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(e)(4)) for such calendar year. (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. (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, (C) a lineal descendant of such individual, of such individual's spouse, or of a parent of such individual, or (D) the spouse of any lineal descendant described in subparagraph (C). For purposes of the preceding sentence, a legally adopted child of an individual shall be treated as the child of such individual by blood. (3) Certain real property included In the case of real property which meets the requirements of subparagraph (C) of subsection (b)(1), residential buildings and related improvements on such real property occupied on a regular basis by the owner or lessee of such real property or by persons employed by such owner or lessee for the purpose of operating or maintaining such real property, and roads, buildings, and other structures and improvements functionally related to the qualified use shall be treated as real property devoted to the qualified use. (4) Farm The term "farm" includes stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands. (5) Farming purposes The term "farming purposes" means— (A) cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm; (B) handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and (C)(i) the planting, cultivating, caring for, or cutting of trees, or (ii) the preparation (other than milling) of trees for market. (6) Material participation Material participation shall be determined in a manner similar to the manner used for purposes of paragraph (1) of section 1402(a) (relating to net earnings from self-employment). (7) Method of valuing farms (A) In general Except as provided in subparagraph (B), the value of a farm for farming purposes shall be determined by dividing (i) the excess of the average annual gross cash rental for comparable land used for farming purposes and located in the locality of such farm over the average annual State and local real estate taxes for such comparable land, by (ii) the average annual effective interest rate for all new Federal Land Bank loans. For purposes of the preceding sentence, each average annual computation shall be made on the basis of the 5 most recent calendar years ending before the date of the decedent's death. (B) Value based on net share rental in certain cases (i) In general If there is no comparable land from which the average annual gross cash rental may be determined but there is comparable land from which the average net share rental may be determined, subparagraph (A)(i) shall be applied by substituting "average annual net share rental" for "average annual gross cash rental". (ii) Net share rental For purposes of this paragraph, the term "net share rental" means the excess of (I) the value of the produce received by the lessor of the land on which such produce is grown, over (II) the cash operating expenses of growing such produce which, under the lease, are paid by the lessor. (C) Exception The formula provided by subparagraph (A) shall not be used (i) where it is established that there is no comparable land from which the average annual gross cash rental may be determined, or (ii) where the executor elects to have the value of the farm for farming purposes determined and that there is no comparable land from which the average net share rental may be determined under paragraph (8). (8) Method of valuing closely held business interests, etc. In any case to which paragraph (7)(A) does not apply, the following factors shall apply in determining the value of any qualified real property: (A) The capitalization of income which the property can be expected to yield for farming or closely held business purposes over a reasonable period of time under prudent management using traditional cropping patterns for the area, taking into account soil capacity, terrain configuration, and similar factors, (B) The capitalization of the fair rental value of the land for farm land or closely held business purposes, (C) Assessed land values in a State which provides a differential or use value assess ment 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) at tributable 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 section 2-year period referred to in (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- 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 im posed 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). (Added Pub. L. 94-455, title XX, § 2003(a), Oct. 4, 1976, 90 Stat. 1856, and amended Pub. L. 95-472, § 4(a), (c), Oct. 17, 1978, 92 Stat. 1334, 1336; Pub. L. 95-600, title VII, § 702(d)(1), (2), (4), (5), Nov. 6, 1978, 92 Stat. 2928, 2929; Pub. L. 97-34, title IV, § 421(a)–(d)(2)(A), (e), (f), (h)-(j)(2)(A), (3), (4), Aug. 13, 1981, 95 Stat. 306-313; Pub. L. 97-448, title I, § 104(b)(1), (2), Jan. 12, 1983, 96 Stat. 2381.) REFERENCES IN TEXT The Social Security Act, referred to in subsec. (b)(4)(A)(i), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Title II of the Social Security Act is classified generally to subchapter II (§ 401 et seq.) of chapter 7 of Title 42, The Public Health and Welfare. For complete classification of this Act to the Code, see section 1305 of Title 42 and Tables. CODIFICATION Section 421(f)(2) of Pub. L. 97-34 which provided for amending subsec. (e)(7)(C) by inserting “and that there is no comparable land from which the average net share rental may be determined" following "determined" did not specify whether the language was to be inserted in cl. (i) or (ii) of subsec. (e)(7)(C). In view of H. Rept. No. 97-201, 97th Cong., July 14, 1981, p. 492, section 421(f)(2) of Pub. L. 97-34 was executed to subsec. (e)(7)(C)(ii) as the probable intent of Congress. AMENDMENTS 1983-Subsec. (b)(5)(C). Pub. L. 97-448, § 104(b)(1), added subpar. (C). Subsec. (i)(1)(B)(ii). Pub. L. 97-448, § 104(b)(2)(A), substituted "the qualified exchange property" for "the other property". Subsec. (i)(3). Pub. L. 97-448, § 104(b)(2)(B), substituted "subparagraph (A) or (B)" for "subparagraph (A), (B), or (C)". 1981-Subsec. (a)(2). Pub. L. 97-34, § 421(a), substituted heading "Limit on aggregate reduction in fair market value" for "Limitation" and in text "shall not exceed the applicable limit set forth in the following table:" for "shall not exceed $500,000", and inserted table. Subsec. (b)(1). Pub. L. 97-34, § 421(b)(1), substituted "qualified use by the decedent or a member of the decedent's family" for "qualified use" in provision preceding subpar. (A), and in subpars. (A)(i) and (C)(i). Subsec. (b)(4), (5). Pub. L. 97-34, § 421(b)(2), added pars. (4) and (5). Subsec. (c)(1). Pub. L. 97-34, § 421(c)(1)(A), substituted "10 years" for "15 years". Subsec. (c)(2)(E). Pub. L. 97-34, § 421(h)(2), added subpar. (E). Subsec. (c)(3). Pub. L. 97-34, § 421(c)(1)(B)(i), redesignated par. (4) as (3) and struck out former par. (3), which provided for a phaseout of additional tax between the 10th and 15th years. Subsec. (c)(4), (5). Pub. L. 97-34, § 421(c)(1)(B)(i), redesignated pars. (5) and (6) as (4) and (5), respectively. Former par. (4) redesignated (3). Subsec. (c)(6). Pub. L. 97-34, § 421(c)(2)(B)(ii), in subpar. (B) substituted "more than 3 years" for "3 years or more". Pub. L. 97-34, § 421(c)(1)(B)(i), redesignated par. (7) as (6). Former par. (6) redesignated (5). Subsec. (c)(7). Pub. L. 97-34, § 421(c)(1)(B)(i), (2)(A), added par. (7). Former par. (7) redesignated (6). Subsec. (d)(1). Pub. L. 97-34, § 421(j)(3), substituted "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." for "The election under this section shall be made not later than the time prescribed by section 6075(a) for filing the return of tax imposed by section 2001 (including extensions thereof), and shall be made in such manner as the Secretary shall by regulations prescribe." Subsec. (e)(2). Pub. L. 97-34, § 421(i), substituted provisions designated subpars. (A) through (D) for "such individual's ancestor or lineal descendant, a lineal descendant of a grandparent of such individual, the spouse of such individual, or the spouse of any such descendant". Subsec. (e)(7). Pub. L. 97-34, § 421(f), added subpar. (B) and redesignated former subpar. (B) as (C) and in subpar. (C)(ii), as so redesignated, inserted "and that there is no comparable land from which the average net share rental may be determined" following "determined". See Codification note above. Subsec. (e)(9). Pub. L. 97-34, § 421(j)(2)(A), struck out from subpar. (B) “in satisfaction of the right of such person to a pecuniary bequest" following "from the estate" and in subpar. (C) substituted "(to the extent such property is includible in the gross estate of the decedent)" for "in satisfaction of a right (which such person has by reason of the death of the decedent) to receive from the trust a specific dollar amount which is the equivalent of a pecuniary bequest". Subsec. (e)(12). Pub. L. 97-34, § 421(c)(2)(B)(i), added par. (12). Subsec. (e)(13), (14). Pub. L. 97-34, § 421(h)(1), (j)(4), added pars. (13) and (14). Subsec. (f)(1). Pub. L. 97-34, § 421(e)(2), substituted "to which subsection (h)" for "to which an election under subsection (h)". Pub. L. 97-34, § 421(d)(2)(A), substituted "conversion or exchange”, “(h) or (i)”, and “replace or of the exchange of property" for "conversion", "(h)”, and “replace". Subsec. (g). Pub. L. 97-34, § 421(j)(1), inserted provision that 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. |