into two trusts, 
one of which receives a fractional share of the total value of 
all trust assets equal to the applicable fraction of the single 
trust immediately before the severance. In such case, the trust 
receiving such fractional share shall have an inclusion ratio 
of zero and the other trust shall have an inclusion ratio of 
one. Under the provision, a trustee may elect to sever a trust 
in a qualified severance at any time.

                             Effective Date

    The provision is effective for severances of trusts 
occurring after December 31, 1999.

4. Modification of certain valuation rules (sec. 403 of the bill and 
        sec. 2642 of the Code)

                              Present Law

    Under present law, the inclusion ratio is determined using 
gift tax values for allocations of generation-skipping transfer 
tax exemption made on timely filed gift tax returns. The 
inclusion ratio generally is determined using estate tax values 
for allocations of generation-skipping transfer tax exemption 
made to transfers at death. Treas. Reg. 26.2642-5(b) provides 
that, with respect to taxable terminations and taxable 
distributions, the inclusion ratio becomes final on the later 
of the period of assessment with respect to the first transfer 
using the inclusionratio or the period for assessing the estate 
tax with respect to the transferor's estate.

                           Reasons for Change

    The Committee believes it is appropriate to clarify the 
valuation rules relating to timely and automatic allocations of 
generation-skipping transfer tax exemption.

                        Explanation of Provision

    Under the bill, in connection with timely and automatic 
allocations of generation-skipping transfer tax exemption, the 
value of the property for purposes of determining the inclusion 
ratio shall be its finally determined gift tax value or estate 
tax value depending on the circumstances of the transfer. In 
the case of a generation-skipping transfer tax exemption 
allocation deemed to be made at the conclusion of an estate tax 
inclusion period, the value for purposes of determining the 
inclusion ratio shall be its value at that time.

                             Effective Date

    The provision is effective for transfers subject to estate 
or gift tax made after December 31, 1999.

5. Relief from late elections (sec. 404 of the bill and sec. 2642 of 
        the Code)

                              Present Law

    Under present law, an election to allocate generation-
skipping transfer tax exemption to a specific transfer may be 
made at any time up to the time for filing the transferor's 
estate tax return. If an allocation is made on a gift tax 
return filed timely with respect to the transfer to trust, then 
the value on the date of transfer to the trust is used for 
determining generation-skipping transfer tax exemption 
allocation. However, if the allocation relating to a specific 
transfer is not made on a timely-filed gift tax return, then 
the value on the date of allocation must be used. There is no 
statutory provision allowing relief for an inadvertent failure 
to make an election on a timely-filed gift tax return to 
allocate generation-skipping transfer tax exemption.

                           Reasons for Change

    The Committee believes it is appropriate for the Treasury 
Secretary to grant extensions of time to make an election to 
allocate generation-skipping transfer tax exemption and to 
grant exceptions to the statutory time requirement in 
appropriate circumstances, e.g., when the taxpayer intended to 
allocate generation-skipping transfer tax exemption and the 
failure to timely allocate generation-skipping transfer tax 
exemption was inadvertent.

                        Explanation of Provision

    Under the bill, the Treasury Secretary is authorized and 
directed to grant extensions of time to make the election to 
allocate generation-skipping transfer tax exemption and to 
grant exceptions to the time requirement. If such relief is 
granted, then the value on the date of transfer to trust would 
be used for determining generation-skipping transfer tax 
exemption allocation.
    In determining whether to grant relief for late elections, 
the Treasury Secretary is directed to consider all relevant 
circumstances, including evidence of intent contained in the 
trust instrument or instrument of transfer and such other 
factors as the Treasury Secretary deems relevant. For purposes 
of determining whether to grant relief, the time for making the 
allocation (or election) is treated as if not expressly 
prescribed by statute.

                             Effective Date

    The provision applies to requests pending on, or filed 
after, December 31, 1999. No inference is intended with respect 
to the availability of relief from late elections prior to the 
effective date of the provision.

6. Substantial compliance (sec. 404 of the bill and sec. 2642 of the 
        Code)

                              Present Law

    Under present law, there is no statutory rule which 
provides that substantial compliance with the statutory and 
regulatory requirements for allocating generation-skipping 
transfer tax exemption will suffice to establish that 
generation-skipping transfer tax exemption was allocated to a 
particular transfer or trust.

                           Reasons for Change

    The Committee recognizes that the rules and regulations 
regarding the allocation of generation-skipping transfer tax 
exemption are complex. Thus, it is often difficult for 
taxpayers to comply with the technical requirements for making 
a proper election to allocate generation-skipping transfer tax 
exemption. The Committee therefore believes it is appropriate 
to provide that generation-skipping transfer tax exemption will 
be allocated when a taxpayer substantially complies with the 
rules and regulations for allocating generation-skipping 
transfer tax exemption.

                        Explanation of Provision

    Under the bill, substantial compliance with the statutory 
and regulatory requirements for allocating generation-skipping 
transfer tax exemption will suffice to establish that 
generation-skipping transfer tax exemption was allocated to a 
particular transfer or a particular trust. If a taxpayer 
demonstrates substantial compliance, then so much of the 
transferor's unused generation-skipping transfer tax exemption 
will be allocated to the extent it produces the lowestpossible 
inclusion ratio. In determining whether there has been substantial 
compliance, all relevant circumstances will be considered, including 
evidence of intent contained in the trust instrument or instrument of 
transfer and such other factors as the Treasury Secretary deems 
appropriate.

                             Effective Date

    The provision applies to transfers subject to estate or 
gift tax made after December 31, 1999. No inference is intended 
with respect to the availability of a rule of substantial 
compliance prior to the effective date of the provision.

 C. Expand Estate Tax Rule for Conservation Easements (Sec. 501 of the 
                    Bill and Sec. 2031 of the Code)


                              Present Law

    An executor may elect to exclude from the taxable estate 40 
percent of the value of any land subject to a qualified 
conservation easement, up to a maximum exclusion of $100,000 in 
1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and 
$500,000 in 2002 and thereafter (sec. 2031(c)). The exclusion 
percentage is reduced 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).
    A qualified conservation easement is one that meets the 
following requirments: (1) the land is located within 25 miles 
of a metropolitan area (as defined by the Office of Management 
and Budget) or a national park or wilderness area, or within 10 
miles of an Urban National Forest (as designated by the Forest 
Service of the U.S. Department of Agriculture); (2) the land 
has been owned by the decedent or a member of the decedent's 
family at all times during the three-year period ending on the 
date of the decedent's death; and (3) a qualified conservation 
contribution (within the meaning of sec. 170(h)) of a qualified 
real property interest (as generally defined in sec. 
170(h)(2)(C)) was granted by the decedent or a member of his or 
her family. For purposes of the provision, preservation of a 
historically important land area or a certified historic 
structure does not qualify as a conservation purpose.
    In order to qualify for the exclusion, a qualifying 
easement must have been granted by the decedent, a member of 
the decedent's family, the executor of the decedent's estate, 
or the trustee of a trust holding the land, no later than the 
date of the election. To the extent that the value of such land 
is excluded from the taxable estate, the basis of such land 
acquired at death is a carryover basis (i.e., the basis is not 
stepped-up to its fair market value at death). Property 
financed with acquisition indebtedness is eligible for this 
provision only to the extent of the net equity in the property. 
The exclusion from estate taxes does not extent to the value of 
any development rights retained by the decedent or donor.

                           Reasons for Change

    The Committee believes that expanding the availability of 
qualified conservation easements will further ease existing 
pressures to develop or sell environmentally significant land 
in order to raise funds to pay estate taxes and would, thereby, 
advance the preservation of such land. The Committee also 
believes it appropriate to clarify the date for determining 
easement compliance.

                        Explanation of Provision

    The bill expands the availability of qualified conservation 
easements by modifying the distance requirements. Under the 
bill, the distance within which the land must be situated from 
a metropolitan area, national park, or wilderness area is 
increased from 25 to 50 miles, and the distance from which the 
land must be situated from an Urban National Forest is 
increased from 10 to 25 miles. The bill also clarifies that the 
date for determining easement compliance is the date on which 
the donation was made.

                             Effective Date

    The provision that clarifies the date for determining 
easement compliance is effective for estates of decedents dying 
after December 31, 1997. The provisions that modify the 
distance rules are effective for estates of decedents dying 
after December 31, 1999.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statements are made 
concerning the votes of the Committee on Ways and Means in its 
consideration of the bill, H.R. 8.

                       MOTION TO REPORT THE BILL

    The bill, H.R. 8, as amended, was ordered favorably 
reported by a rollcall vote of 24 yeas to 11 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
             Representatives                 Yea      Nay            Representatives             Yea       Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer..............................        X   .......  Mr. Rangel.....................  ........        X
Mr. Crane...............................        X   .......  Mr. Stark......................  ........        X
Mr. Thomas..............................        X   .......  Mr. Matsui.....................  ........  ........
Mr. Shaw................................        X   .......  Mr. Coyne......................  ........        X
Mrs. Johnson............................        X   .......  Mr. Levin......................  ........        X
Mr. Houghton............................        X   .......  Mr. Cardin.....................  ........        X
Mr. Herger..............................        X   .......  Mr. McDermott..................  ........        X
Mr. McCrery.............................        X   .......  Mr. Kleczka....................  ........        X
Mr. Camp................................        X   .......  Mr. Lewis (GA).................  ........        X
Mr. Ramstad.............................        X   .......  Mr. Neal.......................  ........        X
Mr. Nussle..............................        X   .......  Mr. McNulty....................        X   ........
Mr. Johnson.............................  ........  .......  Mr. Jefferson..................        X   ........
Ms. Dunn................................        X   .......  Mr. Tanner.....................        X   ........
Mr. Collins.............................        X   .......  Mr. Becerra....................  ........        X
Mr. Portman.............................        X   .......  Mrs. Thurman...................  ........        X
Mr. English.............................        X   .......  Mr. Doggett....................  ........  ........
Mr. Watkins.............................        X   .......
Mr. Hayworth............................        X   .......
Mr. Weller..............................        X   .......
Mr. Hulshof.............................        X   .......
Mr. McInnis.............................  ........  .......
Mr. Lewis (KY)..........................        X   .......
Mr. Foley...............................        X   .......
----------------------------------------------------------------------------------------------------------------

                          VOTES ON AMENDMENTS

    Rollcall votes were conducted on the following amendments 
to the Chairman's amendment in the nature of a substitute.
    An amendment by Mr. Doggett, to deny a gift tax exclusion 
to political organizations if they fail to meet reporting and 
disclosure requirements, was defeated by a rollcall vote of 14 
yeas to 22 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
             Representatives                 Yea      Nay            Representatives             Yea       Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer..............................  ........        X  Mr. Rangel.....................        X   ........
Mr. Crane...............................  ........        X  Mr. Stark......................        X   ........
Mr. Thomas..............................  ........        X  Mr. Matsui.....................  ........  ........
Mr. Shaw................................  ........        X  Mr. Coyne......................        X   ........
Mrs. Johnson............................  ........        X  Mr. Levin......................        X   ........
Mr. Houghton............................  ........        X  Mr. Cardin.....................        X   ........
Mr. Herger..............................  ........        X  Mr. McDermott..................        X   ........
Mr. McCrery.............................  ........        X  Mr. Kleczka....................        X   ........
Mr. Camp................................  ........        X  Mr. Lewis (GA).................        X   ........
Mr. Ramstad.............................  ........        X  Mr. Neal.......................        X   ........
Mr. Nussle..............................  ........        X  Mr. McNulty....................        X   ........
Mr. Johnson.............................  ........        X  Mr. Jefferson..................  ........  ........
Ms. Dunn................................  ........        X  Mr. Tanner.....................        X   ........
Mr. Collins.............................  ........        X  Mr. Becerra....................        X   ........
Mr. Portman.............................  ........        X  Mrs. Thurman...................        X   ........
Mr. English.............................  ........        X  Mr. Doggett....................        X   ........
Mr. Watkins.............................  ........        X
Mr. Hayworth............................  ........        X
Mr. Weller..............................  ........        X
Mr. Hulshof.............................  ........        X
Mr. McInnis.............................  ........  .......
Mr. Lewis (KY)..........................  ........        X
Mr. Foley...............................  ........        X
----------------------------------------------------------------------------------------------------------------

    A substitute amendment by Mr. Rangel, was defeated by a 
rollcall vote of 12 yeas to 21 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
             Representatives                 Yea      Nay            Representatives             Yea       Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer..............................  ........        X  Mr. Rangel.....................        X   ........
Mr. Crane...............................  ........        X  Mr. Stark......................        X   ........
Mr. Thomas..............................  ........        X  Mr. Matsui.....................  ........  ........
Mr. Shaw................................  ........        X  Mr. Coyne......................        X   ........
Mrs. Johnson............................  ........        X  Mr. Levin......................        X   ........
Mr. Houghton............................  ........        X  Mr. Cardin.....................        X   ........
Mr. Herger..............................  ........        X  Mr. McDermott..................        X   ........
Mr. McCrery.............................  ........        X  Mr. Kleczka....................        X   ........
Mr. Camp................................  ........        X  Mr. Lewis (GA).................  ........  ........
Mr. Ramstad.............................  ........        X  Mr. Neal.......................        X   ........
Mr. Nussle..............................  ........        X  Mr. McNulty....................        X   ........
Mr. Johnson.............................  ........  .......  Mr. Jefferson..................        X   ........
Ms. Dunn................................  ........        X  Mr. Tanner.....................  ........        X
Mr. Collins.............................  ........        X  Mr. Becerra....................        X   ........
Mr. Portman.............................  ........  .......  Mrs. Thurman...................        X   ........
Mr. English.............................  ........        X  Mr. Doggett....................  ........  ........
Mr. Watkins.............................  ........        X
Mr. Hayworth............................  ........        X
Mr. Weller..............................  ........        X
Mr. Hulshof.............................  ........        X
Mr. McInnis.............................  ........  .......
Mr. Lewis (KY)..........................  ........        X
Mr. Foley...............................  ........        X
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d)(2) of rule XIII of the Rules 
of the House of Representatives, the following statement is 
made concerning the effects on the budget of the revenue 
provisions of the bill, H.R. 8, as reported.
    The bill is estimated to have the following effects on 
budget receipts for fiscal years 2000-2005:


    B. Statement Regarding New Budget Authority and Tax Expenditures


Budget authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority.

Tax expenditures

    In compliance with clause 2(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
revenue-reducing income tax provisions involve increased tax 
expenditures. (See amounts in table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the Congressional Budget Office (``CBO''), the 
following statement by CBO is provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 30, 2000.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 8, the Death Tax 
Elimination Act of 2000.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Hester 
Grippando.
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

H.R. 8--Death Tax Elimination Act of 2000

    Summary: H.R. 8 would phase out estate, gift, and 
generation-skipping taxes over a nine-year period beginning in 
fiscal year 2001. The bill would also modify generation-
skipping transfer tax rules and expand the estate tax rule for 
conservation easements. The Joint Committee on Taxation (JCT) 
estimates that the bill would reduce revenues by $8 million in 
fiscal year 2001, by $28 billion over the 2001-2005 period, and 
by $105 billion over the 2001-2010 period. Because the bill 
would affect receipts, pay-as-you-go procedures would apply.
    H.R. 8 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 8 is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                               By fiscal year, in millions of dollars--
                                                     -----------------------------------------------------------
                                                        2000      2001      2002      2003      2004      2005
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Estimated revenues..................................         0        -8    -5,068    -6,720    -7,689    -8,841
----------------------------------------------------------------------------------------------------------------

    Basis of Estimate: All estimates of H.R. 8 were provided by 
JCT.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. The net 
changes in outlays and governmental receipts that are subject 
to pay-as-you-go procedures are shown in the following table. 
For the purposes of enforcing pay-as-you-go procedures, only 
the effects in the current year, the budget year, and the 
succeeding four years are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               By fiscal year, in millions of dollars--
                                            ------------------------------------------------------------------------------------------------------------
                                              2000   2001    2002      2003      2004      2005       2006       2007       2008       2009       2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays.........................                                                 not applicable
Changes in receipts........................      0     -8    -5,068    -6,720    -7,689    -8,841    -10,115    -11,302    -12,834    -19,174    -22,993
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: H.R. 8 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal costs: Hester Grippando.
    Estimate approved by: G. Thomas Woodward, Assistant 
Director for Tax Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it was a result of the Committee's 
oversight review concerning the tax burden on individual 
taxpayers that the Committee concluded that it is appropriate 
and timely to enact the revenue provisions included in the bill 
as reported.

    B. Summary of Findings and Recommendations of the Committee on 
                           Government Reform

    With respect to clause 3(c)(4) of rule XII of the Rules of 
the House of Representatives, the Committee advises that no 
oversight findings or recommendations have been submitted to 
this Committee by the Committee on Government Reform with 
respect to the provisions contained in the bill.

                 C. Constitutional Authority Statement

    With respect to clause 3(d)(1) of rule XIII of the Rules of 
the House of Representatives (relating to Constitutional 
Authority), the Committee states that the Committee's action in 
reporting this bill is derived from Article I of the 
Constitution, Section 8 (``The Congress shall have Power To lay 
and collect Taxes, Duties, Imposts and Excises * * *''), and 
from the 16th Amendment to the Constitution.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, and tribal 
governments.

                E. Applicability of House Rule XXI 5(b)

    Rule XXI 5(b) of the Rules of the House of Representatives 
provides, in part, that ``No bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase shall be considered as passed or agreed to unless 
determined by a vote of not less than three-fifths of the 
Members.'' The Committee has carefully reviewed the provisions 
of the bill, and states that the provisions of the bill do not 
involve any Federal income tax rate increase within the meaning 
of the rule.

                       F. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the House Committee on Ways and 
Means, the Senate Committee on Finance, or any committee of 
conference if the legislation includes a provision that 
directly or indirectly amends the Internal Revenue Code and has 
widespread applicability to individuals or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Internal Revenue Code and that have 
``widespread applicability'' to individuals or small 
businesses.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986

           *       *       *       *       *       *       *



                       Subtitle A--Income Taxes

           *       *       *       *       *       *       *


                  CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


              Subchapter A--Determination of Tax Liability

           *       *       *       *       *       *       *


     PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

           *       *       *       *       *       *       *



SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Certain Contributions of Ordinary Income and Capital Gain 
Property.--
          (1) * * *

           *       *       *       *       *       *       *

        the amount of gain which would have been long-term 
        capital gain if the property contributed had been sold 
        by the taxpayer at its fair market value (determined at 
        the time of such contribution). For purposes of 
        applying this paragraph in the case of a charitable 
        contribution of stock in an S corporation, rules 
        similar to the rules of section 751 shall apply in 
        determining whether gain on such stock would have been 
        long-term capital gain if such stock were sold by the 
        taxpayer. For purposes of this paragraph, the 
        determination of whether property is a capital asset 
        shall be made without regard to the exception contained 
        in section 1221(a)(3)(C) for basis determined under 
        section 1022.

           *       *       *       *       *       *       *


         Subchapter O--Gain or Loss on Disposition of Property

           *       *       *       *       *       *       *


              PART II--BASIS RULES OF GENERAL APPLICATION

        Sec. 1011. Adjusted basis for determining gain or loss.
     * * * * * * *
        Sec. 1022. Carryover basis for certain property acquired from a 
                  decedent dying after December 31, 2009.

           *       *       *       *       *       *       *


SEC. 1014. BASIS OF PROPERTY ACQUIRED FROM A DECEDENT.

  (a) * * *

           *       *       *       *       *       *       *

  (f) Termination.--In the case of a decedent dying after 
December 31, 2009, this section shall not apply to property for 
which basis is provided by section 1022.

           *       *       *       *       *       *       *


SEC. 1016. ADJUSTMENTS TO BASIS.

  (a) General Rule.--Proper adjustment in respect of the 
property shall in all cases be made--
          (1) * * *

           *       *       *       *       *       *       *

          (26) to the extent provided in sections 23(g) and 
        137(e), [and]
          (27) in the case of a residence with respect to which 
        a credit was allowed under section 1400C, to the extent 
        provided in section 1400C(h)[.], and
          (28) to the extent provided in section 1022 (relating 
        to basis for certain property acquired from a decedent 
        dying after December 31, 2009).

           *       *       *       *       *       *       *


SEC. 1022. CARRYOVER BASIS FOR CERTAIN PROPERTY ACQUIRED FROM A 
                    DECEDENT DYING AFTER DECEMBER 31, 2009.

  (a) Carryover Basis.--Except as otherwise provided in this 
section, the basis of carryover basis property in the hands of 
a person acquiring such property from a decedent shall be 
determined under section 1015.
  (b) Carryover Basis Property Defined.--
          (1) In general.--For purposes of this section, the 
        term ``carryover basis property'' means any property--
                  (A) which is acquired from or passed from a 
                decedent who died after December 31, 2009, and
                  (B) which is not excluded pursuant to 
                paragraph (2).
        The property taken into account under subparagraph (A) 
        shall be determined under section 1014(b) without 
        regard to subparagraph (A) of the last sentence of 
        paragraph (9) thereof.
          (2) Certain property not carryover basis property.--
        The term ``carryover basis property'' does not 
        include--
                  (A) any item of gross income in respect of a 
                decedent described in section 691,
                  (B) property of the decedent to the extent 
                that the aggregate adjusted fair market value 
                of such property does not exceed $1,300,000, 
                and
                  (C) property which was acquired from the 
                decedent by the surviving spouse of the 
                decedent (and which would be carryover basis 
                property without regard to this subparagraph) 
                but only if the value of such property would 
                have been deductible from the value of the 
                taxable estate of the decedent under section 
                2056, as in effect on the day before the date 
                of the enactment of the Death Tax Elimination 
                Act of 2000.
        For purposes of this subsection, the term ``adjusted 
        fair market value'' means, with respect to any 
        property, fair market value reduced by any indebtedness 
        secured by such property.
          (3) Limitation on exception for property acquired by 
        surviving spouse.--The adjusted fair market value of 
        property which is not carryover basis property by 
        reason of paragraph (2)(C) shall not exceed $3,000,000.
          (4) Allocation of excepted amounts.--The executor 
        shall allocate the limitations under paragraphs (2)(B) 
        and (3).
          (5) Inflation adjustment of excepted amounts.--In the 
        case of decedents dying in a calendar year after 2010, 
        the dollar amounts in paragraphs (2)(B) and (3) shall 
        each be increased by an amount equal to the product 
        of--
                  (A) such dollar amount, and
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for such calendar year, 
                determined by substituting ``2009'' for 
                ``1992'' in subparagraph (B) thereof.
        If any increase determined under the preceding sentence 
        is not a multiple of $10,000, such increase shall be 
        rounded to the nearest multiple of $10,000.
  (c) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.

           *       *       *       *       *       *       *


               Subchapter P--Capital Gains and Losses

           *       *       *       *       *       *       *


  PART III--GENERAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES

           *       *       *       *       *       *       *


SEC. 1221. CAPITAL ASSET DEFINED.

  (a) In General.--For purposes of this subtitle, the term 
``capital asset'' means property held by the taxpayer (whether 
or not connected with his trade or business), but does not 
include--
          (1) * * *

           *       *       *       *       *       *       *

          (3) a copyright, a literary, musical, or artistic 
        composition, a letter or memorandum, or similar 
        property, held by--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) a taxpayer in whose hands the basis of 
                such property is determined (other than by 
                reason of section 1022), for purposes of 
                determining gain from a sale or exchange, in 
                whole or part by reference to the basis of such 
                property in the hands of a taxpayer described 
                in subparagraph (A) or (B);

           *       *       *       *       *       *       *


                  Subtitle B--Estate and Gift Taxes

           *       *       *       *       *       *       *


                        CHAPTER 11--ESTATE TAX

           *       *       *       *       *       *       *


             Subchapter A--Estates of Citizens or Residents

           *       *       *       *       *       *       *


                         PART I--TAX IMPOSED

           *       *       *       *       *       *       *


SEC. 2001. IMPOSITION AND RATE OF TAX.

  (a) * * *
  [(b) Computation of Tax.--The tax imposed by this section 
shall be the amount equal to the excess (if any) of--
          [(1) a tentative tax computed under subsection (c) on 
        the sum of--
                  [(A) the amount of the taxable estate, and
                  [(B) the amount of the adjusted taxable 
                gifts, over
          [(2) the aggregate amount of tax which would have 
        been payable under chapter 12 with respect to gifts 
        made by the decedent after December 31, 1976, if the 
        provisions of subsection (c) (as in effect at the 
        decedent's death) had been applicable at the time of 
        such gifts.
For purposes of paragraph (1)(B), the term ``adjusted taxable 
gifts'' means the total amount of the taxable gifts (within the 
meaning of section 2503) made by the decedent after December 
31, 1976, other than gifts which are includible in the gross 
estate of the decedent.]
  (b) Computation of Tax.--
          (1) In general.--The tax imposed by this section 
        shall be the amount equal to the excess (if any) of--
                  (A) the tentative tax determined under 
                paragraph (2), over
                  (B) the aggregate amount of tax which would 
                have been payable under chapter 12 with respect 
                to gifts made by the decedent after December 
                31, 1976, if the provisions of subsection (c) 
                (as in effect at the decedent's death) had been 
                applicable at the time of such gifts.
          (2) Tentative tax.--For purposes of paragraph (1), 
        the tentative tax determined under this paragraph is a 
        tax computed under subsection (c) on the excess of--
                  (A) the sum of--
                          (i) the amount of the taxable estate, 
                        and
                          (ii) the amount of the adjusted 
                        taxable gifts, over
                  (B) the exemption amount for the calendar 
                year in which the decedent died.
          (3) Exemption amount.--For purposes of paragraph (2), 
        the term ``exemption amount'' means the amount 
        determined in accordance with the following table:

    In the case of                                         The exemption
      calendar year:                                          amount is:

        2001............................................       $675,000 
        2002 and 2003...................................       $700,000 
        2004............................................       $850,000 
        2005............................................       $950,000 
        2006 or thereafter..............................     $1,000,000.

          (4) Adjusted taxable gifts.--For purposes of 
        paragraph (2), the term ``adjusted taxable gifts'' 
        means the total amount of the taxable gifts (within the 
        meaning of section 2503) made by the decedent after 
        December 31, 1976, other than gifts which are 
        includible in the gross estate of the decedent.
  (c) Rate Schedule.--
          (1) In general.--

If the amount with r  pect
  to which the tenta  ve
  tax to be computedThe tentative tax is:

    Not over $10,00018 percent of such amount...........................
     * * * * * * *
    [Over $2,500,000$1,025,800, plus 53% of the excessover $2,500,000...
    [Over $3,000,000$1,290,800, plus 55% of the excessover $3,000,000.].
    Over $2,500,000.$1,025,800, plus 50% of the excess over $2,500,000..

          [(2) Phaseout of graduated rates and unified 
        credit.--The tentative tax determined under paragraph 
        (1) shall be increased by an amount equal to 5 percent 
        of so much of the amount (with respect to which the 
        tentative tax is to be computed) as exceeds $10,000,000 
        but does not exceed the amount at which the average tax 
        rate under this section is 55 percent.]
          (2) Phase-in of reduced rate.--In the case of 
        decedents dying, and gifts made, during 2001, the last 
        item in the table contained in paragraph (1) shall be 
        applied by substituting ``53%'' for ``50%''.
          (3) Phasedown of tax.--In the case of estates of 
        decedents dying, and gifts made, during any calendar 
        year after 2002 and before 2010--
                  (A) In general.--Except as provided in 
                subparagraph (C), the tentative tax under this 
                subsection shall be determined by using a table 
                prescribed by the Secretary (in lieu of using 
                the table contained in paragraph (1)) which is 
                the same as such table; except that--
                          (i) each of the rates of tax shall be 
                        reduced by the number of percentage 
                        points determined under subparagraph 
                        (B), and
                          (ii) the amounts setting forth the 
                        tax shall be adjusted to the extent 
                        necessary to reflect the adjustments 
                        under clause (i).
                  (B) Percentage points of reduction.--

                                                         The number of  
        For calendar year:                         percentage points is:
          2003................................................      1.0 
          2004................................................      2.0 
          2005................................................      3.0 
          2006................................................      4.0 
          2007................................................      5.5 
          2008................................................      7.5 
          2009................................................      9.5.

                  (C) Coordination with income tax rates.--The 
                reductions under subparagraph (A)--
                          (i) shall not reduce any rate under 
                        paragraph (1) below the lowest rate in 
                        section 1(c), and
                          (ii) shall not reduce the highest 
                        rate under paragraph (1) below the 
                        highest rate in section 1(c).
                  (D) Coordination with credit for state death 
                taxes.--Rules similar to the rules of 
                subparagraph (A) shall apply to the table 
                contained in section 2011(b) except that the 
                Secretary shall prescribe percentage point 
                reductions which maintain the proportionate 
                relationship (as in effect before any reduction 
                under this paragraph) between the credit under 
                section 2011 and the tax rates under subsection 
                (c).

           *       *       *       *       *       *       *


                      PART II--CREDITS AGAINST TAX

        [Sec. 2010. Unified credit against estate tax.]
     * * * * * * *

[SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.

  [(a) General Rule.--A credit of the applicable credit amout 
shall be allowed to the estate of every decedent against the 
tax imposed by section 2001.
  [(b) Adjustment to Credit for Certain Gifts Made Before 
1977.--The amount of the credit allowable under subsection (a) 
shall be reduced by an amount equal to 20 percent of the 
aggregate amount allowed as a specific exemption under section 
2521 (as in effect before its repeal by the Tax Reform Act of 
1976) with respect to gifts made by the decedent after 
September 8, 1976.
  [(c) Applicable Credit Amount.--For purposes of this section, 
the applicable credit amount is the amount of the tentative tax 
which would be determined under the rate schedule set forth in 
section 2001(c) if the amount with respect to which such 
tentative tax is to be computed were the applicable exclusion 
amount determined in accordance with the following table:

[In the case of estates of decedents
                                                        The applicable  
  dying, and gifts made, during:
                                                    exclusion amount is:

    1998......................................................$ 625,000 
    1999......................................................$ 650,000 
    2000 and 2001.............................................$ 675,000 
    2002 and 2003.............................................$ 700,000 
    2004 2004.................................................$ 850,000 
    2005......................................................$ 950,000 
    2006 or thereafter.......................................$1,000,000.

  [(d) Limitation Based on Amount of Tax.--The amount of the 
credit allowed by subsection (a) shall not exceed the amount of 
the tax imposed by section 2001.]

SEC. 2011. CREDIT FOR STATE DEATH TAXES.

  (a) * * *
  (b) Amount of Credit.--The credit allowed by this section 
shall not exceed the appropriate amount stated in the following 
table:

If the [adjusted] taThe maximum tax credit shall be:
  Not over $90,000..\8/10\ths of 1% of the amountby which the adjusted .
                    taxable estate exceeds $40,000.
     * * * * * * *
[For purposes of this section, the term ``adjusted taxable 
estate'' means the taxable estate reduced by $60,000.]

           *       *       *       *       *       *       *

  (f) Limitation Based on Amount of Tax.--The credit provided 
by this section shall not exceed the amount of the tax imposed 
by section 2001[, reduced by the amount of the unified credit 
provided by section 2010].

SEC. 2012. CREDIT FOR GIFT TAX.

  (a) In General.--If a tax on a gift has been paid under 
chapter 12 (sec. 2501 and following), or under corresponding 
provisions of prior laws, and thereafter on the death of the 
donor any amount in respect of such gift is required to be 
included in the value of the gross estate of the decedent for 
purposes of this chapter, then there shall be credited against 
the tax imposed by section 2001 the amount of the tax paid on a 
gift under chapter 12, or under corresponding provisions of 
prior laws, with respect to so much of the property which 
constituted the gift as is included in the gross estate, except 
that the amount of such credit shall not exceed an amount which 
bears the same ratio to the tax imposed by section 2001 (after 
deducting from such tax the credit for State death taxes 
provided by section 2011 [and the unified credit provided by 
section 2010]) as the value (at the time of the gift or at the 
time of the death, whichever is lower) of so much of the 
property which constituted the gift as is included in the gross 
estate bears to the value of the entire gross estate reduced by 
the aggregate amount of the charitable and marital deductions 
allowed under sections 2055, 2056, and 2106(a)(2).

           *       *       *       *       *       *       *


SEC. 2013. CREDIT FOR TAX ON PRIOR TRANSFERS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Limitation on credit.--
        (1) In general.--The credit provided in this section 
        shall not exceed the amount by which--
                  (A) the estate tax imposed by section 2001 or 
                section 2101 (after deducting the credits 
                provided for in sections [2010,] 2011, 2012, 
                and 2014) computed without regard to this 
                section, exceeds

           *       *       *       *       *       *       *


SEC. 2014. CREDIT FOR FOREIGN DEATH TAXES.

  (a) * * *
  (b) Limitations on Credit.--The credit provided in this 
section with respect to such taxes paid to any foreign 
country--
          (1) * * *
          (2) shall not, with respect to all such taxes, exceed 
        an amount which bears the same ratio to the tax imposed 
        by section 2001 (after deducting from such tax the 
        credits provided by sections [2010, 2011,] 2011 and 
        2012) as the value of property which is--
                  (A) * * *

           *       *       *       *       *       *       *


                        PART III--GROSS ESTATE

           *       *       *       *       *       *       *


SEC. 2031. DEFINITION OF GROSS ESTATE.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Estate Tax With Respect to Land Subject to a Qualified 
Conservation Easement.--
          (1) * * *
          (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).

           *       *       *       *       *       *       *

          (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--
                                  (I) in or within [25] 50 
                                miles of an area which, on the 
                                date of the decedent's death, 
                                is a metropolitan area (as 
                                defined by the Office of 
                                Management and Budget),
                                  (II) in or within [25] 50 
                                miles of an area which, on the 
                                date of the decedent's death, 
                                is a national park or 
                                wilderness area designated as 
                                part of the National Wilderness 
                                Preservation System (unless it 
                                is determined by the Secretary 
                                that land in or within 25 miles 
                                of such a park or wilderness 
                                area is not under significant 
                                development pressure), or
                                  (III) in or within [10] 25 
                                miles of an area which, on the 
                                date of the decedent's death, 
                                is an Urban National Forest (as 
                                designated by the Forest 
                                Service),

           *       *       *       *       *       *       *


                       PART IV--TAXABLE ESTATE

           *       *       *       *       *       *       *


SEC. 2056A. QUALIFIED DOMESTIC TRUST.

  (a) * * *
  (b) Tax Treatment of Trust.--
          (1) * * *

           *       *       *       *       *       *       *

          (12) Special rule where spouse becomes citizen.--If 
        the surviving spouse of the decedent becomes a citizen 
        of the United States and if--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) such spouse elects--
                          (i) * * *
                          [(ii) to treat any reduction in the 
                        tax imposed by paragraph (1)(A) by 
                        reason of the credit allowable under 
                        section 2010 with respect to the 
                        decedent as a credit allowable to such 
                        surviving spouse under section 2505 for 
                        purposes of determining the amount of 
                        the credit allowable under section 2505 
                        with respect to taxable gifts made by 
                        the surviving spouse during the year in 
                        which the spouse becomes a citizen or 
                        any subsequent year, paragraph (1)(A) 
                        shall not apply to any distributions 
                        after such spouse becomes such a 
                        citizen (and paragraph (1)(B) shall not 
                        apply).]
                          (ii) to treat any reduction in the 
                        tax imposed by paragraph (1)(A) by 
                        reason of the credit allowable under 
                        section 2010 (as in effect on the day 
                        before the date of the enactment of the 
                        Death Tax Elimination Act of 2000) or 
                        the exemption amount allowable under 
                        section 2001(b) with respect to the 
                        decedent as a credit under section 2505 
                        (as so in effect) or exemption under 
                        section 2521 (as the case may be) 
                        allowable to such surviving spouse for 
                        purposes of determining the amount of 
                        the exemption allowable under section 
                        2521 with respect to taxable gifts made 
                        by the surviving spouse during the year 
                        in which the spouse becomes a citizen 
                        or any subsequent year,

           *       *       *       *       *       *       *


SEC. 2057. FAMILY-OWNED BUSINESS INTERESTS.

  (a) General Rule.--
          (1) * * *
          [(2) Maximum deduction.--The deduction allowed by 
        this section shall not exceed $675,000.
          [(3) Coordination with unified credit.--
                  [(A) In general.--Except as provided in 
                subparagraph (B), if this section applies to an 
                estate, the applicable exclusion amount under 
                section 2010 shall be $625,000.
                  [(B) Increase in unified credit if deduction 
                is less than $675,000.--If the deduction 
                allowed by this section is less than $675,000, 
                the amount of the applicable exclusion amount 
                under section 2010 shall be increased (but not 
                above the amount which would apply to the 
                estate without regard to this section) by the 
                excess of $675,000 over the amount of the 
                deduction allowed.]
          (2) Maximum deduction.--The deduction allowed by this 
        section shall not exceed the excess of $1,300,000 over 
        the exemption amount (as defined in section 
        2001(b)(3)).

           *       *       *       *       *       *       *


          Subchapter B--Estates of Nonresidents Not Citizens

           *       *       *       *       *       *       *


SEC. 2101. TAX IMPOSED.

  (a) * * *
  [(b) Computation of Tax.--The tax imposed by this section 
shall be the amount equal to the excess (if any) of--
          [(1) a tentative tax computed under section 2001(c) 
        on the sum of--
                  [(A) the amount of the taxable estate, and
                  [(B) the amount of the adjusted taxable 
                gifts, over
          [(2) a tentative tax computed under section 2001(c) 
        on the amount of the adjusted taxable gifts.
For purposes of the preceding sentence, there shall be 
appropriate adjustments in the application of section 
2001(c)(2) to reflect the difference between the amount of the 
credit provided under section 2102(c) and the amount of the 
credit provided under section 2010.]
  (b) Computation of Tax.--
          (1) In general.--The tax imposed by this section 
        shall be the amount equal to the excess (if any) of--
                  (A) the tentative tax determined under 
                paragraph (2), over
                  (B) a tentative tax computed under section 
                2001(c) on the amount of the adjusted taxable 
                gifts.
          (2) Tentative tax.--For purposes of paragraph (1), 
        the tentative tax determined under this paragraph is a 
        tax computed under section 2001(c) on the excess of--
                  (A) the sum of--
                          (i) the amount of the taxable estate, 
                        and
                          (ii) the amount of the adjusted 
                        taxable gifts, over
                  (B) the exemption amount for the calendar 
                year in which the decedent died.
          (3) Exemption amount.--
                  (A) In general.--The term ``exemption 
                amount'' means $60,000.
                  (B) Residents of possessions of the united 
                states.--In the case of a decedent who is 
                considered to be a nonresident not a citizen of 
                the United States under section 2209, the 
                exemption amount under this paragraph shall be 
                the greater of--
                          (i) $60,000, or
                          (ii) that proportion of $175,000 
                        which the value of that part of the 
                        decedent's gross estate which at the 
                        time of his death is situated in the 
                        United States bears to the value of his 
                        entire gross estate wherever situated.
                  (C) Special rules.--
                          (i) Coordination with treaties.--To 
                        the extent required under any treaty 
                        obligation of the United States, the 
                        exemption amount allowed under this 
                        paragraph shall be equal to the amount 
                        which bears the same ratio to the 
                        exemption amount under section 
                        2001(b)(3) (for the calendar year in 
                        which the decedent died) as the value 
                        of the part of the decedent's gross 
                        estate which at the time of his death 
                        is situated in the United States bears 
                        to the value of his entire gross estate 
                        wherever situated. For purposes of the 
                        preceding sentence, property shall not 
                        be treated as situated in the United 
                        States if such property is exempt from 
                        the tax imposed by this subchapter 
                        under any treaty obligation of the 
                        United States.
                          (ii) Coordination with gift tax 
                        exemption and unified credit.--If an 
                        exemption has been allowed under 
                        section 2521 (or a credit has been 
                        allowed under section 2505 as in effect 
                        on the day before the date of the 
                        enactment of the Death Tax Elimination 
                        Act of 2000) with respect to any gift 
                        made by the decedent, each dollar 
                        amount contained in subparagraph (A) or 
                        (B) or the exemption amount applicable 
                        under clause (i) of this subparagraph 
                        (whichever applies) shall be reduced by 
                        the exemption so allowed under 2521 
                        (or, in the case of such a credit, by 
                        the amount of the gift for which the 
                        credit was so allowed).

           *       *       *       *       *       *       *


SEC. 2102. CREDITS AGAINST TAX.

  (a) * * *

           *       *       *       *       *       *       *

  [(c) Unified Credit.--
          [(1) In general.--A credit of $13,000 shall be 
        allowed against the tax imposed by section 2101.
          [(2) Residents of possessions of the United States.--
        In the case of a decedent who is considered to be a 
        ``nonresident not a citizen of the United States'' 
        under section 2209, the credit under this subsection 
        shall be the greater of--
                  [(A) $13,000, or
                  [(B) that proportion of $46,800 which the 
                value of that part of the decedent's gross 
                estate which at the time of his death is 
                situated in the United States bears to the 
                value of his entire gross estate wherever 
                situated.
          [(3) Special rules.--
                  [(A) Coordination with treaties.--To the 
                extent required under any treaty obligation of 
                the United States, the credit allowed under 
                this subsection shall be equal to the amount 
                which bears the same ratio to the applicable 
                credit amount in effect under section 2010(c) 
                for the calendar year which includes the date 
                of death as the value of the part of the 
                decedent's gross estate which at the time of 
                his death is situated in the United States 
                bears to the value of his entire gross estate 
                wherever situated. For purposes of the 
                preceding sentence, property shall not be 
                treated as situated in the United States if 
                such property is exempt from the tax imposed by 
                this subchapter under any treaty obligation of 
                the United States.
                  [(B) Coordination with gift tax unified 
                credit.--If a credit has been allowed under 
                section 2505 with respect to any gift made by 
                the decedent, each dollar amount contained in 
                paragraph (1) or (2) or subparagraph (A) of 
                this paragraph (whichever applies) shall be 
                reduced by the amount so allowed.
          [(4) Limitation based on amount of tax.--The credit 
        allowed under this subsection shall not exceed the 
        amount of the tax imposed by section 2101.
          [(5) Application of other credits.--For purposes of 
        subsection (a), sections 2011 to 2013, inclusive, shall 
        be applied as if the credit allowed under this 
        subsection were allowed under section 2010.]

           *       *       *       *       *       *       *


SEC. 2107. EXPATRIATION TO AVOID TAX.

  (a) Treatment of Expatriates.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Limitation on exemption amount.--Subparagraphs 
        (B) and (C) of section 2101(b)(3) shall not apply in 
        applying section 2101 for purposes of this section.

           *       *       *       *       *       *       *

  [(c) Credits.--
        [  (1) Unified credit.--
                  [(A) In general.--A credit of $13,000 shall 
                be allowed against the tax imposed by 
                subsection (a).
                  [(B) Limitation based on amount of tax.--The 
                credit allowed under this paragraph shall not 
                exceed the amount of the tax imposed by 
                subsection (a).]
          [(2)] (1) Credit for foreign death taxes.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(3)] (2) Other credits.--The tax imposed by 
        subsection (a) shall be credited with the amounts 
        determined in accordance with subsections (a) and (b) 
        of section 2102. [For purposes of subsection (a) of 
        section 2102, sections 2011 to 2013, inclusive, shall 
        be applied as if the credit allowed under paragraph (1) 
        were allowed under section 2010.]

           *       *       *       *       *       *       *


                         CHAPTER 12--GIFT TAX

           *       *       *       *       *       *       *


              Subchapter A--Determination of Tax Liability

        Sec. 2501. Imposition of tax.
     * * * * * * *
        [Sec. 2505. Unified credit against gift tax.]

           *       *       *       *       *       *       *


SEC. 2502. RATE OF TAX.

  [(a) Computation of Tax.--The tax imposed by section 2501 for 
each calendar year shall be an amount equal to the excess of--
          [(1) a tentative tax, computed under section 2001(c), 
        on the aggregate sum of the taxable gifts for such 
        calendar year and for each of the preceding calendar 
        periods, over
          [(2) a tentative tax, computed under such section, on 
        the aggregate sum of the taxable gifts for each of the 
        preceding calendar periods.]
  (a) Computation of Tax.--
          (1) In general.--The tax imposed by section 2501 for 
        each calendar year shall be the amount equal to the 
        excess (if any) of--
                  (A) the tentative tax determined under 
                paragraph (2), over
                  (B) the tax paid under this section for all 
                prior calendar periods.
          (2) Tentative tax.--For purposes of paragraph (1), 
        the tentative tax determined under this paragraph for a 
        calendar year is a tax computed under section 2001(c) 
        on the excess of--
                  (A) the aggregate sum of the taxable gifts 
                for such calendar year and for each of the 
                preceding calendar periods, over
                  (B) the exemption amount under section 
                2001(b)(3) for such calendar year.

           *       *       *       *       *       *       *


[SEC. 2505. UNIFIED CREDIT AGAINST GIFT TAX.

          [(a) General Rule.--In the case of a citizen or 
        resident of the United States, there shall be allowed 
        as a credit against the tax imposed by section 2501 for 
        each calendar year an amount equal to--
          [(1) The applicable credit amount in effect under 
        section 2010(c) for such calendar year, reduced by
          [(2) the sum of the amounts allowable as a credit to 
        the individual under this section for all preceding 
        calendar periods.
  [(b) Adjustment to Credit for Certain Gifts Made Before 
1977.--The amount allowable under subsection (a) shall be 
reduced by an amount equal to 20 percent of the aggregate 
amount allowed as a specific exemption under section 2521 (as 
in effect before its repeal by the Tax Reform Act of 1976) with 
respect to gifts made by the individual after September 8, 
1976.
  [(c) Limitation Based on Amount of Tax.--The amount of the 
credit allowed under subsection (a) for any calendar year shall 
not exceed the amount of the tax imposed by section 2501 for 
such calendar year.]

           *       *       *       *       *       *       *


       CHAPTER 13--TAX ON CERTAIN GENERATION-SKIPPING TRANSFERS

           *       *       *       *       *       *       *


                      Subchapter D--GST Exemption

           *       *       *       *       *       *       *


SEC. 2632. SPECIAL RULES FOR ALLOCATION OF GST EXEMPTION.

  (a) * * *
  (b) Deemed Allocation to Certain Lifetime Direct Skips.--
          (1) * * *
          (2) Unused portio.--For purposes of paragraph (1), 
        the unused portion of an individual's GST exemption is 
        that portion of such exemption which has not previously 
        been allocated by such individual (or treated as 
        allocated under paragraph (1) [with respect to a prior 
        direct skip] or subsection (c)(1)).

           *       *       *       *       *       *       *

  (c) Deemed Allocation to Certain Lifetime Transfers to GST 
Trusts.--
          (1) In general.--If any individual makes an indirect 
        skip during such individual's lifetime, any unused 
        portion of such individual's GST exemption shall be 
        allocated to the property transferred to the extent 
        necessary to make the inclusion ratio for such property 
        zero. If the amount of the indirect skip exceeds such 
        unused portion, the entire unused portion shall be 
        allocated to the property transferred.
          (2) Unused portion.--For purposes of paragraph (1), 
        the unused portion of an individual's GST exemption is 
        that portion of such exemption which has not previously 
        been--
                  (A) allocated by such individual,
                  (B) treated as allocated under subsection (b) 
                with respect to a direct skip occurring during 
                or before the calendar year in which the 
                indirect skip is made, or
                  (C) treated as allocated under paragraph (1) 
                with respect to a prior indirect skip.
          (3) Definitions.--
                  (A) Indirect skip.--For purposes of this 
                subsection, the term ``indirect skip'' means 
                any transfer of property (other than a direct 
                skip) subject to the tax imposed by chapter 12 
                made to a GST trust.
                  (B) GST trust.--The term ``GST trust'' means 
                a trust that could have a generation-skipping 
                transfer with respect to the transferor 
                unless--
                          (i) the trust instrument provides 
                        that more than 25 percent of the trust 
                        corpus must be distributed to or may be 
                        withdrawn by 1 or more individuals who 
                        are non-skip persons--
                                  (I) before the date that the 
                                individual attains age 46,
                                  (II) on or before one or more 
                                dates specified in the trust 
                                instrument that will occur 
                                before the date that such 
                                individual attains age 46, or
                                  (III) upon the occurrence of 
                                an event that, in accordance 
                                with regulations prescribed by 
                                the Secretary, may reasonably 
                                be expected to occur before the 
                                date that such individual 
                                attains age 46;
                          (ii) the trust instrument provides 
                        that more than 25 percent of the trust 
                        corpus must be distributed to or may be 
                        withdrawn by one or more individuals 
                        who are non-skip persons and who are 
                        living on the date of death of another 
                        person identified in the instrument (by 
                        name or by class) who is more than 10 
                        years older than such individuals;
                          (iii) the trust instrument provides 
                        that, if one or more individuals who 
                        are non-skip persons die on or before a 
                        date or event described in clause (i) 
                        or (ii), more than 25 percent of the 
                        trust corpus either must be distributed 
                        to the estate or estates of one or more 
                        of such individuals or is subject to a 
                        general power of appointment 
                        exercisable by one or more of such 
                        individuals;
                          (iv) the trust is a trust any portion 
                        of which would be included in the gross 
                        estate of a non-skip person (other than 
                        the transferor) if such person died 
                        immediately after the transfer;
                          (v) the trust is a charitable lead 
                        annuity trust (within the meaning of 
                        section 2642(e)(3)(A)) or a charitable 
                        remainder annuity trust or a charitable 
                        remainder unitrust (within the meaning 
                        of section 664(d)); or
                          (vi) the trust is a trust with 
                        respect to which a deduction was 
                        allowed under section 2522 for the 
                        amount of an interest in the form of 
                        the right to receive annual payments of 
                        a fixed percentage of the net fair 
                        market value of the trust property 
                        (determined yearly) and which is 
                        required to pay principal to a non-skip 
                        person if such person is alive when the 
                        yearly payments for which the deduction 
                        was allowed terminate.
                For purposes of this subparagraph, the value of 
                transferred property shall not be considered to 
                be includible in the gross estate of a non-skip 
                person or subject to a right of withdrawal by 
                reason of such person holding a right to 
                withdraw so much of such property as does not 
                exceed the amount referred to in section 
                2503(b) with respect to any transferor, and it 
                shall be assumed that powers of appointment 
                held by non-skip persons will not be exercised.
          (4) Automatic allocations to certain gst trusts.--For 
        purposes of this subsection, an indirect skip to which 
        section 2642(f ) applies shall be deemed to have been 
        made only at the close of the estate tax inclusion 
        period. The fair market value of such transfer shall be 
        the fair market value of the trust property at the 
        close of the estate tax inclusion period.
          (5) Applicability and effect.--
                  (A) In general.--An individual--
                          (i) may elect to have this subsection 
                        not apply to--
                                  (I) an indirect skip, or
                                  (II) any or all transfers 
                                made by such individual to a 
                                particular trust, and
                          (ii) may elect to treat any trust as 
                        a GST trust for purposes of this 
                        subsection with respect to any or all 
                        transfers made by such individual to 
                        such trust.
                  (B) Elections.--
                          (i) Elections with respect to 
                        indirect skips.--An election under 
                        subparagraph (A)(i)(I) shall be deemed 
                        to be timely if filed on a timely filed 
                        gift tax return for the calendar year 
                        in which the transfer was made or 
                        deemed to have been made pursuant to 
                        paragraph (4) or on such later date or 
                        dates as may be prescribed by the 
                        Secretary.
                          (ii) Other elections.--An election 
                        under clause (i)(II) or (ii) of 
                        subparagraph (A) may be made on a 
                        timely filed gift tax return for the 
                        calendar year for which the election is 
                        to become effective.
  (d) Retroactive Allocations.--
          (1) In general.--If--
                  (A) a non-skip person has an interest or a 
                future interest in a trust to which any 
                transfer has been made,
                  (B) such person--
                          (i) is a lineal descendant of a 
                        grandparent of the transferor or of a 
                        grandparent of the transferor's spouse 
                        or former spouse, and
                          (ii) is assigned to a generation 
                        below the generation assignment of the 
                        transferor, and
                  (C) such person predeceases the transferor,
        then the transferor may make an allocation of any of 
        such transferor's unused GST exemption to any previous 
        transfer or transfers to the trust on a chronological 
        basis.
          (2) Special rules.--If the allocation under paragraph 
        (1) by the transferor is made on a gift tax return 
        filed on or before the date prescribed by section 
        6075(b) for gifts made within the calendar year within 
        which the non-skip person's death occurred--
                  (A) the value of such transfer or transfers 
                for purposes of section 2642(a) shall be 
                determined as if such allocation had been made 
                on a timely filed gift tax return for each 
                calendar year within which each transfer was 
                made,
                  (B) such allocation shall be effective 
                immediately before such death, and
                  (C) the amount of the transferor's unused GST 
                exemption available to be allocated shall be 
                determined immediately before such death.
          (3) Future interest.--For purposes of this 
        subsection, a person has a future interest in a trust 
        if the trust may permit income or corpus to be paid to 
        such person on a date or dates in the future.
  [(c)] (e) Allocation of Unused GST Exemption.--
          (1) In general.--Any portion of an individual's GST 
        exemption which has not been allocated within the time 
        prescribed by subsection (a) shall be deemed to be 
        allocated as follows--
                  (A) * * *

           *       *       *       *       *       *       *


             Subchapter E--Applicable Rate; Inclusion Ratio

           *       *       *       *       *       *       *


SEC. 2642. INCLUSION RATIO.

  (a) Inclusion Ratio Defined.--For purposes of this chapter--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Severing of trusts.--
                  (A) In general.--If a trust is severed in a 
                qualified severance, the trusts resulting from 
                such severance shall be treated as separate 
                trusts thereafter for purposes of this chapter.
                  (B) Qualified severance.--For purposes of 
                subparagraph (A)--
                          (i) In general.--The term ``qualified 
                        severance'' means the division of a 
                        single trust and the creation (by any 
                        means available under the governing 
                        instrument or under local law) of two 
                        or more trusts if--
                                  (I) the single trust was 
                                divided on a fractional basis, 
                                and
                                  (II) the terms of the new 
                                trusts, in the aggregate, 
                                provide for the same succession 
                                of interests of beneficiaries 
                                as are provided in the original 
                                trust.
                          (ii) Trusts with inclusion ratio 
                        greater than zero.--If a trust has an 
                        inclusion ratio of greater than zero 
                        and less than 1, a severance is a 
                        qualified severance only if the single 
                        trust is divided into two trusts, one 
                        of which receives a fractional share of 
                        the total value of all trust assets 
                        equal to the applicable fraction of the 
                        single trust immediately before the 
                        severance. In such case, the trust 
                        receiving such fractional share shall 
                        have an inclusion ratio of zero and the 
                        other trust shall have an inclusion 
                        ratio of 1.
                          (iii) Regulations.--The term 
                        ``qualified severance'' includes any 
                        other severance permitted under 
                        regulations prescribed by the 
                        Secretary.
                  (C) Timing and manner of severances.--A 
                severance pursuant to this paragraph may be 
                made at any time. The Secretary shall prescribe 
                by forms or regulations the manner in which the 
                qualified severance shall be reported to the 
                Secretary.
  (b) Valuation Rules, Etc.--Except as provided in subsection 
(f)--
          [(1) Gifts for which gift tax return filed or deemed 
        allocation made.--If the allocation of the GST 
        exemption to any property is made on a gift tax return 
        filed on or before the date prescribed by section 
        6075(b) or is deemed to be made under section 
        2632(b)(1)--
                  [(A) the value of such property for purposes 
                of subsection (a) shall be its value for 
                purposes of chapter 12, and
                  [(B) such allocation shall be effective on 
                and after the date of such transfer.]
          (1) Gifts for which gift tax return filed or deemed 
        allocation made.--If the allocation of the GST 
        exemption to any transfers of property is made on a 
        gift tax return filed on or before the date prescribed 
        by section 6075(b) for such transfer or is deemed to be 
        made under section 2632 (b)(1) or (c)(1)--
                  (A) the value of such property for purposes 
                of subsection (a) shall be its value as finally 
                determined for purposes of chapter 12 (within 
                the meaning of section 2001(f )(2)), or, in the 
                case of an allocation deemed to have been made 
                at the close of an estate tax inclusion period, 
                its value at the time of the close of the 
                estate tax inclusion period, and
                  (B) such allocation shall be effective on and 
                after the date of such transfer, or, in the 
                case of an allocation deemed to have been made 
                at the close of an estate tax inclusion period, 
                on and after the close of such estate tax 
                inclusion period.
          (2) Transfers and allocations at or after death.--
                  [(A) Transfers at death.--If property is 
                transferred as a result of the death of the 
                transferor, the value of such property for 
                purposes of subsection (a) shall be its value 
                for purposes of chapter 11; except that, if the 
                requirements prescribed by the Secretary 
                respecting allocation of post-death changes in 
                value are not met, the value of such property 
                shall be determined as of the time of the 
                distribution concerned.]
                  (A) Transfers at death.--If property is 
                transferred as a result of the death of the 
                transferor, the value of such property for 
                purposes of subsection (a) shall be its value 
                as finally determined for purposes of chapter 
                11; except that, if the requirements prescribed 
                by the Secretary respecting allocation of post-
                death changes in value are not met, the value 
                of such property shall be determined as of the 
                time of the distribution concerned.

           *       *       *       *       *       *       *

  (g) Relief Provisions.--
          (1) Relief from late elections.--
                  (A) In general.--The Secretary shall by 
                regulation prescribe such circumstances and 
                procedures under which extensions of time will 
                be granted to make--
                          (i) an allocation of GST exemption 
                        described in paragraph (1) or (2) of 
                        subsection (b), and
                          (ii) an election under subsection 
                        (b)(3) or (c)(5) of section 2632.
                Such regulations shall include procedures for 
                requesting comparable relief with respect to 
                transfers made before the date of the enactment 
                of this paragraph.
                  (B) Basis for determinations.--In determining 
                whether to grant relief under this paragraph, 
                the Secretary shall take into account all 
                relevant circumstances, including evidence of 
                intent contained in the trust instrument or 
                instrument of transfer and such other factors 
                as the Secretary deems relevant. For purposes 
                of determining whether to grant relief under 
                this paragraph, the time for making the 
                allocation (or election) shall be treated as if 
                not expressly prescribed by statute.
          (2) Substantial compliance.--An allocation of GST 
        exemption under section 2632 that demonstrates an 
        intent to have the lowest possible inclusion ratio with 
        respect to a transfer or a trust shall be deemed to be 
        an allocation of so much of the transferor's unused GST 
        exemption as produces the lowest possible inclusion 
        ratio. In determining whether there has been 
        substantial compliance, all relevant circumstances 
        shall be taken into account, including evidence of 
        intent contained in the trust instrument or instrument 
        of transfer and such other factors as the Secretary 
        deems relevant.

           *       *       *       *       *       *       *


               Subtitle F--Procedure and Administration

           *       *       *       *       *       *       *


                 CHAPTER 61--INFORMATION AND RETURNS

           *       *       *       *       *       *       *


                   Subchapter A--Returns and Records

           *       *       *       *       *       *       *


                  PART II--TAX RETURNS OR STATEMENTS

           *       *       *       *       *       *       *


                Subpart C--Estate and Gift Tax Returns

           *       *       *       *       *       *       *


SEC. 6018. ESTATE TAX RETURNS.

  (a) Returns by Executor.--
          (1) Citizens or residents.--In all cases where the 
        gross estate at the death of a citizen or resident 
        exceeds [the applicable exclusion amount in effect 
        under section 2010(c)] the exemption amount under 
        section 2001(b)(3) for the calendar year which includes 
        the date of death, the executor shall make a return 
        with respect to the estate tax imposed by subtitle B.

           *       *       *       *       *       *       *


                         CHAPTER 67--INTEREST

           *       *       *       *       *       *       *


               Subchapter A--Interest on Underpayments

           *       *       *       *       *       *       *


SEC. 6601. INTEREST ON UNDERPAYMENT, NONPAYMENT, OR EXTENSIONS OF TIME 
                    FOR PAYMENT, OF TAX.

  (a) * * *
  (j) 2-percent Rate on Certain Portion of Estate Tax Extended 
Under Section 6166.--
          (1) * * *
          (2) 2-percent portion.--For purposes of this 
        subsection, the term ``2-percent portion'' means the 
        lesser of--
                  [(A)(i) the amount of the tentative tax which 
                would be determined under the rate schedule set 
                forth in section 2001(c) if the amount with 
                respect to which such tentative tax is to be 
                computed were the sum of $1,000,000 and the 
                applicable exclusion amount in effect under 
                section 2010(c), reduced by
                  [(ii) the applicable credit amount in effect 
                under section 2010(c), or]
                  (A) the amount of the tentative tax which 
                would be determined under the rate schedule set 
                forth in section 2001(c) if the amount with 
                respect to which such tentative tax is to be 
                computed were $1,000,000, or

           *       *       *       *       *       *       *


                        CHAPTER 79--DEFINITIONS

           *       *       *       *       *       *       *


SEC. 7701. DEFINITIONS.

  (a) When used in this title, where not otherwise distinctly 
expressed or manifestly incompatible with the intent thereof--
          (1)  * * *

           *       *       *       *       *       *       *

          (47) Executor.--The term ``executor'' means the 
        executor or administrator of the decedent, or, if there 
        is no executor or administrator appointed, qualified, 
        and acting within the United States, then any person in 
        actual or constructive possession of any property of 
        the decedent.

           *       *       *       *       *       *       *


          THIS AMENDMENT IS EFFECTIVE AFTER DECEMBER 31, 2009

                   [Subtitle B--Estate and Gift Taxes

        [Chapter 11. Estate tax.
        [Chapter 12. Gift tax.
        [Chapter 13. Tax on certain generation-skipping transfers.
        [Chapter 14. Special valuation rules.


                         [CHAPTER 11--ESTATE TAX


        [Subchapter A. Estates of citizens or residents.
        [Subchapter B. Estates of nonresidents not citizens.
        [Subchapter C. Miscellaneous.


             [Subchapter A--Estates of citizens or residents


        [Part I. Tax imposed.
        [Part II. Credits against tax.
        [Part III. Gross estate.
        [Part IV. Taxable estate.

                          [PART I--TAX IMPOSED

        [Sec. 2001. Imposition and rate of tax.
        [Sec. 2002. Liability for payment.

[SEC. 2001. IMPOSITION AND RATE OF TAX.

  [(a) Imposition.--A tax is hereby imposed on the transfer of 
the taxable estate of every decedent who is a citizen or 
resident of the United States.
  [(b) Computation of Tax.--The tax imposed by this section 
shall be the amount equal to the excess (if any) of--
          [(1) a tentative tax computed under subsection (c) on 
        the sum of--
                  [(A) the amount of the taxable estate, and
                  [(B) the amount of the adjusted taxable 
                gifts, over
          [(2) the aggregate amount of tax which would have 
        been payable under chapter 12 with respect to gifts 
        made by the decedent after December 31, 1976, if the 
        provisions of subsection (c) (as in effect at the 
        decedent's death) had been applicable at the time of 
        such gifts.
For purposes of paragraph (1)(B), the term ``adjusted taxable 
gifts'' means the total amount of the taxable gifts (within the 
meaning of section 2503) made by the decedent after December 
31, 1976, other than gifts which are includible in the gross 
estate of the decedent.
  [(c) Rate Schedule.--
          [(1) In general.--

[If the amount with   spect
  to which the tenta  ve
  tax to be computedThe tentative tax is:

    Not over $10,00018 percent of such amount...........................
    Over $10,000 but$1,800, plus 20 percent ofthe excess of such amount 
                    over $10,000.
    Over $20,000 but$3,800, plus 22 percent of the excess of such amount 
                    over $20,000.
    Over $40,000 but$8,200 plus 24 percent of the excess of such amount 
                    over $40,000.
    Over $60,000 but$13,000, plus 26 percent of the excess of such .....
                    amount over $60,000.
    Over $80,000 but$18,200, plus 28 percent ofthe excess of such amount 
                    over $80,000.
    Over $100,000 bu$23,800, plus 30 percent of the excess of such .....
                    amount over $100,000.
    Over $150,000 bu$38,800, plus 32 percent of the excess of such .....
                    amount over $150,000.
    Over $250,000 bu$70,800, plus 34 percent of the excess of such .....
                    amount over $250,000.
    Over $500,000 bu$155,800, plus 37 percent of the excess of such ....
                    amount over $500,000.
    Over $750,000 bu$248,300, plus 39 percent of the excess of such ....
                    amount over $750,000.
    Over $1,000,000 $345,800, plus 41 percent of the excess of such ....
                    amount over $1,000,000.
    Over $1,250,000 $448,300, plus 43 percent of the excess of such ....
                    amount over $1,250,000.
    Over $1,500,000 $555,800, plus 45 percent of the excess of such ....
                    amount over $1,500,000.
    Over $2,000,000 $780,800, plus 49 percent of the excess of such ....
                    amount over $2,000,000.
    Over $2,500,000 $1,025,800, plus 53% of the excess over $2,500,000..
    Over $3,000,000.$1,290,800, plus 55% of the excessover $3,000,000...

          [(2) Phaseout of graduated rates and unified 
        credit.--The tentative tax determined under paragraph 
        (1) shall be increased by an amount equal to 5 percent 
        of so much of the amount (with respect to which the 
        tentative tax is to be computed) as exceeds $10,000,000 
        but does not exceed the amount at which the average tax 
        rate under this section is 55 percent.
  [(d) Adjustment for Gift Tax Paid by Spouse.--For purposes of 
subsection (b)(2), if--
          [(1) the decedent was the donor of any gift one-half 
        of which was considered under section 2513 as made by 
        the decedent's spouse, and
          [(2) the amount of such gift is includible in the 
        gross estate of the decedent,
any tax payable by the spouse under chapter 12 on such gift (as 
determined under section 2012(d)) shall be treated as a tax 
payable with respect to a gift made by the decedent.
  [(e) Coordination of Sections 2513 and 2035.--If--
          [(1) the decedent's spouse was the donor of any gift 
        one-half of which was considered under section 2513 as 
        made by the decedent, and
          [(2) the amount of such gift is includible in the 
        gross estate of the decedent's spouse by reason of 
        section 2035,
such gift shall not be included in the adjusted taxable gifts 
of the decedent for purposes of subsection (b)(1)(B), and the 
aggregate amount determined under subsection (b)(2) shall be 
reduced by the amount (if any) determined under subsection (d) 
which was treated as a tax payable by the decedent's spouse 
with respect to such gift.
  [(f) Valuation of Gifts.--
          [(1) In general.--If the time has expired under 
        section 6501 within which a tax may be assessed under 
        chapter 12 (or under corresponding provisions of prior 
        laws) on--
                  [(A) the transfer of property by gift made 
                during a preceding calendar period (as defined 
                in section 2502(b)); or
                  [(B) an increase in taxable gifts required 
                under section 2701(d),the value thereof shall, 
                for purposes of computing the tax under this 
                chapter, be the value as finally determined for 
                purposes of chapter 12.
          [(2) Final determination.--For purposes of paragraph 
        (1), a value shall be treated as finally determined for 
        purposes of chapter 12 if--
                  [(A) the value is shown on a return under 
                such chapter and such value is not contested by 
                the Secretary before the expiration of the time 
                referred to in paragraph (1) with respect to 
                such return;
                  [(B) in a case not described in subparagraph 
                (A), the value is specified by the Secretary 
                and such value is not timely contested by the 
                taxpayer; or
                  [(C) the value is determined by a court or 
                pursuant to a settlement agreement with the 
                Secretary.
        For purposes of subparagraph (A), the value of an item 
        shall be treated as shown on a return if the item is 
        disclosed in the return, or in a statement attached to 
        the return, in a manner adequate to apprise the 
        Secretary of the nature of such item.

[SEC. 2002. LIABILITY FOR PAYMENT.

  [The tax imposed by this chapter shall be paid by the 
executor.

                     [PART II--CREDITS AGAINST TAX

        [Sec. 2010. Unified credit against estate tax.
        [Sec. 2011. Credit for State death taxes.
        [Sec. 2012. Credit for gift tax.
        [Sec. 2013. Credit for tax on prior transfers.
        [Sec. 2014. Credit for foreign death taxes.
        [Sec. 2015. Credit for death taxes on remainders.
        [Sec. 2016. Recovery of taxes claimed as credit.

[SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.

  [(a) General Rule.--A credit of the applicable credit amout 
shall be allowed to the estate of every decedent against the 
tax imposed by section 2001.
  [(b) Adjustment to Credit for Certain Gifts Made Before 
1977.--The amount of the credit allowable under subsection (a) 
shall be reduced by an amount equal to 20 percent of the 
aggregate amount allowed as a specific exemption under section 
2521 (as in effect before its repeal by the Tax Reform Act of 
1976) with respect to gifts made by the decedent after 
September 8, 1976.
  [(c) Applicable Credit Amount.--For purposes of this section, 
the applicable credit amount is the amount of the tentative tax 
which would be determined under the rate schedule set forth in 
section 2001(c) if the amount with respect to which such 
tentative tax is to be computed were the applicable exclusion 
amount determined in accordance with the following table:

[In the case of estates of decedents
                                                        The applicable  
  dying, and gifts made, during:
                                                    exclusion amount is:

    1998......................................................$ 625,000 
    1999......................................................$ 650,000 
    2000 and 2001.............................................$ 675,000 
    2002 and 2003.............................................$ 700,000 
    2004 2004.................................................$ 850,000 
    2005......................................................$ 950,000 
    2006 or thereafter.......................................$1,000,000.

  [(d) Limitation based on amount of tax
  [The amount of the credit allowed by subsection (a) shall not 
exceed the amount of the tax imposed by section 2001.

[SEC. 2011. CREDIT FOR STATE DEATH TAXES

  [(a) In General.--The tax imposed by section 2001 shall be 
credited with the amount of any estate, inheritance, legacy, or 
succession taxes actually paid to any State or the District of 
Columbia, in respect of any property included in the gross 
estate (not including any such taxes paid with respect to the 
estate of a person other than the decedent).
  [(b) Amount of Credit.--The credit allowed by this section 
shall not exceed the appropriate amount stated in the following 
table:
  [If the adjusted taxable The maximum tax creditestate is: 
shall be:

[If the adjusted taxThe maximum tax credit shall be:
  Not over $90,000..\8/10\ths of 1% of the amountby which the adjusted .
                    taxable estate exceeds $40,000.
  Over $90,000 but n $400 plus 1.6% of the excess over $90,000..........
  Over $140,000 but $1,200 plus 2.4% of theexcess over $140,000.........
  Over $240,000 but $3,600 plus 3.2% of the excess over $240,000........
  Over $440,000 but $10,000 plus 4% of theexcess over $440,000..........
  Over $640,000 but $18,000 plus 4.8% of theexcess over $640,000........
  Over $840,000 but $27,600 plus 5.6% of theexcess over $840,000........
  Over $1,040,000 bu$38,800 plus 6.4% of the excess over $1,040,000.....
  Over $1,540,000 bu$70,800 plus 7.2% of the excess over $1,540,000.....
  Over $2,040,000 bu$106,800 plus 8% of the excess over $2,040,000......
  Over $2,540,000 bu$146,800 plus 8.8% of the excess over $2,540,000....
  Over $3,040,000 bu$190,800 plus 9.6% of the excess over $3,040,000....
  Over $3,540,000 bu$238,800 plus 10.4% of the excess over $3,540,000...
  Over $4,040,000 bu$290,800 plus 11.2% of the excess over $4,040,000...
  Over $5,040,000 bu$402,800 plus 12% of the excess over $5,040,000.....
  Over $6,040,000 bu$522,800 plus 12.8% of the excess over $6,040,000...
  Over $7,040,000 bu$650,800 plus 13.6% of the excess over $7,040,000...
  Over $8,040,000 bu$786,800 plus 14.4% of the excess over $8,040,000...
  Over $9,040,000 bu$930,800 plus 15.2% of the excess over $9,040,000...
  Over $10,040,000..$1,082,800 plus 16% of the excess over $10,040,000..

For purposes of this section, the term ``adjusted taxable 
estate'' means the taxable estate reduced by $60,000.
  [(c) Period of Limitations on Credit.--The credit allowed by 
this section shall include only such taxes as were actually 
paid and credit therefor claimed within 4 years after the 
filing of the return required by section 6018, except that--
          [(1) If a petition for redetermination of a 
        deficiency has been filed with the Tax Court within the 
        time prescribed in section 6213(a), then within such 4-
        year period or before the expiration of 60 days after 
        the decision of the Tax Court becomes final.
          [(2) If, under section 6161 or 6166, an extension of 
        time has been granted for payment of the tax shown on 
        the return, or of a deficiency, then within such 4-year 
        period or before the date of the expiration of the 
        period of the extension.
          [(3) If a claim for refund or credit of an 
        overpayment of tax imposed by this chapter has been 
        filed within the time prescribed in section 6511, then 
        within such 4-year period or before the expiration of 
        60 days from the date of mailing by certified mail or 
        registered mail by the Secretary to the taxpayer of a 
        notice of the disallowance of any part of such claim, 
        or before the expiration of 60 days after a decision by 
        any court of competent jurisdiction becomes final with 
        respect to a timely suit instituted upon such claim, 
        whichever is later.
Refund based on the credit may (despite the provisions of 
sections 6511 and 6512) be made if claim therefor is filed 
within the period above provided. Any such refund shall be made 
without interest.
  [(d) Basic Estate Tax.--The basic estate tax and the estate 
tax imposed by the Revenue Act of 1926 shall be 125 percent of 
the amount determined to be the maximum credit provided by 
subsection (b). The additional estate tax shall be the 
difference between the tax imposed by section 2001 or 2101 and 
the basic estate tax.
  [(e) Limitation in Cases Involving Deduction Under Section 
2053(d).--In any case where a deduction is allowed under 
section 2053(d) for an estate, succession, legacy, or 
inheritance tax imposed by a State or the District of Columbia 
upon a transfer for public, charitable, or religious uses 
described in section 2055 or 2106(a)(2), the allowance of the 
credit under this section shall be subject to the following 
conditions and limitations:
          [(1) The taxes described in subsection (a) shall not 
        include any estate, succession, legacy, or inheritance 
        tax for which such deduction is allowed under section 
        2053(d).
          [(2) The credit shall not exceed the lesser of--
                  [(A) the amount stated in subsection (b) on 
                an adjusted taxable estate determined by 
                allowing such deduction authorized by section 
                2053(d), or
                  [(B) that proportion of the amount stated in 
                subsection (b) on an adjusted taxable estate 
                determined without regard to such deduction 
                authorized by section 2053(d) as (i) the amount 
                of the taxes described in subsection (a), as 
                limited by the provisions of paragraph (1) of 
                this subsection, bears to (ii) the amount of 
                the taxes described in subsection (a) before 
                applying the limitation contained in paragraph 
                (1) of this subsection.
          [(3) If the amount determined under subparagraph (B) 
        of paragraph (2) is less than the amount determined 
        under subparagraph (A) of that paragraph, then for 
        purposes of subsection (d) such lesser amount shall be 
        the maximum credit provided by subsection (b).
  [(f) Limitation Based on Amount of Tax.--The credit provided 
by this section shall not exceed the amount of the tax imposed 
by section 2001, reduced by the amount of the unified credit 
provided by section 2010.

[SEC. 2012. CREDIT FOR GIFT TAX.

  [(a) In General.--If a tax on a gift has been paid under 
chapter 12 (sec. 2501 and following), or under corresponding 
provisions of prior laws, and thereafter on the death of the 
donor any amount in respect of such gift is required to be 
included in the value of the gross estate of the decedent for 
purposes of this chapter, then there shall be credited against 
the tax imposed by section 2001 the amount of the tax paid on a 
gift under chapter 12, or under corresponding provisions of 
prior laws, with respect to so much of the property which 
constituted the gift as is included in the gross estate, except 
that the amount of such credit shall not exceed an amount which 
bears the same ratio to the tax imposed by section 2001 (after 
deducting from such tax the credit for State death taxes 
provided by section 2011 and the unified credit provided by 
section 2010) as the value (at the time of the gift or at the 
time of the death, whichever is lower) of so much of the 
property which constituted the gift as is included in the gross 
estate bears to the value of the entire gross estate reduced by 
the aggregate amount of the charitable and marital deductions 
allowed under sections 2055, 2056, and 2106(a)(2).
  [(b) Valuation Reductions.--In applying, with respect to any 
gift, the ratio stated in subsection (a), the value at the time 
of the gift or at the time of the death, referred to in such 
ratio, shall be reduced--
          [(1) by such amount as will properly reflect the 
        amount of such gift which was excluded in determining 
        (for purposes of section 2503(a)), or of corresponding 
        provisions of prior laws, the total amount of gifts 
        made during the calendar quarter (or calendar year if 
        the gift was made before January 1, 1971) in which the 
        gift was made;
          [(2) if a deduction with respect to such gift is 
        allowed under section 2056(a) (relating to marital 
        deduction), then by the amount of such value, reduced 
        as provided in paragraph (1); and
          [(3) if a deduction with respect to such gift is 
        allowed under sections 2055 or 2106(a)(2) (relating to 
        charitable deduction), then by the amount of such 
        value, reduced as provided in paragraph (1) of this 
        subsection.
  [(c) Where Gift Considered Made One-Half by Spouse.--Where 
the decedent was the donor of the gift but, under the 
provisions of section 2513, or corresponding provisions of 
prior laws, the gift was considered as made one-half by his 
spouse--
          [(1) the term ``the amount of the tax paid on a gift 
        under chapter 12'', as used in subsection (a), includes 
        the amounts paid with respect to each half of such 
        gift, the amount paid with respect to each being 
        computed in the manner provided in subsection (d); and
          [(2) in applying, with respect to such gift, the 
        ratio stated in subsection (a), the value at the time 
        of the gift or at the time of the death, referred to in 
        such ratio, includes such value with respect to each 
        half of such gift, each such value being reduced as 
        provided in paragraph (1) of subsection (b).
  [(d) Computation of Amount of Gift Tax Paid.--
          [(1) Amount of Tax.--For purposes of subsection (a), 
        the amount of tax paid on a gift under chapter 12, or 
        under corresponding provisions of prior laws, with 
        respect to any gift shall be an amount which bears the 
        same ratio to the total tax paid for the calendar 
        quarter (or calendar year if the gift was made before 
        January 1, 1971) in which the gift was made as the 
        amount of such gift bears to the total amount of 
        taxable gifts (computed without deduction of the 
        specific exemption) for such quarter or year.
          [(2) Amount of gift.--For purposes of paragraph (1), 
        the ``amount of such gift'' shall be the amount 
        included with respect to such gift in determining (for 
        the purposes of section 2503(a), or of corresponding 
        provisions of prior laws) the total amount of gifts 
        made during such quarter or year, reduced by the amount 
        of any deduction allowed with respect to such gift 
        under section 2522, or under corresponding provisions 
        of prior laws (relating to charitable deduction), or 
        under section 2523 (relating to marital deduction).
  [(e) Section Inapplicable to Gifts Made After December 31, 
1976.--No credit shall be allowed under this section with 
respect to the amount of any tax paid under chapter 12 on any 
gift made after December 31, 1976.

[SEC. 2013. CREDIT FOR TAX ON PRIOR TRANSFERS.

  [(a) General Rule.--The tax imposed by section 2001 shall be 
credited with all or a part of the amount of the Federal estate 
tax paid with respect to the transfer of property (including 
property passing as a result of the exercise or non-exercise of 
a power of appointment) to the decedent by or from a person 
(herein designated as a ``transferor'') who died within 10 
years before, or within 2 years after, the decedent's death. If 
the transferor died within 2 years of the death of the 
decedent, the credit shall be the amount determined under 
subsections (b) and (c). If the transferor predeceased the 
decedent by more than 2 years, the credit shall be the 
following percentage of the amount so determined--
          [(1) 80 percent, if within the third or fourth years 
        preceding the decedent's death;
          [(2) 60 percent, if within the fifth or sixth years 
        preceding the decedent's death;
          [(3) 40 percent, if within the seventh or eighth 
        years preceding the decedent's death; and
          [(4) 20 percent, if within the ninth or tenth years 
        preceding the decedent's death.
  [(b) Computation of Credit.--Subject to the limitation 
prescribed in subsection (c), the credit provided by this 
section shall be an amount which bears the same ratio to the 
estate tax paid (adjusted as indicated hereinafter) with 
respect to the estate of the transferor as the value of the 
property transferred bears to the taxable estate of the 
transferor (determined for purposes of the estate tax) 
decreased by any death taxes paid with respect to such estate. 
For purposes of the preceding sentence, the estate tax paid 
shall be the Federal estate tax paid increased by any credits 
allowed against such estate tax under section 2012, or 
corresponding provisions of prior laws, on account of gift tax, 
and for any credits allowed against such estate tax under this 
section on account of prior transfers where the transferor 
acquired property from a person who died within 10 years before 
the death of the decedent.
  [(c) Limitation on Credit.--
          [(1) In general.--The credit provided in this section 
        shall not exceed the amount by which--
                  [(A) the estate tax imposed by section 2001 
                or section 2101 (after deducting the credits 
                provided for in sections 2010, 2011, 2012, and 
                2014) computed without regard to this section, 
                exceeds
                  [(B) such tax computed by excluding from the 
                decedent's gross estate the value of such 
                property transferred and, if applicable, by 
                making the adjustment hereinafter indicated.
        If any deduction is otherwise allowable under section 
        2055 or section 2106(a)(2) (relating to charitable 
        deduction) then, for the purpose of the computation 
        indicated in subparagraph (B), the amount of such 
        deduction shall be reduced by that part of such 
        deduction which the value of such property transferred 
        bears to the decedent's entire gross estate reduced by 
        the deductions allowed under sections 2053 and 2054, or 
        section 2106(a)(1) (relating to deduction for expenses, 
        losses, etc.). For purposes of this section, the value 
        of such property transferred shall be the value as 
        provided for in subsection (d) of this section.
          [(2) Two or more transferors.--If the credit provided 
        in this section relates to property received from 2 or 
        more transferors, the limitation provided in paragraph 
        (1) of this subsection shall be computed by aggregating 
        the value of the property so transferred to the 
        decedent. The aggregate limitation so determined shall 
        be apportioned in accordance with the value of the 
        property transferred to the decedent by each 
        transferor.
  [(d) Valuation of Property Transferred.--The value of 
property transferred to the decedent shall be the value used 
for the purpose of determining the Federal estate tax liability 
of the estate of the transferor but--
          [(1) there shall be taken into account the effect of 
        the tax imposed by section 2001 or 2101, or any estate, 
        succession, legacy, or inheritance tax, on the net 
        value to the decedent of such property;
          [(2) where such property is encumbered in any manner, 
        or where the decedent incurs any obligation imposed by 
        the transferor with respect to such property, such 
        encumbrance or obligation shall be taken into account 
        in the same manner as if the amount of a gift to the 
        decedent of such property was being determined; and
          [(3) if the decedent was the spouse of the transferor 
        at the time of the transferor's death, the net value of 
        the property transferred to the decedent shall be 
        reduced by the amount allowed under section 2056 
        (relating to marital deductions), as a deduction from 
        the gross estate of the transferor.
  [(e) Property Defined.--For purposes of this section, the 
term ``property'' includes any beneficial interest in property, 
including a general power of appointment (as defined in section 
2041).
  [(f) Treatment of Additional Tax Imposed Under Section 
2032A.--If section 2032A applies to any property included in 
the gross estate of the transferor and an additional tax is 
imposed with respect to such property under section 2032A(c) 
before the date which is 2 years after the date of the 
decedent's death, for purposes of this section--
          [(1) the additional tax imposed by section 2032A(c) 
        shall be treated as a Federal estate tax payable with 
        respect to the estate of the transferor; and
          [(2) the value of such property and the amount of the 
        taxable estate of the transferor shall be determined as 
        if section 2032A did not apply with respect to such 
        property.

[SEC. 2014. CREDIT FOR FOREIGN DEATH TAXES.

  [(a) In General.--The tax imposed by section 2001 shall be 
credited with the amount of any estate, inheritance, legacy, or 
succession taxes actually paid to any foreign country in 
respect of any property situated within such foreign country 
and included in the gross estate (not including any such taxes 
paid with respect to the estate of a person other than the 
decedent). The determination 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.
  [(b) Limitations on Credit.--The credit provided in this 
section with respect to such taxes paid to any foreign 
country--
          [(1) shall not, with respect to any such tax, exceed 
        an amount which bears the same ratio to the amount of 
        such tax actually paid to such foreign country as the 
        value of property which is--
                  [(A) situated within such foreign country,
                  [(B) subjected to such tax, and
                  [(C) included in the gross estatebears to the 
                value of all property subjected to such tax; 
                and
          [(2) shall not, with respect to all such taxes, 
        exceed an amount which bears the same ratio to the tax 
        imposed by section 2001 (after deducting from such tax 
        the credits provided by sections 2010, 2011, and 2012) 
        as the value of property which is--
                  [(A) situated within such foreign country,
                  [(B) subjected to the taxes of such foreign 
                country, and
                  [(C) included in the gross estate
        bears to the value of the entire gross estate reduced 
        by the aggregate amount of the deductions allowed under 
        sections 2055 and 2056.
  [(c) Valuation of Property.--
          [(1) The values referred to in the ratio stated in 
        subsection (b)(1) are the values determined for 
        purposes of the tax imposed by such foreign country.
          [(2) The values referred to in the ratio stated in 
        subsection (b)(2) are the values determined under this 
        chapter; but, in applying such ratio, the value of any 
        property described in subparagraphs (A), (B), and (C) 
        thereof shall be reduced by such amount as will 
        properly reflect, in accordance with regulations 
        prescribed by the Secretary, the deductions allowed in 
        respect of such property under sections 2055 and 2056 
        (relating to charitable and marital deductions).
  [(d) Proof of Credit.--The credit provided in this section 
shall be allowed only if the taxpayer establishes to the 
satisfaction of the Secretary--
          [(1) the amount of taxes actually paid to the foreign 
        country,
          [(2) the amount and date of each payment thereof,
          [(3) the description and value of the property in 
        respect of which such taxes are imposed, and
          [(4) all other information necessary for the 
        verification and computation of the credit.
  [(e) Period of Limitation.--The credit provided in this 
section shall be allowed only for such taxes as were actually 
paid and credit therefor claimed within 4 years after the 
filing of the return required by section 6018, except that--
          [(1) If a petition for redetermination of a 
        deficiency has been filed with the Tax Court within the 
        time prescribed in section 6213(a), then within such 4-
        year period or before the expiration of 60 days after 
        the decision of the Tax Court becomes final.
          [(2) If, under section 6161, an extension of time has 
        been granted for payment of the tax shown on the 
        return, or of a deficiency, then within such 4-year 
        period or before the date of the expiration of the 
        period of the extension.
Refund based on such credit may (despite the provisions of 
sections 6511 and 6512) be made if claim therefor is filed 
within the period above provided. Any such refund shall be made 
without interest.
  [(f) Additional Limitation in Cases Involving a Deduction 
Under Section 2053(d).--In any case where a deduction is 
allowed under section 2053(d) for an estate, succession, 
legacy, or inheritance tax imposed by and actually paid to any 
foreign country upon a transfer by the decedent for public, 
charitable, or religious uses described in section 2055, the 
property described in subparagraphs (A), (B), and (C) of 
paragraphs (1) and (2) of subsection (b) of this section shall 
not include any property in respect of which such deduction is 
allowed under section 2053(d).
  [(g) Possession of United States Deemed a Foreign Country.--
For purposes of the credits authorized by this section, each 
possession of the United States shall be deemed to be a foreign 
country.
  [(h) Similar Credit Required for Certain Alien Residents.--
Whenever the President finds that--
          [(1) a foreign country, in imposing estate, 
        inheritance, legacy, or succession taxes, does not 
        allow to citizens of the United States resident in such 
        foreign country at the time of death a credit similar 
        to the credit allowed under subsection (a),
          [(2) such foreign country, when requested by the 
        United States to do so has not acted to provide such a 
        similar credit in the case of citizens of the United 
        States resident in such foreign country at the time of 
        death, and
          [(3) it is in the public interest to allow the credit 
        under subsection (a) in the case of citizens or 
        subjects of such foreign country only if it allows such 
        a similar credit in the case of citizens of the United 
        States resident in such foreign country at the time of 
        death,
the President shall proclaim that, in the case of citizens or 
subjects of such foreign country dying while the proclamation 
remains in effect, the credit under subsection (a) shall be 
allowed only if such foreign country allows such a similar 
credit in the case of citizens of the United States resident in 
such foreign country at the time of death.

[SEC. 2015. CREDIT FOR DEATH TAXES ON REMAINDERS.

  [Where an election is made under section 6163(a) to postpone 
payment of the tax imposed by section 2001, or 2101, such part 
of any estate, inheritance, legacy, or succession taxes 
allowable as a credit under section 2011 or 2014, as is 
attributable to a reversionary or remainder interest may be 
allowed as a credit against the tax attributable to such 
interest, subject to the limitations on the amount of the 
credit contained in such sections, if such part is paid, and 
credit therefor claimed, at any time before the expiration of 
the time for payment of the tax imposed by section 2001 or 2101 
as postponed and extended under section 6163.

[SEC. 2016. RECOVERY OF TAXES CLAIMED AS CREDIT.

  [If any tax claimed as a credit under section 2011 or 2014 is 
recovered from any foreign country, any State, any possession 
of the United States, or the District of Columbia, the 
executor, or any other person or persons recovering such 
amount, shall give notice of such recovery to the Secretary at 
such time and in such manner as may be required by regulations 
prescribed by him, and the Secretary shall (despite the 
provisions of section 6501) redetermine the amount of the tax 
under this chapter and the amount, if any, of the tax due on 
such redetermination, shall be paid by the executor or such 
person or persons, as the case may be, on notice and demand. No 
interest shall be assessed or collected on any amount of tax 
due on any redetermination by the Secretary resulting from a 
refund to the executor of tax claimed as a credit under section 
2014, for any period before the receipt of such refund, except 
to the extent interest was paid by the foreign country on such 
refund.

                        [PART III--GROSS ESTATE

        [Sec. 2031. Definition of gross estate.
        [Sec. 2032. Alternate valuation.
        [Sec. 2032A. Valuation of certain farm, etc., real property.
        [Sec. 2033. Property in which the decedent had an interest.
        [Sec. 2034. Dower or curtesy interests.
        [Sec. 2035. Adjustments for certain gifts made within 3 years of 
                  decedent's death.
        [Sec. 2036. Transfers with retained life estate.
        [Sec. 2037. Transfers taking effect at death.
        [Sec. 2038. Revocable transfers.
        [Sec. 2039. Annuities.
        [Sec. 2040. Joint interests.
        [Sec. 2041. Powers of appointment.
        [Sec. 2042. Proceeds of life insurance.
        [Sec. 2043. Transfers for insufficient consideration.
        [Sec. 2044. Certain property for which marital deduction was 
                  previously allowed.
        [Sec. 2045. Prior interests.
        [Sec. 2046. Disclaimers.

[SEC. 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)).
          [(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
                                                           The exclusion
  decedents dying during:
                                                          limitation 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.
          [(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--
                                  [(I) in or within 25 miles of 
                                an area which, on the date of 
                                the decedent's death, is a 
                                metropolitan area (as defined 
                                by the Office of Management and 
                                Budget),
                                  [(II) in or within 25 miles 
                                of an area which, on the date 
                                of the decedent's death, is a 
                                national park or wilderness 
                                area designated as part of the 
                                National Wilderness 
                                Preservation System (unless it 
                                is determined by the Secretary 
                                that land in or within 25 miles 
                                of such a park or wilderness 
                                area is not under significant 
                                development pressure), or
                                  [(III) in or within 10 miles 
                                of an area which, on the date 
                                of the decedent's death, is an 
                                Urban National Forest (as 
                                designated by the Forest 
                                Service),
                          [(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.

[SEC. 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 item 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.

[SEC. 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 151(c)(4)) 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, and that there is no 
                        comparable land from which the average 
                        net share rental may be determined or
                          [(ii) where the executor elects to 
                        have the value of the farm for farming 
                        purposes 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 farm land 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).

[SEC. 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.

[SEC. 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.

[SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 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 paragraph (1).
          [(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) 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.

[SEC. 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).

[SEC. 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.

[SEC. 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.

[SEC. 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.

[SEC. 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.

[SEC. 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.

[SEC. 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.

[SEC. 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.

[SEC. 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.

[SEC. 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.

[SEC. 2046. DISCLAIMERS.

  [For provisions relating to the effect of a qualified 
disclaimer for purposes of this chapter, see section 2518.

                        [PART IV--TAXABLE ESTATE

        [Sec. 2051. Definition of taxable estate.
        [Sec. 2053. Expenses, indebtedness, and taxes.
        [Sec. 2054. Losses.
        [Sec. 2055. Transfers for public, charitable, and religious 
                  uses.
        [Sec. 2056. Bequests, etc., to surviving spouse.
        [Sec. 2056A. Qualified domestic trust.
        [Sec. 2057. Family-owned business interests.

[SEC. 2051. DEFINITION OF TAXABLE ESTATE.

  [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 deductions provided for in this 
part.

[SEC. 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 State and Foreign Death Taxes.--
          [(1) General rule.--Notwithstanding the provisions of 
        subsection (c)(1)(B) of this section, 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--
                  [(A) any estate, succession, legacy, or 
                inheritance tax imposed by a State or the 
                District of Columbia upon a transfer by the 
                decedent for public, charitable, or religious 
                uses described in section 2055 or 2106(a)(2), 
                and
                  [(B) 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 subparagraph (B) 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 
        State death tax or 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 credits for state and 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 references.--

          [See section 2011(e) for the effect of a deduction taken under 
        this subsection on the credit for State death taxes, and see 
        section 2014(f) for the effect of a deduction taken under this 
        subsection 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).

[SEC. 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.

[SEC. 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) 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.
  [(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.

[SEC. 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.
  [(d) Disallowance of Marital Deduction Where Surviving Spouse 
Not United States Citizen.--
          [(1) In general.--Except as provided in paragraph 
        (2), if the surviving spouse of the decedent is not a 
        citizen of the United States--
                  [(A) no deduction shall be allowed under 
                subsection (a), and
                  [(B) section 2040(b) shall not apply.
          [(2) Marital deduction allowed for certain transfers 
        in trust.--
                  [(A) In general.--Paragraph (1) shall not 
                apply to any property passing to the surviving 
                spouse in a qualified domestic trust.
                  [(B) Special rule.--If any property passes 
                from the decedent to the surviving spouse of 
                the decedent, for purposes of subparagraph (A), 
                such property shall be treated as passing to 
                such spouse in a qualified domestic trust if--
                          [(i) such property is transferred to 
                        such a trust before the date on which 
                        the return of the tax imposed by this 
                        chapter is made, or
                          [(ii) such property is irrevocably 
                        assigned to such a trust under an 
                        irrevocable assignment made on or 
                        before such date which is enforceable 
                        under local law.
          [(3) Allowance of credit to certain spouses.--If--
                  [(A) property passes to the surviving spouse 
                of the decedent (hereinafter in this paragraph 
                referred to as the ``first decedent''),
                  [(B) without regard to this subsection, a 
                deduction would be allowable under subsection 
                (a) with respect to such property, and
                  [(C) such surviving spouse dies and the 
                estate of such surviving spouse is subject to 
                the tax imposed by this chapter,
        the Federal estate tax paid (or treated as paid under 
        section 2056A(b)(7)) by the first decedent with respect 
        to such property shall be allowed as a credit under 
        section 2013 to the estate of such surviving spouse and 
        the amount of such credit shall be determined under 
        such section without regard to when the first decedent 
        died and without regard to subsection (d)(3) of such 
        section.
          [(4) Special rule where resident spouse becomes 
        citizen.--Paragraph (1) shall not apply if--
                  [(A) the surviving spouse of the decedent 
                becomes a citizen of the United States before 
                the day on which the return of the tax imposed 
                by this chapter is made, and
                  [(B) such spouse was a resident of the United 
                States at all times after the date of the death 
                of the decedent and before becoming a citizen 
                of the United States.
          [(5) Reformations permitted.--
                  [(A) In general.--In the case of any property 
                with respect to which a deduction would be 
                allowable under subsection (a) but for this 
                subsection, the determination of whether a 
                trust is a qualified domestic trust shall be 
                made--
                          [(i) as of the date on which the 
                        return of the tax imposed by this 
                        chapter is made, or
                          [(ii) if a judicial proceeding is 
                        commenced on or before the due date 
                        (determined with regard to extensions) 
                        for filing such return to change such 
                        trust into a trust which is a qualified 
                        domestic trust, as of the time when the 
                        changes pursuant to such proceeding are 
                        made.
                  [(B) Statute of limitations.--If a judicial 
                proceeding described in subparagraph (A)(ii) is 
                commenced with respect to any trust, the period 
                for assessing any deficiency of tax 
                attributable to any failure of such trust to be 
                a qualified domestic trust shall not expire 
                before the date 1 year after the date on which 
                the Secretary is notified that the trust has 
                been changed pursuant to such judicial 
                proceeding or that such proceeding has been 
                terminated.

[SEC. 2056A. QUALIFIED DOMESTIC TRUST.

  [(a) Qualified Domestic Trust Defined.--For purposes of this 
section and section 2056(d), the term ``qualified domestic 
trust'' means, with respect to any decedent, any trust if--
          [(1) the trust instrument--
                  [(A) except as provided in regulations 
                prescribed by the Secretary, requires that at 
                least 1 trustee of the trust be an individual 
                citizen of the United States or a domestic 
                corporation, and
                  [(B) provides that no distribution (other 
                than a distribution of income) may be made from 
                the trust unless a trustee who is an individual 
                citizen of the United States or a domestic 
                corporation has the right to withhold from such 
                distribution the tax imposed by this section on 
                such distribution,
          [(2) such trust meets such requirements as the 
        Secretary may by regulations prescribe to ensure the 
        collection of any tax imposed by subsection (b), and
          [(3) an election under this section by the executor 
        of the decedent applies to such trust.
  [(b) Tax Treatment of Trust.--
          [(1) Imposition of estate tax.--There is hereby 
        imposed an estate tax on--
                  [(A) any distribution before the date of the 
                death of the surviving spouse from a qualified 
                domestic trust and
                  [(B) the value of the property remaining in a 
                qualified domestic trust on the date of the 
                death of the surviving spouse.
          [(2) Amount of tax.--
                  [(A) In general.--In the case of any taxable 
                event, the amount of the estate tax imposed by 
                paragraph (1) shall be the amount equal to--
                          [(i) the tax which would have been 
                        imposed under section 2001 on the 
                        estate of the decedent if the taxable 
                        estate of the decedent had been 
                        increased by the sum of--
                                  [(I) the amount involved in 
                                such taxable event, plus
                                  [(II) the aggregate amount 
                                involved in previous taxable 
                                events with respect to 
                                qualified domestic trusts of 
                                such decedent, reduced by
                          [(ii) the tax which would have been 
                        imposed under section 2001 on the 
                        estate of the decedent if the taxable 
                        estate of the decedent had been 
                        increased by the amount referred to in 
                        clause (i)(II).
                  [(B) Tentative tax where tax of decedent not 
                finally determined.--
                          [(i) In general.--If the tax imposed 
                        on the estate of the decedent under 
                        section 2001 is not finally determined 
                        before the taxable event, the amount of 
                        the tax imposed by paragraph (1) on 
                        such event shall be determined by using 
                        the highest rate of tax in effect under 
                        section 2001 as of the date of the 
                        decedent's death.
                          [(ii) Refund of excess when tax 
                        finally determined.--If--
                                  [(I) the amount of the tax 
                                determined under clause (i), 
                                exceeds
                                  [(II) the tax determined 
                                under subparagraph (A) on the 
                                basis of the final 
                                determination of the tax 
                                imposed by section 2001 on the 
                                estate of the decedent,
                such excess shall be allowed as a credit or 
                refund (with interest) if claim therefor is 
                filed not later than 1 year after the date of 
                such final determination.
                  [(C) Special rule where decendent has more 
                than 1 qualified domestic trust.--If there is 
                more than 1 qualified domestic trust with 
                respect to any decedent, the amount of the tax 
                imposed by paragraph (1) with respect to such 
                trusts shall be determined by using the highest 
                rate of tax in effect under section 2001 as of 
                the date of the decedent's death (and the 
                provisions of paragraph (3)(B) shall not apply) 
                unless, pursuant to a designation made by the 
                decedent's executor, there is 1 person--
                          [(i) who is an individual citizen of 
                        the United States or a domestic 
                        corporation and is responsible for 
                        filing all returns of tax imposed under 
                        paragraph (1) with respect to such 
                        trusts and for paying all tax so B 
                        imposed, and
                          [(ii) who meets such requirements as 
                        the Secretary may by regulations 
                        prescribe.
          [(3) Certain lifetime distributions exempt from 
        tax.--
                  [(A) Income distributions.--No tax shall be 
                imposed by paragraph (1)(A) on any distribution 
                of income to the surviving spouse.
                  [(B) Hardship exemption.--No tax shall be 
                imposed by paragraph (1)(A) on any distribution 
                to the surviving spouse on account of hardship.
          [(4) Tax where trust ceases to qualify.--If any 
        qualified domestic trust ceases to meet the 
        requirements of paragraphs (1) and (2) of subsection 
        (a), the tax imposed by paragraph (1) shall apply as if 
        the surviving spouse died on the date of such 
        cessation.
          [(5) Due date.--
                  [(A) Tax on distributions.--The estate tax 
                imposed by paragraph (1)(A) shall be due and 
                payable on the 15th day of the 4th month 
                following the calendar year in which the 
                taxable event occurs; except that the estate 
                tax imposed by paragraph (1)(A) on 
                distributions during the calendar year in which 
                the surviving spouse dies shall be due and 
                payable not later than the date on which the 
                estate tax imposed by paragraph (1)(B) is due 
                and payable.
                  [(B) Tax at death of spouse.--The estate tax 
                imposed by paragraph (1)(B) shall be due and 
                payable on the date 9 months after the date of 
                such death.
          [(6) Liability for tax.--Each trustee shall be 
        personally liable for the amount of the tax imposed by 
        paragraph (1). Rules similar to the rules of section 
        2204 shall apply for purposes of the preceding 
        sentence.
          [(7) Treatment of tax.--For purposes of section 
        2056(d), any tax paid under paragraph (1) shall be 
        treated as a tax paid under section 2001 with respect 
        to the estate of the decedent.
          [(8) Lien for tax.--For purposes of section 6324, any 
        tax imposed by paragraph (1) shall be treated as an 
        estate tax imposed under this chapter with respect to a 
        decedent dying on the date of the taxable event (and 
        the property involved shall be treated as the gross 
        estate of such decedent).
          [(9) Taxable even.--The term ``taxable event'' means 
        the event resulting in tax being imposed under 
        paragraph (1).
          [(10) Certain benefits allowed.--
                  [(A) In general.--If any property remaining 
                in the qualified domestic trust on the date of 
                the death of the surviving spouse is includible 
                in the gross estate of such spouse for purposes 
                of this chapter (or would be includible if such 
                spouse were a citizen or resident of the United 
                States), any benefit which is allowable (or 
                would be allowable if such spouse were a 
                citizen or resident of the United States) with 
                respect to such property to the estate of such 
                spouse under section 2011, 2014, 2032, 2032A, 
                2055, 2056, or 6166 shall be allowed for 
                purposes of the tax imposed by paragraph 
                (1)(B).
                  [(B) Section 303.--If the estate of the 
                surviving spouse meets the requirements of 
                section 303 with respect to any property 
                described in subparagraph (A), for purposes of 
                section 303, the tax imposed by paragraph 
                (l)(B) with respect to such property shall be 
                treated as a Federal estate tax payable with 
                respect to the estate of the surviving spouse.
                  [(C) Section 6161(a)(2).--The provisions of 
                section 6161(a)(2) shall apply with respect to 
                the tax imposed by paragraph (1)(B), and the 
                reference in such section to the executor shall 
                be treated as a reference to the trustees of 
                the trust.
          [(11) Special rule where distribution tax paid out of 
        trust.--For purposes of this subsection, if any portion 
        of the tax imposed by paragraph (l)(A) with respect to 
        any distribution is paid out of the trust, an amount 
        equal to the portion so paid shall be treated as a 
        distribution described in paragraph (1)(A).
          [(12) Special rule where spouse becomes citizen.--If 
        the surviving spouse of the decedent becomes a citizen 
        of the United States and if--
                  [(A) such spouse was a resident of the United 
                States at all times after the date of the death 
                of the decedent and before such spouse becomes 
                a citizen of the United States,
                  [(B) no tax was imposed by paragraph (l)(A) 
                with respect to any distribution before such 
                spouse becomes such a citizen, or
                  [(C) such spouse elects--
                          [(i) to treat any distribution on 
                        which tax was imposed by paragraph 
                        (1)(A) as a taxable gift made by such 
                        spouse for purposes of--
                                  [(I) section 2001, and
                                  [(II) determining the amount 
                                of the tax imposed by section 
                                2501 on actual taxable gifts 
                                made by such spouse during the 
                                year in which the spouse 
                                becomes a citizen or any 
                                subsequent year, and
                          [(ii) to treat any reduction in the 
                        tax imposed by paragraph (1)(A) by 
                        reason of the credit allowable under 
                        section 2010 with respect to the 
                        decedent as a credit allowable to such 
                        surviving spouse under section 2505 for 
                        purposes of determining the amount of 
                        the credit allowable under section 2505 
                        with respect to taxable gifts made by 
                        the surviving spouse during the year in 
                        which the spouse becomes a citizen or 
                        any subsequent year, paragraph (1)(A) 
                        shall not apply to any distributions 
                        after such spouse becomes such a 
                        citizen (and paragraph (1)(B) shall not 
                        apply).
          [(13) Coordination with section 1015.--For purposes 
        of section 1015, any distribution on which tax is 
        imposed by paragraph (1)(A) shall be treated as a 
        transfer by gift, and any tax paid under paragraph 
        (1)(A) shall be treated as a gift tax.
          [(14) Coordination with terminable interest rules.--
        Any interest in a qualified domestic trust shall not be 
        treated as failing to meet the requirements of 
        paragraph (5) or (7) of section 2056(b) merely by 
        reason of any provision of the trust instrument 
        permitting the withholding from any distribution of an 
        amount to pay the tax imposed by paragraph (1) on such 
        distribution.
          [(15) No tax on certain distributions.--No tax shall 
        be imposed by paragraph (1) on any distribution to the 
        surviving spouse to the extent such distribution is to 
        reimburse such surviving spouse for any tax imposed by 
        subtitle A on any item of income of the trust to which 
        such surviving spouse is not entitled under the terms 
        of the trust.
  [(c) Definitions.--For purposes of this section--
          [(1) Property includes interest therein.--The term 
        ``property'' includes an interest in property.
          [(2) Income.--Except as provided in regulations, the 
        term ``income'' has the meaning given to such term by 
        section 643(b).
          [(3) Trust.--To the extent provided in regulations 
        prescribed by the Secretary, the term ``trust'' 
        includes other arrangements which have substantially 
        the same effect as a trust.
  [(d) Election.--An election under this section with respect 
to any trust shall be made by the executor on the return of the 
tax imposed by section 2001. Such an election, once made, shall 
be irrevocable. No election may be made under this section on 
any return if such return is filed more than one year after the 
time prescribed by law (including extensions) for filing such 
return.
  [(e) Regulation.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations under which 
there may be treated as a qualified domestic trust any annuity 
or other payment which is includible in the decedent's gross 
estate and is by its terms payable for life or a term of years.

[SEC. 2057. FAMILY-OWNED BUSINESS INTERESTS.

  [(a) General Rule.--
          [(1) Allowance deduction.--For purposes of the tax 
        imposed by section 2001, in the case of an estate of a 
        decedent to which this section applies, the value of 
        the taxable estate shall be determined by deducting 
        from the value of the gross estate the adjusted value 
        of the qualified family-owned business interests of the 
        decedent which are described in subsection (b)(2).
          [(2) Maximum deduction.--The deduction allowed by 
        this section shall not exceed $675,000.
          [(3) Coordination with unified credit.--
                  [(A) In general.--Except as provided in 
                subparagraph (B), if this section applies to an 
                estate, the applicable exclusion amount under 
                section 2010 shall be $625,000.
                  [(B) Increase in unified credit if deduction 
                is less than $675,000.--If the deduction 
                allowed by this section is less than $675,000, 
                the amount of the applicable exclusion amount 
                under section 2010 shall be increased (but not 
                above the amount which would apply to the 
                estate without regard to this section) by the 
                excess of $675,000 over the amount of the 
                deduction allowed.
  [(b) Estates to Which Section Applies.--
          [(1) In general.--This section shall apply to an 
        estate if--
                  [(A) the decedent was (at the date of the 
                decedent's death) a citizen or resident of the 
                United States,
                  [(B) the executor elects the application of 
                this section and files the agreement referred 
                to in subsection (h),
                  [(C) the sum of--
                          [(i) the adjusted value of the 
                        qualified family-owned business 
                        interests described in paragraph (2), 
                        plus
                          [(ii) the amount of the gifts of such 
                        interests determined under paragraph 
                        (3),
                exceeds 50 percent of the adjusted gross 
                estate, and
                  [(D) during the 8-year period ending on the 
                date of the decedent's death there have been 
                periods aggregating 5 years or more during 
                which--
                          [(i) such interests were owned by the 
                        decedent or a member of the decedent's 
                        family, and
                          [(ii) there was material 
                        participation (within the meaning of 
                        section 2032A(e)(6)) by the decedent or 
                        a member of the decedent's family in 
                        the operation of the business to which 
                        such interests relate.
          [(2) Includible qualified family-owned business 
        interests.--The qualified family-owned business 
        interests described in this paragraph are the interests 
        which--
                  [(A) are included in determining the value of 
                the gross estate, and
                  [(B) are acquired by any qualified heir from, 
                or passed to any qualified heir from, the 
                decedent (within the meaning of section 
                2032A(e)(9)).
          [(3) Includible gifts of interest.--The amount of the 
        gifts of qualified family-owned business interests 
        determined under this paragraph is the sum of--
                  [(A) the amount of such gifts from the 
                decedent to members of the decedent's family 
                taken into account under section 2001(b)(1)(B), 
                plus
                  [(B) the amount of such gifts otherwise 
                excluded under section 2503(b),
        to the extent such interests are continuously held by 
        members of such family (other than the decedent's 
        spouse) between the date of the gift and the date of 
        the decedent's death.
  [(c) Adjusted Gross Estate.--For purposes of this section, 
the term ``adjusted gross estate'' means the value of the gross 
estate--
          [(1) reduced by any amount deductible under paragraph 
        (3) or (4) of section 2053(a), and
          [(2) increased by the excess of--
                  [(A) the sum of--
                          [(i) the amount of gifts determined 
                        under subsection (b)(3), plus
                          [(ii) the amount (if more than de 
                        minimis) of other transfers from the 
                        decedent to the decedent's spouse (at 
                        the time of the transfer) within 10 
                        years of the date of the decedent's 
                        death, plus
                          [(iii) the amount of other gifts (not 
                        included under clause (i) or (ii)) from 
                        the decedent within 3 years of such 
                        date, other than gifts to members of 
                        the decedent's family otherwise 
                        excluded under section 2503(b), over
                  [(B) the sum of the amounts described in 
                clauses (i), (ii), and
                          [(iii) of subparagraph (A) which are 
                        otherwise includible in the gross 
                        estate.
For purposes of the preceding sentence, the Secretary may 
provide that de minimis gifts to persons other than members of 
the decedent's family shall not be taken into account.
  [(d) Adjusted Value of the Qualified Family-Owned Business 
Interests.--For purposes of this section, the adjusted value of 
any qualified family-owned business interest is the value of 
such interest for purposes of this chapter (determined without 
regard to this section), reduced by the excess of--
          [(1) any amount deductible under paragraph (3) or (4) 
        of section 2053(a), over
          [(2) the sum of--
                  [(A) any indebtedness on any qualified 
                residence of the decedent the interest on which 
                is deductible under section 163(h)(3), plus
                  [(B) any indebtedness to the extent the 
                taxpayer establishes that the proceeds of such 
                indebtedness were used for the payment of 
                educational and medical expenses of the 
                decedent, the decedent's spouse, or the 
                decedent's dependents (within the meaning of 
                section 152, plus
                  [(C) any indebtedness not described in 
                subparagraph (A) or (B), to the extent such 
                indebtedness does not exceed $10,000.
  [(e) Qualified Family-Owned Business Interest.--
          [(1) In general.--For purposes of this section, the 
        term ``qualified family-owned business interest'' 
        means--
                  [(A) an interest as a proprietor in a trade 
                or business carried on as a proprietorship, or
                  [(B) an interest in an entity carrying on a 
                trade or business, if--
                          [(i) at least--
                                  [(I) 50 percent of such 
                                entity is owned (directly or 
                                indirectly) by the decedent and 
                                members of the decedent's 
                                family,
                                  [(II) 70 percent of such 
                                entity is so owned by members 
                                of 2 families, or
                                  [(III) 90 percent of such 
                                entity is so owned by members 
                                of 3 families, and
                          [(ii) for purposes of subclause (II) 
                        or (III) of clause (i), at least 30 
                        percent of such entity is so owned by 
                        the decedent and members of the 
                        decedent's family.
        For purposes of the preceding sentence, a decedent 
        shall be treated as engaged in a trade or business if 
        any member of the decedent's family is engaged in such 
        trade or business.
          [(2) Limitation.--Such term shall not include--
                  [(A) any interest in a trade or business the 
                principal place of business of which is not 
                located in the United States,
                  [(B) any interest in an entity, if the stock 
                or debt of such entity or a controlled group 
                (as defined in section 267(f)(1) of which such 
                entity was a member was readily tradable on an 
                established securities market or secondary 
                market (as defined by the Secretary) at any 
                time within 3 years of the date of the 
                decedent's death,
                  [(C) any interest in a trade or business not 
                described in section 542(c)(2), if more than 35 
                percent of the adjusted ordinary gross income 
                of such trade or business for the taxable year 
                which includes the date of the decedent's death 
                would qualify as personal holding company 
                income (as defined in section 543(a) without 
                regard to paragraph (2)(B) thereof) if such 
                trade or business were a corporation,
                  [(D) that portion of an interest in a trade 
                or business that is attributable to--
                          [(i) cash or marketable securities, 
                        or both, in excess of the reasonably 
                        expected day-to-day working capital 
                        needs of such trade or business, and
                          [(ii) any other assets of the trade 
                        or business (other than assets used in 
                        the active conduct of a trade or 
                        business described in section 
                        542(c)(2), which produce, or are held 
                        for the production of, personal holding 
                        company income (as defined in 
                        subparagraph (C)) or income described 
                        in section 954(c)(1) (determined 
                        without regard to subparagraph (A) 
                        thereof and by substituting ``trade or 
                        business'' for ``controlled foreign 
                        corporation'').
        In the case of a lease of property on a net cash basis 
        by the decedent to a member of the decedent's family, 
        income from such lease shall not be treated as personal 
        holding company income for purposes of subparagraph 
        (C), and such property shall not be treated as an asset 
        described in subparagraph (D)(ii), if such income and 
        property would not be so treated if the lessor had 
        engaged directly in the activities engaged in by the 
        lessee with respect to such property.
          [(3) Rules regarding ownership.--
                  [(A) Ownership of entities.--For purposes of 
                paragraph (1)(B)--
                          [(i) Corporations.--Ownership of a 
                        corporation shall be determined by the 
                        holding of stock possessing the 
                        appropriate percentage of the total 
                        combined voting power of all classes of 
                        stock entitled to vote and the 
                        appropriate percentage of the total 
                        value of shares of all classes of 
                        stock.
                          [(ii) Partnerships.--Ownership of a 
                        partnership shall be determined by the 
                        owning of the appropriate percentage of 
                        the capital interest in such 
                        partnership.
                  [(B) Ownership of tiered entities.--For 
                purposes of this section, if by reason of 
                holding an interest in a trade or business, a 
                decedent, any member of the decedent's family, 
                any qualified heir, or any member of any 
                qualified heir's family is treated as holding 
                an interest in any other trade or business--
                          [(i) such ownership interest in the 
                        other trade or business shall be 
                        disregarded in determining if the 
                        ownership interest in the first trade 
                        or business is a qualified family-owned 
                        business interest, and
                          [(ii) this section shall be applied 
                        separately in determining if such 
                        interest in any other trade or business 
                        is a qualified family-owned business 
                        interest.
                  [(C) Individual ownership rules.--For 
                purposes of this section, an interest owned, 
                directly or indirectly, by or for an entity 
                described in paragraph (1)(B) shall be 
                considered as being owned proportionately by or 
                for the entity's shareholders, partners, or 
                beneficiaries. A person shall be treated as a 
                beneficiary of any trust only if such person 
                has a present interest in such trust.
  [(f) Tax Treatment of Failure to Materially Participate in 
Business or Dispositions of Interests.--
          [(1) In general.--There is imposed an additional 
        estate tax if, within 10 years after the date of the 
        decedent's death and before the date of the qualified 
        heir's death--
                  [(A) the material participation requirements 
                described in section 2032A(c)(6)(B) are not met 
                with respect to the qualified family-owned 
                business interest which was acquired (or 
                passed) from the decedent,
                  [(B) the qualified heir disposes of any 
                portion of a qualified family-owned business 
                interest (other than by a disposition to a 
                member of the qualified heir's family or 
                through a qualified conservation contribution 
                under section 170(h),
                  [(C) the qualified heir loses United States 
                citizenship (within the meaning of section 877 
                or with respect to whom an event described in 
                subparagraph (A) or (B) of section 877(e)(1) 
                occurs, and such heir does not comply with the 
                requirements of subsection (g), or
                  [(D) the principal place of business of a 
                trade or business of the qualified family-owned 
                business interest ceases to be located in the 
                United States.
          [(2) Additional estate tax.--
                  [(A) In general.--The amount of the 
                additional estate tax imposed by paragraph (1) 
                shall be equal to--
                          [(i) the applicable percentage of the 
                        adjusted tax difference attributable to 
                        the qualified family-owned business 
                        interest, plus
                          [(ii) interest on the amount 
                        determined under clause (i) at the 
                        underpayment rate established under 
                        section 6621 for the period beginning 
                        on the date the estate tax liability 
                        was due under this chapter and ending 
                        on the date such additional estate tax 
                        is due.
                  [(B) Applicable percentage.--For purposes of 
                this paragraph, the applicable percentage shall 
                be determined under the following table:

        [If the event described in                                      
          paragraph (1) occurs in the following           The applicable
          year of material participation:                percentage is: 

          1 through 6............................................. 100  
          7.......................................................  80  
          8.......................................................  60  
          9.......................................................  40  
          10......................................................  20. 
                  [(C) Adjusted tax difference.--For purposes 
                of subparagraph (A)--
                          [(i) In general.--The adjusted tax 
                        difference attributable to a qualified 
                        family-owned business interest is the 
                        amount which bears the same ratio to 
                        the adjusted tax difference with 
                        respect to the estate (determined under 
                        clause (ii)) as the value of such 
                        interest bears to the value of all 
                        qualified family-owned business 
                        interests described in subsection 
                        (b)(2).
                          [(ii) Adjusted tax difference with 
                        respect to the estate.--For purposes of 
                        clause (i), the term ``adjusted tax 
                        difference with respect to the estate'' 
                        means the excess of what would have 
                        been the estate tax liability but for 
                        the election under this section over 
                        the estate tax liability. For purposes 
                        of this clause, the term ``estate tax 
                        liability'' means the tax imposed by 
                        section 2001 reduced by the credits 
                        allowable against such tax.
          [(3) Use in trade or business by family members.--A 
        qualified heir shall not be treated as disposing of an 
        interest described in subsection (e)(1)(A) by reason of 
        ceasing to be engaged in a trade or business so long as 
        the property to which such interest relates is used in 
        a trade or business by any member of such individual's 
        family.
  [(g) Security Requirements for Noncitizen Qualified Heirs.--
          [(1) In general.--Except upon the application of 
        subparagraph (F) of subsection (i)(3), if a qualified 
        heir is not a citizen of the United States, any 
        interest under this section passing to or acquired by 
        such heir (including any interest held by such heir at 
        a time described in subsection (f)(1)(C)) shall be 
        treated as a qualified family-owned business interest 
        only if the interest passes or is acquired (or is held) 
        in a qualified trust.
          [(2) Qualified trust.--The term ``qualified trust'' 
        means a trust--
                  [(A) which is organized under, and governed 
                by, the laws of the United States or a State, 
                and
                  [(B) except as otherwise provided in 
                regulations, with respect to which the trust 
                instrument requires that at least 1 trustee of 
                the trust be an individual citizen of the 
                United States or a domestic corporation.
  [(h) Agreement.--The agreement referred to in this subsection 
is a written agreement signed by each person in being who has 
an interest (whether or not in possession) in any property 
designated in such agreement consenting to the application of 
subsection (f) with respect to such property.
  [(i) Other Definitions and Applicable Rules.--For purposes of 
this section--
          [(1) Qualified heir.--The term ``qualified heir''--
                  [(A) has the meaning given to such term by 
                section 2032A(e)(1), and
                  [(B) includes any active employee of the 
                trade or business to which the qualified 
                family-owned business interest relates if such 
                employee has been employed by such trade or 
                business for a period of at least 10 years 
                before the date of the decedent's death.
          [(2) Member of the family.--The term ``member of the 
        family'' has the meaning given to such term by section 
        2032A(e)(2).
          [(3) Applicable rules.--Rules similar to the 
        following rules shall apply:
                  [(A) Section 2032A(b)(4) (relating to 
                decedents who are retired or disabled).
                  [(B) Section 2032A(b)(5) (relating to special 
                rules for surviving spouses).
                  [(C) Section 2032A(c)(2)(D) (relating to 
                partial dispositions).
                  [(D) Section 2032A(c)(3) (relating to only 1 
                additional tax imposed with respect to any 1 
                portion).
                  [(E) Section 2032A(c)(4) (relating to due 
                date).
                  [(F) Section 2032A(c)(5) (relating to 
                liability for tax; furnishing of bond).
                  [(G) Section 2032A(c)(7) (relating to no tax 
                if use begins within 2 years; active management 
                by eligible qualified heir treated as material 
                participation).
                  [(H) Paragraphs (1) and (3) of section 
                2032A(d) (relating to election; agreement).
                  [(I) Section 2032A(e)(10) (relating to 
                community property).
                  [(J) Section 2032A(e)(14) (relating to 
                treatment of replacement property acquired in 
                section 1031 or 1033 transactions).
                  [(K) Section 2032A(f) (relating to statute of 
                limitations).
                  [(L) Section 2032A(g) (relating to 
                application to interests in partnerships, 
                corporations, and trusts).
                  [(M) Subsections (h) and (i) of section 
                2032A.
                  [(N) Section 6166(b)(3) (relating to 
                farmhouses and certain other structures taken 
                into account).
                  [(O) Subparagraphs (B), (C), and (D) of 
                section 6166(g)(1) (relating to acceleration of 
                payment).
                  [(P) Section 6324B (relating to special lien 
                for additional estate tax).

          [Subchapter B--Estates of Nonresidents Not Citizens

        [Sec. 2101. Tax imposed.
        [Sec. 2102. Credits against estate.
        [Sec. 2103. Definition of grosas estate.
        [Sec. 2104. Property within the United States.
        [Sec. 2105. Property without the United States.
        [Sec. 2106. Taxable estate
        [Sec. 2107. Expatriation to avoid tax
        [Sec. 2108. Application of pre-1967 estate tax provisions.

[SEC. 2101. TAX IMPOSED.

  [(a) Imposition.--Except as provided in section 2107, a tax 
is hereby imposed on the transfer of the taxable estate 
(determined as provided in section 2106) of every decedent 
nonresident not a citizen of the United States.
  [(b) Computation of Tax.--The tax imposed by this section 
shall be the amount equal to the excess (if any) of--
          [(1) a tentative tax computed under section 2001(c) 
        on the sum of--
                  [(A) the amount of the taxable estate, and
                  [(B) the amount of the adjusted taxable 
                gifts, over
          [(2) a tentative tax computed under section 2001(c) 
        on the amount of the adjusted taxable gifts.
For purposes of the preceding sentence, there shall be 
appropriate adjustments in the application of section 
2001(c)(2) to reflect the difference between the amount of the 
credit provided under section 2102(c) and the amount of the 
credit provided under section 2010.
  [(c) Adjustments for Taxable Gifts.--
          [(1) Adjusted taxable gifts defined.--For purposes of 
        this section, the term ``adjusted taxable gifts'' means 
        the total amount of the taxable gifts (within the 
        meaning of section 2503 as modified by section 2511) 
        made by the decedent after December 31, 1976, other 
        than gifts which are includible in the gross estate of 
        the decedent.
          [(2) Adjustment for certain gift tax.--For purposes 
        of this section, the rules of section 2001(d) shall 
        apply.

[SEC. 2102. CREDITS AGAINST TAX.

  [(a) In General.--The tax imposed by section 2101 shall be 
credited with the amounts determined in accordance with 
sections 2011 to 2013, inclusive (relating to State death 
taxes, gift tax, and tax on prior transfers), subject to the 
special limitation provided in subsection (b).
  [(b) Special Limitation.--The maximum credit allowed under 
section 2011 against the tax imposed by section 2101 for State 
death taxes paid shall be an amount which bears the same ratio 
to the credit computed as provided in section 2011(b) as the 
value of the property, as determined for purposes of this 
chapter, upon which State death taxes were paid and which is 
included in the gross estate under section 2103 bears to the 
value of the total gross estate under section 2103. For 
purposes of this subsection, the term ``State death taxes'' 
means the taxes described in section 2011(a).
  [(c) Unified Credit.--
          [(1) In general.--A credit of $13,000 shall be 
        allowed against the tax imposed by section 2101.
          [(2) Residents of possessions of the united states.--
        In the case of a decedent who is considered to be a 
        ``nonresident not a citizen of the United States'' 
        under section 2209, the credit under this subsection 
        shall be the greater of--
                  [(A) $13,000, or
                  [(B) that proportion of $46,800 which the 
                value of that part of the decedent's gross 
                estate which at the time of his death is 
                situated in the United States bears to the 
                value of his entire gross estate wherever 
                situated.
          [(3) Special rules.--
                  [(A) Coordination with treaties.--To the 
                extent required under any treaty obligation of 
                the United States, the credit allowed under 
                this subsection shall be equal to the amount 
                which bears the same ratio to the applicable 
                credit amount in effect under section 2010(c) 
                for the calendar year which includes the date 
                of death as the value of the part of the 
                decedent's gross estate which at the time of 
                his death is situated in the United States 
                bears to the value of his entire gross estate 
                wherever situated. For purposes of the 
                preceding sentence, property shall not be 
                treated as situated in the United States if 
                such property is exempt from the tax imposed by 
                this subchapter under any treaty obligation of 
                the United States.
                  [(B) Coordination with gift tax unified 
                credit.--If a credit has been allowed under 
                section 2505 with respect to any gift made by 
                the decedent, each dollar amount contained in 
                paragraph (1) or (2) or subparagraph (A) of 
                this paragraph (whichever applies) shall be 
                reduced by the amount so allowed.
          [(4) Limitation based on amount of tax.--The credit 
        allowed under this subsection shall not exceed the 
        amount of the tax imposed by section 2101.
          [(5) Application of other credits.--For purposes of 
        subsection (a), sections 2011 to 2013, inclusive, shall 
        be applied as if the credit allowed under this 
        subsection were allowed under section 2010.

[SEC. 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.

[SEC. 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 -- 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 or to a debt 
obligation of a domestic corporation if any interest on such 
obligation, were such interest received by the decedent at the 
time of his death, would be treated by reason of section 
861(a)(1)(A) as income from sources without the United States.

[SEC. 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 en route to or from exhibition, in such 
        a public gallery or museum.

[SEC. 2106. TAXABLE ESTATE.

  [(a) Definition of Taxable Estate.--For purposes of the tax 
imposed by section 2101, the value of the taxable estate of 
every decedent nonresident not a citizen of the United States 
shall be determined by deducting from the value of that part of 
his gross estate which at the time of his death is situated in 
the United States--
          [(1) Expenses, losses, indebtedness, and taxes.--That 
        proportion of the deductions specified in sections 2053 
        and 2054 (other than the deductions described in the 
        following sentence) which the value of such part bears 
        to the value of his entire gross estate, wherever 
        situated. Any deduction allowable under section 2053 in 
        the case of a claim against the estate which was 
        founded on a promise or agreement but was not 
        contracted for an adequate and full consideration in 
        money or money's worth shall be allowable under this 
        paragraph to the extent that it would be allowable as a 
        deduction under paragraph (2) if such promise or 
        agreement constituted a bequest.
          [(2) Transfers for public, charitable, and religious 
        uses.--
                  [(A) In general.--The amount of all bequests, 
                legacies, devises, or transfers (including the 
                interest which falls into any such bequest, 
                legacy, devise, or transfer as a result of an 
                irrevocable disclaimer of a bequest, legacy, 
                devise, transfer, or power, if the disclaimer 
                is made before the date prescribed for the 
                filing of the estate tax return)--
                          [(i) to or for the use of the United 
                        States, any State, any political 
                        subdivision thereof, or the District of 
                        Columbia, for exclusively public 
                        purposes;
                          [(ii) to or for the use of any 
                        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 
                        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; or
                          [(iii) 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 within the 
                        United States 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;
                  [(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 paragraph shall, for purposes of this 
                paragraph, be considered a bequest of such 
                decedent.
                  [(C) Death taxes payable out of bequests.--If 
                the tax imposed by section 2101, 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 
                paragraph, then the amount deductible under 
                this paragraph 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 paragraph 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.--The provisions of section 2055(e) shall 
                be applied in the determination of the amount 
                allowable as a deduction under this paragraph.
                  [(F) Cross references.--

          [(i) For option as to time for valuation for purposes of 
        deduction under this section, see section 2032.
          [(ii) For exemption of certain bequests for the benefit of the 
        United States and for rules of construction for certain 
        bequests, see section 2055(g).
          [(iii) For treatment of gifts and bequests to or for the use 
        of Indian tribal governments (or their subdivisions), see 
        section 7871.

          [(3) Marital deduction.--The amount which would be 
        deductible with respect to property situated in the 
        United States at the time of the decedent's death under 
        the principles of section 2056.
  [(b) Condition of Allowance of Deductions.--No deduction 
shall be allowed under paragraphs (1) and (2) of subsection (a) 
in the case of a nonresident not a citizen of the United States 
unless the executor includes in the return required to be filed 
under section 6018 the value at the time of his death of that 
part of the gross estate of such nonresident not situated in 
the United States.

[SEC. 2107. EXPATRIATION TO AVOID TAX.

  [(a) Treatment of Expatriates.--
          [(1) Rate of tax.--A tax computed in accordance with 
        the table contained in section 2001 is hereby imposed 
        on the transfer of the taxable estate, determined as 
        provided in section 2106, of every decedent nonresident 
        not a citizen of the United States if, within the 10-
        year period ending with the date of death, such 
        decedent lost United States citizenship, unless such 
        loss did not have for one of its principal purposes the 
        avoidance of taxes under this subtitle or subtitle A--
          [(2) Certain individuals treated as having tax 
        avoidance purpose.--
                  [(A) In general.--For purposes of paragraph 
                (1), an individual shall be treated as having a 
                principal purpose to avoid such taxes if such 
                individual is so treated under section 
                877(a)(2).
                  [(B) Exception.--Subparagraph (A) shall not 
                apply to a decedent meeting the requirements of 
                section 877(c)(1).
  [(b) Gross Estate.--For purposes of the tax imposed by 
subsection (a), the value of the gross estate of every decedent 
to whom subsection (a) applies shall be determined as provided 
in section 2103, except that--
          [(1) if such decedent owned (within the meaning of 
        section 958(a)) at the time of his death 10 percent or 
        more of the total combined voting power of all classes 
        of stock entitled to vote of a foreign corporation, and
          [(2) if such decedent owned (within the meaning of 
        section 958(a)), or is considered to have owned (by 
        applying the ownership rules of section 958(b)), at the 
        time of his death, more than 50 percent of--
                  [(A) the total combined voting power of all 
                classes of stock entitled to vote of such 
                corporation, or
                  [(B) the total value of the stock of such 
                corporation,then that proportion of the fair 
                market value of the stock of such foreign 
                corporation owned (within the meaning of 
                section 958(a)) by such decedent at the time of 
                his death, which the fair market value of any 
                assets owned by such foreign corporation and 
                situated in the United States, at the time of 
                his death, bears to the total fair market value 
                of all assets owned by such foreign corporation 
                at the time of his death, shall be included in 
                the gross estate of such decedent. For purposes 
                of the preceding sentence, a decedent shall be 
                treated as owning stock of a foreign 
                corporation at the time of his death if, at the 
                time of a transfer, by trust or otherwise, 
                within the meaning of sections 2035 to 2038, 
                inclusive, he owned such stock.
  [(c) Credits.--
          [(1) Unified credit.--
                  [(A) In general.--A credit of $13,000 shall 
                be allowed against the tax imposed by 
                subsection (a).
                  [(B) Limitation based on amount of tax.--The 
                credit allowed under this paragraph shall not 
                exceed the amount of the tax imposed by 
                subsection (a).
          [(2) Credit for foreign death taxes.--
                  [(A) In general.--The tax imposed by 
                subsection (a) shall be credited with the 
                amount of any estate, inheritance, legacy, or 
                succession taxes actually paid to any foreign 
                country in respect of any property which is 
                included in the gross estate solely by reason 
                of subsection (b).
                  [(B) Limitation on credit.--The credit 
                allowed by subparagraph (A) for such taxes paid 
                to a foreign country shall not exceed the 
                lesser of--
                          [(i) the amount which bears the same 
                        ratio to the amount of such taxes 
                        actually paid to such foreign country 
                        as the value of the property subjected 
                        to such taxes by such foreign country 
                        and included in the gross estate solely 
                        by reason of subsection (b) bears to 
                        the value of all property subjected to 
                        such taxes by such foreign country, or
                          [(ii) such property's proportionate 
                        share of the excess of--
                                  [(I) the tax imposed by 
                                subsection (a), over
                                  [(II) the tax which would be 
                                imposed by section 2101 but for 
                                this section.
                  [(C) Proportionate share.--In the case of 
                property which is included in the gross estate 
                solely by reason of subsection (b), such 
                property's proportionate share is the 
                percentage which the value of such property 
                bears to the total value of all property 
                included in the gross estate solely by reason 
                of subsection (b).
          [(3) Other credits.--The tax imposed by subsection 
        (a) shall be credited with the amounts determined in 
        accordance with subsections (a) and (b) of section 
        2102. For purposes of subsection (a) of section 2102, 
        sections 2011 to 2013, inclusive, shall be applied as 
        if the credit allowed under paragraph (1) were allowed 
        under section 2010.
  [(d) Burden of Proof.--If the Secretary establishes that it 
is reasonable to believe that an individual's loss of United 
States citizenship would, but for this section, result in a 
substantial reduction in the estate, inheritance, legacy, and 
succession taxes in respect of the transfer of his estate, the 
burden of proving that such loss of citizenship did not have 
for one of its principal purposes the avoidance of taxes under 
this subtitle or subtitle A shall be on the executor of such 
individual's estate.
  [(e) Cross Reference.--

          [For comparable treatment of long-term lawful permanent 
        residents who ceased to be taxed as residents, see section 
        877(e).

[SEC. 2108. APPLICATION OF PRE-1967 ESTATE TAX PROVISIONS.

  [(a) Imposition of More Burdensome Tax by Foreign Country.--
Whenever the President finds that--
          [(1) under the laws of any foreign country, 
        considering the tax system of such foreign country, a 
        more burdensome tax is imposed by such foreign country 
        on the transfer of estates of decedents who were 
        citizens of the United States and not residents of such 
        foreign country than the tax imposed by this subchapter 
        on the transfer of estates of decedents who were 
        residents of such foreign country,
          [(2) such foreign country, when requested by the 
        United States to do so, has not acted to revise or 
        reduce such tax so that it is no more burdensome than 
        the tax imposed by this subchapter on the transfer of 
        estates of decedents who were residents of such foreign 
        country, and
          [(3) it is in the public interest to apply pre-1967 
        tax provisions in accordance with this section to the 
        transfer of estates of decedents who were residents of 
        such foreign country,the President shall proclaim that 
        the tax on the transfer of the estate of every decedent 
        who was a resident of such foreign country at the time 
        of his death shall, in the case of decedents dying 
        after the date of such proclamation, be determined 
        under this subchapter without regard to amendments made 
        to sections 2101 (relating to tax imposed), 2102 
        (relating to credits against tax), 2106 (relating to 
        taxable estate), and 6018 (relating to estate tax 
        returns) on or after November 13, 1966.
  [(b) Alleviation of More Burdensome Tax.--Whenever the 
President finds that the laws of any foreign country with 
respect to which the President has made a proclamation under 
subsection (a) have been modified so that the tax on the 
transfer of estates of decedents who were citizens of the 
United States and not residents of such foreign country is no 
longer more burdensome than the tax imposed by this subchapter 
on the transfer of estates of decedents who were residents of 
such foreign country, he shall proclaim that the tax on the 
transfer of the estate of every decedent who was a resident of 
such foreign country at the time of his death shall, in the 
case of decedents dying after the date of such proclamation, be 
determined under this subchapter without regard to subsection 
(a).
  [(c) Notification of Congress Required.--No proclamation 
shall be issued by the President pursuant to this section 
unless, at least 30 days prior to such proclamation, he has 
notified the Senate and the House of Representatives of his 
intention to issue such proclamation.
  [(d) Implementation by Regulations.--The Secretary shall 
prescribe such regulations as may be necessary or appropriate 
to implement this section.

                      [Subchapter C--Miscellaneous

        [Sec. 2201. Members of the Armed Forces dying in combat zone or 
                  by reason of combat-zone-incurred wounds, etc.
        [Sec. 2203. Definition of executor.
        [Sec. 2204. Discharge of fiduciary from personal liability.
        [Sec. 2205. Reimbursement out of estate.
        [Sec. 2206. Liability of life insurance beneficiaries.
        [Sec. 2207. Liability of recipient of property over which 
                  decedent had power of appointment.
        [Sec. 2207A. Right of recovery in the case of certain marital 
                  deduction property.
        [Sec. 2207B. Right of recovery where decedent retained interest.
        [Sec. 2208. Certain residents of possessions considered citizens 
                  of the United States.
        [Sec. 2209. Certain residents of possessions considered 
                  nonresidents not citizens of the United States.

[SEC. 2201. MEMBERS OF THE ARMED FORCES DYING IN COMBAT ZONE OR BY 
                    REASON OF COMBAT-ZONE-INCURRED WOUNDS, ETC.

  [The additional estate tax as defined in section 2011(d) 
shall not apply to the transfer of the taxable estate of a 
citizen or resident of the United States dying while in active 
service as a member of the Armed Forces of the United States, 
if such decedent--
          [(1) was killed in action while serving in a combat 
        zone, as determined under section 112(c); or
          [(2) died as a result of wounds, disease, or injury 
        suffered, while serving in a combat zone (as determined 
        under section 112(c)), and while in line of duty, by 
        reason of a hazard to which he was subjected as an 
        incident of such service.

[SEC. 2203. DEFINITION OF EXECUTOR.

  [The term ``executor'' wherever it is used in this title in 
connection with the estate tax imposed by this chapter means 
the executor or administrator of the decedent, or, if there is 
no executor or administrator appointed, qualified, and acting 
within the United States, then any person in actual or 
constructive possession of any property of the decedent.

[SEC. 2204. DISCHARGE OF FIDUCIARY FROM PERSONAL LIABILITY.

  [(a) General Rule.--If the executor makes written application 
to the Secretary for determination of the amount of the tax and 
discharge from personal liability therefor, the Secretary (as 
soon as possible, and in any event within 9 months after the 
making of such application, or, if the application is made 
before the return is filed, then within 9 months after the 
return is filed, but not after the expiration of the period 
prescribed for the assessment of the tax in section 6501) shall 
notify the executor of the amount of the tax. The executor, on 
payment of the amount of which he is notified (other than any 
amount the time for payment of which is extended under section 
6161, 6163, or 6166), and on furnishing any bond which may be 
required for any amount for which the time for payment is 
extended, shall be discharged from personal liability for any 
deficiency in tax thereafter found to be due and shall be 
entitled to a receipt or writing showing such discharge.
  [(b) Fiduciary Other Than the Executor.--If a fiduciary (not 
including a fiduciary in respect of the estate of a nonresident 
decedent) other than the executor makes written application to 
the Secretary for determination of the amount of any estate tax 
for which the fiduciary may be personally liable, and for 
discharge from personal liability therefor, the Secretary upon 
the discharge of the executor from personal liability under 
subsection (a), or upon the expiration of 6 months after the 
making of such application by the fiduciary, if later, shall 
notify the fiduciary (1) of the amount of such tax for which it 
has been determined the fiduciary is liable, or (2) that it has 
been determined that the fiduciary is not liable for any such 
tax. Such application shall be accompanied by a copy of the 
instrument, if any, under which such fiduciary is acting, a 
description of the property held by the fiduciary, and such 
other information for purposes of carrying out the provisions 
of this section as the Secretary may require by regulations. On 
payment of the amount of such tax for which it has been 
determined the fiduciary is liable (other than any amount the 
time for payment of which has been extended under section 6161, 
6163, or 6166), and on furnishing any bond which may be 
required for any amount for which the time for payment has been 
extended, or on receipt by him of notification of a 
determination that he is not liable for any such tax, the 
fiduciary shall be discharged from personal liability for any 
deficiency in such tax thereafter found to be due and shall be 
entitled to a receipt or writing evidencing such discharge.
  [(c) Special Lien Under Section 6324A.--For purposes of the 
second sentence of subsection (a) and the last sentence of 
subsection (b), an agreement which meets the requirements of 
section 6324A (relating to special lien for estate tax deferred 
under section 6166) shall be treated as the furnishing of bond 
with respect to the amount for which the time for payment has 
been extended under section 6166.
  [(d) Good Faith Reliance on Gift Tax Returns.--If the 
executor in good faith relies on gift tax returns furnished 
under section 6103(e)(3) for determining the decedent's 
adjusted taxable gifts, the executor shall be discharged from 
personal liability with respect to any deficiency of the tax 
imposed by this chapter which is attributable to adjusted 
taxable gifts which--
          [(1) are made more than 3 years before the date of 
        the decedent's death, and
          [(2) are not shown on such returns.

[SEC. 2205. REIMBURSEMENT OUT OF ESTATE.

  [If the tax or any part thereof is paid by, or collected out 
of, that part of the estate passing to or in the possession of 
any person other than the executor in his capacity as such, 
such person shall be entitled to reimbursement out of any part 
of the estate still undistributed or by a just and equitable 
contribution by the persons whose interest in the estate of the 
decedent would have been reduced if the tax had been paid 
before the distribution of the estate or whose interest is 
subject to equal or prior liability for the payment of taxes, 
debts, or other charges against the estate, it being the 
purpose and intent of this chapter that so far as is 
practicable and unless otherwise directed by the will of the 
decedent the tax shall be paid out of the estate before its 
distribution.

[SEC. 2206. LIABILITY OF LIFE INSURANCE BENEFICIARIES.

  [Unless the decedent directs otherwise in his will, if any 
part of the gross estate on which tax has been paid consists of 
proceeds of policies of insurance on the life of the decedent 
receivable by a beneficiary other than the executor, the 
executor shall be entitled to recover from such beneficiary 
such portion of the total tax paid as the proceeds of such 
policies bear to the taxable estate. If there is more than one 
such beneficiary, the executor shall be entitled to recover 
from such beneficiaries in the same ratio. In the case of such 
proceeds receivable by the surviving spouse of the decedent for 
which a deduction is allowed under section 2056 (relating to 
marital deduction), this section shall not apply to such 
proceeds except as to the amount thereof in excess of the 
aggregate amount of the marital deductions allowed under such 
section.

[SEC. 2207. LIABILITY OF RECIPIENT OF PROPERTY OVER WHICH DECEDENT HAD 
                    POWER OF APPOINTMENT.

  [Unless the decedent directs otherwise in his will, if any 
part of the gross estate on which the tax has been paid 
consists of the value of property included in the gross estate 
under section 2041, the executor shall be entitled to recover 
from the person receiving such property by reason of the 
exercise, nonexercise, or release of a power of appointment 
such portion of the total tax paid as the value of such 
property bears to the taxable estate. If there is more than one 
such person, the executor shall be entitled to recover from 
such persons in the same ratio. In the case of such property 
received by the surviving spouse of the decedent for which a 
deduction is allowed under section 2056 (relating to marital 
deduction), this section shall not apply to such property 
except as to the value thereof reduced by an amount equal to 
the excess of the aggregate amount of the marital deductions 
allowed under section 2056 over the amount of proceeds of 
insurance upon the life of the decedent receivable by the 
surviving spouse for which proceeds a marital deduction is 
allowed under such section.

[SEC. 2207A. RIGHT OF RECOVERY IN THE CASE OF CERTAIN MARITAL DEDUCTION 
                    PROPERTY.

  [(a) Recovery With Respect to Estate Tax.--
          [(1) In general.--If any part of the gross estate 
        consists of property the value of which is includible 
        in the gross estate by reason of section 2044 (relating 
        to certain property for which marital deduction was 
        previously allowed), the decedent's estate shall be 
        entitled to recover from the person receiving the 
        property the amount by which--
                  [(A) the total tax under this chapter which 
                has been paid, exceeds
                  [(B) the total tax under this chapter which 
                would have been payable if the value of such 
                property had not been included in the gross 
                estate.
          [(2) Decedent may otherwise direct.--Paragraph (1) 
        shall not apply with respect to any property to the 
        extent that the decedent in his will (or a revocable 
        trust) specifically indicates an intent to waive any 
        right of recovery under this subchapter with respect to 
        such property.
  [(b) Recovery With Respect to Gift Tax.--If for any calendar 
year tax is paid under chapter 12 with respect to any person by 
reason of property treated as transferred by such person under 
section 2519, such person shall be entitled to recover from the 
person receiving the property the amount by which--
          [(1) the total tax for such year under chapter 12, 
        exceeds
          [(2) the total tax which would have been payable 
        under such chapter for such year if the value of such 
        property had not been taken into account for purposes 
        of chapter 12.
  [(c) More Than One Recipient of Property.--For purposes of 
this section, if there is more than one person receiving the 
property, the right of recovery shall be against each such 
person.
  [(d) Taxes and Interest.--In the case of penalties and 
interest attributable to additional taxes described in 
subsections (a) and (b), rules similar to subsections (a), (b), 
and (c) shall apply.

[SEC. 2207B. RIGHT OF RECOVERY WHERE DECEDENT RETAINED INTEREST.

  [(a) Estate Tax.--
          [(1) In general.--If any part of the gross estate on 
        which tax has been paid consists of the value of 
        property included in the gross estate by reason of 
        section 2036 (relating to transfers with retained life 
        estate), the decedent's estate shall be entitled to 
        recover from the person receiving the property the 
        amount which bears the same ratio to the total tax 
        under this chapter which has been paid as--
                  [(A) the value of such property, bears to
                  [(B) the taxable estate.
          [(2) Decedent may otherwise direct.--Paragraph (1) 
        shall not apply with respect to any property to the 
        extent that the decedent in his will (or a revocable 
        trust) specifically indicates an intent to waive any 
        right of recovery under this subchapter with respect to 
        such property.
  [(b) More Than One Recipient.--For purposes of this section, 
if there is more than 1 person receiving the property, the 
right of recovery shall be against each such person.
  [(c) Penalties and Interest.--In the case of penalties and 
interest attributable to the additional taxes described in 
subsection (a), rules similar to the rules of subsections (a) 
and (b) shall apply.
  [(d) No Right of Recovery Against Charitable Remainder 
Trusts.--No person shall be entitled to recover any amount by 
reason of this section from a trust to which section 664 
applies (determined without regard to this section).

[SEC. 2208. CERTAIN RESIDENTS OF POSSESSIONS CONSIDERED CITIZENS OF THE 
                    UNITED STATES.

  [A decedent who was a citizen of the United States and a 
resident of a possession thereof at the time of his death 
shall, for purposes of the tax imposed by this chapter, be 
considered a ``citizen'' of the United States within the 
meaning of that term wherever used in this title unless he 
acquired his United States citizenship solely by reason of (1) 
his being a citizen of such possession of the United States, or 
(2) his birth or residence within such possession of the United 
States.

[SEC. 2209. CERTAIN RESIDENTS OF POSSESSIONS CONSIDERED NONRESIDENTS 
                    NOT CITIZENS OF THE UNITED STATES.

  [A decedent who was a citizen of the United States and a 
resident of a possession thereof at the time of his death 
shall, for purposes of the tax imposed by this chapter, be 
considered a ``nonresident not a citizen of the United States'' 
within the meaning of that term wherever used in this title, 
but only if such person acquired his United States citizenship 
solely by reason of (1) his being a citizen of such possession 
of the United States, or
          [(2) his birth or residence within such possession of 
        the United States.

                         [CHAPTER 12--GIFT TAX

        [Subchapter A. Determination of tax liability.
        [Subchapter B. Transfers.
        [Subchapter C. Deductions.

             [Subchapter A--Determination of Tax Liability

        [Sec. 2501. Imposition of tax.
        [Sec. 2502. Rate of tax.
        [Sec. 2503. Taxable gifts.
        [Sec. 2504. Taxable gifts for preceding calendar periods.
        [Sec. 2505. Unified credit against gift tax.

[SEC. 2501. IMPOSITION OF TAX.

  [(a) Taxable Transfers.--
          [(1) General rule.--A tax, computed as provided in 
        section 2502, is hereby imposed for each calendar year 
        on the transfer of property by gift during such 
        calendar year by any individual resident or 
        nonresident.
          [(2) Transfers of intangible property.--Except as 
        provided in paragraph (3), paragraph (1) shall not 
        apply to the transfer of intangible property by a 
        nonresident not a citizen of the United States.
          [(3) Exception.--
                  [(A) Certain individuals.--Paragraph (2) 
                shall not apply in the case of a donor who, 
                within the 10-year period ending with the date 
                of transfer, lost United States citizenship, 
                unless such loss did not have for one of its 
                principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.
                  [(B) Certain individuals treated as having 
                tax avoidance purpose.--For purposes of 
                subparagraph (A), an individual shall be 
                treated as having a principal purpose to avoid 
                such taxes if such individual is so treated 
                under section 877(a)(2).
                  [(C) Exception for certain individuals.--
                Subparagraph (B) shall not apply to a donor 
                meeting the requirements of section 877(c)(1).
                  [(D) Credit for foreign gift taxes.--The tax 
                imposed by this section solely by reason of 
                this paragraph shall be credited with the 
                amount of any gift tax actually paid to any 
                foreign country in respect of any gift which is 
                taxable under this section solely by reason of 
                this paragraph.
                  [(E) Cross reference.--

          [For comparable treatment of long-term lawful permanent 
        residents who ceased to be taxed as residents, see section 
        877(e).

          [(4) Burden of proof.--If the Secretary establishes 
        that it is reasonable to believe that an individual's 
        loss of United States citizenship would, but for 
        paragraph (3), result in a substantial reduction for 
        the calendar year in the taxes on the transfer of 
        property by gift, the burden of proving that such loss 
        of citizenship did not have for one of its principal 
        purposes the avoidance of taxes under this subtitle or 
        subtitle A shall be on such individual.
          [(5) Transfers to political organizations.--Paragraph 
        (1) shall not apply to the transfer of money or other 
        property to a political organization (within the 
        meaning of section 527(e)(1)) for the use of such 
        organization.
  [(b) Certain Residents of Possessions Considered Citizens of 
the United States.--A donor who is a citizen of the United 
States and a resident of a possession thereof shall, for 
purposes of the tax imposed by this chapter, be considered a 
``citizen'' of the United States within the meaning of that 
term wherever used in this title unless he acquired his United 
States citizenship solely by reason of (1) his being a citizen 
of such possession of the United States, or (2) his birth or 
residence within such possession of the United States.
  [(c) Certain Residents of Possessions Considered Nonresidents 
Not Citizens of the United States.--A donor who is a citizen of 
the United States and a resident of a possession thereof shall, 
for purposes of the tax imposed by this chapter, be considered 
a ``nonresident not a citizen of the United States'' within the 
meaning of that term wherever used in this title, but only if 
such donor acquired his United States citizenship solely by 
reason of (1) his being a citizen of such possession of the 
United States, or
          [(2) his birth or residence within such possession of 
        the United States.
  [(d) Cross References.--

          [(1) For increase in basis of property acquired by gift for 
        gift tax paid, see section 1015(d).
          [(2) For exclusion of transfers of property outside the United 
        States by a nonresident who is not a citizen of the United 
        States, see section 2511(a).

[SEC. 2502. RATE OF TAX.

  [(a) Computation of Tax.--The tax imposed by section 2501 for 
each calendar year shall be an amount equal to the excess of--
          [(1) a tentative tax, computed under section 2001(c), 
        on the aggregate sum of the taxable gifts for such 
        calendar year and for each of the preceding calendar 
        periods, over
          [(2) a tentative tax, computed under such section, on 
        the aggregate sum of the taxable gifts for each of the 
        preceding calendar periods.
  [(b) Preceding Calendar Period.--Whenever used in this title 
in connection with the gift tax imposed by this chapter, the 
term ``preceding calendar period'' means--
          [(1) calendar years 1932 and 1970 and all calendar 
        years intervening between calendar year 1932 and 
        calendar year 1970,
          [(2) the first calendar quarter of calendar year 1971 
        and all calendar quarters intervening between such 
        calendar quarter and the first calendar quarter of 
        calendar year 1982, and
          [(3) all calendar years after 1981 and before the 
        calendar year for which the tax is being computed.
For purposes of paragraph (1), the term ``calendar year 1932'' 
includes only that portion of such year after June 6, 1932.
  [(c) Tax To Be Paid by Donor.--The tax imposed by section 
2501 shall be paid by the donor.

[SEC. 2503. TAXABLE GIFTS.

  [(a) General Definition.--The term ``taxable gifts'' means 
the total amount of gifts made during the calendar year, less 
the 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).
  [(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)).

[SEC. 2504. TAXABLE GIFTS FOR PRECEDING CALENDAR PERIODS.

  [(a) In General.--In computing taxable gifts for preceding 
calendar periods for purposes of computing the tax for any 
calendar year--
          [(1) there shall be treated as gifts such transfers 
        as were considered to be gifts under the gift tax laws 
        applicable to the calendar period in which the 
        transfers were made,
          [(2) there shall be allowed such deductions as were 
        provided for under such laws, and
          [(3) the specific exemption in the amount (if any) 
        allowable under section 2521 (as in effect before its 
        repeal by the Tax Reform Act of 1976) shall be applied 
        in all computations in respect of preceding calendar 
        periods ending before January 1, 1977, for purposes of 
        computing the tax for any calendar year.
  [(b) Exclusions From Gifts for Preceding Calendar Periods.--
In the case of gifts made to any person by the donor during 
preceding calendar periods, the amount excluded, if any, by the 
provisions of gift tax laws applicable to the periods in which 
the gifts were made shall not, for purposes of subsection (a), 
be included in the total amount of the gifts made during such 
preceding calendar periods.
  [(c) Valuation of Gifts.--If the time has expired under 
section 6501 within which a tax may be assessed under this 
chapter 12 (or under corresponding provisions of prior laws) 
on--
          [(1) the transfer of property by gift made during a 
        preceding calendar period (as defined in section 
        2502(b)); or
          [(2) an increase in taxable gifts required under 
        section 2701(d),the value thereof shall, for purposes 
        of computing the tax under this chapter, be the value 
        as finally determined (within the meaning of section 
        2001(f)(2)) for purposes of this chapter.
  [(d) Net Gifts.--The term ``net gifts'' as used in 
corresponding provisions of prior laws shall be read as 
``taxable gifts'' for purposes of this chapter.

[SEC. 2505. UNIFIED CREDIT AGAINST GIFT TAX.

  [(a) General Rule.--In the case of a citizen or resident of 
the United States, there shall be allowed as a credit against 
the tax imposed by section 2501 for each calendar year an 
amount equal to--
          [(1) The applicable credit amount in effect under 
        section 2010(c) for such calendar year, reduced by
          [(2) the sum of the amounts allowable as a credit to 
        the individual under this section for all preceding 
        calendar periods.
  [(b) Adjustment to Credit for Certain Gifts Made Before 
1977.--The amount allowable under subsection (a) shall be 
reduced by an amount equal to 20 percent of the aggregate 
amount allowed as a specific exemption under section 2521 (as 
in effect before its repeal by the Tax Reform Act of 1976) with 
respect to gifts made by the individual after September 8, 
1976.
  [(c) Limitation Based on Amount of Tax.--The amount of the 
credit allowed under subsection (a) for any calendar year shall 
not exceed the amount of the tax imposed by section 2501 for 
such calendar year.

                        [Subchapter B--Transfers

        [Sec. 2511. Transfers in general.
        [Sec. 2512. Valuation of gifts.
        [Sec. 2513. Gift by husband or wife to third party.
        [Sec. 2514. Powers of appointment.
        [Sec. 2515. Treatment of generation-skipping transfer tax.
        [Sec. 2516. Certain property settlements.
        [Sec. 2518. Disclaimers.
        [Sec. 2519. Disposition of certain life estates.

[SEC. 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.

[SEC. 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.
  [(c) Cross Reference.--

          [For individual's right to be furnished on request a statement 
        regarding any valuation made by the Secretary of a gift by that 
        individual, see section 7517.

[SEC. 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 is 
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.

[SEC. 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.

[SEC. 2515. TREATMENT OF GENERATION-SKIPPING TRANSFER TAX.

  [In the case of any taxable gift which is a direct skip 
(within the meaning of chapter 13), the amount of such gift 
shall be increased by the amount of any tax imposed on the 
transferor under chapter 13 with respect to such gift.

[SEC. 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.

[SEC. 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 day 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.

[SEC. 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).

                       [Subchapter C--Deductions

        [Sec. 2522. Charitable and similar gifts.
        [Sec. 2523. Gift to spouse.
        [Sec. 2524. Extent of deductions.

[SEC. 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 
        inures 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 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 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.
  [(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) 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.

[SEC. 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 
        terms ``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.
  [(i) Disallowance of Marital Deduction Where Spouse Not 
Citizen.--If the spouse of the donor is not a citizen of the 
United States--
          [(1) no deduction shall be allowed under this 
        section,
          [(2) section 2503(b) shall be applied with respect to 
        gifts which are made by the donor to such spouse and 
        with respect to which a deduction would be allowable 
        under this section but for paragraph (1) by 
        substituting ``$100,000'' for ``$10,000'', and
          [(3) the principles of sections 2515 and 2515A (as 
        such sections were in effect before their repeal by the 
        Economic Recovery Tax Act of 1981) shall apply, except 
        that the provisions of such section 2515 providing for 
        an election shall not apply.
This subsection shall not apply to any transfer resulting from 
the acquisition of rights under a joint and survivor annuity 
described in subsection (f)(6).

[SEC. 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.

           [CHAPTER 13--TAX ON GENERATION-SKIPPING TRANSFERS

        [Subchapter A. Tax imposed.
        [Subchapter B. Generation-skipping transfers.
        [Subchapter C. Taxable amount.
        [Subchapter D. GST exemption.
        [Subchapter E. Applicable rate; inclusion ratio.
        [Subchapter F. Other definitions and special rules.
        [Subchapter G. Administration.

                       [Subchapter A--Tax Imposed

        [Sec. 2601. Tax imposed.
        [Sec. 2602. Amount of tax.
        [Sec. 2603. Liability for tax.
        [Sec. 2604. Credit for certain State taxes.

[SEC. 2601. TAX IMPOSED.

  [A tax is hereby imposed on every generation-skipping 
transfer (within the meaning of subchapter B).

[SEC. 2602. AMOUNT OF TAX.

  [The amount of the tax imposed by section 2601 is--
          [(1) the taxable amount (determined under subchapter 
        C), multiplied by
          [(2) the applicable rate (determined under subchapter 
        E).

[SEC. 2603. LIABILITY FOR TAX.

  [(a) Personal Liability.--
          [(1) Taxable distributions.--In the case of a taxable 
        distribution, the tax imposed by section 2601 shall be 
        paid by the transferee.
          [(2) Taxable termination.--In the case of a taxable 
        termination or a direct skip from a trust, the tax 
        shall be paid by the trustee.
          [(3) Direct skip.--In the case of a direct skip 
        (other than a direct skip from a trust), the tax shall 
        be paid by the transferor.
  [(b) Source of Tax.--Unless otherwise directed pursuant to 
the governing instrument by specific reference to the tax 
imposed by this chapter, the tax imposed by this chapter on a 
generation-skipping transfer shall be charged to the property 
constituting such transfer.
  [(c) Cross Reference.--

          [For provisions making estate and gift tax provisions with 
        respect to transferee liability, liens, and related matters 
        applicable to the tax imposed by section 2601, see section 2661.

[SEC. 2604. CREDIT FOR CERTAIN STATE TAXES.

  [(a) General Rule.--If a generation-skipping transfer (other 
than a direct skip) occurs at the same time as and as a result 
of the death of an individual, a credit against the tax imposed 
by section 2601 shall be allowed in an amount equal to the 
generation-skipping transfer tax actually paid to any State in 
respect to any property included in the generation-skipping 
transfer.
  [(b) Limitation.--The aggregate amount allowed as a credit 
under this section with respect to any transfer shall not 
exceed 5 percent of the amount of the tax imposed by section 
2601 on such transfer.

              [Subchapter B--Generation-Skipping Transfers

        [Sec. 2611. Generation-skipping transfer defined.
        [Sec. 2612. Taxable termination; taxable distribution; direct 
                  skip.
        [Sec. 2613. Skip person and non-skip person defined.

[SEC. 2611. GENERATION-SKIPPING TRANSFER DEFINED.

  [(a) In General.--For purposes of this chapter, the term 
``generation-skipping transfer'' means--
          [(1) a taxable distribution,
          [(2) a taxable termination, and
          [(3) a direct skip.
  [(b) Certain Transfers Excluded.--The term ``generation-
skipping transfer'' does not include--
          [(1) any transfer which, if made inter vivos by an 
        individual, would not be treated as a taxable gift by 
        reason of section 2503(e) (relating to exclusion of 
        certain transfers for educational or medical expenses), 
        and
          [(2) any transfer to the extent--
                  [(A) the property transferred was subject to 
                a prior tax imposed under this chapter,
                  [(B) the transferee in the prior transfer was 
                assigned to the same generation as (or a lower 
                generation than) the generation assignment of 
                the transferee in this transfer, and
                  [(C) such transfers do not have the effect of 
                avoiding tax under this chapter with respect to 
                any transfer.

[SEC. 2612. TAXABLE TERMINATION; TAXABLE DISTRIBUTION; DIRECT SKIP.

  [(a) Taxable Termination.--
          [(1) General rule.--For purposes of this chapter, the 
        term ``taxable termination'' means the termination (by 
        death, lapse of time, release of power, or otherwise) 
        of an interest in property held in a trust unless--
                  [(A) immediately after such termination, a 
                non-skip person has an interest in such 
                property, or
                  [(B) at no time after such termination may a 
                distribution (including distributions on 
                termination) be made from such trust to a skip 
                person.
          [(2) Certain partial terminations treated as 
        taxable.--If, upon the termination of an interest in 
        property held in trust by reason of the death of a 
        lineal descendant of the transferor, a specified 
        portion of the trust's assets are distributed to 1 or 
        more skip persons (or 1 or more trusts for the 
        exclusive benefit of such persons), such termination 
        shall constitute a taxable termination with respect to 
        such portion of the trust property.
  [(b) Taxable Distribution.--For purposes of this chapter, the 
term ``taxable distribution'' means any distribution from a 
trust to a skip person (other than a taxable termination or a 
direct skip).
  [(c) Direct Skip.--For purposes of this chapter--
          [(1) In general.--The term ``direct skip'' means a 
        transfer subject to a tax imposed by chapter 11 or 12 
        of an interest in property to a skip person.
          [(2) Look-thru rules not to apply.--Solely for 
        purposes of determining whether any transfer to a trust 
        is a direct skip, the rules of section 2651(f)(2) shall 
        not apply.

[SEC. 2613. SKIP PERSON AND NON-SKIP PERSON DEFINED.

  [(a) Skip Person.--For purposes of this chapter, the term 
``skip person'' means--
          [(1) a natural person assigned to a generation which 
        is 2 or more generations below the generation 
        assignment of the transferor, or
          [(2) a trust--
                  [(A) if all interests in such trust are held 
                by skip persons, or
                  [(B) if--
                          [(i) there is no person holding an 
                        interest in such trust, and
                          [(ii) at no time after such transfer 
                        may a distribution (including 
                        distributions on termination) be made 
                        from such trust to a nonskip person.
  [(b) Non-Skip Person.--For purposes of this chapter, the term 
``non-skip person'' means any person who is not a skip person.

                     [Subchapter C--Taxable Amount

        [Sec. 2621. Taxable amount in case of taxable distribution.
        [Sec. 2622. Taxable amount in case of taxable termination.
        [Sec. 2623. Taxable amount in case of direct skip.
        [Sec. 2624. Valuation.

[SEC. 2621. TAXABLE AMOUNT IN CASE OF TAXABLE DISTRIBUTION

  [(a) In General.--For purposes of this chapter, the taxable 
amount in the case of any taxable distribution shall be--
          [(1) the value of the property received by the 
        transferee, reduced by
          [(2) any expense incurred by the transferee in 
        connection with the determination, collection, or 
        refund of the tax imposed by this chapter with respect 
        to such distribution.
  [(b) Payment of GST Tax Treated as Taxable Distribution.--For 
purposes of this chapter, if any of the tax imposed by this 
chapter with respect to any taxable distribution is paid out of 
the trust, an amount equal to the portion so paid shall be 
treated as a taxable distribution.

[SEC. 2622. TAXABLE AMOUNT IN CASE OF TAXABLE TERMINATION.

  [(a) In General.--For purposes of this chapter, the taxable 
amount in the case of a taxable termination shall be--
          [(1) the value of all property with respect to which 
        the taxable termination has occurred, reduced by
          [(2) any deduction allowed under subsection (b).
  [(b) Deduction for Certain Expenses.--For purposes of 
subsection (a), there shall be allowed a deduction similar to 
the deduction allowed by section 2053 (relating to expenses, 
indebtedness, and taxes) for amounts attributable to the 
property with respect to which the taxable termination has 
occurred.

[SEC. 2623. TAXABLE AMOUNT IN CASE OF DIRECT SKIP.

  [For purposes of this chapter, the taxable amount in the case 
of a direct skip shall be the value of the property received by 
the transferee.

[SEC. 2624. VALUATION.

  [(a) General Rule.--Except as otherwise provided in this 
chapter, property shall be valued as of the time of the 
generation-skipping transfer.
  [(b) Alternate Valuation and Special Use Valuation Elections 
Apply to Certain Direct Skips.--In the case of any direct skip 
of property which is included in the transferor's gross estate, 
the value of such property for purposes of this chapter shall 
be the same as its value for purposes of chapter 11 (determined 
with regard to sections 2032 and 2032A).
  [(c) Alternate Valuation Election Permitted in the Case of 
Taxable Terminations Occurring at Death.--If 1 or more taxable 
terminations with respect to the same trust occur at the same 
time as and as a result of the death of an individual, an 
election may be made to value all of the property included in 
such terminations in accordance with section 2032.
  [(d) Reduction for Consideration Provided by Transferee.--For 
purposes of this chapter, the value of the property transferred 
shall be reduced by the amount of any consideration provided by 
the transferee.

                      [Subchapter D--GST Exemption

        [Sec. 2631. GST Exemption.
        [Sec. 2632. Special rules for allocation of GST exemption.

[SEC. 2631. GST EXEMPTION.

  [(a) General Rule.--For purposes of determining the inclusion 
ratio, every individual shall be allowed a GST exemption of 
$1,000,000 which may be allocated by such individual (or his 
executor) to any property with respect to which such individual 
is the transferor.
  [(b) Allocations Irrevocable.--Any allocation under 
subsection (a), once made, shall be irrevocable.
  [(c) Inflation Adjustment.--
          [(1) In general.--In the case of any calendar year 
        after 1998, the $1,000,000 amount contained in 
        subsection (a) shall be increased by an amount equal 
        to--
                  [(A) $1,000,000, 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.
          [(2) Allocation of increase.--Any increase under 
        paragraph (1) for any calendar year shall apply only to 
        generation-skipping transfers made during or after such 
        calendar year; except that no such increase for 
        calendar years after the calendar year in which the 
        transferor dies shall apply to transfers by such 
        transferor.

[SEC. 2632. SPECIAL RULES FOR ALLOCATION OF GST EXEMPTION.

  [(a) Time and Manner of Allocation.--
          [(1) Time.--Any allocation by an individual of his 
        GST exemption under section 2631(a) may be made at any 
        time on or before the date prescribed for filing the 
        estate tax return for such individual's estate 
        (determined with regard to extensions), regardless of 
        whether such a return is required to be filed.
          [(2) Manner.--The Secretary shall prescribe by forms 
        or regulations the manner in which any allocation 
        referred to in paragraph (1) is to be made.
  [(b) Deemed Allocation to Certain Lifetime Direct Skips.--
          [(1) In general.--If any individual makes a direct 
        skip during his lifetime, any unused portion of such 
        individual's GST exemption shall be allocated to the 
        property transferred to the extent necessary to make 
        the inclusion ratio for such property zero. If the 
        amount of the direct skip exceeds such unused portion, 
        the entire unused portion shall be allocated to the 
        property transferred.
          [(2) Unused portion.--For purposes of paragraph (1), 
        the unused portion of an individual's GST exemption is 
        that portion of such exemption which has not previously 
        been allocated by such individual (or treated as 
        allocated under paragraph (1) with respect to a prior 
        direct skip).
          [(3) Subsection not to apply in certain cases.--An 
        individual may elect to have this subsection not apply 
        to a transfer.
  [(c) Allocation of Unused GST Exemption.--
          [(1) In general.--Any portion of an individual's GST 
        exemption which has not been allocated within the time 
        prescribed by subsection (a) shall be deemed to be 
        allocated as follows--
                  [(A) first, to property which is the subject 
                of a direct skip occurring at such individual's 
                death, and
                  [(B) second, to trusts with respect to which 
                such individual is the transferor and from 
                which a taxable distribution or a taxable 
                termination might occur at or after such 
                individual's death.
          [(2) Allocation within categories.--
                  [(A) In general.--The allocation under 
                paragraph (1) shall be made among the 
                properties described in subparagraph (A) 
                thereof and the trusts described in 
                subparagraph (B) thereof, as the case may be, 
                in proportion to the respective amounts (at the 
                time of allocation) of the nonexempt portions 
                of such properties or trusts.
                  [(B) Nonexempt portion.--For purposes of 
                subparagraph (A), the term ``nonexempt 
                portion'' means the value (at the time of 
                allocation) of the property or trust, 
                multiplied by the inclusion ratio with respect 
                to such property or trust.

            [Subchapter E--Applicable Rate; Inclusion Ratio

        [Sec. 2641. Applicable rate.
        [Sec. 2642. Inclusion rate.

[SEC. 2641. APPLICABLE RATE.

  [(a) General Rule.--For purposes of this chapter, the term 
``applicable rate'' means, with respect to any generation-
skipping transfer, the product of--
          [(1) the maximum Federal estate tax rate, and
          [(2) the inclusion ratio with respect to the 
        transfer.
  [(b) Maximum Federal Estate Tax Rate.--For purposes of 
subsection (a), the term ``maximum Federal estate tax rate'' 
means the maximum rate imposed by section 2001 on the estates 
of decedents dying at the time of the taxable distribution, 
taxable termination, or direct skip, as the case may be.

[SEC. 2642. INCLUSION RATIO.

  [(a) Inclusion Ratio Defined.--For purposes of this chapter--
          [(1) In general.--Except as otherwise provided in 
        this section, the inclusion ratio with respect to any 
        property transferred in a generation-skipping transfer 
        shall be the excess (if any) of 1 over--
                  [(A) except as provided in subparagraph (B), 
                the applicable fraction determined for the 
                trust from which such transfer is made, or
                  [(B) in the case of a direct skip, the 
                applicable fraction determined for such skip.
          [(2) Applicable fraction.--For purposes of paragraph 
        (1), the applicable fraction is a fraction--
                  [(A) the numerator of which is the amount of 
                the GST exemption allocated to the trust (or in 
                the case of a direct skip, allocated to the 
                property transferred in such skip), and
                  [(B) the denominator of which is--
                          [(i) the value of the property 
                        transferred to the trust (or involved 
                        in the direct skip), reduced by
                          [(ii) the sum of--
                                  [(I) any Federal estate tax 
                                or State death tax actually 
                                recovered from the trust 
                                attributable to such property, 
                                and
                                  [(II) any charitable 
                                deduction allowed under section 
                                2055 or 2522 with respect to 
                                such property.
  [(b) Valuation Rules, Etc.--Except as provided in subsection 
(f)--
          [(1) Gifts for which gift tax return filed or deemed 
        allocation made.--If the allocation of the GST 
        exemption to any property is made on a gift tax return 
        filed on or before the date prescribed by section 
        6075(b) or is deemed to be made under section 
        2632(b)(1)--
                  [(A) the value of such property for purposes 
                of subsection (a) shall be its value for 
                purposes of chapter 12, and
                  [(B) such allocation shall be effective on 
                and after the date of such transfer.
          [(2) Transfers and allocations at or after death.--
                  [(A) Transfers at death.--If property is 
                transferred as a result of the death of the 
                transferor, the value of such property for 
                purposes of subsection (a) shall be its value 
                for purposes of chapter 11; except that, if the 
                requirements prescribed by the Secretary 
                respecting allocation of post-death changes in 
                value are not met, the value of such property 
                shall be determined as of the time of the 
                distribution concerned.
                  [(B) Allocations to property transferred at 
                death of transferor.--Any allocation to 
                property transferred as a result of the death 
                of the transferor shall be effective on and 
                after the date of the death of the transferor.
          [(3) Allocations to inter vivos transfers not made on 
        timely filed gift tax return.--If any allocation of the 
        GST exemption to any property not transferred as a 
        result of the death of the transferor is not made on a 
        gift tax return filed on or before the date prescribed 
        by section 6075(b) and is not deemed to be made under 
        section 2632(b)(1)--
                  [(A) the value of such property for purposes 
                of subsection (a) shall be determined as of the 
                time such allocation is filed with the 
                Secretary, and
                  [(B) such allocation shall be effective on 
                and after the date on which such allocation is 
                filed with the Secretary.
          [(4) QTIP trusts.--If the value of property is 
        included in the estate of a spouse by virtue of section 
        2044, and if such spouse is treated as the transferor 
        of such property under section 2652(a), the value of 
        such property for purposes of subsection (a) shall be 
        its value for purposes of chapter 11 in the estate of 
        such spouse.
  [(c) Treatment of Certain Direct Skips Which are Nontaxable 
Gifts.--
          [(1) In general.--In the case of a direct skip which 
        is a nontaxable gift, the inclusion ratio shall be 
        zero.
          [(2) Exception for certain transfers in trust.--
        Paragraph (1) shall not apply to any transfer to a 
        trust for the benefit of an individual unless--
                  [(A) during the life of such individual, no 
                portion of the corpus or income of the trust 
                may be distributed to (or for the benefit of) 
                any person other than such individual, and
                  [(B) if the trust does not terminate before 
                the individual dies, the assets of such trust 
                will be includible in the gross estate of such 
                individual.
        Rules similar to the rules of section 2652(c)(3) shall 
        apply for purposes of subparagraph (A).
          [(3) Nontaxable gift.--For purposes of this 
        subsection, the term ``nontaxable gift'' means any 
        transfer of property to the extent such transfer is not 
        treated as a taxable gift by reason of--
                  [(A) section 2503(b) (taking into account the 
                application of section 2513), or
                  [(B) section 2503(e).
  [(d) Special Rules Where More Than 1 Transfer Made to 
Trust.--
          [(1) In general.--If a transfer of property is made 
        to a trust in existence before such transfer, the 
        applicable fraction for such trust shall be recomputed 
        as of the time of such transfer in the manner provided 
        in paragraph (2).
          [(2) Applicable fraction.--In the case of any such 
        transfer, the recomputed applicable fraction is a 
        fraction--
                  [(A) the numerator of which is the sum of--
                          [(i) the amount of the GST exemption 
                        allocated to property involved in such 
                        transfer, plus
                          [(ii) the nontax portion of such 
                        trust immediately before such transfer, 
                        and
                  [(B) the denominator of which is the sum of--
                          [(i) the value of the property 
                        involved in such transfer reduced by 
                        the sum of--
                                  [(I) any Federal estate tax 
                                or State death tax actually 
                                recovered from the trust 
                                attributable to such property, 
                                and
                                  [(II) any charitable 
                                deduction allowed under section 
                                2055 or 2522 with respect to 
                                such property, and
                          [(ii) the value of all of the 
                        property in the trust (immediately 
                        before such transfer).
          [(3) Nontax portion.--For purposes of paragraph (2), 
        the term ``nontax portion'' means the product of--
                  [(A) the value of all of the property in the 
                trust, and
                  [(B) the applicable fraction in effect for 
                such trust.
          [(4) Similar recomputation in case of certain late 
        allocations.--If--
                  [(A) any allocation of the GST exemption to 
                property transferred to a trust is not made on 
                a timely filed gift tax return required by 
                section 6019, and
                  [(B) there was a previous allocation with 
                respect to property transferred to such trust,
the applicable fraction for such trust shall be recomputed as 
of the time of such allocation under rules similar to the rules 
of paragraph (2).
  [(e) Special Rules for Charitable Lead Annuity Trusts.--
          [(1) In general.--For purposes of determining the 
        inclusion ratio for any charitable lead annuity trust, 
        the applicable fraction shall be a fraction--
                  [(A) the numerator of which is the adjusted 
                GST exemption, and
                  [(B) the denominator of which is the value of 
                all of the property in such trust immediately 
                after the termination of the charitable lead 
                annuity.
          [(2) Adjusted gst exemption.--For purposes of 
        paragraph (1), the adjusted GST exemption is an amount 
        equal to the GST exemption allocated to the trust 
        increased by interest determined--
                  [(A) at the interest rate used in determining 
                the amount of the deduction under section 2055 
                or 2522 (as the case may be) for the charitable 
                lead annuity, and
                  [(B) for the actual period of the charitable 
                lead annuity.
          [(3) Definitions.--For purposes of this subsection--
                  [(A) Charitable lead annuity trust.--The term 
                ``charitable lead annuity trust'' means any 
                trust in which there is a charitable lead 
                annuity.
                  [(B) Charitable lead annuity.--The term 
                ``charitable lead annuity'' means any interest 
                in the form of a guaranteed annuity with 
                respect to which a deduction was allowed under 
                section 2055 or 2522 (as the case may be).
          [(4) Coordination with subsection (d).--Under 
        regulations, appropriate adjustments shall be made in 
        the application of subsection (d) to take into account 
        the provisions of this subsection.
  [(f) Special Rules for Certain Inter Vivos Transfers.--Except 
as provided in regulations--
          [(1) In general.--For purposes of determining the 
        inclusion ratio, if--
                  [(A) an individual makes an inter vivos 
                transfer of property, and
                  [(B) the value of such property would be 
                includible in the gross estate of such 
                individual under chapter 11 if such individual 
                died immediately after making such transfer 
                (other than by reason of section 2035),
        any allocation of GST exemption to such property shall 
        not be made before the close of the estate tax 
        inclusion period (and the value of such property shall 
        be determined under paragraph (2)). If such transfer is 
        a direct skip, such skip shall be treated as occurring 
        as of the close of the estate tax inclusion period.
          [(2) Valuation.--In the case of any property to which 
        paragraph (1) applies, the value of such property shall 
        be--
                  [(A) if such property is includible in the 
                gross estate of the transferor (other than by 
                reason of section 2035), its value for purposes 
                of chapter 11, or
                  [(B) if subparagraph (A) does not apply, its 
                value as of the close of the estate tax 
                inclusion period (or, if any allocation of GST 
                exemption to such property is not made on a 
                timely filed gift tax return for the calendar 
                year in which such period ends, its value as of 
                the time such allocation is filed with the 
                Secretary).
          [(3) Estate tax inclusion period.--For purposes of 
        this subsection, the term ``estate tax inclusion 
        period'' means any period after the transfer described 
        in paragraph (1) during which the value of the property 
        involved in such transfer would be includible in the 
        gross estate of the transferor under chapter 11 if he 
        died. Such period shall in no event extend beyond the 
        earlier of--
                  [(A) the date on which there is a generation-
                skipping transfer with respect to such 
                property, or
                  [(B) the date of the death of the transferor.
          [(4) Treatment of spouse.--Except as provided in 
        regulations, any reference in this subsection to an 
        individual or transferor shall be treated as including 
        a reference to the spouse of such individual or 
        transferor.
          [(5) Coordination with subsection (d).--Under 
        regulations, appropriate adjustments shall be made in 
        the application of subsection (d) to take into account 
        the provisions of this subsection.

           [Subchapter F--Other Definitions and Special Rules

        [Sec. 2651. Generation assignment.
        [Sec. 2652. Other definitions.
        [Sec. 2653. Taxation of multiple skips.
        [Sec. 2654. Special rules.

[SEC. 2651. GENERATION ASSIGNMENT.

  [(a) In General.--For purposes of this chapter, the 
generation to which any person (other than the transferor) 
belongs shall be determined in accordance with the rules set 
forth in this section.
  [(b) Lineal Descendants.--
          [(1) In general.--An individual who is a lineal 
        descendant of a grandparent of the transferor shall be 
        assigned to that generation which results from 
        comparing the number of generations between the 
        grandparent and such individual with the number of 
        generations between the grandparent and the transferor.
          [(2) On spouse's side.--An individual who is a lineal 
        descendant of a grandparent of a spouse (or former 
        spouse) of the transferor (other than such spouse) 
        shall be assigned to that generation which results from 
        comparing the number of generations between such 
        grandparent and such individual with the number of 
        generations between such grandparent and such spouse.
          [(3) Treatment of legal adoptions, etc.--For purposes 
        of this subsection--
                  [(A) Legal adoptions.--A relationship by 
                legal adoption shall be treated as a 
                relationship by blood.
                  [(B) Relationships by half-blood.--A 
                relationship by the half-blood shall be treated 
                as a relationship of the whole-blood.
  [(c) Marital Relationship.--
          [(1) Marriage to transferor.--An individual who has 
        been married at any time to the transferor shall be 
        assigned to the transferor's generation.
          [(2) Marriage to other lineal descendants.--An 
        individual who has been married at any time to an 
        individual described in subsection (b) shall be 
        assigned to the generation of the individual so 
        described.
  [(d) Persons Who Are Not Lineal Descendants.--An individual 
who is not assigned to a generation by reason of the foregoing 
provisions of this section shall be assigned to a generation on 
the basis of the date of such individual's birth with--
          [(1) an individual born not more than 12-1/2 years 
        after the date of the birth of the transferor assigned 
        to the transferor's generation,
          [(2) an individual born more than 12-1/2 years but 
        not more than 37\1/2\ years after the date of the birth 
        of the transferor assigned to the first generation 
        younger than the transferor, and
          [(3) similar rules for a new generation every 25 
        years.
  [(e) Special Rule for Persons With a Deceased Parent.--
          [(1) In general.--For purposes of determining whether 
        any transfer is a generation-skipping transfer, if--
                  [(A) an individual is a descendant of a 
                parent of the transferor (or the transferor's 
                spouse or former spouse), and
                  [(B) such individual's parent who is a lineal 
                descendant of the parent of the transferor (or 
                the transferor's spouse or former spouse) is 
                dead at the time the transfer (from which an 
                interest of such individual is established or 
                derived) is subject to a tax imposed by chapter 
                11 or 12 upon the transferor (and if there 
                shall be more than 1 such time, then at the 
                earliest such time),
        such individual shall be treated as if such individual 
        were a member of the generation which is 1 generation 
        below the lower of the transferor's generation or the 
        generation assignment of the youngest living ancestor 
        of such individual who is also a descendant of the 
        parent of the transferor (or the transferor's spouse or 
        former spouse), and the generation assignment of any 
        descendant of such individual shall be adjusted 
        accordingly.
          [(2) Limited application of subsection to collateral 
        heirs.--This subsection shall not apply with respect to 
        a transfer to any individual who is not a lineal 
        descendant of the transferor (or the transferor's 
        spouse or former spouse) if, at the time of the 
        transfer, such transferor has any living lineal 
        descendant.
  [(f) Other Special Rules.--
          [(1) Individuals assigned to more than 1 
        generation.--Except as provided in regulations, an 
        individual who, but for this subsection, would be 
        assigned to more than 1 generation shall be assigned to 
        the youngest such generation.
          [(2) Interests through entities.--Except as provided 
        in paragraph (3), if an estate, trust, partnership, 
        corporation, or other entity has an interest in 
        property, each individual having a beneficial interest 
        in such entity shall be treated as having an interest 
        in such property and shall be assigned to a generation 
        under the foregoing provisions of this subsection.
          [(3) Treatment of certain charitable organizations 
        and governmental entities.--Any--
                  [(A) organization described in section 
                511(a)(2),
                  [(B) charitable trust described in section 
                511(b)(2), and
                  [(C) governmental entity,
        shall be assigned to the transferor's generation.

[SEC. 2652. OTHER DEFINITIONS.

  [(a) Transferor.--For purposes of this chapter--
          [(1) In general.--Except as provided in this 
        subsection or section 2653(a), the term ``transferor'' 
        means--
                  [(A) in the case of any property subject to 
                the tax imposed by chapter 11, the decedent, 
                and
                  [(B) in the case of any property subject to 
                the tax imposed by chapter 12, the donor.
        An individual shall be treated as transferring any 
        property with respect to which such individual is the 
        transferor.
          [(2) Gift-splitting by married couples.--If, under 
        section 2513, one-half of a gift is treated as made by 
        an individual and one-half of such gift is treated as 
        made by the spouse of such individual, such gift shall 
        be so treated for purposes of this chapter.
          [(3) Special election for qualified terminable 
        interest property.--In the case of--
                  [(A) any trust with respect to which a 
                deduction is allowed to the decedent under 
                section 2056 by reason of subsection (b)(7) 
                thereof, and
                  [(B) any trust with respect to which a 
                deduction to the donor spouse is allowed under 
                section 2523 by reason of subsection (f) 
                thereof,
        the estate of the decedent or the donor spouse, as the 
        case may be, may elect to treat all of the property in 
        such trust for purposes of this chapter as if the 
        election to be treated as qualified terminable interest 
        property had not been made.
  [(b) Trust and Trustee.--
          [(1) Trust.--The term ``trust'' includes any 
        arrangement (other than an estate) which, although not 
        a trust, has substantially the same effect as a trust.
          [(2) Trustee.--In the case of an arrangement which is 
        not a trust but which is treated as a trust under this 
        subsection, the term ``trustee'' shall mean the person 
        in actual or constructive possession of the property 
        subject to such arrangement.
          [(3) Examples.--Arrangements to which this subsection 
        applies include arrangements involving life estates and 
        remainders, estates for years, and insurance and 
        annuity contracts.
  [(c) Interest.--
          [(1) In general.--A person has an interest in 
        property held in trust if (at the time the 
        determination is made) such person--
                  [(A) has a right (other than a future right) 
                to receive income or corpus from the trust,
                  [(B) is a permissible current recipient of 
                income or corpus from the trust and is not 
                described in section 2055(a), or
                  [(C) is described in section 2055(a) and the 
                trust is--
                          [(i) a charitable remainder annuity 
                        trust,
                          [(ii) a charitable remainder unitrust 
                        within the meaning of section 664, or
                          [(iii) a pooled income fund within 
                        the meaning of section 642(c)(5).
          [(2) Certain interests disregarded.--For purposes of 
        paragraph (1), an interest which is used primarily to 
        postpone or avoid any tax imposed by this chapter shall 
        be disregarded.
          [(3) Certain support obligations disregarded.--The 
        fact that income or corpus of the trust may be used to 
        satisfy an obligation of support arising under State 
        law shall be disregarded in determining whether a 
        person has an interest in the trust, if--
                  [(A) such use is discretionary, or
                  [(B) such use is pursuant to the provisions 
                of any State law substantially equivalent to 
                the Uniform Gifts to Minors Act.
  [(d) Executor.--For purposes of this chapter, the term 
``executor'' has the meaning given such term by section 2203.

[SEC. 2653. TAXATION OF MULTIPLE SKIPS.

  [(a) General Rule.--For purposes of this chapter, if--
          [(1) there is a generation-skipping transfer of any 
        property, and
          [(2) immediately after such transfer such property is 
        held in trust,
for purposes of applying this chapter (other than section 2651) 
to subsequent transfers from the portion of such trust 
attributable to such property, the trust will be treated as if 
the transferor of such property were assigned to the first 
generation above the highest generation of any person who has 
an interest in such trust immediately after the transfer.
  [(b) Trust Retains Inclusion Ratio.--
          [(1) In general.--Except as provided in paragraph 
        (2), the provisions of subsection (a) shall not affect 
        the inclusion ratio determined with respect to any 
        trust. Under regulations prescribed by the Secretary, 
        notwithstanding the preceding sentence, proper 
        adjustment shall be made to the inclusion ratio with 
        respect to such trust to take into account any tax 
        under this chapter borne by such trust which is imposed 
        by this chapter on the transfer described in subsection 
        (a).
          [(2) Special rule for pour-over trust.--
                  [(A) In general.--If the generation-skipping 
                transfer referred to in subsection (a) involves 
                the transfer of property from 1 trust to 
                another trust (hereinafter in this paragraph 
                referred to as the ``pour-over trust''), the 
                inclusion ratio for the pour-over trust shall 
                be determined by treating the nontax portion of 
                such distribution as if it were a part of a GST 
                exemption allocated to such trust.
                  [(B) Nontax portion.--For purposes of 
                subparagraph (A), the nontax portion of any 
                distribution is the amount of such distribution 
                multiplied by the applicable fraction which 
                applies to such distribution.

[SEC. 2654. SPECIAL RULES.

  [(a) Basis Adjustment.--
          [(1) In general.--Except as provided in paragraph 
        (2), if property is transferred in a generation-
        skipping transfer, the basis of such property shall be 
        increased (but not above the fair market value of such 
        property) by an amount equal to that portion of the tax 
        imposed by section 2601 (computed without regard to 
        section 2604) with respect to the transfer which is 
        attributable to the excess of the fair market value of 
        such property over its adjusted basis immediately 
        before the transfer. The preceding shall be applied 
        after any basis adjustment under section 1015 with 
        respect to the transfer.
          [(2) Certain transfers at death.--If property is 
        transferred in a taxable termination which occurs at 
        the same time as and as a result of the death of an 
        individual, the basis of such property shall be 
        adjusted in a manner similar to the manner provided 
        under section 1014(a); except that, if the inclusion 
        ratio with respect to such property is less than 1, any 
        increase or decrease in basis shall be limited by 
        multiplying such increase or decrease (as the case may 
        be) by the inclusion ratio.
  [(b) Certain Trusts Treated as Separate Trusts.--For purposes 
of this chapter--
          [(1) the portions of a trust attributable to 
        transfers from different transferors shall be treated 
        as separate trusts, and
          [(2) substantially separate and independent shares of 
        different beneficiaries in a trust shall be treated as 
        separate trusts.
Except as provided in the preceding sentence, nothing in this 
chapter shall be construed as authorizing a single trust to be 
treated as 2 or more trusts. For purposes of this subsection, a 
trust shall be treated as part of an estate during any period 
that the trust is so treated under section 645.
  [(c) Disclaimers.--For provisions relating to the effect of a 
qualified disclaimer for purposes of this chapter, see section 
2518.
  [(d) Limitation on Personal Liability of Trustee.--A trustee 
shall not be personally liable for any increase in the tax 
imposed by section 2601 which is attributable to the fact 
that--
          [(1) section 2642(c) (relating to exemption of 
        certain nontaxable gifts) does not apply to a transfer 
        to the trust which was made during the life of the 
        transferor and for which a gift tax return was not 
        filed, or
          [(2) the inclusion ratio with respect to the trust is 
        greater than the amount of such ratio as computed on 
        the basis of the return on which was made (or was 
        deemed made) an allocation of the GST exemption to 
        property transferred to such trust.
The preceding sentence shall not apply if the trustee has 
knowledge of facts sufficient reasonably to conclude that a 
gift tax return was required to be filed or that the inclusion 
ratio was erroneous.

                     [Subchapter G--Administration

        [Sec. 2661. Administration.
        [Sec. 2662. Return requirements.
        [Sec. 2663. Regulations.

[SEC. 2661. ADMINISTRATION.

  [Insofar as applicable and not inconsistent with the 
provisions of this chapter--
          [(1) except as provided in paragraph (2), all 
        provisions of subtitle F (including penalties) 
        applicable to the gift tax, to chapter 12, or to 
        section 2501, are hereby made applicable in respect of 
        the generation-skipping transfer tax, this chapter, or 
        section 2601, as the case may be, and
          [(2) in the case of a generation-skipping transfer 
        occurring at the same time as and as a result of the 
        death of an individual, all provisions of subtitle F 
        (including penalties) applicable to the estate tax, to 
        chapter 11, or to section 2001 are hereby made 
        applicable in respect of the generation-skipping 
        transfer tax, this chapter, or section 2601 (as the 
        case may be).

[SEC. 2662. RETURN REQUIREMENTS.

  [(a) In General.--The Secretary shall prescribe by 
regulations the person who is required to make the return with 
respect to the tax imposed by this chapter and the time by 
which any such return must be filed. To the extent practicable, 
such regulations shall provide that--
          [(1) the person who is required to make such return 
        shall be the person liable under section 2603(a) for 
        payment of such tax, and
          [(2) the return shall be filed--
                  [(A) in the case of a direct skip (other than 
                from a trust), on or before the date on which 
                an estate or gift tax return is required to be 
                filed with respect to the transfer, and
                  [(B) in all other cases, on or before the 
                15th day of the 4th month after the close of 
                the taxable year of the person required to make 
                such return in which such transfer occurs.
  [(b) Information Returns.--The Secretary may by regulations 
require a return to be filed containing such information as he 
determines to be necessary for purposes of this chapter.

[SEC. 2663. REGULATIONS.

  [The Secretary shall prescribe such regulations as may be 
necessary or appropriate to carry out the purposes of this 
chapter, including--
          [(1) such regulations as may be necessary to 
        coordinate the provisions of this chapter with the 
        recapture tax imposed under section 2032A(c),
          [(2) regulations (consistent with the principles of 
        chapters 11 and 12) providing for the application of 
        this chapter in the case of transferors who are 
        nonresidents not citizens of the United States, and
          [(3) regulations providing for such adjustments as 
        may be necessary to the application of this chapter in 
        the case of any arrangement which, although not a 
        trust, is treated as a trust under section 2652(b).

                  [CHAPTER 14--SPECIAL VALUATION RULES

        [Sec. 2701. Special valuation rules in case of transfers of 
                  certain interests in corporations or partnerships.
        [Sec. 2702. Special valuation rules in case of transfers of 
                  interests in trusts.
        [Sec. 2703. Certain rights and restrictions disregarded.
        [Sec. 2704. Treatment of certain lapsing rights and 
                  restrictions.

[SEC. 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) Election.--
                          [(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 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) Election 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.

[SEC. 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) Exemptions.--
                  [(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).

[SEC. 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.

[SEC. 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.]