§2701 — Special valuation rules in case of transfers of certain interests in corporations or partnerships
12 citing cases
Statute Text — 26 U.S.C. §2701
Solely 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—
which is described in subparagraph (A) or (B) of subsection (b)(1), and
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.
Paragraph (1) shall not apply to any right with respect to an applicable retained interest if—
market quotations are readily available (as of the date of the transfer) for such interest on an established securities market,
such interest is of the same class as the transferred interest, or
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.
The value of any right described in paragraph (1), other than a distribution right which consists of a right to receive a qualified payment, shall be treated as being zero.
If—
any applicable retained interest confers a distribution right which consists of the right to a qualified payment, and
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.
In the case of an applicable retained interest which is described in subparagraph (B)(i) but not subparagraph (B)(ii), the value of the distribution right shall be determined without regard to this section.
In 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—
the total value of all of the equity interests in such entity, plus
the total amount of indebtedness of such entity to the transferor (or an applicable family member).
For purposes of this paragraph—
The term “junior equity interest” means common stock or, in the case of a partnership, any partnership interest under which the rights as to income and capital (or, to the extent provided in regulations, the rights as to either income or capital) are junior to the rights of all other classes of equity interests.
The term “equity interest” means stock or any interest as a partner, as the case may be.
For purposes of this section—
The term “applicable retained interest” means any interest in an entity with respect to which there is—
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
a liquidation, put, call, or conversion right.
For purposes of paragraph (1)—
In the case of a corporation, the term “control” means the holding of at least 50 percent (by vote or value) of the stock of the corporation.
In the case of a partnership, the term “control” means—
the holding of at least 50 percent of the capital or profits interests in the partnership, or
in the case of a limited partnership, the holding of any interest as a general partner.
For purposes of this subsection, the term “applicable family member” includes any lineal descendant of any parent of the transferor or the transferor’s spouse.
For purposes of this section—
The term “distribution right” means—
a right to distributions from a corporation with respect to its stock, and
a right to distributions from a partnership with respect to a partner’s interest in the partnership.
The term “distribution right” does not include—
a right to distributions with respect to any interest which is junior to the rights of the transferred interest,
any liquidation, put, call, or conversion right, or
any right to receive any guaranteed payment described in section 707(c) of a fixed amount.
The term “liquidation, put, call, or conversion right” means any liquidation, put, call, or conversion right, or any similar right, the exercise or nonexercise of which affects the value of the transferred interest.
The term “liquidation, put, call, or conversion right” does not include any right which must be exercised at a specific time and at a specific amount.
If a right is assumed to be exercised in a particular manner under subsection (a)(3)(B), such right shall be treated as so exercised for purposes of clause (i).
The term “liquidation, put, call, or conversion right” does not include any right which—
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),
is nonlapsing,
is subject to proportionate adjustments for splits, combinations, reclassifications, and similar changes in the capital stock, and
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.
Except as otherwise provided in this paragraph, the term “qualified payment” means any dividend payable on a periodic basis under any cumulative preferred stock (or a comparable payment under any partnership interest) to the extent that such dividend (or comparable payment) is determined at a fixed rate.
For purposes of subparagraph (A), a payment shall be treated as fixed as to rate if such payment is determined at a rate which bears a fixed relationship to a specified market interest rate.
Payments under any interest held by a transferor which (without regard to this subparagraph) are qualified payments shall be treated as qualified payments unless the transferor elects not to treat such payments as qualified payments. Payments described in the preceding sentence which are held by an applicable family member shall be treated as qualified payments only if such member elects to treat such payments as qualified payments.
A transferor or applicable family member holding any distribution right which (without regard to this subparagraph) is not a qualified payment may elect to treat such right as a qualified payment, to be paid in the amounts and at the times specified in such election. The preceding sentence shall apply only to the extent that the amounts and times so specified are not inconsistent with the underlying legal instrument giving rise to such right.
Any election under this subparagraph with respect to an interest shall, once made, be irrevocable.
If 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):
The taxable estate of the transferor in the case of a taxable event described in paragraph (3)(A)(i).
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).
The amount of the increase determined under this paragraph shall be the excess (if any) of—
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—
all such payments were paid on the date payment was due, and
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
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.
The amount of the increase under subparagraph (A) shall not exceed the applicable percentage of the excess (if any) of—
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
the value of such interests (determined as of the date of the transfer to which subsection (a)(1) applied).
For purposes of clause (i), the applicable percentage is the percentage determined by dividing—
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
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).
For purposes of this subparagraph, the term “equity interest” has the meaning given such term by subsection (a)(4)(B).
A similar percentage shall be determined in the case of interests in a partnership.
For purposes of subparagraph (A), any payment of any distribution during the 4-year period beginning on its due date shall be treated as having been made on such due date.
For purposes of this subsection—
The term “taxable event” means any of the following:
The death of the transferor if the applicable retained interest conferring the distribution right is includible in the estate of the transferor.
The transfer of such applicable retained interest.
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.
Subparagraph (A)(i) shall not apply to any interest includible in the gross estate of the transferor if a deduction with respect to such interest is allowable under section 2056 or 2106(a)(3).
A 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—
any deduction allowed under section 2523, or the exclusion under section 2503(b), or
consideration for the transfer provided by the spouse.
If an event is not treated as a taxable event by reason of this subparagraph, the transferee spouse or surviving spouse (as the case may be) shall be treated in the same manner as the transferor in applying this subsection with respect to the interest involved.
For purposes of this subsection, an applicable family member shall be treated in the same manner as the transferor with respect to any distribution right retained by such family member to which subsection (a)(3)(B) or (C) applied.
In the case of a taxable event described in paragraph (3)(A)(ii) involving the transfer of an applicable retained interest to an applicable family member (other than the spouse of the transferor), the applicable family member shall be treated in the same manner as the transferor in applying this subsection to distributions accumulating with respect to such interest after such taxable event.
In the case of a taxable event described in paragraph (3)(A)(ii) involving a transfer of an applicable retained interest from an applicable family member to a transferor, this subsection shall continue to apply to the transferor during any period the transferor holds such interest.
For purposes of this subsection, any termination of an interest shall be treated as a transfer.
For purposes of this section—
The term “member of the family” means, with respect to any transferor—
the transferor’s spouse,
a lineal descendant of the transferor or the transferor’s spouse, and
the spouse of any such descendant.
The term “applicable family member” means, with respect to any transferor—
the transferor’s spouse,
an ancestor of the transferor or the transferor’s spouse, and
the spouse of any such ancestor.
An individual shall be treated as holding any interest to the extent such interest is held indirectly by such individual through a corporation, partnership, trust, or other entity. If any individual is treated as holding any interest by reason of the preceding sentence, any transfer which results in such interest being treated as no longer held by such individual shall be treated as a transfer of such interest.
A relationship by legal adoption shall be treated as a relationship by blood.
Except 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—
receives an applicable retained interest in such entity pursuant to such transaction, or
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.
Under regulations prescribed by the Secretary, if there is any subsequent transfer, or inclusion in the gross estate, of any applicable retained interest which was valued under the rules of subsection (a), appropriate adjustments shall be made for purposes of chapter 11, 12, or 13 to reflect the increase in the amount of any prior taxable gift made by the transferor or decedent by reason of such valuation or to reflect the application of subsection (d).
The Secretary may by regulation provide that any applicable retained interest shall be treated as 2 or more separate interests for purposes of this section.
Treasury Regulations
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Treas. Reg. §25.2701-0Table of contents
This section lists the major paragraphs contained in §§ 25.2701-1 through 25.2701-8.
(a) In general.
(1) Scope of section 2701.
(2) Effect of section 2701.
(3) Example.
(b) Transfers and other triggering events.
(1) Completed transfers.
(2) Transactions treated as transfers.
(3) Excluded transactions.
(c) Circumstances in which section 2701 does not apply.
(1) Marketable transferred interests.
(2) Marketable retained interests.
(3) Interests of the same class.
(4) Proportionate transfers.
(d) Family definitions.
(1) Member of the family.
(2) Applicable family member.
(3) Relationship by adoption.
(e) Examples.
(a) In general.
(1) Valuing an extraordinary payment right.
(2) Valuing a distribution right.
(3) Special rule for valuing a qualified payment right held in conjunction with an extraordinary payment right.
(4) Valuing other rights.
(5) Example.
(b) Definitions.
(1) Applicable retained interest.
(2) Extraordinary payment right.
(3) Distribution right.
(4) Rights that are not extraordinary payment rights or distribution rights.
(5) Controlled entity.
(6) Qualified payment right.
(c) Qualified payment elections.
(1) Election to treat a qualified payment right as other than a qualified payment right.
(2) Election to treat other distribution rights as qualified payment rights.
(3) Elections irrevocable.
(4) Treatment of certain payments to applicable family members.
(5) Time and manner of elections.
(d) Examples.
(a) Overview.
(1) In general.
(2) Definitions.
(b) Valuation methodology.
(1) Step 1—Valuation of family-held interests.
(2) Step 2—Subtract the value of senior equity interests.
(3) Step 3—Allocate the remaining value among the transferred interests and other family-held subordinate equity interests.
(4) Step 4—Determine the amount of the gift.
(5) Adjustment in Step 2.
(c) Minimum value rule.
(1) In general.
(2) Junior equity interest.
(3) Indebtedness.
(d) Examples.
(a) In general.
(b) Taxable event.
(1) In general.
(2) Exception.
(3) Individual treated as interest holder.
(c) Amount of increase.
(1) In general.
(2) Due date of qualified payments.
(3) Appropriate discount rate.
(4) Application of payments.
(5) Payment.
(6) Limitation.
(d) Taxpayer election.
(1) In general.
(2) Limitation not applicable.
(3) Time and manner of election.
(4) Example.
(a) Reduction of transfer tax base.
(1) In general.
(2) Federal gift tax modification.
(3) Federal estate tax modification.
(4) Section 2701 interest.
(b) Amount of reduction.
(c) Duplicated amount.
(1) In general.
(2) Transfer tax value—in general.
(3) Special transfer tax value rules.
(d) Examples.
(e) Computation of reduction if initial transfer is split under section 2513.
(1) In general.
(2) Transfers during joint lives.
(3) Transfers at or after death of either spouse.
(f) Examples.
(g) Double taxation otherwise avoided.
(h) Effective date.
(a) In general.
(1) Attribution to individuals.
(2) Corporations.
(3) Partnerships.
(4) Estates, trusts, and other entities.
(5) Multiple attribution.
(b) Examples.
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Treas. Reg. §25.2701-0(a)In general.
In general.
(1) Attribution to individuals.
(2) Corporations.
(3) Partnerships.
(4) Estates, trusts, and other entities.
(5) Multiple attribution.
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Treas. Reg. §25.2701-0(b)Examples.
Examples.
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Treas. Reg. §25.2701-0(c)Duplicated amount.
Duplicated amount.
(1) In general.
(2) Transfer tax value—in general.
(3) Special transfer tax value rules.
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Treas. Reg. §25.2701-0(d)Examples.
Examples.
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Treas. Reg. §25.2701-0(e)Computation of reduction if initial transfer is split under section 2513.
Computation of reduction if initial transfer is split under section 2513.
(1) In general.
(2) Transfers during joint lives.
(3) Transfers at or after death of either spouse.
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Treas. Reg. §25.2701-0(f)Examples.
Examples.
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Treas. Reg. §25.2701-0(g)Double taxation otherwise avoided.
Double taxation otherwise avoided.
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Treas. Reg. §25.2701-0(h)Effective date.
Effective date.
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Treas. Reg. §25.2701-1Special valuation rules in the case of transfers of certain interests in corporations and partnerships
(a) In general—(1) Scope of section 2701. Section 2701 provides special valuation rules to determine the amount of the gift when an individual transfers an equity interest in a corporation or partnership to a member of the individual's family. For section 2701 to apply, the transferor or an applicable family member (as defined in paragraph (d)(2) of this section) must, immediately after the transfer, hold an applicable retained interest (a type of equity interest defined in § 25.2701-2(b)(1)). If certain subsequent payments with respect to the applicable retained interest do not conform to the assumptions used in valuing the interest at the time of the initial transfer, § 25.2701-4 provides a special rule to increase the individual's later taxable gifts or taxable estate. Section 25.2701-5 provides an adjustment to mitigate the effects of double taxation when an applicable retained interest is subsequently transferred.
(2) Effect of section 2701. If section 2701 applies to a transfer, the amount of the transferor's gift, if any, is determined using a subtraction method of valuation (described in § 25.2701-3). Under this method, the amount of the gift is determined by subtracting the value of any family-held applicable retained interests and other non-transferred equity interests from the aggregate value of family-held interests in the corporation or partnership (the “entity”). Generally, in determining the value of any applicable retained interest held by the transferor or an applicable family member—
(i) Any put, call, or conversion right, any right to compel liquidation, or any similar right is valued at zero if the right is an “extraordinary payment right” (as defined in § 25.2701-2(b)(2));
(ii) Any distribution right in a controlled entity (e.g., a right to receive dividends) is valued at zero unless the right is a “qualified payment right” (as defined in § 25.2701-2(b)(6)); and
(iii) Any other right (including a qualified payment right) is valued as if any right valued at zero did not exist but otherwise without regard to section 2701.
(3) Example. The following example illustrates rules of this paragraph (a).
(b) Transfers and other triggering events—(1) Completed transfers. Section 2701 applies to determine the existence and amount of any gift, whether or not the transfer would otherwise be a taxable gift under chapter 12 of the Internal Revenue Code. For example, section 2701 applies to a transfer that would not otherwise be a gift under chapter 12 because it was a transfer for full and adequate consideration.
(2) Transactions treated as transfers—(i) In general. Except as provided in paragraph (b)(3) of this section, for purposes of section 2701, transfer includes the following transactions:
(A) A contribution to the capital of a new or existing entity;
(B) A redemption, recapitalization, or other change in the capital structure of an entity (a “capital structure transaction”), if—
(1) The transferor or an applicable family member receives an applicable retained interest in the capital structure transaction;
(2) The transferor or an applicable family member holding an applicable retained interest before the capital structure transaction surrenders an equity interest that is junior to the applicable retained interest (a “subordinate interest”) and receives property other than an applicable retained interest; or
(3) The transferor or an applicable family member holding an applicable retained interest before the capital structure transaction surrenders an equity interest in the entity (other than a subordinate interest) and the fair market value of the applicable retained interest is increased; or
(C) The termination of an indirect holding in an entity (as defined in § 25.2701-6) (or a contribution to capital by an entity to the extent an individual indirectly holds an interest in the entity), if—
(1) The property is held in a trust as to which the indirect holder is treated as the owner under subchapter J of chapter 1 of the Internal Revenue Code; or
(2) If the termination (or contribution) is not treated as a transfer under paragraph (b)(2)(i)(C)(1) of this section, to the extent the value of the indirectly-held interest would have been included in the value of the indirect holder's gross estate for Federal estate tax purposes if the indirect holder died immediately prior to the termination.
(ii) Multiple attribution. For purposes of paragraph (b)(2)(i)(C) of this section, if the transfer of an indirect holding in property is treated as a transfer with respect to more than one indirect holder, the transfer is attributed in the following order:
(A) First, to the indirect holder(s) who transferred the interest to the entity (without regard to section 2513);
(B) Second, to the indirect holder(s) possessing a presently exercisable power to designate the person who shall possess or enjoy the property;
(C) Third, to the indirect holder(s) presently entitled to receive the income from the interest;
(D) Fourth, to the indirect holder(s) specifically entitled to receive the interest at a future date; and
(E) Last, to any other indirect holder(s) proportionally.
(3) Excluded transactions. For purposes of section 2701, a transfer does not include the following transactions:
(i) A capital structure transaction, if the transferor, each applicable family member, and each member of the transferor's family holds substantially the same interest after the transaction as that individual held before the transaction. For this purpose, common stock with non-lapsing voting rights and nonvoting common stock are interests that are substantially the same;
(ii) A shift of rights occurring upon the execution of a qualified disclaimer described in section 2518; and
(iii) A shift of rights occurring upon the release, exercise, or lapse of a power of appointment other than a general power of appointment described in section 2514, except to the extent the release, exercise, or lapse would otherwise be a transfer under chapter 12.
(c) Circumstances in which section 2701 does not apply. To the extent provided, section 2701 does not apply in the following cases:
(1) Marketable transferred interests. Section 2701 does not apply if there are readily available market quotations on an established securities market for the value of the transferred interests.
(2) Marketable retained interests. Section 25.2701-2 does not apply to any applicable retained interest if there are readily available market quotations on an established securities market for the value of the applicable retained interests.
(3) Interests of the same class. Section 2701 does not apply if the retained interest is of the same class of equity as the transferred interest or if the retained interest is of a class that is proportional to the class of the transferred interest. A class is the same class as (or is proportional to the class of) the transferred interest if the rights are identical (or proportional) to the rights of the transferred interest, except for non-lapsing differences in voting rights (or, for a partnership, non-lapsing differences with respect to management and limitations on liability). For purposes of this section, non-lapsing provisions necessary to comply with partnership allocation requirements of the Internal Revenue Code (e.g., section 704(b)) are non-lapsing differences with respect to limitations on liability. A right that lapses by reason of Federal or State law is treated as a non-lapsing right unless the Secretary determines, by regulation or by published revenue ruling, that it is necessary to treat such a right as a lapsing right to accomplish the purposes of section 2701. An interest in a partnership is not an interest in the same class as the transferred interest if the transferor or applicable family members have the right to alter the liability of the transferee.
(4) Proportionate transfers. Section 2701 does not apply to a transfer by an individual to a member of the individual's family of equity interests to the extent the transfer by that individual results in a proportionate reduction of each class of equity interest held by the individual and all applicable family members in the aggregate immediately before the transfer. Thus, for example, section 2701 does not apply if P owns 50 percent of each class of equity interest in a corporation and transfers a portion of each class to P's child in a manner that reduces each interest held by P and any applicable family members, in the aggregate, by 10 percent even if the transfer does not proportionately reduce P's interest in each class. See § 25.2701-6 regarding indirect holding of interests.
(d) Family definitions—(1) Member of the family. A member of the family is, with respect to any transferor—
(i) The transferor's spouse;
(ii) Any lineal descendant of the transferor or the transferor's spouse; and
(iii) The spouse of any such lineal descendant.
(2) Applicable family member. An applicable family member is, with respect to any transferor—
(i) The transferor's spouse;
(ii) Any ancestor of the transferor or the transferor's spouse; and
(iii) The spouse of any such ancestor.
(3) Relationship by adoption. For purposes of section 2701, any relationship by legal adoption is the same as a relationship by blood.
(e) Examples. The following examples illustrate provisions of this section:
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Treas. Reg. §25.2701-1(a)In general—(1) Scope of section 2701.
In general—(1) Scope of section 2701. Section 2701 provides special valuation rules to determine the amount of the gift when an individual transfers an equity interest in a corporation or partnership to a member of the individual's family. For section 2701 to apply, the transferor or an applicable family member (as defined in paragraph (d)(2) of this section) must, immediately after the transfer, hold an applicable retained interest (a type of equity interest defined in § 25.2701-2(b)(1)). If certain subsequent payments with respect to the applicable retained interest do not conform to the assumptions used in valuing the interest at the time of the initial transfer, § 25.2701-4 provides a special rule to increase the individual's later taxable gifts or taxable estate. Section 25.2701-5 provides an adjustment to mitigate the effects of double taxation when an applicable retained interest is subsequently transferred.
(2) Effect of section 2701. If section 2701 applies to a transfer, the amount of the transferor's gift, if any, is determined using a subtraction method of valuation (described in § 25.2701-3). Under this method, the amount of the gift is determined by subtracting the value of any family-held applicable retained interests and other non-transferred equity interests from the aggregate value of family-held interests in the corporation or partnership (the “entity”). Generally, in determining the value of any applicable retained interest held by the transferor or an applicable family member—
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Treas. Reg. §25.2701-1(b)Transfers and other triggering events—(1) Completed transfers.
Transfers and other triggering events—(1) Completed transfers. Section 2701 applies to determine the existence and amount of any gift, whether or not the transfer would otherwise be a taxable gift under chapter 12 of the Internal Revenue Code. For example, section 2701 applies to a transfer that would not otherwise be a gift under chapter 12 because it was a transfer for full and adequate consideration.
(2) Transactions treated as transfers—(i) In general. Except as provided in paragraph (b)(3) of this section, for purposes of section 2701, transfer includes the following transactions:
(A) A contribution to the capital of a new or existing entity;
(B) A redemption, recapitalization, or other change in the capital structure of an entity (a “capital structure transaction”), if—
(1) The transferor or an applicable family member receives an applicable retained interest in the capital structure transaction;
(2) The transferor or an applicable family member holding an applicable retained interest before the capital structure transaction surrenders an equity interest that is junior to the applicable retained interest (a “subordinate interest”) and receives property other than an applicable retained interest; or
(3) The transferor or an applicable family member holding an applicable retained interest before the capital structure transaction surrenders an equity interest in the entity (other than a subordinate interest) and the fair market value of the applicable retained interest is increased; or
(C) The termination of an indirect holding in an entity (as defined in § 25.2701-6) (or a contribution to capital by an entity to the extent an individual indirectly holds an interest in the entity), if—
(1) The property is held in a trust as to which the indirect holder is treated as the owner under subchapter J of chapter 1 of the Internal Revenue Code; or
(2) If the termination (or contribution) is not treated as a transfer under paragraph (b)(2)(i)(C)(1) of this section, to the extent the value of the indirectly-held interest would have been included in the value of the indirect holder's gross estate for Federal estate tax purposes if the indirect holder died immediately prior to the termination.
(ii) Multiple attribution. For purposes of paragraph (b)(2)(i)(C) of this section, if the transfer of an indirect holding in property is treated as a transfer with respect to more than one indirect holder, the transfer is attributed in the following order:
(A) First, to the indirect holder(s) who transferred the interest to the entity (without regard to section 2513);
(B) Second, to the indirect holder(s) possessing a presently exercisable power to designate the person who shall possess or enjoy the property;
(C) Third, to the indirect holder(s) presently entitled to receive the income from the interest;
(D) Fourth, to the indirect holder(s) specifically entitled to receive the interest at a future date; and
(E) Last, to any other indirect holder(s) proportionally.
(3) Excluded transactions. For purposes of section 2701, a transfer does not include the following transactions:
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Treas. Reg. §25.2701-1(c)Circumstances in which section 2701 does not apply.
Circumstances in which section 2701 does not apply. To the extent provided, section 2701 does not apply in the following cases:
(1) Marketable transferred interests. Section 2701 does not apply if there are readily available market quotations on an established securities market for the value of the transferred interests.
(2) Marketable retained interests. Section 25.2701-2 does not apply to any applicable retained interest if there are readily available market quotations on an established securities market for the value of the applicable retained interests.
(3) Interests of the same class. Section 2701 does not apply if the retained interest is of the same class of equity as the transferred interest or if the retained interest is of a class that is proportional to the class of the transferred interest. A class is the same class as (or is proportional to the class of) the transferred interest if the rights are identical (or proportional) to the rights of the transferred interest, except for non-lapsing differences in voting rights (or, for a partnership, non-lapsing differences with respect to management and limitations on liability). For purposes of this section, non-lapsing provisions necessary to comply with partnership allocation requirements of the Internal Revenue Code (e.g., section 704(b)) are non-lapsing differences with respect to limitations on liability. A right that lapses by reason of Federal or State law is treated as a non-lapsing right unless the Secretary determines, by regulation or by published revenue ruling, that it is necessary to treat such a right as a lapsing right to accomplish the purposes of section 2701. An interest in a partnership is not an interest in the same class as the transferred interest if the transferor or applicable family members have the right to alter the liability of the transferee.
(4) Proportionate transfers. Section 2701 does not apply to a transfer by an individual to a member of the individual's family of equity interests to the extent the transfer by that individual results in a proportionate reduction of each class of equity interest held by the individual and all applicable family members in the aggregate immediately before the transfer. Thus, for example, section 2701 does not apply if P owns 50 percent of each class of equity interest in a corporation and transfers a portion of each class to P's child in a manner that reduces each interest held by P and any applicable family members, in the aggregate, by 10 percent even if the transfer does not proportionately reduce P's interest in each class. See § 25.2701-6 regarding indirect holding of interests.
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Treas. Reg. §25.2701-1(d)Family definitions—(1) Member of the family.
Family definitions—(1) Member of the family. A member of the family is, with respect to any transferor—
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Treas. Reg. §25.2701-1(e)Examples.
Examples. The following examples illustrate provisions of this section:
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Treas. Reg. §25.2701-1(i)§25.2701-1(i)
The transferor's spouse;
(ii) Any ancestor of the transferor or the transferor's spouse; and
(iii) The spouse of any such ancestor.
(3) Relationship by adoption. For purposes of section 2701, any relationship by legal adoption is the same as a relationship by blood.
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Treas. Reg. §25.2701-2Special valuation rules for applicable retained interests
(a) In general. In determining the amount of a gift under § 25.2701-3, the value of any applicable retained interest (as defined in paragraph (b)(1) of this section) held by the transferor or by an applicable family member is determined using the rules of chapter 12, with the modifications prescribed by this section. See § 25.2701-6 regarding the indirect holding of interests.
(1) Valuing an extraordinary payment right. Any extraordinary payment right (as defined in paragraph (b)(2) of this section) is valued at zero.
(2) Valuing a distribution right. Any distribution right (as defined in paragraph (b)(3) of this section) in a controlled entity is valued at zero, unless it is a qualified payment right (as defined in paragraph (b)(6) of this section). Controlled entity is defined in paragraph (b)(5) of this section.
(3) Special rule for valuing a qualified payment right held in conjunction with an extraordinary payment right. If an applicable retained interest confers a qualified payment right and one or more extraordinary payment rights, the value of all these rights is determined by assuming that each extraordinary payment right is exercised in a manner that results in the lowest total value being determined for all the rights, using a consistent set of assumptions and giving due regard to the entity's net worth, prospective earning power, and other relevant factors (the “lower of” valuation rule). See §§ 20.2031-2(f) and 20.2031-3 for rules relating to the valuation of business interests generally.
(4) Valuing other rights. Any other right (including a qualified payment right not subject to the prior paragraph) is valued as if any right valued at zero does not exist and as if any right valued under the lower of rule is exercised in a manner consistent with the assumptions of that rule but otherwise without regard to section 2701. Thus, if an applicable retained interest carries no rights that are valued at zero or under the lower of rule, the value of the interest for purposes of section 2701 is its fair market value.
(5) Example. The following example illustrates rules of this paragraph (a).
(b) Definitions—(1) Applicable retained interest. An applicable retained interest is any equity interest in a corporation or partnership with respect to which there is either—
(i) An extraordinary payment right (as defined in paragraph (b)(2) of this section), or
(ii) In the case of a controlled entity (as defined in paragraph (b)(5) of this section), a distribution right (as defined in paragraph (b)(3) of this section).
(2) Extraordinary payment right. Except as provided in paragraph (b)(4) of this section, an extraordinary payment right is any put, call, or conversion right, any right to compel liquidation, or any similar right, the exercise or nonexercise of which affects the value of the transferred interest. A call right includes any warrant, option, or other right to acquire one or more equity interests.
(3) Distribution right. A distribution right is the right to receive distributions with respect to an equity interest. A distribution right does not include—
(i) Any right to receive distributions with respect to an interest that is of the same class as, or a class that is subordinate to, the transferred interest;
(ii) Any extraordinary payment right; or
(iii) Any right described in paragraph (b)(4) of this section.
(4) Rights that are not extraordinary payment rights or distribution rights. Mandatory payment rights, liquidation participation rights, rights to guaranteed payments of a fixed amount under section 707(c), and non-lapsing conversion rights are neither extraordinary payment rights nor distribution rights.
(i) Mandatory payment right. A mandatory payment right is a right to receive a payment required to be made at a specific time for a specific amount. For example, a mandatory redemption right in preferred stock requiring that the stock be redeemed at its fixed par value on a date certain is a mandatory payment right and therefore not an extraordinary payment right or a distribution right. A right to receive a specific amount on the death of the holder is a mandatory payment right.
(ii) Liquidation participation rights. A liquidation participation right is a right to participate in a liquidating distribution. If the transferor, members of the transferor's family, or applicable family members have the ability to compel liquidation, the liquidation participation right is valued as if the ability to compel liquidation—
(A) Did not exist, or
(B) If the lower of rule applies, is exercised in a manner that is consistent with that rule.
(iii) Right to a guaranteed payment of a fixed amount under section 707(c). The right to a guaranteed payment of a fixed amount under section 707(c) is the right to a guaranteed payment (within the meaning of section 707(c)) the amount of which is determined at a fixed rate (including a rate that bears a fixed relationship to a specified market interest rate). A payment that is contingent as to time or amount is not a guaranteed payment of a fixed amount.
(iv) Non-lapsing conversion right—(A) Corporations. A non-lapsing conversion right, in the case of a corporation, is a non-lapsing right to convert an equity interest in a corporation into a fixed number or a fixed percentage of shares of the same class as the transferred interest (or into an interest that would be of the same class but for non-lapsing differences in voting rights), that is subject to proportionate adjustments for changes in the equity ownership of the corporation and to adjustments similar to those provided in section 2701(d) for unpaid payments.
(B) Partnerships. A non-lapsing conversion right, in the case of a partnership, is a non-lapsing right to convert an equity interest in a partnership into a specified interest (other than an interest represented by a fixed dollar amount) of the same class as the transferred interest (or into an interest that would be of the same class but for non-lapsing differences in management rights or limitations on liability) that is subject to proportionate adjustments for changes in the equity ownership of the partnership and to adjustments similar to those provided in section 2701(d) for unpaid payments.
(C) Proportionate adjustments in equity ownership. For purposes of this paragraph (b)(4), an equity interest is subject to proportionate adjustments for changes in equity ownership if, in the case of a corporation, proportionate adjustments are required to be made for splits, combinations, reclassifications, and similar changes in capital stock, or, in the case of a partnership, the equity interest is protected from dilution resulting from changes in the partnership structure.
(D) Adjustments for unpaid payments. For purposes of this paragraph (b)(4), an equity interest is subject to adjustments similar to those provided in section 2701(d) if it provides for—
(1) Cumulative payments;
(2) Compounding of any unpaid payments at the rate specified in § 25.2701-4(c)(2); and
(3) Adjustment of the number or percentage of shares or the size of the interest into which it is convertible to take account of accumulated but unpaid payments.
(5) Controlled entity—(i) In general. For purposes of section 2701, a controlled entity is a corporation or partnership controlled, immediately before a transfer, by the transferor, applicable family members, and any lineal descendants of the parents of the transferor or the transferor's spouse. See § 25.2701-6 regarding indirect holding of interests.
(ii) Corporations—(A) In general. In the case of a corporation, control means the holding of at least 50 percent of the total voting power or total fair market value of the equity interests in the corporation.
(B) Voting rights. Equity interests that carry no right to vote other than on liquidation, merger, or a similar event are not considered to have voting rights for purposes of this paragraph (b)(5)(ii). Generally, a voting right is considered held by an individual to the extent that the individual, either alone or in conjunction with any other person, is entitled to exercise (or direct the exercise of) the right. However, if an equity interest carrying voting rights is held in a fiduciary capacity, the voting rights are not considered held by the fiduciary, but instead are considered held by each beneficial owner of the interest and by each individual who is a permissible recipient of the income from the interest. A voting right does not include a right to vote that is subject to a contingency that has not occurred, other than a contingency that is within the control of the individual holding the right.
(iii) Partnerships. In the case of any partnership, control means the holding of at least 50 percent of either the capital interest or the profits interest in the partnership. Any right to a guaranteed payment under section 707(c) of a fixed amount is disregarded in making this determination. In addition, in the case of a limited partnership, control means the holding of any equity interest as a general partner. See § 25.2701-2(b)(4)(iii) for the definition of a right to a guaranteed payment of a fixed amount under section 707(c).
(6) Qualified payment right—(i) In general. A qualified payment right is a right to receive qualified payments. A qualified payment is a distribution that is—
(A) A dividend payable on a periodic basis (at least annually) under any cumulative preferred stock, to the extent such dividend is determined at a fixed rate;
(B) Any other cumulative distribution payable on a periodic basis (at least annually) with respect to an equity interest, to the extent determined at a fixed rate or as a fixed amount; or
(C) Any distribution right for which an election has been made pursuant to paragraph (c)(2) of this section.
(ii) Fixed rate. For purposes of this section, a payment rate that bears a fixed relationship to a specified market interest rate is a payment determined at a fixed rate.
(c) Qualified payment elections—(1) Election to treat a qualified payment right as other than a qualified payment right. Any transferor holding a qualified payment right may elect to treat all rights held by the transferor of the same class as rights that are not qualified payment rights. An election may be a partial election, in which case the election must be exercised with respect to a consistent portion of each payment right in the class as to which the election has been made.
(2) Election to treat other distribution rights as qualified payment rights. Any individual may elect to treat a distribution right held by that individual in a controlled entity as a qualified payment right. An election may be a partial election, in which case the election must be exercised with respect to a consistent portion of each payment right in the class as to which the election has been made. An election under this paragraph (c)(2) will not cause the value of the applicable retained interest conferring the distribution right to exceed the fair market value of the applicable retained interest (determined without regard to section 2701). The election is effective only to the extent—
(i) Specified in the election, and
(ii) That the payments elected are permissible under the legal instrument giving rise to the right and are consistent with the legal right of the entity to make the payment.
(3) Elections irrevocable. Any election under paragraph (c)(1) or (c)(2) of this section is revocable only with the consent of the Commissioner.
(4) Treatment of certain payments to applicable family members. Any payment right described in paragraph (b)(6) of this section held by an applicable family member is treated as a payment right that is not a qualified payment right unless the applicable family member elects (pursuant to paragraph (c)(2) of this section) to treat the payment right as a qualified payment right. An election may be a partial election, in which case the election must be exercised with respect to a consistent portion of each payment right in the class as to which the election has been made.
(5) Time and manner of elections. Any election under paragraph (c)(1) or (c)(2) of this section is made by attaching a statement to the Form 709, Federal Gift Tax Return, filed by the transferor on which the transfer is reported. An election filed after the time of the filing of the Form 709 reporting the transfer is not a valid election. An election filed as of April 6, 1992, for transfers made prior to its publication is effective. The statement must—
(i) Set forth the name, address, and taxpayer identification number of the electing individual and of the transferor, if different;
(ii) If the electing individual is not the transferor filing the return, state the relationship between the individual and the transferor;
(iii) Specifically identify the transfer disclosed on the return to which the election applies;
(iv) Describe in detail the distribution right to which the election applies;
(v) State the provision of the regulation under which the election is being made; and
(vi) If the election is being made under paragraph (c)(2) of this section—
(A) State the amounts that the election assumes will be paid, and the times that the election assumes the payments will be made;
(B) Contain a statement, signed by the electing individual, in which the electing individual agrees that—
(1) If payments are not made as provided in the election, the individual's subsequent taxable gifts or taxable estate will, upon the occurrence of a taxable event (as defined in § 25.2701-4(b)), be increased by an amount determined under § 25.2701-4(c), and
(2) The individual will be personally liable for any increase in tax attributable thereto.
(d) Examples. The following examples illustrate provisions of this section:
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Treas. Reg. §25.2701-2(a)In general.
In general. In determining the amount of a gift under § 25.2701-3, the value of any applicable retained interest (as defined in paragraph (b)(1) of this section) held by the transferor or by an applicable family member is determined using the rules of chapter 12, with the modifications prescribed by this section. See § 25.2701-6 regarding the indirect holding of interests.
(1) Valuing an extraordinary payment right. Any extraordinary payment right (as defined in paragraph (b)(2) of this section) is valued at zero.
(2) Valuing a distribution right. Any distribution right (as defined in paragraph (b)(3) of this section) in a controlled entity is valued at zero, unless it is a qualified payment right (as defined in paragraph (b)(6) of this section). Controlled entity is defined in paragraph (b)(5) of this section.
(3) Special rule for valuing a qualified payment right held in conjunction with an extraordinary payment right. If an applicable retained interest confers a qualified payment right and one or more extraordinary payment rights, the value of all these rights is determined by assuming that each extraordinary payment right is exercised in a manner that results in the lowest total value being determined for all the rights, using a consistent set of assumptions and giving due regard to the entity's net worth, prospective earning power, and other relevant factors (the “lower of” valuation rule). See §§ 20.2031-2(f) and 20.2031-3 for rules relating to the valuation of business interests generally.
(4) Valuing other rights. Any other right (including a qualified payment right not subject to the prior paragraph) is valued as if any right valued at zero does not exist and as if any right valued under the lower of rule is exercised in a manner consistent with the assumptions of that rule but otherwise without regard to section 2701. Thus, if an applicable retained interest carries no rights that are valued at zero or under the lower of rule, the value of the interest for purposes of section 2701 is its fair market value.
(5) Example. The following example illustrates rules of this paragraph (a).
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Treas. Reg. §25.2701-2(b)Definitions—(1) Applicable retained interest.
Definitions—(1) Applicable retained interest. An applicable retained interest is any equity interest in a corporation or partnership with respect to which there is either—
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Treas. Reg. §25.2701-2(c)Qualified payment elections—(1) Election to treat a qualified payment right as other than a qualified payment right.
Qualified payment elections—(1) Election to treat a qualified payment right as other than a qualified payment right. Any transferor holding a qualified payment right may elect to treat all rights held by the transferor of the same class as rights that are not qualified payment rights. An election may be a partial election, in which case the election must be exercised with respect to a consistent portion of each payment right in the class as to which the election has been made.
(2) Election to treat other distribution rights as qualified payment rights. Any individual may elect to treat a distribution right held by that individual in a controlled entity as a qualified payment right. An election may be a partial election, in which case the election must be exercised with respect to a consistent portion of each payment right in the class as to which the election has been made. An election under this paragraph (c)(2) will not cause the value of the applicable retained interest conferring the distribution right to exceed the fair market value of the applicable retained interest (determined without regard to section 2701). The election is effective only to the extent—
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Treas. Reg. §25.2701-2(d)Examples.
Examples. The following examples illustrate provisions of this section:
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Treas. Reg. §25.2701-2(i)§25.2701-2(i)
Set forth the name, address, and taxpayer identification number of the electing individual and of the transferor, if different;
(ii) If the electing individual is not the transferor filing the return, state the relationship between the individual and the transferor;
(iii) Specifically identify the transfer disclosed on the return to which the election applies;
(iv) Describe in detail the distribution right to which the election applies;
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Treas. Reg. §25.2701-2(v)§25.2701-2(v)
State the provision of the regulation under which the election is being made; and
(vi) If the election is being made under paragraph (c)(2) of this section—
(A) State the amounts that the election assumes will be paid, and the times that the election assumes the payments will be made;
(B) Contain a statement, signed by the electing individual, in which the electing individual agrees that—
(1) If payments are not made as provided in the election, the individual's subsequent taxable gifts or taxable estate will, upon the occurrence of a taxable event (as defined in § 25.2701-4(b)), be increased by an amount determined under § 25.2701-4(c), and
(2) The individual will be personally liable for any increase in tax attributable thereto.
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Treas. Reg. §25.2701-3Determination of amount of gift
(a) Overview—(1) In general. The amount of the gift resulting from any transfer to which section 2701 applies is determined by a subtraction method of valuation. Under this method, the amount of the transfer is determined by subtracting the values of all family-held senior equity interests from the fair market value of all family-held interests in the entity determined immediately before the transfer. The values of the senior equity interests held by the transferor and applicable family members generally are determined under section 2701. Other family-held senior equity interests are valued at their fair market value. The balance is then appropriately allocated among the transferred interests and other family-held subordinate equity interests. Finally, certain discounts and other appropriate reductions are provided, but only to the extent permitted by this section.
(2) Definitions. The following definitions apply for purposes of this section.
(i) Family-held. Family-held means held (directly or indirectly) by an individual described in § 25.2701-2(b)(5)(i).
(ii) Senior equity interest. Senior equity interest means an equity interest in the entity that carries a right to distributions of income or capital that is preferred as to the rights of the transferred interest.
(iii) Subordinate equity interest. Subordinate equity interest means an equity interest in the entity as to which an applicable retained interest is a senior equity interest.
(b) Valuation methodology. The following methodology is used to determine the amount of the gift when section 2701 applies.
(1) Step 1—Valuation of family-held interest—(i) In general. Except as provided in paragraph (b)(1)(ii) of this section determine the fair market value of all family-held equity interests in the entity immediately after the transfer. The fair market value is determined by assuming that the interests are held by one individual, using a consistent set of assumptions.
(ii) Special rule for contributions to capital. In the case of a contribution to capital, determine the fair market value of the contribution.
(2) Step 2—Subtract the value of senior equity interests—(i) In general. If the amount determined in Step 1 of paragraph (b)(1) of this section is not determined under the special rule for contributions to capital, from that value subtract the following amounts:
(A) An amount equal to the sum of the fair market value of all family-held senior equity interests, (other than applicable retained interests held by the transferor or applicable family members) and the fair market value of any family-held equity interests of the same class or a subordinate class to the transferred interests held by persons other than the transferor, members of the transferor's family, and applicable family members of the transferor. The fair market value of an interest is its pro rata share of the fair market value of all family-held senior equity interests of the same class (determined, immediately after the transfer, as is all family-held senior equity interests were held by one individual); and
(B) The value of all applicable retained interests held by the transferor or applicable family members (other than an interest received as consideration for the transfer) determined under § 25.2701-2, taking into account the adjustment described in paragraph (b)(5) of this section.
(ii) Special rule for contributions to capital. If the value determined in Step 1 of paragraph (b)(1) of this section is determined under the special rule for contributions to capital, subtract the value of any applicable retained interest received in exchange for the contribution to capital determined under § 25.2701-2.
(2) Step 2—Subtract the value of senior equity interests. From the value determined in Step 1, subtract the following amounts:
(i) An amount equal to the fair market value of all family-held senior equity interests, other than applicable retained interests held by the transferor or applicable family members. The fair market value of an interest is its pro rata share of the fair market value of all family-held senior equity interests of the same class (determined as if all family-held senior equity interests were held by one individual); and
(ii) The value of all applicable retained interests held by the transferor or applicable family members determined under § 25.2701-2, taking into account the adjustment described in paragraph (b)(5) of this section.
(3) Step 3—Allocate the remaining value among the transferred interests and other family-held subordinate equity interests. The value remaining after Step 2 is allocated among the transferred interests and other subordinate equity interests held by the transferor, applicable family members, and members of the transferor's family. If more than one class of family-held subordinate equity interest exists, the value remaining after Step 2 is allocated, beginning with the most senior class of subordinate equity interest, in the manner that would most fairly approximate their value if all rights valued under section 2701 at zero did not exist (or would be exercised in a manner consistent with the assumptions of the rule of § 25.2702-2(a)(4), if applicable). If there is no clearly appropriate method of allocating the remaining value pursuant to the preceding sentence, the remaining value (or the portion remaining after any partial allocation pursuant to the preceding sentence) is allocated to the interests in proportion to their fair market values determined without regard to section 2701.
(4) Step 4—Determine the amount of the gift—(i) In general. The amount allocated to the transferred interests in Step 3 is reduced by the amounts determined under this paragraph (b)(4).
(ii) Reduction for minority or similar discounts. Except as provided in § 25.2701-3(c), if the value of the transferred interest (determined without regard to section 2701) would be determined after application of a minority or similar discount with respect to the transferred interest, the amount of the gift determined under section 2701 is reduced by the excess, if any, of—
(A) A pro rata portion of the fair market value of the family-held interests of the same class (determined as if all voting rights conferred by family-held equity interests were held by one person who had no interest in the entity other than the family-held interests of the same class, but otherwise without regard to section 2701), over
(B) The value of the transferred interest (without regard to section 2701).
(iii) Adjustment for transfers with a retained interest. If the value of the transferor's gift (determined without regard to section 2701) would be reduced under section 2702 to reflect the value of a retained interest, the value determined under section 2701 is reduced by the same amount.
(iv) Reduction for consideration. The amount of the transfer (determined under section 2701) is reduced by the amount of consideration in money or money's worth received by the transferor, but not in excess of the amount of the gift (determined without regard to section 2701). The value of consideration received by the transferor in the form of an applicable retained interest in the entity is determined under section 2701 except that, in the case of a contribution to capital, the Step 4 value of such an interest is zero.
(5) Adjustment in Step 2—(i) In general. For purposes of paragraph (b)(2) of this section, if the percentage of any class of applicable retained interest held by the transferor and by applicable family members (including any interest received as consideration for the transfer) exceeds the family interest percentage, the excess is treated as a family-held interest that is not held by the transferor or an applicable family member.
(ii) Family interest percentage. The family interest percentage is the highest ownership percentage (determined on the basis of relative fair market values) of family-held interests in—
(A) Any class of subordinate equity interest; or
(B) All subordinate equity interests, valued in the aggregate.
(c) Minimum value rule—(1) In general. If section 2701 applies to the transfer of an interest in an entity, the value of a junior equity interest is not less than its pro-rata portion of 10 percent of the sum of—
(i) The total value of all equity interests in the entity, and
(ii) The total amount of any indebtedness of the entity owed to the transferor and applicable family members.
(2) Junior equity interest. For purposes of paragraph (c)(1) of this section, junior equity interest means common stock or, in the case of a partnership, any partnership interest under which the rights to income and capital are junior to the rights of all other classes of partnership interests. Common stock means the class or classes of stock that, under the facts and circumstances, are entitled to share in the reasonably anticipated residual growth in the entity.
(3) Indebtedness—(i) In general. For purposes of paragraph (c)(1) of this section, indebtedness owed to the transferor (or an applicable family member) does not include—
(A) Short-term indebtedness incurred with respect to the current conduct of the entity's trade or business (such as amounts payable for current services);
(B) Indebtedness owed to a third party solely because it is guaranteed by the transferor or an applicable family member; or
(C) Amounts permanently set aside in a qualified deferred compensation arrangement, to the extent the amounts are unavailable for use by the entity.
(ii) Leases. A lease of property is not indebtedness, without regard to the length of the lease term, if the lease payments represent full and adequate consideration for use of the property. Lease payments are considered full and adequate consideration if a good faith effort is made to determine the fair rental value under the lease and the terms of the lease conform to the value so determined. Arrearages with respect to a lease are indebtedness.
(d) Examples. The application of the subtraction method described in this section is illustrated by the following Examples:
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Treas. Reg. §25.2701-3(a)Overview—(1) In general.
Overview—(1) In general. The amount of the gift resulting from any transfer to which section 2701 applies is determined by a subtraction method of valuation. Under this method, the amount of the transfer is determined by subtracting the values of all family-held senior equity interests from the fair market value of all family-held interests in the entity determined immediately before the transfer. The values of the senior equity interests held by the transferor and applicable family members generally are determined under section 2701. Other family-held senior equity interests are valued at their fair market value. The balance is then appropriately allocated among the transferred interests and other family-held subordinate equity interests. Finally, certain discounts and other appropriate reductions are provided, but only to the extent permitted by this section.
(2) Definitions. The following definitions apply for purposes of this section.
12 Citing Cases
For those situations in which section 2701 applies, the value of the junior interest transferred is generally calculated by subtracting the value of the senior interests (including rights to distribution of 16(...continued) payment not subject to § 2701, with a couple of exceptions.” Louis S.
1989).6 We also find that the executrix is mistaken in her reliance on the legislative history of section 2701, which was added to the Internal Revenue Code by section 11602(a) of the Omnibus Budget Reconciliation Act of 1990, Pub.
We also find that the executrix is mistaken in her reliance on the legislative history of section 2701, which was added to the Internal Revenue Code by section 11602(a) of the Omnibus Budget Reconciliation Act of 1990, Pub.