S 1128 IS

To amend the Internal Revenue Code of 1986 to repeal the Federal estate and gift taxes and the tax on generation-skipping transfers, to provide for a carryover basis at death, and to establish a partial capital gains exclusion for inherited assets.

May 26, 1999

Mr. KYL (for himself, Mr. KERREY, Mr. NICKLES, Mr. BREAUX, Mr. MACK, Mr. ROBB, and Mr. GRAMM) introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to repeal the Federal estate and gift taxes and the tax on generation-skipping transfers, to provide for a carryover basis at death, and to establish a partial capital gains exclusion for inherited assets.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Estate Tax Elimination Act of 1999'.

SEC. 2. REPEAL OF CERTAIN FEDERAL TRANSFER TAXES.

(a) IN GENERAL- Subtitle B of the Internal Revenue Code of 1986 is hereby repealed.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 the date of enactment of this Act.

(c) TECHNICAL AND CONFORMING CHANGES- The Secretary of the Treasury or the Secretary's delegate shall, as soon as practicable but in any event not later than 90 days after the date of enactment of this Act, submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a draft of any technical and conforming changes in the Internal Revenue Code of 1986 which are necessary to reflect throughout such Code the changes in the substantive provisions of law made by this Act.

SEC. 3. TERMINATION OF A STEP UP IN BASIS AT DEATH.

(a) TERMINATION OF APPLICATION OF SECTION 1014- Section 1014 of the Internal Revenue Code of 1986 (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 the date of enactment of the Estate Tax Elimination Act of 1999, this section shall not apply to property for which basis is provided by section 1022.'

(b) CONFORMING AMENDMENT- Subsection (a) of section 1016 of the Internal Revenue Code of 1986 (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 the date of enactment of the Estate Tax Elimination Act of 1999.'

SEC. 4. CARRYOVER BASIS AT DEATH.

(a) GENERAL RULE- Part II of subchapter O of chapter 1 of the Internal Revenue Code of 1986 (relating to basis rules of general application) is amended by inserting after section 1021 the following:

`SEC. 1022. CARRYOVER BASIS FOR CERTAIN PROPERTY ACQUIRED FROM A DECEDENT.

`(a) CARRYOVER BASIS-

`(1) IN GENERAL- 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 is--

`(A) its initial basis, increased by

`(B) its allowable share of the decedent's exclusion allowance determined under subsection (c).

`(2) INITIAL BASIS- The initial basis of carryover basis property is its adjusted basis for purposes of determining gain immediately before the death of the decedent.

`(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 the date of enactment of the Estate Tax Elimination Act of 1999, and

`(B) which is not excluded pursuant to paragraph (2) or (3).

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) property which--

`(i) was acquired from the decedent before the decedent's death, and

`(ii) was sold, exchanged, or otherwise disposed of before the decedent's death by the person so acquiring it,

`(B) any item of gross income in respect of a decedent described in section 691;

`(C) property described in section 2042 (relating to proceeds of life insurance), as in effect on the day before the date of enactment of the Estate Tax Elimination Act of 1999;

`(D) property described in section 1014(b)(5); and

`(E) property which was acquired from the decedent by the surviving spouse of the decedent, the value of which 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 enactment of the Estate Tax Elimination Act of 1999.

`(3) $50,000 EXCLUSION FOR TANGIBLE PERSONAL PROPERTY-

`(A) EXCLUSION- The term `carryover basis property' does not include any tangible personal property--

`(i) which, in the hands of the decedent, was a capital asset, and

`(ii) with respect to which the executor has made an election under this paragraph.

`(B) LIMITATION- The fair market value of all assets designated under this subsection with respect to any decedent shall not exceed $50,000.

`(C) ELECTION- An election under this paragraph with respect to any asset shall be made by the executor not later than the date prescribed for filing the return required under section 6039H(a), and shall be made on such return.

`(c) EXCLUSION ALLOWANCE-

`(1) BASIS ADJUSTMENT-

`(A) IN GENERAL- The basis adjustment under this subsection for any carryover basis property is--

`(i) the portion of the decedent's family-owned business interest exclusion allowance which is allocated to property exclusively used by the qualified family-owned business interest pursuant to this section, and

`(ii) the portion of the decedent's general exclusion allowance which is allocated to property pursuant to this section (determined after the allocation under clause (i)).

`(B) LIMITATION- Such basis adjustment for any property shall not exceed the net appreciation in such property.

`(C) NET APPRECIATION- For purposes of this subsection, the net appreciation in value of any property is the amount by which--

`(i) the fair market value of such property, exceeds

`(ii) the initial basis of such property.

`(D) DECEDENT'S FAMILY-OWNED BUSINESS INTEREST EXCLUSION ALLOWANCE- In the case of any estate, the decedent's family-owned business interest exclusion allowance shall be equal to the lesser of--

`(i) the excess of--

`(I) $1,300,000, over

`(II) the applicable dollar amount, or

`(ii) the aggregate net appreciation of all carryover basis property exclusively used by the qualified family-owned business interest.

`(E) DECEDENT'S GENERAL EXCLUSION ALLOWANCE- In the case of any estate, the decedent's general exclusion allowance shall be equal to the lesser of--

`(i) the applicable amount, or

`(ii) the aggregate net appreciation of all carryover basis property not described in subparagraph (D)(ii).

`(F) APPLICABLE AMOUNT-

`(i) IN GENERAL- For purposes of this subsection, the applicable amount for any decedent is equal to the sum of--

`(I) the applicable dollar amount, and

`(II) in the case of a decedent with a deceased spouse whose decedent's allowance was less than the applicable amount for such spouse the unallocated portion of such amount.

`(ii) APPLICABLE DOLLAR AMOUNT- For purposes of clause (i)(I), the applicable dollar amount shall be the dollar amount set forth in the following table:

`In the case of estates of decedents

--The applicable

dying, and gifts made, during:

--dollar amount is:

1999

--$650,000

2000 and 2001

--$675,000

2002 and 2003

--$700,000

2004

--$850,000

2005

--$950,000

2006

--$1,000,000.

`(G) QUALIFIED FAMILY-OWNED BUSINESS INTEREST- For purposes of this section, the `qualified family-owned business interest' has the meaning given such term by section 2057(e), as in effect on the day before the date of enactment of the Estate Tax Elimination Act of 1999.

`(2) ALLOCATION RULES-

`(A) IN GENERAL- The executor shall allocate the adjustments under this subsection among the carryover basis properties on the return required under section 6039H(a).

`(B) CHANGES IN ALLOCATION- Any allocation made pursuant to subparagraph (A) may be changed at any time before the close of the 30th day after the initial basis finality date. The allocation in effect at the close of such 30th day may be changed only with the consent of the Secretary.

`(C) INITIAL BASIS FINALITY DATE- For purposes of this paragraph, the term `initial basis finality date' means the last day on which the initial basis of property may be changed in an administrative or judicial proceeding referred to in section 7480.

`(d) SPECIAL RULES AND DEFINITIONS- For purposes of this section--

`(1) TREATMENT OF ITEMS ON A CLASS BASIS- Under regulations prescribed by the Secretary, the holding periods, bases, and fair market value of similar items falling within the same class of property may be determined on a class basis rather than on an individual item basis.

`(2) PERSONAL AND HOUSEHOLD EFFECTS-

`(A) LOSS- In the case of any carryover basis property which, in the hands of the decedent, was a personal or household effect, for purposes of determining loss the basis of such property in the hands of the person acquiring such property from the decedent shall not exceed its fair market value.

`(B) DETERMINATION OF MINIMUM BASIS- The basis of any property which is a personal or household effect shall be treated as not greater than the fair market value of such property.

`(3) FAIR MARKET VALUE- For purposes of this section, when not otherwise distinctly expressed, the term `fair market value' means value determined without regard to whether there is a mortgage on, or indebtedness in respect of, the property.

`(4) FAIR MARKET VALUE LIMITATION- The adjustment under subsection (c) shall not increase the basis of property above its fair market value.

`(5) PROPERTY PASSING FROM THE DECEDENT- For purposes of this section, property passing from the decedent shall be treated as property acquired from the decedent.

`(6) NONRESIDENTS NOT CITIZENS- In the case of a decedent who was (at the time of his death) a nonresident not a citizen of the United States--

`(A) subsection (b)(3) shall not apply, and

`(B) there shall be no basis adjustment under subsection (c).

`(e) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.'

(b) PROCEDURE FOR BINDING DETERMINATION OF INITIAL BASIS-

(1) IN GENERAL- Part IV of subchapter C of chapter 76 of the Internal Revenue Code of 1986 (relating to declaratory judgments) is amended by adding at the end the following:

`SEC. 7480. PROCEDURE FOR BINDING DETERMINATION OF INITIAL BASIS OF CARRYOVER BASIS PROPERTY.

`(a) ADMINISTRATIVE AUDIT-

`(1) DESIGNATION BY EXECUTOR- An executor may request the Secretary to audit the initial basis of any carryover basis property which is shown on the return required under section 6039H(a). Any such request shall be made on such return.

`(2) AUTHORITY OF THE SECRETARY- For purposes of examining the correctness of the initial basis of any property with respect to which an executor has made a request under paragraph (1), the Secretary shall have the same authority as if he were determining the liability of any person for a tax imposed by this title.

`(b) JUDICIAL REVIEW-

`(1) BRINGING OF ACTION- If the executor and the Secretary have not entered into an agreement described in subsection (c)(2) with respect to any property for which a request has been made under subsection (a)(1), the executor may bring an action in the Tax Court with respect to such property.

`(2) DECLARATION BY TAX COURT- Upon the filing of an appropriate pleading in an action brought under paragraph (1), the Tax Court may make a declaration of the initial basis of the property with respect to which such an action is brought. Any such declaration shall be final and conclusive and shall not be reviewed by any other court.

`(3) TIME FOR BRINGING ACTION- No action may be brought under this subsection with respect to any property unless the pleading is filed--

`(A) after the expiration of 1 year after the date on which the executor made a request under subsection (a)(1) with respect to such property, and

`(B) before the 91st day after the later of--

`(i) the day on which the Secretary sends by certified or registered mail a notification of his disagreement with the initial basis of the property shown on the return required under section 6039H(a), or

`(ii) the expiration of the 1-year period referred to in subparagraph (A).

`(c) BINDING EFFECT OF DETERMINATIONS-

`(1) NO NOTICE FROM SECRETARY- If--

`(A) an executor makes a request under subsection (a)(1) with respect to the initial basis of any property, and

`(B) before the date 3 years after the day on which such request is made, the Secretary does not send to the executor by certified or registered mail notice of his disagreement with the initial basis of such property shown on the return required under section 6039H(a),

then the initial basis so shown shall be binding and conclusive on the Secretary and on any person whose basis in such property is affected by such initial basis unless any such person establishes a different initial basis to the satisfaction of the Secretary.

`(2) AGREEMENT BETWEEN SECRETARY AND EXECUTOR- If the executor and the Secretary sign a written agreement as to the initial basis of any property with respect to which the executor made a request under subsection (a)(1), such agreement shall be binding and conclusive on the Secretary and on any person whose basis in such property is affected by the initial basis in the same manner as if such agreement were a closing agreement under section 7121 between the Secretary and such person.

`(3) TAX COURT DECISION BINDING ON HEIRS- Any declaration of the initial basis of any property made by the Tax Court which has become final shall also be binding on any person whose basis in the property is affected by the initial basis.

`(d) INTERVENTION- Any person whose basis in any property is affected by the initial basis of any property shall be allowed to intervene in any administrative or judicial proceeding under this section with respect to such property.

`(e) DEFINITIONS- Terms used in this section which are also used in section 1022 shall have the meanings as when used in section 1022.'

(2) CLERICAL AMENDMENT- The table of sections for part IV of subchapter C of chapter 76 of such Code is amended by adding at the end the following:

`Sec. 7480. Procedure for binding determination of initial basis of carryover basis property.'

(c) INFORMATION RETURNS; ASSESSABLE PENALTY FOR NEGLIGENT OR FRAUDULENT OVERSTATEMENT OF INITIAL BASIS; PENALTIES FOR FAILURE TO FURNISH INFORMATION-

(1) INFORMATION RETURNS- Subpart A of part III of subchapter A of chapter 61 of the Internal Revenue Code of 1986 (relating to information concerning persons subject to special provisions) is amended by adding after section 6039G the following:

`SEC. 6039H. INFORMATION REGARDING CARRYOVER BASIS PROPERTY ACQUIRED FROM A DECEDENT.

`(a) IN GENERAL- Every executor shall furnish the Secretary such information with respect to carryover basis property to which section 1022 applies as the Secretary may by regulations prescribe.

`(b) STATEMENTS TO BE FURNISHED TO PERSONS WHO ACQUIRE PROPERTY FROM A DECEDENT- Every executor who is required to furnish information under subsection (a) shall furnish in writing to each person acquiring an item of such property from the decedent (or to whom the item passes from the decedent) the adjusted basis of such item.'

(2) PENALTIES- Part I of subchapter B of chapter 68 of such Code (relating to assessable penalties) is amended by adding at the end the following:

`SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CARRYOVER BASIS PROPERTY.

`(a) INFORMATION REQUIRED TO BE FURNISHED TO THE SECRETARY- Any executor who fails to furnish information required under section 6039H(a) on the date prescribed therefor (determined with regard to any extension of time for filing) shall, if such failure is due to negligence or intentional disregard of rules and regulations, pay a penalty of $100 for each such failure, but the total amount imposed for all such failures shall not exceed $5,000.

`(b) INFORMATION REQUIRED TO BE FURNISHED TO BENEFICIARIES- Any executor who fails to furnish in writing to each person described in section 6039H(b) the information required under such section shall, if such failure is due to negligence or intentional disregard of rules and regulations, pay a penalty of $50 for each such failure, but the total amount imposed for all such failures shall not exceed $2,500.

`(c) NEGLIGENT OR FRAUDULENT OVERSTATEMENT OF INITIAL BASIS-

`(1) NEGLIGENT OVERSTATEMENT- If any part of an initial basis overstatement is due to negligence or intentional disregard of rules and regulations (but without intent to defraud) by the executor, such executor shall pay a penalty equal to 10 percent of such overstatement.

`(2) FRAUDULENT OVERSTATEMENT- If any part of an initial basis overstatement is due to fraud by the executor, such executor shall pay a penalty equal to 30 percent of such overstatement.

`(3) INITIAL BASIS OVERSTATEMENT DEFINED- For purposes of this subsection, the term `initial basis overstatement' means the excess of--

`(A) the initial basis of any carryover basis property shown on the return required under section 6039H(a), over

`(B) the amount determined to be the initial basis of such property.

`(d) DEFICIENCY PROCEDURES NOT TO APPLY- Subchapter B of chapter 63 shall not apply in respect of the assessment or collection of any penalty imposed by this section.'

(3) CLERICAL AMENDMENTS-

(A) The table of sections for subpart A of part III of subchapter A of chapter 61 of such Code is amended by adding after the item relating to section 6039G the following:

`Sec. 6039H. Information regarding carryover basis property acquired from a decedent.'

(B) The table of sections for part I of subchapter B of chapter 68 of such Code is amended by adding at the end the following:

`Sec. 6716. Failure to file information with respect to carryover basis property.'

(d) 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(3) of the Internal Revenue Code of 1986 (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) of such Code (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(3)(C) for basis determined under section 1022.'

(2) DEFINITION OF EXECUTOR- Section 7701(a) of such Code (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.'

(e) EFFECTIVE DATE- The amendments made by this section shall apply to estates of decedents dying after the date of enactment of this Act.

END