If a family-owned business is a corporation, replacement of ownership is decided by

Editor's Note: Pub. L. 113-295, Div. A, Sec. 221(a)(97)(A), struck Sec. 2057, effective December 19, 2014.

I.R.C. § 2057(a) General Rule

I.R.C. § 2057(a)(1) Allowance Of Deduction —

For purposes of the tax imposed by section 2001, in the case of an estate of a decedent to which this section applies, the value of the taxable estate shall be determined by deducting from the value of the gross estate the adjusted value of the qualified family-owned business interests of the decedent which are described in subsection (b)(2).

I.R.C. § 2057(a)(2) Maximum Deduction —

The deduction allowed by this section shall not exceed $675,000.

I.R.C. § 2057(a)(3) Coordination With Unified Credit

I.R.C. § 2057(a)(3)(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.

I.R.C. § 2057(a)(3)(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.

I.R.C. § 2057(b) Estates To Which Section Applies

I.R.C. § 2057(b)(1) In General —

This section shall apply to an estate if—

I.R.C. § 2057(b)(1)(A) —

the decedent was (at the date of the decedent's death) a citizen or resident of the United States,

I.R.C. § 2057(b)(1)(B) —

the executor elects the application of this section and files the agreement referred to in subsection (h),

I.R.C. § 2057(b)(1)(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.R.C. § 2057(b)(1)(D)(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.

I.R.C. § 2057(b)(2) Includible Qualified Family-Owned Business Interests —

The qualified family-owned business interests described in this paragraph are the interests which—

I.R.C. § 2057(b)(2)(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)).

I.R.C. § 2057(b)(3) Includible Gifts Of Interests —

The amount of the gifts of qualified family-owned business interests determined under this paragraph is the sum of—

I.R.C. § 2057(b)(3)(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

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.

I.R.C. § 2057(c) Adjusted Gross Estate —

For purposes of this section, the term “adjusted gross estate” means the value of the gross estate—

I.R.C. § 2057(c)(1) —

reduced by any amount deductible under paragraph (3) or (4) of section 2053(a), and

I.R.C. § 2057(c)(2) —

increased by the excess of—

I.R.C. § 2057(c)(2)(A) —

the sum of—

I.R.C. § 2057(c)(2)(A)(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

I.R.C. § 2057(c)(2)(A)(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

I.R.C. § 2057(c)(2)(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.

I.R.C. § 2057(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—

I.R.C. § 2057(d)(1) —

any amount deductible under paragraph (3) or (4) of section 2053(a), over

I.R.C. § 2057(d)(2) —

the sum of—

I.R.C. § 2057(d)(2)(A) —

any indebtedness on any qualified residence of the decedent the interest on which is deductible under section 163(h)(3), plus

I.R.C. § 2057(d)(2)(B) —

any indebtedness to the extent the taxpayer establishes that the proceeds of such indebtedness were used for the payment of educational and medical expenses of the decedent, the decedent's spouse, or the decedent's dependents (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), plus

I.R.C. § 2057(d)(2)(C) —

any indebtedness not described in subparagraph (A) or (B), to the extent such indebtedness does not exceed $10,000.

I.R.C. § 2057(e) Qualified Family-Owned Business Interest

I.R.C. § 2057(e)(1) In General —

For purposes of this section, the term “qualified family-owned business interest” means—

I.R.C. § 2057(e)(1)(A) —

an interest as a proprietor in a trade or business carried on as a proprietorship, or

I.R.C. § 2057(e)(1)(B) —

an interest in an entity carrying on a trade or business, if—

I.R.C. § 2057(e)(1)(B)(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.

I.R.C. § 2057(e)(2) Limitation —

Such term shall not include—

I.R.C. § 2057(e)(2)(A) —

any interest in a trade or business the principal place of business of which is not located in the United States,

I.R.C. § 2057(e)(2)(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,

I.R.C. § 2057(e)(2)(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,

I.R.C. § 2057(e)(2)(D) —

that portion of an interest in a trade or business that is attributable to—

I.R.C. § 2057(e)(2)(D)(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

I.R.C. § 2057(e)(2)(D)(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.

I.R.C. § 2057(e)(3) Rules Regarding Ownership

I.R.C. § 2057(e)(3)(A) Ownership Of Entities —

For purposes of paragraph (1)(B)—

I.R.C. § 2057(e)(3)(A)(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.

I.R.C. § 2057(e)(3)(A)(ii) Partnerships —

Ownership of a partnership shall be determined by the owning of the appropriate percentage of the capital interest in such partnership.

I.R.C. § 2057(e)(3)(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.R.C. § 2057(e)(3)(B)(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

I.R.C. § 2057(e)(3)(B)(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.

I.R.C. § 2057(e)(3)(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.

I.R.C. § 2057(f) Tax Treatment Of Failure To Materially Participate In Business Or Dispositions Of Interests

I.R.C. § 2057(f)(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—

I.R.C. § 2057(f)(1)(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,

I.R.C. § 2057(f)(1)(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)),

I.R.C. § 2057(f)(1)(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

I.R.C. § 2057(f)(1)(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.

I.R.C. § 2057(f)(2) Additional Estate Tax

I.R.C. § 2057(f)(2)(A) In General —

The amount of the additional estate tax imposed by paragraph (1) shall be equal to—

I.R.C. § 2057(f)(2)(A)(i) —

the applicable percentage of the adjusted tax difference attributable to the qualified family-owned business interest, plus

I.R.C. § 2057(f)(2)(A)(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.

I.R.C. § 2057(f)(2)(B) Applicable Percentage —

For purposes of this paragraph, the applicable percentage shall be determined under the following table:

 

If the event described in        The applicable
paragraph (1) occurs in     material participation
the following year of :           percentage is:
     1 through 6                           100
       7                                           80
       8                                           60
       9                                           40
     10                                           20.

I.R.C. § 2057(f)(2)(C) Adjusted Tax Difference —

For purposes of subparagraph (A)—

I.R.C. § 2057(f)(2)(C)(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).

I.R.C. § 2057(f)(2)(C)(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.”

I.R.C. § 2057(f)(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.

I.R.C. § 2057(g) Security Requirements For Noncitizen Qualified Heirs

I.R.C. § 2057(g)(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.

I.R.C. § 2057(g)(2) Qualified Trust —

The term “qualified trust” means a trust—

I.R.C. § 2057(g)(2)(A) —

which is organized under, and governed by, the laws of the United States or a State, and

I.R.C. § 2057(g)(2)(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.

I.R.C. § 2057(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.R.C. § 2057(i) Other Definitions And Applicable Rules —

For purposes of this section—

I.R.C. § 2057(i)(1) Qualified Heir —

The term “qualified heir”—

I.R.C. § 2057(i)(1)(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.

I.R.C. § 2057(i)(2) Member Of The Family —

The term “member of the family” has the meaning given to such term by section 2032A(e)(2).

I.R.C. § 2057(i)(3) Applicable Rules —

Rules similar to the following rules shall apply:

I.R.C. § 2057(i)(3)(D) —

Section 2032A(c)(3) (relating to only 1 additional tax imposed with respect to any 1 portion).

I.R.C. § 2057(i)(3)(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).

I.R.C. § 2057(i)(3)(J) —

Section 2032A(e)(14) (relating to treatment of replacement property acquired in section 1031 or 1033 transactions).

I.R.C. § 2057(i)(3)(L) —

Section 2032A(g) (relating to application to interests in partnerships, corporations, and trusts).

I.R.C. § 2057(i)(3)(N) —

Section 6166(b)(3) (relating to farmhouses and certain other structures taken into account).

I.R.C. § 2057(i)(3)(O) —

Subparagraphs (B), (C), and (D) of section 6166(g)(1) (relating to acceleration of payment).

I.R.C. § 2057(j) Termination —

This section shall not apply to the estates of decedents dying after December 31, 2003.

(Added by Pub. L. 105-34, title V, Sec. 502(a), Aug. 5, 1997, 111 Stat. 788; amended by Pub. L. 105-206, title VI, Sec. 6007, July 22, 1998, 112 Stat. 685; Pub. L. 107-16, title V, Sec. 521(d), June 7, 2001, 115 Stat. 38; Pub. L. 108-311, title II, Sec. 207(23), Oct. 4, 2004, 118 Stat. 1166; repealed by Pub. L. 113-295, Div. A, title II, Sec. 221(a)(97)(A), Dec. 19, 2014, 128 Stat. 4010.)

2014 - Pub. L. 113-295, Div. A, Sec. 221(a)(97)(A), repealed Sec. 2057.

2004 - Subsec. (d)(2)(B). Pub. L. 108-311, Sec. 207(23), amended subpar. (B) by inserting “, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof” after “section 152”.

2001 - Subsec. (j). Pub. L. 107-16, Sec. 521(d), added subsec. (j).

1998 - Sec. 2033A. Pub. L. 105-206, Sec. 6007(b)(1)(A), redesignated Sec. 2033A as Sec. 2057.

Sec. 2057. Pub. L. 105-206, Sec. 6007(b)(1)(B), amended so much of Sec. 2057 as precedes subsec. (b). Prior to amendment it read as follows: Family-owned Business Exclusion

In the case of an estate of a decedent to which this section applies, the value of the gross estate shall not include the lesser of--

“(1) the adjusted value of the qualified family-owned business interests of the decedent otherwise includible in the estate, or

“(2) the excess of $1,300,000 over the applicable exclusion amount under section 2010(c) with respect to such estate.”

Subsec. (b)(2)(A). Pub. L. 105-206, Sec. 6007(b)(1)(C), amended subpar. (A) by striking “(without regard to this section)”.

Subsec. (b)(3). Pub. L. 105-206, Sec. 6007(b)(2), amended par. (3). Prior to amendment it read as follows:

“(3) Includible gifts of interests.--

The amount of the gifts of qualified family-owned business interests determined under this paragraph is the excess of--

“(i) the amount of such gifts from the decedent to members of the decedent's family taken into account under subsection 2001(b)(1)(B), plus

“(ii) the amount of such gifts otherwise excluded under section 2503(b),

to the extent such interests are continuously held by members of such family (other than the decedent's spouse) between the date of the gift and the date of the decedent's death, over

“(B) the amount of such gifts from the decedent to members of the decedent's family otherwise included in the gross estate.”

Subsec. (c). Pub. L. 105-206, Sec. 6007(b)(1)(D), amended subsec. (c) by striking “(determined without regard to this section)”.

Subsec. (e)(1). Pub. L. 105-206, Sec. 6007(b)(5)(A), amended par. (1) by adding the flush sentence at the end.

Subsec. (e)(2). Pub. L. 105-206, Sec. 6007(b)(3)(C), amended par. (2) by adding the flush sentence at the end.

Subsec. (e)(2)(C). Pub. L. 105-206, Sec. 6007(b)(3)(A), amended subpar. (C) by substituting “(as defined in section 543(a) without regard ot paragraph (2)(B) thereof)” for “(as defined in section 543(a))”.

Subsec. (e)(2)(D)(ii). Pub. L. 105-206, Sec. 6007(b)(3)(B), amended clause (ii) by substituting “personal holding company income (as defined in subparagraph (C)) or income described” for “income of which is described in section 543(a) or”.

Subsec. (f)(2). Pub. L. 105-206, Sec. 6007(b)(4), amended par. (2) by striking “(as determined under rules similar to the rules of section 2032A(c)(2)(B))” and by adding subpar. (C).

Subsec. (f)(3). Pub. L. 105-206, Sec. 6007(b)(5)(B), added par. (3).

Subsec. (g)(1). Pub. L. 105-206, Sec. 6007(b)(6), amended par. (1) by striking “or (M)”.

Subsec. (I)(3). Pub. L. 105-206, Sec. 6007(b)(7), amended par. (3) by redesignating subpars. (L), (M), and (N) as subpars. (N), (O), and (P), and added subpars. (L) and (M).

Repeal by Pub. L. 113-295, Div. A, Sec. 221(a)(97)(A), effective on the date of the enactment of this Act [Enacted: Dec. 19, 2014].

Section 221(b)(2) of Pub. L. 113-295, Div. A, provided the following Savings Provision:

“(2) SAVINGS PROVISION.—If—

“(A) any provision amended or repealed by the amendments made by this section applied to—

“(i) any transaction occurring before the date of the enactment of this Act [Enacted: Dec. 19, 2014],

“(ii) any property acquired before such date of enactment, or

“(iii) any item of income, loss, deduction, or credit taken into account before such date of enactment, and

“(B) the treatment of such transaction, property, or item under such provision would (without regard to the amendments or repeals made by this section) affect the liability for tax for periods ending after date of enactment, nothing in the amendments or repeals made by this section shall be construed to affect the treatment of such transaction, property, or item for purposes of determining liability for tax for periods ending after such date of enactment.”

EFFECTIVE DATE OF 2004 AMENDMENT

Amendment by Sec. 207(23) of Pub. L. 108-311 effective for taxable years beginning after December 31, 2004.

EFFECTIVE DATE OF 2001 AMENDMENT

Amendment by Sec. 521(d) of Pub. L. 107-16 effective for estates of decedents dying, and generation-skipping transfers, after December 31, 2003.

Section 901 (Sunset of Provisions of Act) of Pub. L. 107-16, as amended by Pub. L. 107-358 and Pub. L. 111-312, Sec. 101(a), and struck by Pub. L. 112-240, Sec. 101(a)(1) (effective for taxable, plan, or limitation years beginning after Dec. 31, 2012, and estates of decedents dying, gifts made, or generation skipping transfers after Dec. 31, 2012), provided that:

“(a) IN GENERAL.--All provisions of, and amendments made by, this Act shall not apply--

“(1) to taxable, plan, or limitation years beginning after December 31, 2012, or

“(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2012.

“(b) APPLICATION OF CERTAIN LAWS.--The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.

“(c) EXCEPTION.-Subsection (a) shall not apply to section 803 (relating to no federal income tax on restitution received by victims of the Nazi regime or their heirs or estates).”

EFFECTIVE DATE OF 1998 AMENDMENTS

Amendments made by Sec. 6007(b) of Pub. L. 105-206 effective as if included in the provisions of the Taxpayer Relief Act of 1997 to which they relate [Effective Date for Pub. L. 105-34, Sec. 502: Applicable to estates of decedents dying after December 31, 1997].

Applicable to estates of decedents dying after December 31, 1997.

A prior section 2057, added Pub. L. 99-514, title XI, Sec. 1172(a), Oct. 22, 1986, 100 Stat. 2513, and amended Pub. L. 100-203, title X, Sec. 10411(a), 10412(a), Dec. 22, 1987, 101 Stat. 1330-432, 1330-433; Pub. L. 100-647, title I, Sec. 1011B(g)(3), Nov. 10, 1988, 102 Stat. 3490, which related to sales of employer securities to employee stock ownership plans or worker-owned cooperatives was repealed by Pub. L. 101-239, title VII, Sec. 7304(a)(1), Dec. 19, 1989, 103 Stat. 2352, applicable to estates of decedents dying after Dec. 19, 1989.

A prior section 2057, added Pub. L. 94-455, title XX, Sec. 2007(a), Oct. 4, 1976, 90 Stat. 1890, and amended Pub. L. 95-600, title VII, Sec. 702(l)(1), (2), Nov. 6, 1978, 92 Stat. 2934, 2935, which related to bequests, etc., to certain minor children, was repealed by Pub. L. 97-34, title IV, Sec. 427(a), (c), Aug. 13, 1981, 95 Stat. 3181, applicable to estates of decedents dying after December 31, 1981.

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