This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
If an estate of a decedent dying before January 1, 2004, claimed a qualified family-owned business interest (QFOBI) deduction
on Schedule T of Form
706, United States Estate (and Generation-Skipping Transfer) Tax Return, each qualified heir assumed personal liability for
a portion of the reduction
in estate tax resulting from the QFOBI deduction.
Section 2057 imposes an additional estate tax on a qualified heir when certain “taxable events” occur with respect to a QFOBI received by the
qualified heir. The qualified heir uses Form 706-D to report and pay the additional estate tax. A qualified heir also uses
Form 706-D to report
certain nontaxable events.
Note.
In order to properly prepare Form 706-D, you will need a copy of, or information from, the original Form 706 that the executor
of the decedent's
estate filed with the IRS. Generally, any heir at law, next of kin, or beneficiary under the decedent's will is entitled to
inspect a return or
receive return information in the case of the return of an estate if such heir, next of kin, or beneficiary has a material
interest which will be
affected by information contained in the return of the estate. See section 6103(e)(1)(E)(ii).
Each qualified heir must file a Form 706-D to report:
-
A taxable event (see Taxable Events below),
-
An involuntary conversion or exchange of a QFOBI,
-
A transfer to a family member,
-
A qualified conservation contribution, or
-
The loss of U.S. citizenship if the QFOBI passes or is acquired or held in a qualified trust.
File Form 706-D and pay any additional tax due within 6 months after the taxable disposition, disqualifying act, or failure
to materially
participate in the QFOBI, unless an extension of time has been granted.
Use Form 4768 to apply for an automatic extension of time to file. Check the “Form 706-D” box in Part II of Form 4768.
Make the check or money order payable to the “United States Treasury” and write “Form 706-D” and the qualified heir's social security
number on the check or money order.
File Form 706-D at the following address:
Internal Revenue Service Center
Cincinnati, OH 45999
The additional estate tax may be assessed until 3 years after the IRS receives notice that the qualified heir disposed of
the QFOBI, material
participation ended, or a disqualifying act occurred.
However, if the property was disposed of in an involuntary conversion or in an exchange, the tax may be assessed up to 3 years
after the IRS
receives notice that the property was replaced or will not be replaced. See section 2032A(f) for details.
If the estate elected to take the QFOBI deduction, section 6324B establishes a special lien against the QFOBI equal to the
adjusted tax difference
attributable to such an interest.
Ownership rules.
Ownership of the business interest may either be direct, or indirect through a corporation, partnership, or a trust. An interest owned,
directly or indirectly, by or for such an entity, is considered owned proportionately by or for the entity's shareholders,
partners, or beneficiaries.
A person is the beneficiary of a trust only if he or she has a present interest in the trust.
Qualified heir.
A person is a
qualified heir of property if he or she is a member of the decedent's family and acquired or received the QFOBI from the
decedent.
If a qualified heir disposes of any QFOBI to any member of his or her family, that person will then be treated as
the qualified heir with respect
to that interest.
For the purpose of the QFOBI deduction, a qualified heir also includes any active employee of the trade or business to which
the QFOBI relates, if
the employee has been employed by the trade or business for a period of at least 10 years before the date of the decedent's
death.
Member of family.
The term “
member of the family” includes only:
-
An ancestor (parent, grandparent, etc.) of such individual;
-
The spouse of such individual;
-
The lineal descendent (child, stepchild, grandchild, etc.) of the individual, of the individual's spouse, or of a parent of
such individual;
and
-
The spouse, widow, or widower of any lineal descendent described above.
A legally adopted child of an individual is treated as a child of that individual by blood.
Section 2057 imposes an additional estate tax when there is a taxable event. A taxable event occurs if, within 10 years of the
decedent's death and before the qualified heir's death, one of the following events occurs:
-
The qualified heir disposes of any portion of his or her interest in the qualified family-owned business, other than by a
disposition to a
member of the qualified heir's family or through a qualified conservation contribution under section 170(h);
-
The qualified heir fails to meet material participation requirements because neither the qualified heir nor any member of
his or her family
has materially participated in the trade or business for at least 5 years of any 8-year period (see Material Participation
below);
-
The principal place of business of the qualified family-owned business ceases to be located in the United States; or
-
The qualified heir loses U.S. citizenship and a qualified trust was not created nor was a security arrangement made. (See
Loss of U.S.
citizenship on page 5 for more information.)
Note.
For special rules for involuntary conversions and exchanges, see the instructions for Schedule B on page 3.
The 10-year recapture period may be extended for a period of up to 2 years if the qualified heir does not begin to use the
property for a period of
up to 2 years after the decedent's death. (See Two-Year Grace Period—Commencement Date on page 3.)
Only one additional estate tax will be imposed with respect to any one interest in the qualified family-owned business. For
example, if additional
estate tax is imposed for failure to materially participate in the QFOBI, a second additional estate tax will not be imposed
for a subsequent early
disposition of the same part of the QFOBI.
A sale or disposition, in the ordinary course of business, of assets such as, inventory or a piece of equipment used in the
business (for example,
the sale of crops or a tractor) would not result in recapture of the benefits of the QFOBI deduction.
Also, a distribution in redemption of stock that is part of a QFOBI and that qualifies under section 303 is not a disposition
for recapture
purposes.
Each qualified heir is personally liable for the portion of the recapture tax imposed with respect to his or her interest
in the qualified
family-owned business.
Thus, for example, if a brother and sister inherit a qualified family-owned business from their father, and only the sister
materially participates
in the business, her participation will cause both her and her brother to meet the material participation test.
If she fails to materially participate in the business within 10 years after her father's death (and the brother still does
not materially
participate), the sister and brother would both be liable for the additional estate tax (that is, each would be liable for
the additional estate tax
attributable to his or her interest).
Disposition to family member.
If a transferee who is a family member enters into an agreement to be personally liable for any additional tax under
section 2057, the disposition
is nontaxable, and you should enter it on Schedule C. Otherwise, a disposition of an interest in property to a family member
of the qualified heir is
a taxable event, and you should enter it on Schedule A.
For this purpose, material participation is defined under section 2032A (special-use valuation) and the related regulations.
See Regulations
section 20.2032A-3.
Under such regulations, no one factor is determinative of the presence of material participation. The nature of the particular
industry (for
example, farming, manufacturing, etc.) must be considered.
Physical work and participation in management decisions are the principal factors for consideration. For example, an individual
generally is
considered to be materially participating in the business if he or she personally manages the business fully, regardless of
the number of hours
worked, as long as any necessary functions are performed.
If a qualified heir rents qualifying property to a member of the qualified heir's family on a net cash basis, and that family
member materially
participates in the business, the material participation requirement is met with respect to the qualified heir for purposes
of this provision.
If a qualified heir dies before the required period has passed, any material participation requirement ends for that heir's
portion of the
property, provided the heir received a separate or other undivided interest from the decedent.
If qualified heirs receive successive interests in the QFOBI (for example, a life estate and remainder interests) the material
participation
requirement does not end for any part of the property until the later of the expiration of the recapture period or the death
of the last qualified
heir.
In determining whether the required participation has occurred, disregard brief periods (for example, 30 days or less) during
which there was no
material participation, as long as such periods were preceded and followed by substantial periods (more than 120 days) during
which there was
uninterrupted material participation.
Surviving spouse.
A surviving spouse who received qualified real property from the predeceased spouse is considered to have materially
participated if he or she was
engaged in the active management of the business.
For additional details regarding material participation, see Regulations section 20.2032A-3(e).
The amount of the additional estate tax is equal to the applicable percentage of the adjusted tax difference attributable
to the QFOBI deduction.
The applicable percentage is based on the number of years that the qualified heir (or members of the qualified heir's family)
materially participated
in the trade or business after the decedent's death.
In addition, interest is due at the underpayment rate established under section 6621 for the period beginning on the date
the estate tax liability
was due under section 2001 and ending on the date such additional estate tax is due (section 2057(f)(2)(A)).
You may calculate this interest amount yourself, or you may have the IRS calculate it for you. If the IRS calculates the interest,
there may be
additional interest charged under section 6601 until the full amount is paid.
If you want the IRS to calculate the interest, you may estimate the amount of interest and pay it with the tax, following
the Note
below. This may avoid any additional interest.
Note.
If you include interest with your payment, indicate the amount of interest paid on the dotted line for line 15. Do not include
the interest in the
entry space for line 15.
Applicable Percentage
| IF the taxable event occurred in the following year of material participation. . . |
THEN the applicable percentage is . . . |
|
1 through 6 years
|
100%
|
|
7 years
|
80%
|
|
8 years
|
60%
|
|
9 years
|
40%
|
|
10 years
|
20%
|
Two-Year Grace Period— Commencement Date
No additional tax is imposed if the qualified heir begins material participation in the QFOBI within the 2-year period after
the decedent's death.
The date on which the qualified heir begins material participation is the commencement date.
The 10-year recapture period is extended by the period after the decedent's death and before the commencement date.
For example, if the decedent died February 28, 2003, and the commencement date is August 1, 2004, the recapture period would
begin August 1, 2004,
and end July 31, 2014.
How To Complete Form 706-D
You may only file Form 706-D for one qualified heir. If a disposition, failure to materially participate, disqualifying act,
involuntary conversion
or exchange, or nontaxable transfer involves more than one qualified heir, each must file a separate Form 706-D.
Complete Form 706-D in this order:
Note.
The qualified heir must sign the return.
-
Part I,
-
Schedules A and B,
-
Part II,
-
Schedule C.
