Limitation on discounts; valuation rules for certain transfers of nonbusiness assets

(a) In general Chapter 14 of subtitle B is amended by adding at the end the following new section: 2705. Limitation on discounts; valuation rules for certain transfers of nonbusiness assets (a) Limitation on discount by reason of family control (1) In general For purposes of this subtitle, in the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092), if the transferor, the transferee, and members of the family of the transferor and transferee have control of such entity immediately before such transfer, no discount shall be allowed— (A) by reason of the fact that the transferor or transferee does not have control of such entity, (B) by reason of the lack of marketability of the interest, or (C) for any other reason. (2) Definitions In this subsection, the terms control and member of the family have the same meanings given such terms in section 2704(c). (3) Attribution For purposes of this section, the rule of section 2701(e)(3) shall apply for purposes of determining the interests held by any individual. (b) Valuation rules for certain transfers of nonbusiness assets (1) In general For purposes of this subtitle, in the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)— (A) the value of any nonbusiness assets held by the entity with respect to such interest shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and (B) such nonbusiness assets shall not be taken into account in determining the value of the interest in the entity. (2) Nonbusiness assets For purposes of this subsection— (A) In general The term nonbusiness asset means any asset other than an asset which is used in the active conduct of a trade or business. (B) Passive assets treated as nonbusiness assets (i) In general For purposes of subparagraph (A), a passive asset shall be treated as a nonbusiness asset unless— (I) the asset is property described in paragraph (1) or (4) of section 1221(a) or is a hedge with respect to such property, or (II) the asset is real property used in the active conduct of 1 or more real property trades or businesses (within the meaning of section 469(c)(7)(C)) in which the transferor materially participates and with respect to which the transferor meets the requirements of section 469(c)(7)(B)(ii). (ii) Material participation For purposes of clause (i)(II), material participation shall be determined under the rules of section 469(h), except that section 469(h)(3) shall be applied without regard to the limitation to farming activity. (C) Working capital treated as used in trade or business Any asset (including a passive asset) which is held as a part of the reasonably required working capital needs of a trade or business shall be treated as used in the active conduct of a trade or business. (3) Passive asset For purposes of this subsection, the term passive asset means any— (A) cash or cash equivalents, (B) stock in a corporation or any other equity, profits, or capital interest in any entity, (C) evidence of indebtedness, option, forward or futures contract, notional principal contract, or derivative, (D) asset described in clause (iii), (iv), or (v) of section 351(e)(1)(B), (E) annuity, (F) real property used in 1 or more real property trades or businesses (as defined in section 469(c)(7)(C)), (G) asset (other than a patent, trademark, or copyright) which produces royalty income, (H) commodity, (I) collectible (within the meaning of section 408(m)), or (J) any other asset specified in regulations prescribed by the Secretary. (4) Look-thru rule (A) In general If a nonbusiness asset of an entity described in paragraph (1) consists of a 10-percent interest in any other entity, this subsection shall be applied by disregarding the 10-percent interest and by treating the entity as holding directly its ratable share of the assets of the other entity. (B) 10-percent interest The term 10-percent interest means— (i) in the case of an interest in a corporation, direct ownership of at least 10 percent (by vote or value) of the stock in such corporation, (ii) in the case of an interest in a partnership, direct ownership of at least 10 percent of the capital or profits interest in the partnership, and (iii) in any other case, direct ownership of at least 10 percent of the beneficial interests in the entity.. (b) Conforming amendments (1) Section 2031(b) of the Internal Revenue Code of 1986 is amended by inserting (after application of section 2705(b)) after shall be determined. (2) The table of sections of chapter 14 of subtitle B of such Code is amended by adding at the end the following: Sec. 2705. Limitation on discounts; valuation rules for certain transfers of nonbusiness assets.. (c) Effective date The amendments made by this section shall apply to transfers after the date of the enactment of this Act.