26 USC 2704 - Treatment of certain lapsing rights and restrictions

Collapse to view only § 2704. Treatment of certain lapsing rights and restrictions

§ 2701. Special valuation rules in case of transfers of certain interests in corporations or partnerships
§ 2702. Special valuation rules in case of transfers of interests in trusts
§ 2703. Certain rights and restrictions disregarded
§ 2704. Treatment of certain lapsing rights and restrictions

§ 2701. Special valuation rules in case of transfers of certain interests in corporations or partnerships

(a) Valuation rules

(1) In generalSolely for purposes of determining whether a transfer of an interest in a corporation or partnership to (or for the benefit of) a member of the transferor’s family is a gift (and the value of such transfer), the value of any right—

(A) which is described in subparagraph (A) or (B) of subsection (b)(1), and

(B) which is with respect to any applicable retained interest that is held by the transferor or an applicable family member immediately after the transfer,

shall be determined under paragraph (3). This paragraph shall not apply to the transfer of any interest for which market quotations are readily available (as of the date of transfer) on an established securities market.

(2) Exceptions for marketable retained interests, etc.Paragraph (1) shall not apply to any right with respect to an applicable retained interest if—

(A) market quotations are readily available (as of the date of the transfer) for such interest on an established securities market,

(B) such interest is of the same class as the transferred interest, or

(C) such interest is proportionally the same as the transferred interest, without regard to nonlapsing differences in voting power (or, for a partnership, nonlapsing differences with respect to management and limitations on liability).

Subparagraph (C) shall not apply to any interest in a partnership if the transferor or an applicable family member has the right to alter the liability of the transferee of the transferred property. Except as provided by the Secretary, any difference described in subparagraph (C) which lapses by reason of any Federal or State law shall be treated as a nonlapsing difference for purposes of such subparagraph.

(3) Valuation of rights to which paragraph (1) applies

(A) In general

(B) Valuation of certain qualified paymentsIf—

(i) any applicable retained interest confers a distribution right which consists of the right to a qualified payment, and

(ii) there are 1 or more liquidation, put, call, or conversion rights with respect to such interest,

the value of all such rights shall be determined as if each liquidation, put, call, or conversion right were exercised in the manner resulting in the lowest value being determined for all such rights.

(4) Minimum valuation of junior equity

(A) In generalIn the case of a transfer described in paragraph (1) of a junior equity interest in a corporation or partnership, such interest shall in no event be valued at an amount less than the value which would be determined if the total value of all of the junior equity interests in the entity were equal to 10 percent of the sum of—

(i) the total value of all of the equity interests in such entity, plus

(ii) the total amount of indebtedness of such entity to the transferor (or an applicable family member).

(B) DefinitionsFor purposes of this paragraph—

(i) Junior equity interest

(ii) Equity interest

(b) Applicable retained interestsFor purposes of this section—

(1) In generalThe term “applicable retained interest” means any interest in an entity with respect to which there is—

(A) a distribution right, but only if, immediately before the transfer described in subsection (a)(1), the transferor and applicable family members hold (after application of subsection (e)(3)) control of the entity, or

(B) a liquidation, put, call, or conversion right.

(2) ControlFor purposes of paragraph (1)—

(A) Corporations

(B) PartnershipsIn the case of a partnership, the term “control” means—

(i) the holding of at least 50 percent of the capital or profits interests in the partnership, or

(ii) in the case of a limited partnership, the holding of any interest as a general partner.

(1) Distribution right

(A) In generalThe term “distribution right” means—

(i) a right to distributions from a corporation with respect to its stock, and

(ii) a right to distributions from a partnership with respect to a partner’s interest in the partnership.

(B) ExceptionsThe term “distribution right” does not include—

(i) a right to distributions with respect to any interest which is junior to the rights of the transferred interest,

(ii) any liquidation, put, call, or conversion right, or

(iii) any right to receive any guaranteed payment described in section 707(c) of a fixed amount.

(2) Liquidation, etc. rights

(A) In general

(B) Exception for fixed rights

(i) In general

(ii) Treatment of certain rights

(C) Exception for certain rights to convertThe term “liquidation, put, call, or conversion right” does not include any right which—

(i) is a right to convert into a fixed number (or a fixed percentage) of shares of the same class of stock in a corporation as the transferred stock in such corporation under subsection (a)(1) (or stock which would be of the same class but for nonlapsing differences in voting power),

(ii) is nonlapsing,

(iii) is subject to proportionate adjustments for splits, combinations, reclassifications, and similar changes in the capital stock, and

(iv) is subject to adjustments similar to the adjustments under subsection (d) for accumulated but unpaid distributions.

A rule similar to the rule of the preceding sentence shall apply for partnerships.

(3) Qualified payment

(A) In general

(B) Treatment of variable rate payments

(i) In general

(ii) Election to have interest treated as qualified payment

(iii) Elections irrevocable

(d) Transfer tax treatment of cumulative but unpaid distributions

(1) In generalIf a taxable event occurs with respect to any distribution right to which subsection (a)(3)(B) or (C) applied, the following shall be increased by the amount determined under paragraph (2):

(A) The taxable estate of the transferor in the case of a taxable event described in paragraph (3)(A)(i).

(B) The taxable gifts of the transferor for the calendar year in which the taxable event occurs in the case of a taxable event described in paragraph (3)(A)(ii) or (iii).

(2) Amount of increase

(A) In generalThe amount of the increase determined under this paragraph shall be the excess (if any) of—

(i) the value of the qualified payments payable during the period beginning on the date of the transfer under subsection (a)(1) and ending on the date of the taxable event determined as if—(I) all such payments were paid on the date payment was due, and(II) all such payments were reinvested by the transferor as of the date of payment at a yield equal to the discount rate used in determining the value of the applicable retained interest described in subsection (a)(1), over

(ii) the value of such payments paid during such period computed under clause (i) on the basis of the time when such payments were actually paid.

(B) Limitation on amount of increase

(i) In generalThe amount of the increase under subparagraph (A) shall not exceed the applicable percentage of the excess (if any) of—(I) the value (determined as of the date of the taxable event) of all equity interests in the entity which are junior to the applicable retained interest, over(II) the value of such interests (determined as of the date of the transfer to which subsection (a)(1) applied).

(ii) Applicable percentageFor purposes of clause (i), the applicable percentage is the percentage determined by dividing—(I) the number of shares in the corporation held (as of the date of the taxable event) by the transferor which are applicable retained interests of the same class, by(II) the total number of shares in such corporation (as of such date) which are of the same class as the class described in subclause (I).

A similar percentage shall be determined in the case of interests in a partnership.

(iii) Definition

(3) Taxable eventsFor purposes of this subsection—

(A) In generalThe term “taxable event” means any of the following:

(i) The death of the transferor if the applicable retained interest conferring the distribution right is includible in the estate of the transferor.

(ii) The transfer of such applicable retained interest.

(iii) At the election of the taxpayer, the payment of any qualified payment after the period described in paragraph (2)(C), but only with respect to such payment.

(B) Exception where spouse is transferee

(i) Deathtime transfers

(ii) Lifetime transfersA transfer to the spouse of the transferor shall not be treated as a taxable event under subparagraph (A)(ii) if such transfer does not result in a taxable gift by reason of—(I) any deduction allowed under section 2523, or the exclusion under section 2503(b), or(II) consideration for the transfer provided by the spouse.

(iii) Spouse succeeds to treatment of transferor

(4) Special rules for applicable family members

(A) Family member treated in same manner as transferor

(B) Transfer to applicable family member

(5) Transfer to include termination

(e) Other definitions and rulesFor purposes of this section—

(1) Member of the familyThe term “member of the family” means, with respect to any transferor—

(A) the transferor’s spouse,

(B) a lineal descendant of the transferor or the transferor’s spouse, and

(2) Applicable family memberThe term “applicable family member” means, with respect to any transferor—

(A) the transferor’s spouse,

(B) an ancestor of the transferor or the transferor’s spouse, and

(3) Attribution of indirect holdings and transfers

(4) Effect of adoption

(5) Certain changes treated as transfersExcept as provided in regulations, a contribution to capital or a redemption, recapitalization, or other change in the capital structure of a corporation or partnership shall be treated as a transfer of an interest in such entity to which this section applies if the taxpayer or an applicable family member—

(A) receives an applicable retained interest in such entity pursuant to such transaction, or

(B) under regulations, otherwise holds, immediately after such transaction, an applicable retained interest in such entity.

This paragraph shall not apply to any transaction (other than a contribution to capital) if the interests in the entity held by the transferor, applicable family members, and members of the transferor’s family before and after the transaction are substantially identical.

(6) Adjustments

(7) Treatment as separate interests

(Added Pub. L. 101–508, title XI, § 11602(a), Nov. 5, 1990, 104 Stat. 1388–491; amended Pub. L. 104–188, title I, § 1702(f)(1)–(3)(B), (4)–(5)(B), (6)–(10), Aug. 20, 1996, 110 Stat. 1870–1872.)

§ 2702. Special valuation rules in case of transfers of interests in trusts

(a) Valuation rules

(1) In general

(2) Valuation of retained interests

(A) In general

(B) Valuation of qualified interest

(3) Exceptions

(A) In general

This subsection shall not apply to any transfer—

(i) if such transfer is an incomplete gift,

(ii) if such transfer involves the transfer of an interest in trust all the property in which consists of a residence to be used as a personal residence by persons holding term interests in such trust, or

(iii) to the extent that regulations provide that such transfer is not inconsistent with the purposes of this section.

(B) Incomplete gift

(b) Qualified interest

For purposes of this section, the term “qualified interest” means—

(1) any interest which consists of the right to receive fixed amounts payable not less frequently than annually,

(2) any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair market value of the property in the trust (determined annually), and

(3) any noncontingent remainder interest if all of the other interests in the trust consist of interests described in paragraph (1) or (2).

For purposes of this section—

(1) In general

(2) Joint purchases

(3) Term interest

The term “term interest” means—

(A) a life interest in property, or

(B) an interest in property for a term of years.

(4) Valuation rule for certain term interests

If the nonexercise of rights under a term interest in tangible property would not have a substantial effect on the valuation of the remainder interest in such property—

(A) subparagraph (A) of subsection (a)(2) shall not apply to such term interest, and

(B) the value of such term interest for purposes of applying subsection (a)(1) shall be the amount which the holder of the term interest establishes as the amount for which such interest could be sold to an unrelated third party.

(d) Treatment of transfers of interests in portion of trust

(e) Member of the family

(Added Pub. L. 101–508, title XI, § 11602(a), Nov. 5, 1990, 104 Stat. 1388–497; amended Pub. L. 104–188, title I, § 1702(f)(11), Aug. 20, 1996, 110 Stat. 1872.)

§ 2703. Certain rights and restrictions disregarded

(a) General rule

For purposes of this subtitle, the value of any property shall be determined without regard to—

(1) any option, agreement, or other right to acquire or use the property at a price less than the fair market value of the property (without regard to such option, agreement, or right), or

(2) any restriction on the right to sell or use such property.

(b) Exceptions

Subsection (a) shall not apply to any option, agreement, right, or restriction which meets each of the following requirements:

(1) It is a bona fide business arrangement.

(2) It is not a device to transfer such property to members of the decedent’s family for less than full and adequate consideration in money or money’s worth.

(3) Its terms are comparable to similar arrangements entered into by persons in an arms’ length transaction.

(Added Pub. L. 101–508, title XI, § 11602(a), Nov. 5, 1990, 104 Stat. 1388–498.)

§ 2704. Treatment of certain lapsing rights and restrictions

(a) Treatment of lapsed voting or liquidation rights

(1) In generalFor purposes of this subtitle, if—

(A) there is a lapse of any voting or liquidation right in a corporation or partnership, and

(B) the individual holding such right immediately before the lapse and members of such individual’s family hold, both before and after the lapse, control of the entity,

such lapse shall be treated as a transfer by such individual by gift, or a transfer which is includible in the gross estate of the decedent, whichever is applicable, in the amount determined under paragraph (2).

(2) Amount of transferFor purposes of paragraph (1), the amount determined under this paragraph is the excess (if any) of—

(A) the value of all interests in the entity held by the individual described in paragraph (1) immediately before the lapse (determined as if the voting and liquidation rights were nonlapsing), over

(B) the value of such interests immediately after the lapse.

(3) Similar rights

(b) Certain restrictions on liquidation disregarded

(1) In generalFor purposes of this subtitle, if—

(A) there is a transfer of an interest in a corporation or partnership to (or for the benefit of) a member of the transferor’s family, and

(B) the transferor and members of the transferor’s family hold, immediately before the transfer, control of the entity,

any applicable restriction shall be disregarded in determining the value of the transferred interest.

(2) Applicable restrictionFor purposes of this subsection, the term “applicable restriction” means any restriction—

(A) which effectively limits the ability of the corporation or partnership to liquidate, and

(B) with respect to which either of the following applies:

(i) The restriction lapses, in whole or in part, after the transfer referred to in paragraph (1).

(ii) The transferor or any member of the transferor’s family, either alone or collectively, has the right after such transfer to remove, in whole or in part, the restriction.

(3) ExceptionsThe term “applicable restriction” shall not include—

(A) any commercially reasonable restriction which arises as part of any financing by the corporation or partnership with a person who is not related to the transferor or transferee, or a member of the family of either, or

(B) any restriction imposed, or required to be imposed, by any Federal or State law.

(4) Other restrictions

(1) Control

(2) Member of the familyThe term “member of the family” means, with respect to any individual—

(A) such individual’s spouse,

(B) any ancestor or lineal descendant of such individual or such individual’s spouse,

(D) any spouse of any individual described in subparagraph (B) or (C).

(3) Attribution

(Added Pub. L. 101–508, title XI, § 11602(a), Nov. 5, 1990, 104 Stat. 1388–498; amended Pub. L. 104–188, title I, § 1702(f)(3)(C), Aug. 20, 1996, 110 Stat. 1871.)