Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704 analyzes the historical and current federal estate and gift tax treatment of “estate freezing” transactions. Written by Louis A. Mezzullo, Esq., Luce, Forward, Hamilton & Scripps LLP, this Portfolio briefly discusses former §2036(c), which was designed to bring back into a transferor's estate property he had actually or constructively transferred in certain “freeze” transactions; the portfolio then analyzes in detail §§2701, 2703 and 2704 of the Code, effective generally for transactions taking place after October 8, 1990.

This Portfolio discusses in detail the valuation rules imposed and the associated regulations, including:

• Section 2701 — Transfers of Interests in Corporations and Partnerships
• Section 2703 — Buy-Sell Agreements and Options
• Section 2704(a) — Lapsing Voting and Liquidation
• Section 2704(b) — Liquidation Restrictions
• Statute of Limitations and Effective Dates

Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704 discusses special issues in estate and business planning involving retained interests; transfers of equity interests in corporations where market quotations are not available to value retained interests; buy-sell agreements; and the treatment of “lapsing” rights and restrictions in corporations and partnerships.

Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704 allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

Detailed Analysis

I. Introduction and History

A. Background

1. Traditional Freezing Techniques

a. Corporate and Partnership Recapitalizations

b. Grantor Retained Income Trusts

c. Split Purchases of Property

d. Buy-Sell Agreements

e. Lapsing Rights

f. Restrictions on Liquidation

2. Congressional Reaction: Section 2036(c)

3. Repeal of § 2036(c)

B. Subsequent Developments

1. Technical Corrections

2. Proposed Regulations

3. Final Regulations

C. Overview of Chapter 14

1. Repeal of § 2036(c)

2. New Valuation Rules

3. Transactions and Arrangements Covered

4. Scope of Portfolio

II. Section 2701 - Transfers of Interests in Corporations and Partnerships

A. Application of Special Valuation Rules

B. Definitions

C. Deemed Transfers

D. Attribution Rules

E. Exceptions to the Special Valuation Rules

F. Determination of Value of Applicable Retained Interests

G. Determination of the Amount of Gift

H. Transfers of Applicable Retained Interests (the Compounding Rules)

I. Adjustments

1. In General

2. Split Gifts

J. Planning

III. Section 2703 - Buy-Sell Agreements and Options

A. Background

B. Section 2703 in General

C. Exceptions

1. Statutory Exception

2. Regulatory Exception

3. Definition of Family-Controlled Business

4. Multiple Rights or Restrictions

D. IRS Attempts to Use § 2703 to Disregard the Entity

E. Effective Date and Modifications of Buy-Sell Agreements

F. Planning

1. Nonfamily-Controlled Corporations

2. Family-Controlled Businesses

G. Judicial Interpretation

1. The True Decision: Effect of Buy-Sell Agreements on Transfer Tax Value

2. Blount Est. v. Comr.: Buy-Sell Agreement Fails to Satisfy Either Pre-1990 Law or § 2703

H. Conclusion

IV. Section 2704(a) - Lapsing Voting and Liquidation Rights

A. In General

B. Definitions

C. Exceptions

D. Examples from the Regulations

E. Planning

V. Section 2704(b) - Liquidation Restrictions

A. In General

B. Examples from the Regulations

C. Planning

VI. Statute of Limitations, Study, and Effective Dates

A. Statute of Limitations

B. Study

C. Effective Dates

Working Papers

Table of Worksheets

Worksheet 1 1990 Senate Report on Proposed Revision of Estate Freeze Rules 136 Congressional Record S15679-S15683 (Daily Ed. October 18, 1990)

Worksheet 2 Excerpt from H.R. Rep. 101-964 Conference Report on H.R. 5835, the Omnibus Budget Reconciliation Act of 1990 101st Cong., 2d Sess. 1130-1138 (1990)

Worksheet 3 Excerpt from House Ways and Means Committee Report on the Small Business Job Protection Bill of 1996 (H.R. 3448), H.R. Rep. No. 586, 104th Cong., 2d Sess. 1996

Worksheet 4 Preambles to Prop. Regs. § § 25.2701, 25.2702, 25.2703, and 25.2704 finalized on Jan. 28, 1992 (T.D. 8395)

Worksheet 5 Election Statement Electing Qualified Payment Status Under § 2701(c)(3)(ii)

Worksheet 6 Election Statement to Elect Out of Qualified Payment Status Under § 2701(c)(3)(i)

Worksheet 7 Election Statement to Treat Late Payment of Qualified Payment as Taxable Event

Bibliography

OFFICIAL

Statutes:

Primary:

Secondary:

Treasury Regulations:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

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