§2704 — Treatment of certain lapsing rights and restrictions
9 cases·1 followed·4 distinguished·4 cited—11% support
Statute Text — 26 U.S.C. §2704
For purposes of this subtitle, if—
there is a lapse of any voting or liquidation right in a corporation or partnership, and
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).
For purposes of paragraph (1), the amount determined under this paragraph is the excess (if any) of—
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
the value of such interests immediately after the lapse.
The Secretary may by regulations apply this subsection to rights similar to voting and liquidation rights.
For purposes of this subtitle, if—
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
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.
For purposes of this subsection, the term “applicable restriction” means any restriction—
which effectively limits the ability of the corporation or partnership to liquidate, and
with respect to which either of the following applies:
The restriction lapses, in whole or in part, after the transfer referred to in paragraph (1).
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.
The term “applicable restriction” shall not include—
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
any restriction imposed, or required to be imposed, by any Federal or State law.
The Secretary may by regulations provide that other restrictions shall be disregarded in determining the value of the transfer of any interest in a corporation or partnership to a member of the transferor’s family if such restriction has the effect of reducing the value of the transferred interest for purposes of this subtitle but does not ultimately reduce the value of such interest to the transferee.
For purposes of this section—
The term “control” has the meaning given such term by section 2701(b)(2).
The term “member of the family” means, with respect to any individual—
such individual’s spouse,
any ancestor or lineal descendant of such individual or such individual’s spouse,
any brother or sister of the individual, and
any spouse of any individual described in subparagraph (B) or (C).
The rule of section 2701(e)(3) shall apply for purposes of determining the interests held by any individual.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §25.2704-1 Lapse of certain rights
- Treas. Reg. §Treas. Reg. §25.2704-1(a) Lapse treated as transfer—(1) In general.
- Treas. Reg. §Treas. Reg. §25.2704-1(b) Lapse of voting right.
- Treas. Reg. §Treas. Reg. §25.2704-1(c) Lapse of liquidation right—(1) In general.
- Treas. Reg. §Treas. Reg. §25.2704-1(d) Amount of transfer.
- Treas. Reg. §Treas. Reg. §25.2704-1(e) Application to similar rights.
- Treas. Reg. §Treas. Reg. §25.2704-1(f) Examples.
- Treas. Reg. §Treas. Reg. §25.2704-1(i) Family cannot obtain liquidation value—(A) In general.
- Treas. Reg. §Treas. Reg. §25.2704-1(v) Liquidation right.
- Treas. Reg. §Treas. Reg. §25.2704-2 Transfers subject to applicable restrictions
- Treas. Reg. §Treas. Reg. §25.2704-2(a) In general.
- Treas. Reg. §Treas. Reg. §25.2704-2(b) Applicable restriction defined.
- Treas. Reg. §Treas. Reg. §25.2704-2(c) Effect of disregarding an applicable restriction.
- Treas. Reg. §Treas. Reg. §25.2704-2(d) Examples.
- Treas. Reg. §Treas. Reg. §25.2704-3 Effective date
9 Citing Cases
We must decide whether, as respondent contends, the restrictions on the right to liquidate the partnership contained in the partnership agreement are applicable restrictions within the meaning of section 2704 and are accordingly to be disregarded when valuing the shares of the partnership.
Respondent determined in pertinent part that the restrictions on liquidation set forth in section 10.01 of the KFLP and KILP partnership agreements constitute “applicable restrictions” within the meaning of section 2704(b), and that these restrictions should have been disregarded in valuing the limited partnership interests. Procedural History After petitioners filed a timely joint petition for redetermination, and respondent filed an answer to the petition, petitioners filed the motion for part
Eastland further advised petitioners that the partnerships should include a charity as a partner in light of the recent enactment of section 2704 and to “make sure that traditional valuation rules apply to the partnerships.” Kerr Issue GST Trust On December 29, 1993, petitioners, as grantors, and their children, as trustees, executed a document entitled “Agreement Creating the Kerr Issue GST Trusts”.
See DenHollander, Note, “Minority Interest Discounts and the Effect of the Section 2704 Regulations”, 45 Tax Law.
See DenHollander, Note, “Minority Interest Discounts and the Effect of the Section 2704 Regulations”, 45 Tax Law.