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tractor) would not result in recapture of

not end for any part of the property until

Two-Year Grace

the benefits of the QFOBI deduction.

the later of the expiration of the recapture

Period:

period or the death of the last qualified

Each qualified heir is personally liable

heir.

for the portion of the recapture tax

imposed with respect to his or her interest

In determining whether the required

Commencement Date

in the qualified family-owned business.

participation has occurred, disregard brief

No additional tax is imposed if the

periods (e.g., 30 days or less) during

Thus, for example, if a brother and

qualified heir begins using the property in

which there was no material participation,

sister inherit a qualified family-owned

a qualified use within the 2-year period

as long as such periods were preceded

business from their father, and only the

after the decedent's death. The date on

and followed by substantial periods (more

sister materially participates in the

which the qualified heir begins to use the

than 120 days) during which there was

business, her participation will cause both

property in a qualified use is the

uninterrupted material participation.

her and her brother to meet the material

“commencement date.”

participation test.

Surviving spouse. A surviving spouse

The 10-year recapture period is

who received qualified real property from

If she ceases to materially participate

extended by the period after the

the predeceased spouse is considered to

in the business within 10 years after her

decedent's death and before the

have materially participated if he or she

father's death (and the brother still does

commencement date.

was engaged in the active management

not materially participate), the sister and

For example, if the decedent died

of the business.

brother would both be liable for the

February 28, 1999, and the

additional estate tax (i.e., each would be

For additional details regarding material

commencement date is August 1, 2000,

liable for the additional estate tax

participation, see Regulations section

the recapture period would begin August

attributable to his or her interest).

20.2032A-3(e).

1, 2000, and end July 31, 2001.

Disposition to family member. If a

Additional Estate Tax

transferee, who is a family member,

How To Complete Form

enters into an agreement to be personally

The amount of the additional estate tax is

706-D

liable for any additional tax under section

equal to the applicable percentage of the

2057, the disposition is nontaxable, and

adjusted tax difference attributable to the

You may only file Form 706-D for one

you should enter it on Schedule C.

QFOBI deduction. The applicable

qualified heir. If a disposition, cessation,

Otherwise, a disposition of an interest in

percentage is based on the number of

disqualifying act, involuntary conversion

property to a family member of the

years that the qualified heir (or members

or exchange, or nontaxable transfer

qualified heir is a taxable event, and you

of the qualified heir's family) materially

involves more than one qualified heir,

should enter it on Schedule A.

participated in the trade or business after

each must file a separate Form 706-D.

the decedent's death.

Complete Form 706-D in this order:

Material Participation

In addition, interest at the

1. Part I;

For this purpose, "material participation"

underpayment rate established under

2. Schedules A and B;

is defined under section 2032A (special

section 6621 for the period beginning on

3. Part II;

use valuation) and the related regulations.

the date the estate tax liability was due

4. Schedule C.

See, for example, Regulations section

under section 2001 and ending on the

20.2032A-3.

date such additional estate tax is due

(section 2057(f)(2)(A)).

Important: The qualified heir must sign

Under such regulations, no one factor

the return.

is determinative of the presence of

You may calculate this interest amount

material participation. The uniqueness of

yourself, or you may have the IRS

the particular industry (e.g., farming,

calculate it for you. If the IRS calculates

Specific Instructions

manufacturing, etc.) must be considered.

the interest, there may be additional

interest charged under section 6601 until

Physical work and participation in

the full amount is paid.

management decisions are the principal

Valuation

factors for consideration. For example, an

If you want the IRS to calculate the

individual generally is considered to be

interest, you may estimate the amount of

When computing the amounts to enter on

materially participating in the business if

interest and pay it with the tax, following

Form 706-D, use the same values and

he or she personally manages the

the Note below. This may avoid any

estate tax that the executor reported on

business fully, regardless of the number

additional interest.

the Form 706 filed for the decedent.

of hours worked, as long as any

Note: If you include interest with your

However, if the IRS has completed the

necessary functions are performed.

audit of the estate tax return, use the

payment, indicate the amount of interest

agreed values and tax rather than the

If a qualified heir rents qualifying

paid on the dotted line for line 15. Do not

property to a member of the qualified

include the interest in the entry space for

reported values and tax.

heir's family on a net cash basis, and that

line 15.

family member materially participates in

Schedule A. Disposition of

Applicable Percentage

the business, the material participation

Qualified Family-Owned

requirement is met with respect to the

Business Interest, Cessation

qualified heir for purposes of this

provision.

of Qualified Use, or

IF . . .

THEN . . .

If a qualified heir dies before the

Disqualifying Act

The taxable event

The applicable

required period has passed, any material

occurred in the following

percentage is:

year of material

participation requirement ends for that

How To Complete Schedule A

participation:

heir's portion of the property, provided the

On Schedule A, list every QFOBI or

heir received a separate or other

1 through 6 years .......... 100%

portion thereof that the qualified heir

undivided interest from the decedent.

7 years ..........

80%

disposed of, or discontinued use of, since

If qualified heirs receive successive

the date of the decedent's death and for

8 years ..........

60%

interests in specially valued property (e.g.,

which a Form 706-D has not been

a life estate and remainder interests) the

9 years ..........

40%

previously filed. You must also report any

material participation requirement does

disqualifying act regarding the QFOBI

10 years .........

20%

(i.e., the principal place of the qualified

family-owned business is no longer

Page 2

Instructions For Form 706-D - United States Additional Estate Tax Return Under Code Section 2057 - 2000 Page 2

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