§2703 — Certain rights and restrictions disregarded
29 citing cases
Statute Text — 26 U.S.C. §2703
For purposes of this subtitle, the value of any property shall be determined without regard to—
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
any restriction on the right to sell or use such property.
Subsection (a) shall not apply to any option, agreement, right, or restriction which meets each of the following requirements:
It is a bona fide business arrangement.
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.
Its terms are comparable to similar arrangements entered into by persons in an arms’ length transaction.
Treasury Regulations
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Treas. Reg. §25.2703-1Property subject to restrictive arrangements
(a) Disregard of rights or restrictions—(1) In general. For purposes of subtitle B (relating to estate, gift, and generation-skipping transfer taxes), the value of any property is determined without regard to any right or restriction relating to the property.
(2) Right or restriction. For purposes of this section, right or restriction means—
(i) Any option, agreement, or other right to acquire or use the property at a price less than fair market value (determined without regard to the option, agreement, or right); or
(ii) Any restriction on the right to sell or use the property.
(3) Agreements, etc. containing rights or restrictions. A right or restriction may be contained in a partnership agreement, articles of incorporation, corporate bylaws, a shareholders' agreement, or any other agreement. A right or restriction may be implicit in the capital structure of an entity.
(4) Qualified easements. A perpetual restriction on the use of real property that qualified for a charitable deduction under either section 2522(d) or section 2055(f) of the Internal Revenue Code is not treated as a right or restriction.
(b) Exceptions—(1) In general. This section does not apply to any right or restriction satisfying the following three requirements—
(i) The right or restriction is a bona fide business arrangement;
(ii) The right or restriction is not a device to transfer property to the natural objects of the transferor's bounty for less than full and adequate consideration in money or money's worth; and
(iii) At the time the right or restriction is created, the terms of the right or restriction are comparable to similar arrangements entered into by persons in an arm's length transaction.
(2) Separate requirements. Each of the three requirements described in paragraph (b)(1) of this section must be independently satisfied for a right or restriction to meet this exception. Thus, for example, the mere showing that a right or restriction is a bona fide business arrangement is not sufficient to establish that the right or restriction is not a device to transfer property for less than full and adequate consideration.
(3) Exception for certain rights or restrictions. A right or restriction is considered to meet each of the three requirements described in paragraph (b)(1) of this section if more than 50 percent by value of the property subject to the right or restriction is owned directly or indirectly (within the meaning of § 25.2701-6) by individuals who are not members of the transferor's family. In order to meet this exception, the property owned by those individuals must be subject to the right or restriction to the same extent as the property owned by the transferor. For purposes of this section, members of the transferor's family include the persons described in § 25.2701-2(b)(5) and any other individual who is a natural object of the transferor's bounty. Any property held by a member of the transferor's family under the rules of § 25.2701-6 (without regard to § 25.2701-6(a)(5)) is treated as held only by a member of the transferor's family.
(4) Similar arrangement—(i) In general. A right or restriction is treated as comparable to similar arrangements entered into by persons in an arm's length transaction if the right or restriction is one that could have been obtained in a fair bargain among unrelated parties in the same business dealing with each other at arm's length. A right or restriction is considered a fair bargain among unrelated parties in the same business if it conforms with the general practice of unrelated parties under negotiated agreements in the same business. This determination generally will entail consideration of such factors as the expected term of the agreement, the current fair market value of the property, anticipated changes in value during the term of the arrangement, and the adequacy of any consideration given in exchange for the rights granted.
(ii) Evidence of general business practice. Evidence of general business practice is not met by showing isolated comparables. If more than one valuation method is commonly used in a business, a right or restriction does not fail to evidence general business practice merely because it uses only one of the recognized methods. It is not necessary that the terms of a right or restriction parallel the terms of any particular agreement. If comparables are difficult to find because the business is unique, comparables from similar businesses may be used.
(5) Multiple rights or restrictions. If property is subject to more than one right or restriction described in paragraph (a)(2) of this section, the failure of a right or restriction to satisfy the requirements of paragraph (b)(1) of this section does not cause any other right or restriction to fail to satisfy those requirements if the right or restriction otherwise meets those requirements. Whether separate provisions are separate rights or restrictions, or are integral parts of a single right or restriction, depends on all the facts and circumstances.
(c) Substantial modification of a right or restriction—(1) In general. A right or restriction that is substantially modified is treated as a right or restriction created on the date of the modification. Any discretionary modification of a right or restriction, whether or not authorized by the terms of the agreement, that results in other than a de minimis change to the quality, value, or timing of the rights of any party with respect to property that is subject to the right or restriction is a substantial modification. If the terms of the right or restriction require periodic updating, the failure to update is presumed to substantially modify the right or restriction unless it can be shown that updating would not have resulted in a substantial modification. The addition of any family member as a party to a right or restriction (including by reason of a transfer of property that subjects the transferee family member to a right or restriction with respect to the transferred property) is considered a substantial modification unless the addition is mandatory under the terms of the right or restriction or the added family member is assigned to a generation (determined under the rules of section 2651 of the Internal Revenue Code) no lower than the lowest generation occupied by individuals already party to the right or restriction).
(2) Exceptions. A substantial modification does not include—
(i) A modification required by the terms of a right or restriction;
(ii) A discretionary modification of an agreement conferring a right or restriction if the modification does not change the right or restriction;
(iii) A modification of a capitalization rate used with respect to a right or restriction if the rate is modified in a manner that bears a fixed relationship to a specified market interest rate; and
(iv) A modification that results in an option price that more closely approximates fair market value.
(d) Examples. The following examples illustrate the provisions of this section:
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Treas. Reg. §25.2703-1(a)Disregard of rights or restrictions—(1) In general.
Disregard of rights or restrictions—(1) In general. For purposes of subtitle B (relating to estate, gift, and generation-skipping transfer taxes), the value of any property is determined without regard to any right or restriction relating to the property.
(2) Right or restriction. For purposes of this section, right or restriction means—
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Treas. Reg. §25.2703-1(b)Exceptions—(1) In general.
Exceptions—(1) In general. This section does not apply to any right or restriction satisfying the following three requirements—
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Treas. Reg. §25.2703-1(c)Substantial modification of a right or restriction—(1) In general.
Substantial modification of a right or restriction—(1) In general. A right or restriction that is substantially modified is treated as a right or restriction created on the date of the modification. Any discretionary modification of a right or restriction, whether or not authorized by the terms of the agreement, that results in other than a de minimis change to the quality, value, or timing of the rights of any party with respect to property that is subject to the right or restriction is a substantial modification. If the terms of the right or restriction require periodic updating, the failure to update is presumed to substantially modify the right or restriction unless it can be shown that updating would not have resulted in a substantial modification. The addition of any family member as a party to a right or restriction (including by reason of a transfer of property that subjects the transferee family member to a right or restriction with respect to the transferred property) is considered a substantial modification unless the addition is mandatory under the terms of the right or restriction or the added family member is assigned to a generation (determined under the rules of section 2651 of the Internal Revenue Code) no lower than the lowest generation occupied by individuals already party to the right or restriction).
(2) Exceptions. A substantial modification does not include—
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Treas. Reg. §25.2703-1(d)Examples.
Examples. The following examples illustrate the provisions of this section:
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Treas. Reg. §25.2703-1(i)§25.2703-1(i)
A modification required by the terms of a right or restriction;
(ii) A discretionary modification of an agreement conferring a right or restriction if the modification does not change the right or restriction;
(iii) A modification of a capitalization rate used with respect to a right or restriction if the rate is modified in a manner that bears a fixed relationship to a specified market interest rate; and
(iv) A modification that results in an option price that more closely approximates fair market value.
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Treas. Reg. §25.2703-2Effective date
Section 25.2703-1 applies to any right or restriction created or substantially modified after October 8, 1990, and is effective as of January 28, 1992. With respect to transfers occurring prior to January 28, 1992, and for purposes of determining whether an event occurring prior to January 28, 1992 constitutes a substantial modification, taxpayers may rely on any reasonable interpretation of the statutory provisions. For these purposes, the provisions of the proposed regulations and the final regulations are considered a reasonable interpretation of the statutory provisions.
29 Citing Cases
Section 2703 Section 2703(a)(1) provides that the value of any property must be determined without regard to “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).” Section 2703(b) provides an exception to section 2703(a)
§ 2703 is inapplicable.
-3- [*3] not, we must determine the fair market values of the split-dollar rights including whether the special valuation rule of section 2703 applies to require that the valuation disregard a provision in the split-dollar agreements that restricts the parties’ right to unilaterally terminate the agreements.
- 21 - [*21] asks for summaryjudgment that section 2703(a) does not apply.¹° For the reasons discussed below, we conclude that summaryjudgment for the estate is inappropriate as to this issue.
Section 2703 As noted supra note 8: (1) section 2703(a)(2) provides that, for estate and gift tax purposes, the value ofany property is determined without regard to any restriction on the right to sell or use such property, (2) section 2703(b) provides that section 2703(a) does not apply to disregard a right or restriction ifit meets certain requirements, and (3) petitioners concede that neither the cotenants' agreement nor the art lease satisfies the section 2703(b) exception.
Section 2703 As noted supra note 8: (1) section 2703(a)(2) provides that, for estate and gift tax purposes, the value of any property is determined without regard to any restriction on the right to sell or use such property, (2) section 2703(b) provides that section 2703(a) does not apply to disregard a right or restriction if it meets certain requ
170, 191 (2008) (applying section 2703 to disregar d restrictions in a partnership agreement) .
170, 191 (2008) (applying section 2703 to disregard restrictions in a partnership agreement).
I - 32 - 2703(a) does not apply to disregard a restriction if the restriction meets each of the following three requirements: (1) It is a bona fide business arrangement.
Introduction In pertinent part, section 2703(a) provides that, for purposes of the gift tax, the value of any property transferred by gift is determined without regard to any right or restriction (without distinction, restriction) relating to the property. Paragraphs 9.1, 9.2, and 9.3 of the partnership agreement (paragraphs 9.1, 9.
Section 2703, enacted in 1990, also governs restrictive agreements. Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec. 11602, 104 Stat. 1388-491. The general rule of section 2703 is that any agreement to acquire property at less than its fair market value will be disregarded for Federal estate tax purposes unless the agreement satisfi
ermining the value of D’s shares for Federal estate tax purposes because D had the unilateral ability to modify the agreement, rendering the agreement not binding during D’s lifetime, as required by sec. 20.2031-2(h), Estate Tax Regs. Held, further: Sec. 2703, I.R.C., applies to the modified agreement because the 1996 modification, which occurred after the effective date of sec. 2703, I.R.C., was a substantial modification. Held, further: The modified agreement is also disregarded under sec. 270
2703 and added provisions to 25 U.S.C. sec. 2718 authorizing appropriation of necessary funds for operation of the NIGC for fiscal years beginning Oct. 1, 1991 and 1992. In 1992, the Federal Indian Statutes: Technical Amendments, Pub. L. 102-497, sec. 16, 106 Stat. 3255, 3261 (1992), current version at 25 U.S.C. sec. 2703 (Supp. 2000), struck
that extended the existing leases on the ranch properties and, if so, whether the oral options or the existing leases were a restriction on the sale or use of the ranch properties that should be disregarded for estate tax valuation purposes under section 2703. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect on the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the fact
Petitioners’ Assertion That Respondent Impermissibly Applied Section 2703 Retroactively .
Petitioners’ Assertion That Respondent Impermissibly Applied Section 2703 Retroactively .
t v. Commissioner, T.C. Memo. 1997-380; Estate of Lauder v. Commissioner, T.C. Memo. 1992-736; see also sec. 20.2031-2(h), Estate Tax Regs. We find that the option provision in each of the partnership agreements represents a testamentary device to 6 Sec. 2703, relating to the valuation of property subject to options, is not applicable to an agreement entered into before Oct. 9, 1990, unless there has been substantial modification since Oct. 8, 1990. See Omnibus Budget Reconciliation Act of 1990,
2703(a), I.R.C., does not apply to the partnership agreement.
We conclude that Congress did not intend, by the enactment of section 2703, to treat partnership assets as if they were assets of the estate where the legal interest owned by the deGedent at the time of death was a limited partnership or corporate interest.
Respondent argues that the 1987 redemption agreement does not establish the fair market value of decedent’s shares because: (1) The 1987 redemption agreement is not a binding contract under New York law, (2) section 2703 requires that we disregard the 1987 redemption agreement, and (3) the price established by the 1987 redemption agreement cannot be trusted because the agreement is simply a substitute for a testamentary device.