Specific Instructions

Valuation

When computing the amounts to enter on Form 706-D, use the same values and estate tax that the executor reported on the Form 706 filed for the decedent. However, if the IRS has completed the audit of the estate tax return, use the agreed values and tax rather than the reported values and tax.

Schedule A. Disposition of Qualified Family-Owned Business Interest, Failure to Materially Participate, or Disqualifying Act

How To CompleteSchedule A

On Schedule A, list every QFOBI or portion thereof that the qualified heir disposed of, or in which material participation has ended, since the date of the decedent's death and for which a Form 706-D has not been previously filed. You must also report any disqualifying act regarding the QFOBI (that is, the principal place of the qualified family-owned business is no longer located in the United States, or the qualified heir lost United States citizenship and the QFOBI property was neither placed into a qualified trust, nor was a security arrangement made).

In general, for Schedule A, do not list property interests that were disposed of to family members of the qualified heir. (See Disposition to family member on page 2.) Instead, these interests should be listed on Schedule C.

Also, do not list any interests that have already been reported on a previously filed Form 706-D.

Column (A).   Number and list the property interests in chronological order of disposition, failure to materially participate, or disqualification.

Column (B).   Use the same description in column (B) that the executor used for the QFOBI on the Form 706 filed for the decedent's estate. Include in column (B) the schedule and item number where the QFOBI was reported on the Form 706.

Column (C).   Report in column (C) the date that the qualified heir disposed of the QFOBI, material participation ended, or a disqualifying act occurred.

Column (D).   You only need to complete column (D) if you are reporting an involuntary conversion or exchange. If the qualified heir disposed of the QFOBI in an arm's length transaction, report the amount realized in column (D).

  If the QFOBI is disposed of by the qualified heir in other than an arm's length transaction, report in column (D) the fair market value (FMV) (defined below) of the QFOBI as of the date of its disposition.

  If the qualified heir owned only a part of the QFOBI, report in column (D) the pro rata share of the amount realized or the FMV allocable to the part owned by the qualified heir.

Arm's length transaction.

An arm's length transaction is a transaction where there is no bargain or gift element for affection or other reasons.

Amount realized.

The amount realized is the sum of the money received plus the FMV of property (other than money) received. For the real property taxes that must be taken into account, see section 1001(b).

Fair market value.

Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

Column (E).   Report in column (E) the value at the date of the decedent's death (or alternate valuation date, if applicable) of the QFOBI property that passed from the decedent to the qualified heir who disposed of the property, in which material participation has ended, or incurred a disqualifying act. If you are reporting part of your total QFOBI, include only that pro rata share in column (E).

  In general, use the value that the executor reported on the Form 706 filed for the decedent's estate. However, if the IRS has completed the audit of the estate tax return, use the agreed value rather than the reported value.

Schedule B. Involuntary Conversions or Exchanges

Involuntary conversions of qualified property (under the rules of section 1033) and exchanges of qualified property (under the rules of section 1031) are treated similarly when computing the additional estate tax on Form 706-D.

If you are reporting an involuntary conversion or exchange, you may not use the same Form 706-D to report any other taxable events that are not involuntary conversions or exchanges. Use a separate Form 706-D for the other taxable events.

You may report conversions and exchanges together on the same return.

Nontaxable Involuntary Conversions or Exchanges

If the qualified heir reinvests all of the involuntary conversion proceeds in qualified replacement property, or if the qualified heir exchanges qualified property solely for qualified exchange property, then there is no additional estate tax.

You should complete Form 706-D, even though there is no tax, to notify the IRS that the involuntary conversion or exchange took place. However, you need to complete only Part I, Schedule A, and Schedule B. Write “nontaxable” on line 15 of Part II.

Rules similar to those under sections 2032A(e)(14), 2032A(h), and 2032A(i) are applicable. Also, see section 2057(i).

Partially Taxable Involuntary Conversions or Exchanges

If the cost of the qualified replacement property is less than the amount realized in the involuntary conversion; or if other property, in addition to qualified exchange property, is received in the exchange, the conversion or exchange is partially taxable. You should complete all of Form 706-D and determine the tax using Part II.

List on Schedule A the QFOBI that the qualified heir disposed of, in which material participation ended, or with regard to which the disqualifying act occurred, regardless of whether he or she received replacement or exchange property for the interest. List on Schedule B only the replacement or exchange property the qualified heir actually received.

Qualified Replacement or Exchange Property

The term “qualified replacement property” means any property which is:

  • Acquired in an exchange which qualifies under section 1031, or

  • The acquisition of which results in the nonrecognition of gain under section 1033.

The period of the decedent's or family member's ownership or material participation with respect to replaced or exchanged property is treated as the period of ownership or material participation with respect to the qualified replacement or exchange property. This applies only to that part of the FMV of the replacement or exchange property (at the date of acquisition) that does not exceed the FMV of the replaced or exchanged property (at the date of disposition).

Note.

The 10-year recapture period is extended under certain circumstances. See Two-Year Grace Period—Commencement Date on page 3.

How To CompleteSchedule B

Column (A).   Make one entry for each item of qualified replacement or exchange property.

Column (B).   Describe the qualified replacement property with enough detail so that the IRS can locate and value it. For more information, see the instructions to Form 706.

Column (C).   For an involuntary conversion, enter the cost of the replacement property. For an exchange, enter the FMV of the replacement property.

Part II—Tax Computation

Line 1

Enter the qualified heir's share of the QFOBIs shown on line 4 of the decedent's Form 706, Schedule T.

Line 2

Enter the total reported value of the QFOBIs shown on line 6 of the decedent's Form 706, Schedule T.

Line 5

Multiply the amount of gross additional estate tax entered on line 3c by the qualified heir's percentage of QFOBIs entered on line 4 of this Form 706-D. The result is the qualified heir's share of the total reduction in estate tax.

Line 9

See the Applicable Percentage table on page 3.

Line 10

Multiply line 8 by the applicable percentage entered on line 9. If you completed Schedule B, complete lines 11 through 15. If you did not complete Schedule B, skip lines 11 through 14 and enter the amount from line 10 on line 15.

Line 15

Enter the additional estate tax due.

Show, on the dotted line for line 15, interest at the underpayment rate established under section 6621 for the period beginning on the date the estate tax liability was due and ending on the date such additional estate tax is due.

Example.

April Green died November 1, 2003. On the Form 706 filed for her estate, the executor elected to claim the maximum QFOBI deduction of $675,000 based on her ownership of 100% of the stock in XYZ Corp. The estate tax value of the stock was $900,000. June Green, April Green's daughter and sole heir, received all of the XYZ stock from the estate, and managed the corporation. On June 30, 2005, June Green sold part of the stock to a person other than a qualified heir. The stock sold had an estate tax value of $200,000.

The following amounts should be entered on the Form 706-D filed by June Green to report the sale of stock:

Line 1. $900,000 (the qualified heir's share of the total QFOBIs as shown on line 4 of the Schedule T, Form 706).

Line 2. $900,000 (the total reported value of all the decedent's QFOBIs shown on line 6 of the decedent's Schedule T, Form 706).

Line 3c. $330,750 (gross additional estate tax).

Line 4. 100%

Line 5. $330,750 (qualified heir's share of total reduction in estate tax).

Line 6. $200,000 from column (E), Schedule A of this Form 706-D (estate tax value of the QFOBI disposed of).

Line 7. 22.2%

Line 8. $73,427

Line 9. 100% as the applicable percentage (the recapture event occurred within 4 years of the decedent's death).

Line 10. $73,427, total additional estate tax.

Line 15. $73,427, additional estate tax due (there were no entries on lines 11 through 14).

Interest was not entered on the dotted line of line 15. June Green, the qualified heir, chose to have the Internal Revenue Service compute the interest on the additional estate tax due.

Schedule C. Nontaxable Transfers

Disposition to family member.   You may enter a disposition to a family member of the qualified heir on Schedule C only if you file this Form 706-D on time (including extensions) and attach an agreement by the transferee to be personally liable for any additional estate tax under section 2057(f) on the QFOBI received. For a format for such an agreement, see Form 706, Schedule T (section 2057(h)).

  If you are not filing this Form 706-D on time, or if the transferee does not enter into the agreement, you must enter the disposition(s) on Schedule A instead of Schedule C.

Qualified conservation contribution.   Enter a disposition made through a qualified conservation contribution under section 170(h). In general, the term “qualified conservation contribution” means a contribution:
  • Of a qualified real property interest,

  • To a qualified organization,

  • To be used exclusively for conservation purposes.

  Attach a copy of the Form 8283, Noncash Charitable Contributions, that was filed and a statement that:
  • Identifies the conservation purposes furthered by your donation;

  • Shows, if before and after valuation is used, the FMV of the underlying property before and after the gift;

  • States whether you made the donation in order to get a permit or other approval from a local or other governing authority and whether the donation was required by a contract; and

  • Describes whether you or a related person has any interest in other property nearby.

  For any contribution made in a tax year beginning after August 17, 2006, also attach:
  • A qualified appraisal of the qualified property interest,

  • Photographs of the entire exterior of the building, and

  • A description of all restrictions on the development of the building.

  For more information, see Pub. 561, Determining the Value of Donated Property, and section 170(h) and the related regulations.

Loss of U.S. citizenship.   A qualified heir who loses U.S. citizenship (and, in some circumstances, a long-term resident who ceases to be treated as such) may avoid additional estate tax by placing the qualified family-owned business assets into a trust meeting certain requirements, or by furnishing a bond in lieu of personal liability. See section 2057(g) for details.

  Show in Schedule C if the qualified heir lost U.S. citizenship (or long-term residency), and such heir complied with the requirements of section 2057(g)). Attach a copy of the qualified trust agreement or evidence of the bond. See section 2057(f)(1)(C) for more information.

How To CompleteSchedule C

See the instructions for completing columns (A) and (B) of Schedule A on page 3. Report the applicable dates in column (C).

Signature(s)

Form 706-D must be signed. The taxpayer (or person filing on his or her behalf) must verify and sign the declaration on page 1 under penalties of perjury. The taxpayer may use Form 2848, Power of Attorney and Declaration of Representative, to authorize another person to act for him or her before the Internal Revenue Service.

Generally, anyone who is paid to prepare the return must sign the return in the space provided and fill in the Paid Preparer's Use Only area. See section 7701(a)(36)(B) for exceptions.

In addition to signing and completing the required information, the paid preparer must give a copy of the completed return to the taxpayer.

Note.

A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.


More Online Instructions