us internal revenue service: i706--1997

8/14/2019 US Internal Revenue Service: i706--1997

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Department of the TreasuryInternal Revenue Service

Instructions for Form 706(Revised April 1997)United States Estate (and Generation-Skipping Transfer)Tax ReturnFor decedents dying after October 8, 1990.Section references are to the Internal Revenue Code unless otherwise noted.

Paperwork Reduction Act Notice. We ask for the information on this form to carry out theInternal Revenue laws of the United States. You are required to give us the information. We needit to ensure that you are complying with these laws and to allow us to figure and collect the rightamount of tax.

You are not required to provide the information requested on a form that is subject to thePaperwork Reduction Act unless the form displays a valid OMB control number. Books or recordsrelating to a form or its instructions must be retained as long as their contents may becomematerial in the administration of any Internal Revenue law. Generally, tax returns and returninformation are confidential as required by section 6103.

The time needed to complete and file this form and related schedules will vary depending onindividual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates or suggestions formaking this form simpler, we would be happy to hear from you. You can write to the Tax FormsCommittee, Western Area Distribution Center, Rancho Cordova, CA 957430001. DO NOT sendthe tax form to this address. Instead, see Where To File on page 2.

General Instructions

Purpose of FormThe executor of a decedent's estate uses Form706 to figure the estate tax imposed by Chapter11 of the Internal Revenue Code. This tax islevied on the entire taxable estate, not just onthe share received by a particular beneficiary.Form 706 is also used to compute thegeneration-skipping transfer (GST) tax

To determine whether you must file a returnfor the estate, add:1. The adjusted taxable gifts (under section2001(b)) made by the decedent afterDecember 31, 1976;2. The total specific exemption allowedunder section 2521 (as in effect before itsrepeal by the Tax Reform Act of 1976) for giftsmade by the decedent after September 8,1976; and3. The decedent's gross estate valued atthe date of death.Note: Even if the amount computed above isless than $600,000, Form 706 may be requiredif the decedent had an excess retirementaccumulation in a qualified pension plan or anIRA. See the instructions for Schedule S onpage 20.

Gross Estate

The gross estate includes all property in whichthe decedent had an interest (including realproperty outside the United States). It alsoincludes:q Certain transfers made during the decedent'slife without an adequate and full considerationin money or money's worth;q Annuities;q The includible portion of joint estates withright of survivorship (see the instructions on theback of Schedule E);q

The includible portion of tenancies by theentirety (see the instructions on the back ofSchedule E);q Certain life insurance proceeds (even thoughpayable to beneficiaries other than theestate)(see the instructions on the back ofSchedule D);q Property over which the decedent possesseda general power of appointment;q Dower or curtesy (or statutory estate) of thesurviving spouse;q Community property to the extent of thedecedent's interest as defined by applicablelaw.

For more specific information, see theinstructions for Schedules A through I.

U.S. Citizens or Residents;

Nonresident NoncitizensFile Form 706 for the estates of decedents whowere either U.S. citizens or U.S. residents atthe time of death. For estate tax purposes, aresident is someone who had a domicile in theUnited States at the time of death. A personacquires a domicile by living in a place for evena brief period of time, as long as the personhad no intention of moving from that place.

File Form 706-NA, United States Estate(and Generation-Skipping Transfer) TaxReturn, Estate of nonresident not a citizen ofthe United States, for the estates ofnonresident alien decedents (decedents who

Form Recordkeeping

Learning about

the law or theform Preparingthe form

Copying,assembling, and

sending the formto the IRS

706 2 hr., 11 min. 1 hr., 31 min. 3 hr., 26 min. 49 min.Sch. A 20 min. 16 min. 10 min. 20 min.A1 46 min. 25 min. 59 min. 49 min.B 20 min. 10 min. 11 min. 20 min.C 13 min. 2 min. 8 min. 20 min.D 7 min. 6 min. 8 min. 20 min.E 40 min. 7 min. 24 min. 20 min.F 33 min. 8 min. 21 min. 20 min.G 26 min. 20 min. 11 min. 14 min.H 26 min. 7 min. 10 min. 14 min.I 26 min. 27 min. 11 min. 20 min.J 26 min. 6 min. 16 min. 20 min.K 26 min. 10 min. 10 min. 20 min.L 13 min. 5 min. 10 min. 20 min.M 13 min. 31 min. 24 min. 20 min.O 20 min. 11 min. 18 min. 17 min.

P 7 min. 14 min. 18 min. 14 min.Q 7 min. 10 min. 11 min. 14 min.Q Wksht. 7 min. 10 min. 59 min. 20 min.R 20 min. 34 min. 1 hr., 1 min. 49 min.R1 7 min. 29 min. 24 min. 20 min.S 26 min. 22 min. 37 min. 25 min.Contin. 20 min. 3 min. 7 min. 20 min.

AfterFor Decedents Dying

and BeforeUse Revision ofForm 706 Dated

- - - - - - - - - - - - January 1, 1982 November, 1981December 31, 1981 October 23, 1986 November, 1987

December 31, 1989 October 9, 1990 October, 1988October 8, 1990 - - - - - - - - - - - - April, 1997

imposed by Chapter 13 on direct skips(transfers to skip persons of interests inproperty included in the decedent's grossestate).

Which Estates Must FileForm 706 must be filed by the executor for theestate of every U.S. citizen or resident whosegross estate, plus adjusted taxable gifts andspecific exemption, is more than $600,000.

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were neither U.S. citizens nor residents at thetime of death).

Residents of U.S. Possessions

All references to citizens of the United Statesare subject to the provisions of sections 2208and 2209, relating to decedents who were U.S.citizens and residents of a U.S. possession onthe date of death. If such a decedent becamea U.S. citizen only because of his or herconnection with a possession, then thedecedent is considered a nonresident aliendecedent for estate tax purposes, and youshould file Form 706-NA. If such a decedentbecame a U.S. citizen wholly independently ofhis or her connection with a possession, thenthe decedent is considered a U.S. citizen forestate tax purposes, and you should file Form706.

ExecutorThe term executor means the executor,personal representative, or administrator of thedecedent's estate. If none of these isappointed, qualified, and acting in the UnitedStates, every person in actual or constructivepossession of any property of the decedent isconsidered an executor and must file a return.

When To File

You must file Form 706 to report estate and/orgeneration-skipping transfer tax within 9months after the date of the decedent's deathunless you receive an extension of time to file.Use Form 4768, Application for Extension ofTime To File a Return and/or Pay U.S. Estate(and Generation-Skipping Transfer) Taxes, toapply for an extension of time. If you receivedan extension, attach a copy of it to Form 706.

Where To FileUnless the return is hand carried to the officeof the District Director, please mail it to theInternal Revenue Service Center indicatedbelow for the state where the decedent wasdomiciled at the time of death. If you are filinga return for the estate of a nonresident U.S.citizen, mail it to the Internal Revenue Service

Center, Philadelphia, PA 19255, USA.

Where To File

Paying the TaxThe estate and GST taxes are due within 9months after the date of the decedent's deathunless an extension of time for payment hasbeen granted, or unless you have properlyelected under section 6166 to pay ininstallments, or under section 6163 to postponethe part of the tax attributable to a reversionary

or remainder interest. These elections aremade by checking lines 3 and 4 (respectively)of Part 3, Elections by the Executor, andattaching the required statements.

If the tax paid with the return is different fromthe balance due as figured on the return,explain the difference in an attached statement.If you have made prior payments to IRS orredeemed certain marketable United StatesTreasury bonds to pay the estate tax (see thelast paragraph of the instructions to ScheduleB), attach a statement to Form 706 includingthese facts. If an extension of time to pay hasbeen granted, attach a copy of the approvedForm 4768 to Form 706.

Make the check payable to the InternalRevenue Service. Please write the decedent'sname, social security number, and Form 706

on the check to assist us in posting it to theproper account.

Signature and VerificationIf there is more than one executor, all listedexecutors must verify and sign the return.All executors are responsible for the return asfiled and are liable for penalties provided forerroneous or false returns.

If two or more persons are liable for filing thereturn, they should all join together in filing onecomplete return. However, if they are unable to

join in making one complete return, each isrequired to file a return disclosing all theinformation the person has in the case,including the name of every person holding aninterest in the property and a full description ofthe property. If the appointed, qualified, andacting executor is unable to make a completereturn, then every person holding an interest inthe property must, on notice from the IRS,make a return regarding that interest.

The executor who files the return must, inevery case, sign the declaration on page 1under penalties of perjury. If the return isprepared by someone other than the personwho is filing the return, the preparer must alsosign at the bottom of page 1.

Amending Form 706There is no provision in the law for filing anamended Form 706. However, if you find that

you must change something on a return thathas already been filed, you should file anotherForm 706 and write SupplementalInformation across the top of page 1 of theform. If you have already been notified that thereturn has been selected for examination, youshould provide the additional informationdirectly to the office conducting theexamination.

Part 1

Line 2

Enter the social security number assignedspecifically to the decedent. You cannot usethe social security number assigned to thedecedent's spouse. If the decedent did nothave a social security number, the executorshould obtain one for the decedent by filingForm SS-5 with a local Social SecurityAdministration office.

Line 6aName of Executor

If there is more than one executor, enter thename of the executor to be contacted by theIRS. List the other executors' names,addresses, and SSNs (if applicable) on anattached sheet.

Line 6bExecutor's Address

Use Form 8822, Change of Address, to report

a change of the executor's address.

Line 6cExecutor's Social SecurityNumber

Only individual executors should complete thisline. If there is more than one individualexecutor, all should list their social securitynumbers on an attached sheet.

Supplemental DocumentsYou must attach the death certificate to thereturn.

If the decedent was a citizen or resident anddied testate, attach a certified copy of the willto the return. If you cannot obtain a certifiedcopy, attach a copy of the will and anexplanation of why it is not certified. Other

supplemental documents may be required asexplained below. Examples include Forms 712,709, 709-A, and 706-CE, trust and power ofappointment instruments, death certificate, andstate certification of payment of death taxes. Ifyou do not file these documents with the return,the processing of the return will be delayed.

If the decedent was a U.S. citizen but not aresident of the United States, you must attachthe following documents to the return: (1) acopy of the inventory of property and theschedule of liabilities, claims against the estate,and expenses of administration filed with theforeign court of probate jurisdiction, certified bya proper official of the court; (2) a copy of thereturn filed under the foreign inheritance,estate, legacy, succession tax, or other deathtax act, certified by a proper official of the

foreign tax department, if the estate is subjectto such a foreign tax; and (3) if the decedentdied testate, a certified copy of the will.

Rounding Off to Whole DollarsYou may show the money items on the returnand accompanying schedules as whole-dollaramounts. To do so, drop any amount less than50 cents and increase any amount from 50cents through 99 cents to the next higherdollar.

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, ElDorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska,Nevada, North Dakota,

Oregon, South Dakota,Utah, Washington, Wyoming

Ogden, UT 84201

California (all othercounties), Hawaii

Fresno, CA 93888

Alabama, Arkansas,Louisiana, Mississippi, NorthCarolina, Tennessee

Memphis, TN 37501

Florida, Georgia, SouthCarolina

Atlanta, GA 39901

Illinois, Iowa, Minnesota,Missouri, Wisconsin

Kansas City, MO 64999

New Jersey, New York (NewYork City and counties ofNassau, Rockland, Suffolk,and Westchester)

Holtsville, NY 00501

New York (all othercounties), Connecticut,Maine, Massachusetts, New

Hampshire, Rhode Island,Vermont

Andover, MA 05501

Delaware, District ofColumbia, Maryland,Pennsylvania, Virginia

Philadelphia, PA 19255

Indiana, Kentucky, Michigan,Ohio, West Virginia

Cincinnati, OH 45999

Kansas, New Mexico,Oklahoma, Texas

Austin, TX 73301

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PenaltiesLate filing and late payment. Section 6651provides for penalties for both late filing and forlate payment unless there is reasonable causefor the delay. The law also provides forpenalties for willful attempts to evade paymentof tax. The late filing penalty will not beimposed if the taxpayer can show that thefailure to file a timely return is due toreasonable cause. Executors filing late (afterthe due date, including extensions) shouldattach an explanation to the return to showreasonable cause.

Valuation understatement. Section 6662provides a penalty for the underpayment ofestate tax of $5,000 or more when theunderpayment is attributable to valuationunderstatements. A valuation understatementoccurs when the value of property reported onForm 706 is 50% or less of the actual value ofthe property.

This penalty increases to 40% if there is agross valuation understatement. A grossvaluation understatement occurs if anyproperty on the return is valued at 25% or lessof the value determined to be correct.

These penalties also apply to late filing, latepayment, and underpayment of GST taxes.

Specific InstructionsYou must file the first three pages of Form 706and all required schedules. Schedules Athrough I must be filed, as appropriate, tosupport the entries in items 1 through 9 of theRecapitulation.

If you enter zero on any item of theRecapitulation, you need not file the schedule(except for Schedule F) referred to on that item.

If you claim any deductions on items 11through 19 of the Recapitulation, you mustcomplete and attach the appropriate Schedulesto support the claimed deductions.

If you claim the credits for foreign deathtaxes or tax on prior transfers, you mustcomplete and attach Schedule P or Q.

Form 706 has 41 numbered pages. Thepages are perforated so that you can removethem for copying and filing. When you completethe return, staple all the required pagestogether in the proper order.

Number the items you list on each schedule,beginning with 1 each time. Total the itemslisted on the schedule and its attachments,Continuation Schedules, etc. Enter the total ofall attachments, Continuation Schedules, etc.,at the bottom of the printed schedule, but donot carry the totals forward from one scheduleto the next. Enter the total or totals for eachschedule on the Recapitulation, page 3, Form706.

Do not complete the Alternate valuationdate or Alternate value columns of anyschedule unless you elected alternate valuationon line 1 of Part 3, Elections by the Executor.

If there is not enough space on a scheduleto list all the items, attach a ContinuationSchedule (or additional sheets of the samesize) to the back of the schedule. TheContinuation Schedule is located at the end ofthe Form 706 package. You should photocopythe blank schedule before completing it if youwill need more than one copy.

Instructions for Part 3.Elections by the Executor

Line 1Alternate Valuation

Unless you elect at the time you file the returnto adopt alternate valuation as authorized by

section 2032, you must value all propertyincluded in the gross estate on the date of thedecedent's death. Alternate valuation cannotbe applied to only a part of the property. Youmay elect special use valuation (line 2) inaddition to alternate valuation.

You may not elect alternate valuation unlessthe election will decrease both the value of thegross estate and the total net estate and GSTtaxes due after application of all allowablecredits.

Alternate valuation is elected by checkingYes on line 1 and filing Form 706. Oncemade, the election may not be revoked. Theelection may be made on a late filed Form 706provided it is not filed later than 1 year after thedue date (including extensions).

If you elect alternate valuation, value theproperty that is included in the gross estate asof the applicable dates as follows:1. Any property distributed, sold, exchanged,or otherwise disposed of or separated orpassed from the gross estate by any methodwithin 6 months after the decedent's death isvalued on the date of distribution, sale,exchange, or other disposition, whicheveroccurs first. Value this property on the date itceases to form a part of the gross estate, thatis, on the date the title passes as the result ofits sale, exchange, or other disposition.2. Any property not distributed, sold,exchanged, or otherwise disposed of within the6-month period is valued on the date 6 monthsafter the date of the decedent's death.3. Any property, interest, or estate that isaffected by mere lapse of time is valued asof the date of decedent's death or on the dateof its distribution, sale, exchange, or otherdisposition, whichever occurs first. However,you may change the date of death value toaccount for any change in value that is not dueto a mere lapse of time on the date of itsdistribution, sale, exchange, or otherdisposition.

The property included in the alternatevaluation and valued as of 6 months after thedate of the decedent's death, or as of someintermediate date (as described above) is theproperty included in the gross estate on thedate of the decedent's death. Therefore, youmust first determine what property constitutedthe gross estate at the decedent's death.

Interest accrued to the date of thedecedent's death on bonds, notes, and otherinterest-bearing obligations is property of thegross estate on the date of death and isincluded in the alternate valuation. Rentaccrued to the date of the decedent's death onleased real or personal property is property ofthe gross estate on the date of death and isincluded in the alternate valuation.

Outstanding dividends that were declared tostockholders of record on or before the date ofthe decedent's death are considered propertyof the gross estate on the date of death, andare included in the alternate valuation. Ordinarydividends declared to stockholders of recordafter the date of the decedent's death are not

property of the gross estate on the date ofdeath and are not included in the alternatevaluation. However, if dividends are declaredto stockholders of record after the date of thedecedent's death so that the shares of stockat the later valuation date do not reasonablyrepresent the same property at the date of thedecedent's death, include those dividends(except dividends paid from earnings of thecorporation after the date of the decedent'sdeath) in the alternate valuation.

As part of each Schedule A through I, youmust show: (1) what property is included in thegross estate on the date of the decedent'sdeath; (2) what property was distributed, sold,exchanged, or otherwise disposed of within the6-month period after the decedent's death, andthe dates of these distributions, etc. These twoitems should be entered in the Descriptioncolumn of each schedule. Briefly explain thestatus or disposition governing the alternatevaluation date, such as: Not disposed of within6 months following death, Distributed,Sold, Bond paid on maturity, etc. In thissame column, describe each item of principal

and includible income; (3) the date of deathvalue, entered in the appropriate value columnwith items of principal and includible incomeshown separately; and (4) the alternate value,entered in the appropriate value column withitems of principal and includible income shownseparately. In the case of any interest or estate,the value of which is affected by lapse of time,such as patents, leaseholds, estates for the lifeof another, or remainder interests, the valueshown under the heading Alternate valuemust be the adjusted value (i.e., the value asof the date of death with an adjustmentreflecting any difference in its value as of thelater date not due to lapse of time).

Distributions, sales, exchanges, and otherdispositions of the property within the 6-monthperiod after the decedent's death must be

supported by evidence. If the court issued anorder of distribution during that period, youmust submit a certified copy of the order aspart of the evidence. The District Director mayrequire you to submit additional evidence ifnecessary.

If the alternate valuation method is used, thevalues of life estates, remainders, and similarinterests are figured using the age of therecipient on the date of the decedent's deathand the value of the property on the alternatevaluation date.

Line 2Special Use Valuation ofSection 2032A

In General. Under section 2032A, you mayelect to value certain farm and closely heldbusiness real property at its farm or business

use value rather than its fair market value. Youmay elect both special use valuation andalternate valuation.

To elect this valuation you must checkYes to line 2 and complete and attachSchedule A-1 and its required additionalstatements. You must file Schedule A-1 andits required attachments with Form 706 forthis election to be valid. You may make theelection on a late filed return so long as it is thefirst return filed.

The total value of the property valued undersection 2032A may not be decreased from fairmarket value by more than $750,000.

Real property may qualify for the section2032A election if:1. The decedent was a U.S. citizen orresident at the time of death;

2. The real property is located in the UnitedStates;3. At the decedent's death the real propertywas used by the decedent or a family memberfor farming or in a trade or business or wasrented for such use by the surviving spouse toa family member on a net cash basis;4. The real property was acquired from orpassed from the decedent to a qualified heirof the decedent;

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5. The real property was owned and used ina qualified manner by the decedent or amember of the decedent's family during 5 of the8 years before the decedent's death;6. There was material participation by thedecedent or a member of the decedent's familyduring 5 of the 8 years before the decedent'sdeath; and7. The qualified property meets the followingpercentage requirements:a. At least 50% of the adjusted value of thegross estate must consist of the adjusted valueof real or personal property that was beingused as a farm or in a closely held businessand that was acquired from, or passed from,the decedent to a qualified heir of thedecedent, andb. At least 25% of the adjusted value of thegross estate must consist of the adjusted valueof qualified farm or closely held business realproperty.

For this purpose, adjusted value is the valueof property determined without regard to itsspecial-use value. The value is reduced forunpaid mortgages on the property or anyindebtedness against the property, if the fullvalue of the decedent's interest in the property(not reduced by such mortgage orindebtedness) is included in the value of thegross estate. The adjusted value of thequalified real and personal property used in

different businesses may be combined to meetthe 50% and 25% requirements.

Qualified Real Property

Qualified use. The term qualified use meansthe use of the property as a farm for farmingpurposes or the use of property in a trade orbusiness other than farming. Trade or businessapplies only to the active conduct of abusiness. It does not apply to passiveinvestment activities or the mere passive rentalof property to a person other than a memberof the decedent's family. Also, no trade orbusiness is present in the case of activities notengaged in for profit.Ownership. To qualify as special-useproperty, the decedent or a member of thedecedent's family must have owned and usedthe property in a qualified use for 5 of the last8 years before the decedent's death.Ownership may be direct or indirect through acorporation, a partnership, or a trust.

If the ownership is indirect, the businessmust qualify as a closely held business undersection 6166. The ownership, when combinedwith periods of direct ownership, must meet therequirements of section 6166 on the date of thedecedent's death and for a period of time thatequals at least 5 of the 8 years precedingdeath.

If the property was leased by the decedentto a closely held business, it qualifies as longas the business entity to which it was rentedwas a closely held business with respect to thedecedent on the date of the decedent's deathand for sufficient time to meet the 5 in 8years test explained above.Structures and other real propertyimprovements. Qualified real propertyincludes residential buildings and otherstructures and real property improvementsregularly occupied or used by the owner orlessee of real property (or by the employeesof the owner or lessee) to operate the farm orbusiness. A farm residence which the decedenthad occupied is considered to have beenoccupied for the purpose of operating the farmeven when a family member and not thedecedent was the person materiallyparticipating in the operation of the farm.

Qualified real property also includes roads,buildings, and other structures andimprovements functionally related to thequalified use.

Elements of value such as mineral rightsthat are not related to the farm or business useare not eligible for special-use valuation.Property acquired from the decedent.Property is considered to have been acquiredfrom or to have passed from the decedent ifone of the following applies:q The property is considered to have beenacquired from or to have passed from the

decedent under section 1014(b) (relating tobasis of property acquired from a decedent).q The property is acquired by any person fromthe estate.q The property is acquired by any person froma trust, to the extent the property is includiblein the gross estate.Qualified heir. A person is a qualified heirof property if he or she is a member of thedecedent's family and acquired or received theproperty from the decedent. If a qualified heirdisposes of any interest in qualified realproperty to any member of his or her family,that person will then be treated as the qualifiedheir with respect to that interest.

The term member of the family includesonly:1. An ancestor (parent, grandparent, etc.) of

the individual;2. The spouse of the individual;3. The lineal descendant (child, stepchild,grandchild, etc.) of the individual, theindividual's spouse, or a parent of theindividual; or4. The spouse, widow, or widower of anylineal descendant described above.A legally adopted child of an individual istreated as a child of that individual by blood.

Material Participation

To elect special-use valuation, either thedecedent or a member of his or her family musthave materially participated in the operation ofthe farm or other business for at least 5 of the8 years ending on the date of the decedent'sdeath. The existence of material participation

is a factual determination, but passivelycollecting rents, salaries, draws, dividends, orother income from the farm or other businessdoes not constitute material participation.Neither does merely advancing capital andreviewing a crop plan and financial reportseach season or business year.

In determining whether the requiredparticipation has occurred, disregard briefperiods (e.g., 30 days or less) during whichthere was no material participation, as long assuch periods were both preceded and followedby substantial periods (more than 120 days)during which there was uninterrupted materialparticipation.Retirement or disability. If, on the date ofdeath, the time period for material participationcould not be met because the decedent had

retired or was disabled, a substitute period mayapply. The decedent must have retired onSocial Security or been disabled for acontinuous period ending with death. A personis disabled for this purpose if he or she wasmentally or physically unable to materiallyparticipate in the operation of the farm or otherbusiness.

The substitute time period for materialparticipation for these decedents is a periodtotaling at least 5 years out of the 8-year periodthat ended on the earlier of (1) the date thedecedent began receiving social securitybenefits, or (2) the date the decedent becamedisabled.

Surviving spouse. A surviving spouse whoreceived qualified real property from thepre-deceased spouse is considered to havematerially participated if he or she wasengaged in the active management of the farmor other business. If the surviving spouse diedwithin 8 years of the first spouse's death, youmay add the period of material participation ofthe pre-deceased spouse to the period ofactive management by the surviving spouse todetermine if the surviving spouse's estatequalifies for special-use valuation. To qualify forthis, the property must have been eligible forspecial-use valuation in the pre-deceased

spouse's estate, though it does not have tohave been elected by that estate.

For additional details regarding materialparticipation, see Regulations section20.2032A-3(e).

Valuation Methods

The primary method of valuing special-usevalue property that is used for farmingpurposes is the annual gross cash rentalmethod. If comparable gross cash rentals arenot available, you can substitute comparableaverage annual net share rentals. If neither ofthese are available, or if you so elect, you canuse the method for valuing real property in aclosely held business.Average annual gross cash rental.Generally, the special-use value of property

that is used for farming purposes is determinedas follows:1. Subtract the average annual state andlocal real estate taxes on actual tracts ofcomparable real property from the averageannual gross cash rental for that samecomparable property, and2. Divide the result in 1 by the averageannual effective interest rate charged for allnew Federal Land Bank loans.

The computation of each average annualamount is based on the 5 most recent calendaryears ending before the date of the decedent'sdeath.

Gross cash rental.Generally, gross cashrental is the total amount of cash received in acalendar year for the use of actual tracts ofcomparable farm real property in the samelocality as the property being specially valued.You may not use appraisals or otherstatements regarding rental value or areawideaverages of rentals. You may not use rents thatare paid wholly or partly in kind, and theamount of rent may not be based onproduction. The rental must have resulted froman arm's-length transaction. Also, the amountof rent is not reduced by the amount of anyexpenses or liabilities associated with the farmoperation or the lease.

Comparable property.Comparableproperty must be situated in the same localityas the specially valued property as determinedby generally accepted real property valuationrules. The determination of comparability isbased on all the facts and circumstances. It isoften necessary to value land in segments

where there are different uses or landcharacteristics included in the specially valuedland. The following list contains some of thefactors considered in determiningcomparability.q Similarity of soil.q Whether the crops grown would deplete thesoil in a similar manner.q Types of soil conservation techniques thathave been practiced on the 2 properties.q Whether the 2 properties are subject toflooding.q Slope of the land.q For livestock operations, the carryingcapacity of the land.

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q For timbered land, whether the timber iscomparable.q Whether the property as a whole is unifiedor segmented; if segmented, the availability ofthe means necessary for movement among thedifferent sections.q Number, types, and conditions of all buildingsand other fixed improvements located on theproperties and their location as it affectsefficient management, use, and value of theproperty.q Availability and type of transportationfacilities in terms of costs and of proximity ofthe properties to local markets.

You must specifically identify on the returnthe property being used as comparableproperty. Use the type of descriptions used tolist real property on Schedule A.

Effective interest rate.To get theeffective annual interest in effect for the yearof death and the area in which the property islocated, contact your IRS District Director.

Net share rental.You may use averageannual net share rental from comparable landonly if there is no comparable land from whichaverage annual gross cash rental can bedetermined. Net share rental is the differencebetween the gross value of produce receivedby the lessor from the comparable land and thecash operating expenses (other than realestate taxes) of growing the produce that,

under the lease, are paid by the lessor. Theproduction of the produce must be the businesspurpose of the farming operation. For thispurpose, produce includes livestock.

The gross value of the produce is generallythe gross amount received if the produce wasdisposed of in an arm's-length transactionwithin the period established by theDepartment of Agriculture for its price supportprogram. Otherwise, the value is the weightedaverage price for which the produce sold on theclosest national or regional commoditiesmarket. The value is figured for the date ordates on which the lessor received (orconstructively received) the produce.Valuing a real property interest in closelyheld business. Use this method todetermine the special-use valuation for

qualifying real property used in a trade orbusiness other than farming. You may also usethis method for qualifying farm property if thereis no comparable land or if you elect to use it.Under this method, the following factors areconsidered:q The capitalization of income that the propertycan be expected to yield for farming or forclosely held business purposes over areasonable period of time with prudentmanagement and traditional cropping patternsfor the area, taking into account soil capacity,terrain configuration, and similar factors.q The capitalization of the fair rental value ofthe land for farming or for closely held businesspurposes.q The assessed land values in a state thatprovides a differential or use value assessment

law for farmland or closely held business.q Comparable sales of other farm or closelyheld business land in the same geographicalarea far enough removed from a metropolitanor resort area so that nonagricultural use is nota significant factor in the sales price.q Any other factor that fairly values the farmor closely held business value of the property.

Making the Election

Include the words section 2032A valuation inthe Description column of any Form 706schedule if section 2032A property is includedin the decedent's gross estate.

An election under section 2032A need notinclude all the property in an estate that iseligible for special use valuation, but sufficientproperty to satisfy the threshold requirementsof section 2032A(b)(1)(B) must be speciallyvalued under the election.

If joint or undivided interests (e.g., interestsas joint tenants or tenants in common) in thesame property are received from a decedentby qualified heirs, an election with respect toone heir's joint or undivided interest need notinclude any other heir's interest in the sameproperty if the electing heir's interest plus otherproperty to be specially valued satisfies the

requirements of section 2032A(b)(1)(B).If successive interests (e.g., life estates and

remainder interests) are created by a decedentin otherwise qualified property, an electionunder section 2032A is available only withrespect to that property (or part) in whichqualified heirs of the decedent receive all of thesuccessive interests, and such an electionmust include the interests of all of those heirs.

For example, if a surviving spouse receivesa life estate in otherwise qualified property andthe spouse's brother receives a remainderinterest in fee, no part of the property may bevalued pursuant to an election under section2032A.

Where successive interests in speciallyvalued property are created, remainderinterests are treated as being received by

qualified heirs only if the remainder interestsare not contingent on surviving a nonfamilymember or are not subject to divestment infavor of a nonfamily member.

Protective Election

You may make a protective election to speciallyvalue qualified real property. Under thiselection, whether or not you may ultimately usespecial use valuation depends upon values asfinally determined (or agreed to followingexamination of the return) meeting therequirements of section 2032A.

To make a protective election, check Yesto line 2 and complete Schedule A-1 accordingto its instructions for Protective Election.

If you make a protective election, you shouldcomplete this Form 706 by valuing all property

at its fair market value. Do not use special usevaluation. Usually, this will result in higherestate and GST tax liabilities than will beultimately determined if special use valuationis allowed. The protective election does notextend the time to pay the taxes shown onthe return. If you wish to extend the time topay the taxes, you should file Form 4768 inadequate time beforethe return due date.

If it is found that the estate qualifies forspecial use valuation based on the values asfinally determined (or agreed to followingexamination of the return), you must file anamended Form 706 (with a complete section2032A election) within 60 days after the dateof this determination. Complete the amendedreturn using special use values under the rulesof section 2032A, and complete Schedule A-1

and attach allof the required statements.

Additional information

For definitions and additional information, seesection 2032A and the related regulations.

Line 3Installment Payments

If the gross estate includes an interest in aclosely held business, you may be able to electto pay part of the estate tax in installments.

The maximum amount that can be paid ininstallments is that part of the estate tax that isattributable to the closely held business. Ingeneral, that amount is the amount of tax that

bears the same ratio to the total estate tax thatthe value of the closely held business includedin the gross estate bears to the total grossestate.Percentage requirements. To qualify forinstallment payments, the value of the interestin the closely held business that is included inthe gross estate must be more than 35% of theadjusted gross estate (the gross estate lessexpenses, indebtedness, taxes, and losses).

Interests in two or more closely heldbusinesses are treated as an interest in asingle business if at least 20% of the total valueof each business is included in the grossestate. For this purpose, include any interestheld by the surviving spouse that representsthe surviving spouse's interest in a businessheld jointly with the decedent as communityproperty or as joint tenants, tenants by theentirety, or tenants in common.

Value.The value used for meeting thepercentage requirements is the same valueused for determining the gross estate.Therefore, if the estate is valued underalternate valuation or special use valuation, youmust use those values to meet the percentagerequirements.

Transfers before death.Generally, giftsmade before death are not included in thegross estate. However, the estate must meetthe 35% requirement by both including andexcluding in the gross estate any gifts madeby the decedent within 3 years of death.

Passive assets.In determining the valueof a closely held business and whether the35% requirement is met, do not include thevalue of any passive assets held by thebusiness. A passive asset is any asset notused in carrying on a trade or business. Stockin another corporation is a passive asset unlessthe stock is treated as held by the decedentbecause of the election to treat holdingcompany stock as business company stock, asdiscussed on page 6.

If a corporation owns at least 20% in valueof the voting stock of another corporation, orthe other corporation had no more than 15shareholders and at least 80% of the value ofthe assets of each corporation is attributable toassets used in carrying on a trade or business,

then these corporations will be treated as asingle corporation, and the stock will not betreated as a passive asset. Stock held in theother corporation is not taken into account indetermining the 80% requirement.Interest in closely held business. Forpurposes of the installment payment election,an interest in a closely held business means:q Ownership of a trade or business carried onas a proprietorship.q An interest as a partner in a partnershipcarrying on a trade or business if 20% or moreof the total capital interest was included in thegross estate of the decedent or the partnershiphad no more than 15 partners.q Stock in a corporation carrying on a trade orbusiness if 20% or more in value of the votingstock of the corporation is included in the grossestate of the decedent or the corporation hadno more than 15 shareholders.

The partnership or corporation must becarrying on a trade or business at the time ofthe decedent's death.

In determining the number of partners orshareholders, a partnership or stock interest istreated as owned by one partner orshareholder if it is community property or heldby a husband and wife as joint tenants, tenantsin common, or as tenants by the entirety.

Property owned directly or indirectly by or fora corporation, partnership, estate, or trust istreated as owned proportionately by or for itsshareholders, partners, or beneficiaries. For

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trusts, only beneficiaries with current interestsare considered.

The interest in a closely held farm businessincludes the interest in the residential buildingsand related improvements occupied regularlyby the owners, lessees, and employeesoperating the farm.

Holding company stock.The executormay elect to treat as business company stockthe portion of any holding company stock thatrepresents direct ownership (or indirectownership through one or more other holdingcompanies) in a business company. A holdingcompany is a corporation holding stock inanother corporation. A business company isa corporation carrying on a trade or business.

This election applies only to stock that is notreadily tradable. For purposes of the 20%voting stock requirement, stock is treated asvoting stock to the extent the holding companyowns voting stock in the business company.

If the executor makes this election, the firstinstallment payment is due when the estate taxreturn is filed. The 5-year deferral for paymentof the tax, as discussed below under Time forpayment, does not apply. In addition, the 4%interest rate, discussed below under Interestcomputation, will not apply.Time for payment. Under the installmentmethod, the executor may elect to deferpayment of the qualified estate tax, but notinterest, for up to 5 years from the originalpayment due date. After the first installment oftax is paid, you must pay the remaininginstallments annually by the date one year afterthe due date of the preceding installment.There can be no more than 10 installmentpayments.

Interest on the unpaid portion of the tax isnot deferred and must be paid annually.Interest must be paid at the same time and asa part of each installment payment of the tax.

Note: This interest is deductible as anadministrative expense of the estate. Otherdeductions, such as the marital or charitablededuction, may have to be recomputed wheninterest expense increases.Interest computation. A special interestrate applies to installment payments. The

interest rate is 4% of the tax on the first $1million worth of closely held business property.The maximum amount of estate tax that maybe subject to the lower 4% interest rate is thelesser of:1. $345,800 (the estate tax on $1 million)reduced by the amount of the allowable unifiedcredit, or2. The amount of the estate tax that isattributable to the closely held business andthat is payable in installments.

If you elect installment payments and theestate tax due is more than the maximumamount to which the 4% interest rate applies,each installment payment is deemed tocomprise both tax subject to the 4% interestrate and tax subject to the regular underpaidrate. The amount of any installment subject to

the 4% rate is the same as the percentage oftotal tax that is subject to the 4% rate.Recomputation of installments. If youmake the installment payment election, youmay be able to deduct the amount of interestaccruing on the installment payments as anadministrative expense. When the interestbecomes deductible and the estate claims thededuction, the estate tax and the installmentamounts must be recomputed.

If you deduct interest after the estate taxreturn has been filed, you should file asupplemental Form 706. Write the wordsSupplemental Information at the top of page

1 of the return. You may file this supplementwith the annual installment payment or at alater date. Do not file it before you pay theinterest for which the deduction is claimed.Note that other items on the return may beaffected by the increased interest deductionand must be recomputed on the supplementalreturn.

If you and IRS agree on the amounts, theunpaid tax liability and any accrued interest willbe reduced. Future installments will berecalculated and any overpayments will beapplied to the next installment. If the totalamount of installment payments made is more

than the estate tax liability, you may claim arefund by filing Form 843, Claim for Refundand Request for Abatement, within the periodof limitations.

For information on the acceleration ofpayment when an interest in the closely heldbusiness is disposed of, see section 6166(g).Making the election. If you check this lineto make a protective election, you shouldattach a notice of protective election asdescribed in Regulations section 20.6166-1(d).If you check this line to make a final election,you should attach the notice of electiondescribed in Regulations section 20.6166-1(b).

In computing the adjusted gross estateunder section 6166(b)(6) to determine whetheran election may be made under section 6166,the net amount of any real estate in a closely

held business must be used.You may also elect to pay GST taxes in

installments. See section 6166(i).

Line 4Reversionary or RemainderInterests

For details of this election, see section 6163and the related regulations.

Instructions for Part 4.General Information (Pages 2and 3)

Power of Attorney

Completing the authorization on page 2 ofForm 706 will authorize one attorney,

accountant, or enrolled agent to represent theestate and receive confidential tax information,but will not authorize the representative to enterinto closing agreements for the estate. If youwish to represent the estate, you mustcomplete and sign the authorization.

If you wish to authorize persons other thanattorneys, accountants, and enrolled agents,or if you wish to authorize more than oneperson, to receive confidential information orrepresent the estate, you must complete andattach Form 2848, Power of Attorney andDeclaration of Representative.

You must also complete and attach Form2848 if you wish to authorize someone to enterinto closing agreements for the estate.

If you wish only to authorize someone toinspect and/or receive confidential tax

information (but not to represent you before theIRS), complete and file Form 8821,TaxInformation Authorization.

Line 4

Complete line 4 whether or not there is asurviving spouse and whether or not thesurviving spouse received any benefits fromthe estate. If there was no surviving spouse onthe date of decedent's death, enter None inline 4a and leave lines 4b and 4c blank. Thevalue entered in line 4c need not be exact. Seethe instructions for Amount under line 5,below.

Line 5

Name. Enter the name of each individual,trust, or estate who received (or will receive)benefits of $5,000 or more from the estatedirectly as an heir, next-of-kin, devisee, orlegatee; or indirectly (for example, asbeneficiary of an annuity or insurance policy,shareholder of a corporation, or partner of apartnership that is an heir, etc.).Identifying Number. Enter the socialsecurity number of each individual beneficiarylisted. If the number is unknown, or theindividual has no number, please indicate

unknown or none. For trusts and otherestates, enter the employer identificationnumber.Relationship. For each individualbeneficiary enter the relationship (if known) tothe decedent by reason of blood, marriage, oradoption. For trust or estate beneficiaries,indicate TRUST or ESTATE.Amount. Enter the amount actuallydistributed (or to be distributed) to eachbeneficiary including transfers during thedecedent's life from Schedule G required to beincluded in the gross estate. The value to beentered need not be exact. A reasonableestimate is sufficient. For example, whereprecise values cannot readily be determined,as with certain future interests, a reasonableapproximation should be entered. The total of

these distributions should approximate theamount of gross estate reduced by funeral andadministrative expenses, debts and mortgages,bequests to surviving spouse, charitablebequests, and any Federal and state estateand GST taxes paid (or payable) relating to thebenefits received by the beneficiaries listed onlines 4 and 5.

All distributions of less than $5,000 tospecific beneficiaries may be included withdistributions to unascertainable beneficiarieson the line provided.

Line 6Section 2044 Property

If you answered Yes, these assets must beshown on Schedule F.

Section 2044 property is property for whicha previous section 2056(b)(7) election (QTIP

election) has been made, or for which a similargift tax election (section 2523) has been made.For more information, see the instructions onthe back of Schedule F.

Line 8Insurance Not Included in theGross Estate

If you checked Yes for either 8a or 8b, youmust complete and attach Schedule D andattach a Form 712, Life Insurance Statement,for each policy and an explanation of why thepolicy or its proceeds are not includible in thegross estate.

Line 10Partnership Interests andStock in Close Corporations

If you answered Yes to line 10, you mustinclude full details for partnerships and

unincorporated businesses on Schedule F(Schedule E if the partnership interest is jointlyowned). You must include full details for thestock of inactive or close corporations onSchedule B.

Value these interests using the rules ofRegulations section 20.2031-2 (stocks) or20.2031-3 (other business interests).

A close corporation is a corporation whoseshares are owned by a limited number ofshareholders. Often, one family holds the entirestock issue. As a result, little, if any, trading ofthe stock takes place. There is, therefore, noestablished market for the stock, and thosesales that do occur are at irregular intervals

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and seldom reflect all the elements of arepresentative transaction as defined by theterm fair market value.

Line 12Trusts

If you answered Yes to either 12a or 12b,you must attach a copy of the trustinstrument for each trust.

You must complete Schedule G if youanswered Yes to 12a and Schedule F if youanswered Yes to 12b.

Line 14Transitional MaritalDeduction Computation

You must check Yes if property passes to thesurviving spouse under a maximum maritaldeduction formula provision that meets therequirements of section 403(e)(3) of theEconomic Recovery Tax Act of 1981 (P.L.97-34; 95 Stat. 305).

If you check Yes to line 14, you mustcompute the marital deduction under the rulesthat were in effect before the EconomicRecovery Tax Act of 1981.

For a format for this computation, you shouldobtain the November 1981 revision of Form706 and its instructions. The computation isitems 19 through 26 of the Recapitulation. Youshould also apply the rules of Rev. Rul.80-148, 1980-1 C.B. 207, if there is propertythat passes to the surviving spouse outside of

the maximum marital deduction formulaprovision.

Line 16Excess RetirementAccumulation

If the decedent did not have any interest in aqualified employer plan or individual retirementplan (defined in section 7701(a)(37)), checkNo to this question.Note: The tax on excess retirementaccumulations will not apply to most decedentsbecause the present value of the hypotheticalannuity is usually so large that very fewdecedents will have a larger total interest inqualified plans and individual retirement plans.The rules below are a general description ofthe section 4980A(d) excess retirementaccumulation. If it appears, after reading these

rules, that there is the possibility of such anexcess, see the instructions for Schedule S onpage 20 for more information.

A qualified plan means any:1. Qualified pension, profit-sharing, or stockbonus plan described in section 401(a) thatincludes a trust exempt from tax under section501(a);2. Annuity plan described in section 403(a);3. Annuity contract, custodial account, orretirement income account described in section403(b)(1), 403(b)(7), or 403(b)(9);4. Qualified bond purchase plan describedin section 405(a) prior to that section's repealby section 491(a) of the Tax Reform Act of1984.

To determine if the decedent had an excessretirement accumulation, you must first total allof the decedent's interests (as of the date ofdeath) in qualified plans and individualretirement plans. Then determine the present(date of death or alternate valuation date) valueof a hypothetical life annuity for the decedent.This hypothetical life annuity must pay thedecedent the greater of $150,000 (unindexed)or $112,500 (indexed) per year, times themultiplier described in the instructions for line3, Part III, of Schedule S. Those instructionsare on page 21.

If the decedent's total interest in the plans isgreater than the value of this hypotheticalannuity, then there is an excess retirementaccumulation, and you should check Yes to

question 16 and attach Schedule S to yourreturn.

Instructions for Part 5.Recapitulation (Page 3 of Form706)

Gross Estate

Items 1 through 9. You must make anentry in each of items 1 through 9. If thegross estate does not contain any assets of thetype specified by a given item, enter zero for

that item. Entering zero for any of items 1through 9 is a statement by the executor, madeunder penalties of perjury, that the gross estatedoes not contain any includible assets coveredby that item. Do not enter any amounts in theAlternate value column unless you electedalternate valuation on line 1 of Elections by theExecutor on page 2.Which Schedules To Attach for Items 1Through 9. You must attach Schedule F tothe return and answer its questions even if youreport no assets on it.

You must attach Schedules A, B, and C ifthe gross estate includes any Real Estate;Stocks and Bonds; or Mortgages, Notes, andCash, respectively. You must attach ScheduleD if the gross estate includes any LifeInsurance or if you answered Yes to question

8a. You must attach Schedule E if the grossestate contains any Jointly Owned Property orif you answered Yes to question 9. You mustattach Schedule G if the decedent made anyof the lifetime transfers to be listed on thatschedule or if you answered Yes to question11 or 12a. You must attach Schedule H if youanswered Yes to question 13. You mustattach Schedule I if you answered Yes toquestion 15.

Deductions

Items 11 Through 19. You must attach theappropriate schedules for the deductions youclaim.Item 15. If item 14 is less than or equal to thevalue (at the time of the decedent's death) ofthe property subject to claims, enter the

amount from item 14 on item 15.If the amount on item 14 is more than thevalue of the property subject to claims, enterthe greater of (a) the value of the propertysubject to claims, or (b) the amount actuallypaid at the time the return is filed.

In no event should you enter more on item15 than the amount on item 14. See section2053 and the related regulations for moreinformation.

Instructions for Part 2.TaxComputation (Page 1 of Form706)In general, the estate tax is figured by applyingthe unified rates shown in Table A to the totalof transfers both during life and at death, andthen subtracting the gift taxes. You mustcomplete the Tax Computation.

Line 1

If you elected alternate valuation on line 1, Part3, Elections by the Executor, enter theamount you entered in the Alternate valuecolumn of item 10 of Part 5, Recapitulation.Otherwise, enter the amount from the Valueat date of death column.

Lines 4 and 9

Three worksheets are provided to help youcompute the entries for these lines. You need

not file these worksheets with your return butshould keep them for your records. WorksheetTG allows you to reconcile the decedent'slifetime taxable gifts to compute totals that willbe used for the line 4 and line 9 worksheets.

You must get all of the decedent's gift taxreturns (Form 709, United States Gift (andGeneration-Skipping Transfer) Tax Return)before you complete Worksheet TG. Theamounts you will enter on Worksheet TG canusually be derived from these returns as filed.However, if any of the returns were audited bythe IRS, you should use the amounts that werefinally determined as a result of the audits.

In addition, you must include in column bof Worksheet TG any gifts in excess of theannual exclusion made by the decedent (or onbehalf of the decedent under a power ofattorney) but for which no Forms 709 werefiled. You must make a reasonable inquiry asto the existence of any such gifts. The annualexclusion for 1977 through 1981 was $3,000per donee per year and $10,000 for years after1981.

Note:In figuring the line 9 amount, do notinclude any tax paid or payable on gifts madebefore 1977. The line 9 amount is ahypothetical figure based only on gifts madeafter 1976 and used to calculate the estate tax.Special Treatment of Split Gifts. Thesespecial rules apply only if:1. The decedent's spouse predeceased thedecedent;2. The decedent's spouse made gifts thatwere split with the decedent under the rulesof section 2513;3. The decedent was the consentingspouse for those split gifts, as that term isused on Form 709; and4. The split gifts were included in thedecedent's spouse's gross estate under section2035.

If all four conditions above are met, do notincludethese gifts on line 4 of the TaxComputation and do not includethe gift taxespayable on these gifts on line 9 of the TaxComputation. These adjustments areincorporated into the worksheets.

Line 7

Lines 7ac are used to calculate the phaseoutof the unified credit and graduated rates. Thephaseout applies only to estates in which theamount the tentative tax is computed onexceeds $10 million.

Line 12

If the decedent made gifts (including gifts madeby the decedent's spouse and treated as madeby the decedent by reason of gift splitting) afterSeptember 8, 1976, and before January 1,1977, for which the decedent claimed a specificexemption, the unified credit on this estate taxreturn must be reduced. The reduction isfigured by entering 20% of the specificexemption claimed for these gifts. (Note: Thespecific exemption was allowed by section

2521 for gifts made before January 1, 1977.)If the decedent did not make any giftsbetween September 8, 1976, and January 1,1977, or if the decedent made gifts during thatperiod but did not claim the specific exemption,enter zero.

Line 15

You may take a credit on line 15 for estate,inheritance, legacy, or succession taxes paidas the result of the decedent's death to anystate or the District of Columbia. However, seesection 2053(d) and the related regulations forexceptions and limits if you elected to deductthe taxes from the value of the gross estate.

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Worksheet TGTaxable Gifts ReconciliationTo be used for lines 4 and 9 of the Tax Computation

Calendar year orcalendar quarter

Total taxable gifts forperiod (see Note)

Note: For the definition of a taxable gift see section 2503. Ignore the old specificexemption. Follow Form 709. That is, include only the decedents one-half of splitgifts, whether the gifts were made by the decedent or the decedents spouse. Inaddition to gifts reported on Form 709, you must include any taxable gifts inexcess of the annual exclusion that were not reported on Form 709.

b.a.

Taxable amountincluded in col. b forgifts that qualify for

special treatment ofsplit gifts described

above

Taxable amountincluded in col. b

for gifts includedin the gross estate

Gift tax paid bydecedent on gifts

in col. d

Gift tax paid bydecedents spouse on

gifts in col. cGiftsmadeafterJune6,

1932,andbefore1977

Total taxable giftsmade before 1977

1.

f.e.d.c.

Giftsmade

after1976

Totals for gifts made after 19762.

Line 4 WorksheetAdjusted Taxable Gifts Made After 1976

1. Taxable gifts made after 1976. Enter the amount from line 2, column b, Worksheet TGTaxable gifts made after 1976 reportable on Schedule G. Enter the amount from line 2,column c, Worksheet TG

2.

Taxable gifts made after 1976 that qualify for special treatment. Enter the amountfrom line 2, column d, Worksheet TG

3.

Add lines 2 and 34.Adjusted taxable gifts. Subtract line 4 from line 1. Enter here and on line 4 of the Tax Computation of Form706

5.

If you make a section 6166 election to paythe Federal estate tax in installments and makea similar election to pay the state death tax ininstallments, see Rev. Rul. 86-38, 1986-1 C.B.296, for the method of computing the creditallowed with this Form 706.

If you have elected to extend the time to paythe tax on a reversionary or remainder interest,you may take a credit against that portion of theFederal estate tax for state death taxesattributable to the reversionary or remainderinterest. The state death taxes must be paidand claimed before the expiration of theextended time for paying the estate tax.

The credit may not be more than the amountfigured by using Table B on page 10, basedon the value of the adjusted taxable estate. Theadjusted taxable estate is the amount of theFederal taxable estate (line 3 of the TaxComputation) reduced by $60,000. You mayclaim an anticipated amount of credit and figurethe Federal estate tax on the return before thestate death taxes have been paid. However,the credit cannot be finally allowed unless youpay the state death taxes and claim the creditwithin 4 years after the return is filed (or lateras provided by the Code if a petition is filedwith the Tax Court of the United States, or ifyou have an extension of time to pay) andsubmit evidence that the tax has been paid. Ifyou claim the credit for any state death tax thatis later recovered, see Regulations section20.2016-1 for the notice you are required togive the IRS within 30 days.

If you transfer property other than cash tothe state in payment of state inheritance taxes,the amount you may claim as a credit is thelesser of the state inheritance tax liabilitydischarged or the fair market value of theproperty on the date of the transfer.

For more details, see Rev. Rul. 86-117,1986-2 C.B. 157.

You should send the following evidence tothe IRS:1. Certificate of the proper officer of thetaxing state, or the District of Columbia,

showing: (a) the total amount of tax imposed(before adding interest and penalties andbefore allowing discount); (b) the amount ofdiscount allowed; (c) the amount of penaltiesand interest imposed or charged; (d) the totalamount actually paid in cash; and (e) the dateof payment.2. Any additional proof the IRS specificallyrequests.

You should file the evidence requestedabove with the return if possible. Otherwise,send it as soon after you file the return aspossible.

Line 17

You may take a credit for Federal gift taxesimposed by Chapter 12 of the Code, and thecorresponding provisions of prior laws, on

certain transfers the decedent made beforeJanuary 1, 1977, that are included in the grossestate. The credit cannot be more than theamount figured by the following formula:

For more information, see the regulationsunder section 2012. This computation may bemade using Form 4808, Computation of Creditfor Gift Tax. Attach a copy of a completed Form4808 or the computation of the credit. Alsoattach all available copies of Forms 709 filed

by the decedent to help verify the amountsentered on lines 4, 9, and 17.

Line 23

If you answered Yes to question 16 ofGeneral Information, you must complete

Schedule S. Enter the tax due from line 17 ofSchedule S on line 23. This increased estatetax may not be offset by any of the estate taxcredits on lines 1119.

Line 26

You may not use these bonds to pay the GSTtax. You may use these bonds to pay theincreased estate tax shown on line 23.

Instructions for ScheduleA.Real EstateSee the reverse side of Schedule A on Form706.

Instructions for Schedule

B.Stocks and BondsGeneral

If the total gross estate contains any stocks orbonds, you must complete Schedule B and fileit with the return.

On Schedule B list the stocks and bondsincluded in the decedent's gross estate.Number each item in the left-hand column.Bonds that are exempt from Federal incometaxes are not exempt from estate taxesunless specifically exempted by an estatetax provision of the Code. Therefore, youshould list these bonds on Schedule B.

Public housing bonds includible in the gross

Gross estate tax minus (the sum of thestate death taxes and unified credit)

Value ofincluded gift

Value of gross estate minus (the sumof the deductions for charitable, public,and similar gifts and bequests andmarital deduction)

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Line 9 WorksheetGift Tax on Gifts Made After 1976

Total taxable gifts for priorperiods (from Form 709,Tax Computation, line 2)

Calendar yearor calendar

quarter

Unused unified credit forthis period (see below)

Taxable gifts for thisperiod (from Form 709,

Tax Computation, line 1)(see below)

Tax payable for thisperiod (subtract col.

e from col. d)

Tax payable using TableA (on page 10)

(see below)

b.a.

Total pre-1977taxable gifts. Enter

the amount from line1, Worksheet TG

f.e.d.c.

1. Total gift taxes payable on gifts made after 1976 (combine the amounts in column f)

Gift taxes paid by the decedent on gifts that qualify for special treatment. Enter the amount fromline 2, column e, Worksheet TG on page 8

2.

Subtract line 2 from line 13.

Gift tax paid by decedents spouse on split gifts included on Schedule G. Enter the amount from line2, column f, Worksheet TG on page 8

4.

Add lines 3 and 4. Enter here and on line 9 of the Tax Computation of Form 7065.

Columns b and c.In addition to gifts reported on Form 709, you must include in these columns any taxable gifts in excess ofthe annual exclusion that were not reported on Form 709.

If the amount in columns b and c combined exceeds $10 million for any given calendar year, then you must calculate the taxin column d for that year using the Form 709 revision in effect for the year of the decedents death.

To calculate the tax, enter the amount for the appropriate year from column c of the worksheet on line 1 of the TaxComputation of the Form 709. Enter the amount from column b on line 2 of the Tax Computation. Complete the TaxComputation through the tax due before any reduction for the unified credit and enter that amount in column d, above.

Column e.To figure the unused unified credit, use the unified credit in effect for the year the gift was made. This amountshould be on line 12 of the Tax Computation of the Form 709 filed for the gift.

Column d.To figure the tax payable for this column, you must use Table A in these instructions, as it applies to the year ofthe decedents death rather than to the year the gifts were actually made. To compute the entry for col. d, you should figure thetax payable on the amount in col. b and subtract it from the tax payable on the amounts in cols. b and c added together.Enter the difference in col. d.

Tax payable as used here is an hypothetical amount and does not necessarily reflect tax actually paid. Figure tax payableonly on gifts made after 1976. Do not include any tax paid or payable on gifts made before 1977. Pre-1977 gifts are listed onlyto exclude them from the calculation.

estate must be included at their full value.If you paid any estate, inheritance, legacy,

or succession tax to a foreign country on anystocks or bonds included in this schedule,group those stocks and bonds together andlabel them Subjected to Foreign DeathTaxes.

List interest and dividends on each stock orbond separately. Indicate as a separate item

dividends that have not been collected atdeath, but which are payable to the decedentor the estate because the decedent was astockholder of record on the date of death.However, if the stock is being traded on anexchange and is selling ex-dividend on the dateof the decedent's death, do not include theamount of the dividend as a separate item.Instead, add it to the ex-dividend quotation indetermining the fair market value of the stockon the date of the decedent's death. Dividendsdeclared on shares of stock before the deathof the decedent but payable to stockholders ofrecord on a date after the decedent's death arenot includible in the gross estate for Federalestate tax purposes.

Description

For stocks indicate:q Number of sharesq Whether common or preferredq Issueq Par value where needed for identificationq Price per shareq Exact name of corporationq Principal exchange upon which sold, if listedon an exchangeq 9digit CUSIP number

For bonds indicate:q Quantity and denominationq Name of obligorq Date of maturity

q Interest rateq Interest due dateq Principal exchange, if listed on an exchangeq 9digit CUSIP number

If the stock or bond is unlisted, show thecompany's principal business office.

The CUSIP (Committee on Uniform SecurityIdentification Procedure) number is a nine-digitnumber that is assigned to all stocks and bondstraded on major exchanges and many unlistedsecurities. Usually, the CUSIP number isprinted on the face of the stock certificate. If theCUSIP number is not printed on the certificate,it may be obtained through the company'stransfer agent.

Valuation

List the fair market value of the stocks orbonds. The fair market value of a stock or bond(whether listed or unlisted) is the meanbetween the highest and lowest selling pricesquoted on the valuation date. If only the closingselling prices are available, then the fair marketvalue is the mean between the quoted closingselling price on the valuation date and on thetrading day before the valuation date. To figurethe fair market value if there were no sales onthe valuation date:1. Find the mean between the highest andlowest selling prices on the nearest tradingdate before and the nearest trading date afterthe valuation date. Both trading dates must bereasonably close to the valuation date.2. Prorate the difference between the meanprices to the valuation date.3. Add or subtract (whichever applies) theprorated part of the difference to or from themean price figured for the nearest trading datebefore the valuation date.

If no actual sales were made reasonablyclose to the valuation date, make the samecomputation using the mean between the bona

fide bid and asked prices instead of salesprices. If actual sales prices or bona fide bidand asked prices are available within areasonable period of time before the valuationdate but not after the valuation date, or viceversa, use the mean between the highest andlowest sales prices or bid and asked prices asthe fair market value.

For example, assume that sales of stock

nearest the valuation date (June 15) occurred2 trading days before (June 13) and 3 tradingdays after (June 18). On those days the meansale prices per share were $10 and $15,respectively. Therefore, the price of $12 isconsidered the fair market value of a share ofstock on the valuation date. If, however, onJune 13 and 18, the mean sale prices pershare were $15 and $10, respectively, the fairmarket value of a share of stock on thevaluation date is $13.

If only closing prices for bonds are available,see Regulations section 20.2031-2(b).

Apply the rules in the section 2031regulations to determine the value of inactivestock and stock in close corporations. Sendwith the schedule complete financial and otherdata used to determine value, including

balance sheets (particularly the one nearest tothe valuation date) and statements of the netearnings or operating results and dividendspaid for each of the 5 years immediately beforethe valuation date.

Securities reported as of no value, nominalvalue, or obsolete should be listed last. Includethe address of the company and the state anddate of the incorporation. Attach copies ofcorrespondence or statements used todetermine the no value.

If the security was listed on more than onestock exchange, use either the records of theexchange where the security is principallytraded or the composite listing of combinedexchanges, if available, in a publication of

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Table AUnified Rate Schedule

Column DColumn CColumn BColumn A

Rate of tax onexcess overamount incolumn A

Tax onamount incolumn A

Taxableamountnot over

Taxableamount

over

(Percent)

$10,0000 0 182020,000$10,000 $1,800

40,00020,000 3,800 22

2460,00040,000 8,200

Table B Worksheet

80,00060,000 13,000 26

80,000 2818,200100,000

Federal Adjusted Taxable Estate

30100,000 23,800150,0003238,800250,000150,0003470,800500,000250,000

$

37155,800750,000500,000

60,000

1 Federal taxable estate (from TaxComputation, Form 706, line 3)

1,000,000 39750,000 248,3001,250,000 411,000,000 345,800

3 Federal adjusted taxable estate.Subtract line 2 from line 1. Use thisamount to compute maximum credit

for state death taxes in Table B.

1,500,000 431,250,000 448,3002,000,000 451,500,000 555,8002,500,000 492,000,000 780,800

2,500,000 1,025,800 53

Table B

Computation of Maximum Credit for State Death Taxes

(Based on Federal adjusted taxable estate computed using the worksheet above.)

Rate of credit onexcess over amount

in column (1)

Credit on amountin column (1)

Adjusted taxableestate less than

Adjusted taxableestate equal to or

more than

Rate of credit onexcess over amount

in column (1)

Credit on amountin column (1)

Adjusted taxableestate less than

Adjusted taxableestate equal to or

more than

(4)(3)(4)(3)(2)(1) (2)(1)

(Percent)(Percent)

0 2,540,0002,040,000$40,000 8.0106,800None0$40,000 3,040,0002,540,00090,000 8.8146,8000.80

90,000 3,540,0003,040,000140,000 9.6190,8001.6$400140,000 4,040,0003,540,000240,000 10.4238,8002.41,200240,000 5,040,0004,040,000440,000 11.2290,8003.23,600

440,000 6,040,0005,040,000640,000 12.0402,8004.010,000640,000 7,040,0006,040,000840,000 12.8522,8004.818,000

8,040,0007,040,0001,040,000840,000 13.6650,8005.627,6001,040,000 9,040,0008,040,0001,540,000 14.4786,8006.438,800

10,040,0009,040,0002,040,0001,540,000 15.2930,8007.270,80010,040,000 16.01,082,800

2 Adjustment

Examples showing use of Schedule B

Example where the alternate valuation is not adopted; date of death, January 1, 1997

Alternatevaluation

date

Alternatevalue

Value at dateof death

Description including face amount of bonds or number of shares and par value whereneeded for identification. Give CUSIP number.

Itemnumber

Unit value

$60,000-Arkansas Railroad Co. first mortgage 4%, 20-year bonds,due 1999. Interest payable quarterly on Feb. 1, May 1, Aug. 1 andNov. 1; N.Y. Exchange, CUSIP No. XXXXXXXXX

1

60,000100

Interest coupons attached to bonds, item 1, due and payable on Nov.1, 1996, but not cashed at date of death 600

400Interest accrued on item 1, from Nov. 1, 1996, to Jan. 1, 1997

500 shares Public Service Corp., common; N.Y. Exchange, CUSIP No.XXXXXXXXX

255,000110

Dividend on item 2 of $2 per share declared Dec. 10, 1996, payableon Jan. 10, 1997, to holders of record on Dec. 30, 1996 1,000

3,000,000551,290,8003,000,000

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Example where the alternate valuation is adopted; date of death, January 1, 1997

Alternatevaluation

date

Alternatevalue

Value at dateof death

Description including face amount of bonds or number of shares and par value whereneeded for identification. Give CUSIP number.

Itemnumber

Unit value

$60,000-Arkansas Railroad Co. first mortgage 4%, 20-year bonds,due 1999. Interest payable quarterly on Feb. 1, May 1, Aug. 1 andNov. 1; N.Y. Exchange, CUSIP No. XXXXXXXXX

1

60,000100

29,7004/1/9799$30,000 of item 1 distributed to legatees on Apr. 1, 1997

29,4005/2/9798$30,000 of item 1 sold by executor on May 2, 1997

Interest coupons attached to bonds, item 1, due and payable on

Nov. 1, 1996, but not cashed at date of death. Cashed by executoron Feb. 1, 1997 6006002/1/97

Interest accrued on item 1, from Nov. 1, 1996, to Jan. 1, 1997. Cashedby executor on Feb. 1, 1997 4004002/1/97

500 shares of Public Service Corp., common; N.Y. Exchange, CUSIPNo. XXXXXXXXX

255,000110

45,0007/1/9790Not disposed of within 6 months following death

Dividend on item 2 of $2 per share declared Dec. 10, 1996, and paidon Jan. 10, 1997, to holders of record on Dec. 30, 1996 1/10/97 1,0001,000

(Continued from page 9)

general circulation. In valuing listed stocks andbonds, you should carefully check accuraterecords to obtain values for the applicablevaluation date.

If you get quotations from brokers, orevidence of the sale of securities from theofficers of the issuing companies, attach to theschedule copies of the letters furnishing thesequotations or evidence of sale.

See Rev. Rul. 69-489, 1969-2 C.B. 172, forthe special valuation rules for certainmarketable U.S. Treasury Bonds (issuedbefore March 4, 1971). These bonds,commonly called flower bonds, may beredeemed at par plus accrued interest inpayment of the tax at any Federal Reservebank, the office of the Treasurer of the UnitedStates, or the Bureau of the Public Debt, asexplained in Rev. Proc. 69-18, 1969-2 C.B.300.

Instructions for Schedule

C.Mortgages, Notes, andCashSee the reverse side of Schedule C on Form706.

Instructions for ScheduleD.Insurance on theDecedent's LifeSee the reverse side of Schedule D on Form706.

Instructions for ScheduleE.Jointly Owned PropertySee the reverse side of Schedule E on Form

706.

Instructions for ScheduleF.Other MiscellaneousPropertySee the reverse side of Schedule F on Form706.

Instructions for ScheduleG.Transfers DuringDecedent's LifeYou must complete Schedule G and file it withthe return if the decedent made any of the

transfers described below in 1 through 5 or ifyou answered Yes on line 11 or 12a of Part4, General Information.

Five types of transfers should be reported

on this schedule:1. Certain gift taxes (section 2035(c)).Enter at item A of the Schedule the total valueof the gift taxes that were paid by the decedentor the estate on gifts made by the decedent orthe decedent's spouse within 3 years beforedeath.

The date of the gift, not the date of paymentof the gift tax, determines whether a gift taxpaid is included in the gross estate under thisrule. Therefore, you should carefully examinethe Forms 709 filed by the decedent and thedecedent's spouse to determine what part ofthe total gift taxes reported on them wasattributable to gifts made within 3 years beforedeath. For example, if the decedent died onJuly 10, 1996, you should examine gift taxreturns for 1996, 1995, 1994, and 1993.

However, the gift taxes on the 1993 return thatare attributable to gifts made before July 10,1993, are not included in the gross estate.

Attach an explanation of how you computedthe includible gift taxes if you do not include inthe gross estate the entire gift taxes shown onany Form 709 filed within 3 years of death. Alsoattach copies of any pertinent gift tax returnsfiled by the decedent's spouse within 3 yearsof death.2. Other transfers within 3 years beforedeath (section 2035(a)).These transfersinclude onlythe following:q Any transfer by the decedent with respect toa life insurance policy within 3 years beforedeath.q Any transfer within 3 years before death ofa retained section 2036 life estate, section

2037 reversionary interest, or section 2038power to revoke, etc., if the property subject tothe life estate, interest, or power would havebeen included in the gross estate had thedecedent continued to possess the life estate,interest, or power until death.

These transfers are reported on ScheduleG regardless of whether a gift tax return wasrequired to be filed for them when they weremade. However, the amount includible and theinformation required to be shown for thetransfers are determined:q For insurance on the life of the decedentusing the instructions to Schedule D. (AttachForms 712.)

q For insurance on the life of another using theinstructions to Schedule F. (Attach Forms 712.)q For sections 2036, 2037, and 2038 transfers,using paragraphs 3, 4, and 5 of these

instructions.3. Transfers with retained life estate(section 2036).These are transfers by thedecedent in which the decedent retained aninterest in the transferred property. The transfercan be in trust or otherwise, but excludes bonafide sales for adequate and full consideration.

Interests or rights. Section 2036 applies tothe following retained interests or rights:q The right to income from the transferredproperty.q The right to the possession or enjoyment ofthe property.q The right, either alone or with any person, todesignate the persons who shall receive theincome from, or possess or enjoy the property.

Retained voting rights. Transfers with aretained life estate also include transfers ofstock in a controlled corporation after June22, 1976, if the decedent retained or acquiredvoting rights in the stock. If the decedentretained direct or indirect voting rights in acontrolled corporation, the decedent isconsidered to have retained enjoyment of thetransferred property. A corporation is acontrolled corporation if the decedent owned(actually or constructively) or had the right(either alone or with any other person) to voteat least 20% of the total combined voting powerof all classes of stock. See section 2036(b). Ifthese voting rights ceased or were relinquishedwithin 3 years before the decedent's death, thecorporate interests are included in the grossestate as if the decedent had actually retainedthe voting rights until death.

The amount includible in the gross estate is

the value of the transferred property at the timeof the decedent's death. If the decedent keptor reserved an interest or right to only a partof the transferred property, the amountincludible in the gross estate is a correspondingpart of the entire value of the property.

A retained life estate does not have to belegally enforceable. What matters is that asubstantial economic benefit was retained. Forexample, if a mother transferred title to herhome to her daughter but with the informalunderstanding that she was to continue livingthere until her death, the value of the homewould be includible in the mother's estate evenif the agreement would not have been legallyenforceable.

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4. Transfers taking effect at death(section 2037).A transfer that takes effectat the decedent's death is one under whichpossession or enjoyment can be obtained onlyby surviving the decedent. A transfer is nottreated as one that takes effect at thedecedent's death unless the decedent retaineda reversionary interest (defined below) in theproperty that immediately before thedecedent's death had a value of more than 5%of the value of the transferred property. If thetransfer was made before October 8, 1949, thereversionary interest must have arisen by theexpress terms of the instrument of transfer.

A reversionary interestis generally any rightunder which the transferred property will ormay be returned to the decedent or thedecedent's estate. It also includes thepossibility that the transferred property maybecome subject to a power of disposition by thedecedent. It does not matter if the right arisesby the express terms of the instrument oftransfer or by operation of law. For thispurpose, reversionary interest does notinclude the possibility the income alone fromthe property may return to the decedent orbecome subject to the decedent's power ofdisposition.5. Revocable transfers (section2038).The gross estate includes the valueof transferred property in which the enjoymentof the transferred property was subject at

decedent's death to any change through theexercise of a power to alter, amend, revoke,or terminate. A decedent's power to change thebeneficiaries or to hasten or increase anybeneficiary's enjoyment of the property areexamples of this.

It does not matter whether the power wasreserved at the time of the transfer, whether itarose by operation of law, or was later createdor conferred. The rule applies regardless of thesource from which the power was acquired,and regardless of whether the power wasexercisable by the decedent alone or with anyperson (and regardless of whether that personhad a substantial adverse interest in thetransferred property).

The capacity in which the decedent coulduse a power has no bearing. If the decedent

gave property in trust and was the trustee withthe power t