-CITE-

26 USC CHAPTER 14 - SPECIAL VALUATION RULES 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle B - Estate and Gift Taxes

CHAPTER 14 - SPECIAL VALUATION RULES

-HEAD-

CHAPTER 14 - SPECIAL VALUATION RULES

-MISC1-

Sec.

2701. Special valuation rules in case of transfers of

certain interests in corporations or partnerships.

2702. Special valuation rules in case of transfers of

interests in trusts.

2703. Certain rights and restrictions disregarded.

2704. Treatment of certain lapsing rights and restrictions.

-End-

-CITE-

26 USC Sec. 2701 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle B - Estate and Gift Taxes

CHAPTER 14 - SPECIAL VALUATION RULES

-HEAD-

Sec. 2701. Special valuation rules in case of transfers of certain

interests in corporations or partnerships

-STATUTE-

(a) Valuation rules

(1) In general

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 -

(A) which is described in subparagraph (A) or (B) of

subsection (b)(1), and

(B) which is with respect to any applicable retained interest

that is held by the transferor or an applicable family member

immediately after the transfer,

shall be determined under paragraph (3). This paragraph shall not

apply to the transfer of any interest for which market quotations

are readily available (as of the date of transfer) on an

established securities market.

(2) Exceptions for marketable retained interests, etc.

Paragraph (1) shall not apply to any right with respect to an

applicable retained interest if -

(A) market quotations are readily available (as of the date

of the transfer) for such interest on an established securities

market,

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

interest, or

(C) such interest is proportionally the same as the

transferred interest, without regard to nonlapsing differences

in voting power (or, for a partnership, nonlapsing differences

with respect to management and limitations on liability).

Subparagraph (C) shall not apply to any interest in a partnership

if the transferor or an applicable family member has the right to

alter the liability of the transferee of the transferred

property. Except as provided by the Secretary, any difference

described in subparagraph (C) which lapses by reason of any

Federal or State law shall be treated as a nonlapsing difference

for purposes of such subparagraph.

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

(A) In general

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.

(B) Valuation of certain qualified payments

If -

(i) any applicable retained interest confers a distribution

right which consists of the right to a qualified payment, and

(ii) there are 1 or more liquidation, put, call, or

conversion rights with respect to such interest,

the value of all such rights shall be determined as if each

liquidation, put, call, or conversion right were exercised in

the manner resulting in the lowest value being determined for

all such rights.

(C) Valuation of qualified payments where no liquidation, etc.

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.

(4) Minimum valuation of junior equity

(A) In general

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 -

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

entity, plus

(ii) the total amount of indebtedness of such entity to the

transferor (or an applicable family member).

(B) Definitions

For purposes of this paragraph -

(i) Junior equity interest

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.

(ii) Equity interest

The term "equity interest" means stock or any interest as a

partner, as the case may be.

(b) Applicable retained interests

For purposes of this section -

(1) In general

The term "applicable retained interest" means any interest in

an entity with respect to which there is -

(A) a distribution right, but only if, immediately before the

transfer described in subsection (a)(1), the transferor and

applicable family members hold (after application of subsection

(e)(3)) control of the entity, or

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

(2) Control

For purposes of paragraph (1) -

(A) Corporations

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.

(B) Partnerships

In the case of a partnership, the term "control" means -

(i) the holding of at least 50 percent of the capital or

profits interests in the partnership, or

(ii) in the case of a limited partnership, the holding of

any interest as a general partner.

(C) Applicable family member

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.

(c) Distribution and other rights; qualified payments

For purposes of this section -

(1) Distribution right

(A) In general

The term "distribution right" means -

(i) a right to distributions from a corporation with

respect to its stock, and

(ii) a right to distributions from a partnership with

respect to a partner's interest in the partnership.

(B) Exceptions

The term "distribution right" does not include -

(i) a right to distributions with respect to any interest

which is junior to the rights of the transferred interest,

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

(iii) any right to receive any guaranteed payment described

in section 707(c) of a fixed amount.

(2) Liquidation, etc. rights

(A) In general

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.

(B) Exception for fixed rights

(i) In general

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.

(ii) Treatment of certain rights

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).

(C) Exception for certain rights to convert

The term "liquidation, put, call, or conversion right" does

not include any right which -

(i) is a right to convert into a fixed number (or a fixed

percentage) of shares of the same class of stock in a

corporation as the transferred stock in such corporation

under subsection (a)(1) (or stock which would be of the same

class but for nonlapsing differences in voting power),

(ii) is nonlapsing,

(iii) is subject to proportionate adjustments for splits,

combinations, reclassifications, and similar changes in the

capital stock, and

(iv) is subject to adjustments similar to the adjustments

under subsection (d) for accumulated but unpaid

distributions.

A rule similar to the rule of the preceding sentence shall

apply for partnerships.

(3) Qualified payment

(A) In general

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.

(B) Treatment of variable rate payments

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.

(C) Elections

(i) In general

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.

(ii) Election to have interest treated as qualified payment

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.

(iii) Elections irrevocable

Any election under this subparagraph with respect to an

interest shall, once made, be irrevocable.

(d) Transfer tax treatment of cumulative but unpaid distributions

(1) In general

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):

(A) The taxable estate of the transferor in the case of a

taxable event described in paragraph (3)(A)(i).

(B) The taxable gifts of the transferor for the calendar year

in which the taxable event occurs in the case of a taxable

event described in paragraph (3)(A)(ii) or (iii).

(2) Amount of increase

(A) In general

The amount of the increase determined under this paragraph

shall be the excess (if any) of -

(i) the value of the qualified payments payable during the

period beginning on the date of the transfer under subsection

(a)(1) and ending on the date of the taxable event determined

as if -

(I) all such payments were paid on the date payment was

due, and

(II) all such payments were reinvested by the transferor

as of the date of payment at a yield equal to the discount

rate used in determining the value of the applicable

retained interest described in subsection (a)(1), over

(ii) the value of such payments paid during such period

computed under clause (i) on the basis of the time when such

payments were actually paid.

(B) Limitation on amount of increase

(i) In general

The amount of the increase under subparagraph (A) shall not

exceed the applicable percentage of the excess (if any) of -

(I) the value (determined as of the date of the taxable

event) of all equity interests in the entity which are

junior to the applicable retained interest, over

(II) the value of such interests (determined as of the

date of the transfer to which subsection (a)(1) applied).

(ii) Applicable percentage

For purposes of clause (i), the applicable percentage is

the percentage determined by dividing -

(I) the number of shares in the corporation held (as of

the date of the taxable event) by the transferor which are

applicable retained interests of the same class, by

(II) the total number of shares in such corporation (as

of such date) which are of the same class as the class

described in subclause (I).

A similar percentage shall be determined in the case of

interests in a partnership.

(iii) Definition

For purposes of this subparagraph, the term "equity

interest" has the meaning given such term by subsection

(a)(4)(B).

(C) Grace period

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.

(3) Taxable events

For purposes of this subsection -

(A) In general

The term "taxable event" means any of the following:

(i) The death of the transferor if the applicable retained

interest conferring the distribution right is includible in

the estate of the transferor.

(ii) The transfer of such applicable retained interest.

(iii) At the election of the taxpayer, the payment of any

qualified payment after the period described in paragraph

(2)(C), but only with respect to such payment.

(B) Exception where spouse is transferee

(i) Deathtime transfers

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).

(ii) Lifetime transfers

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 -

(I) any deduction allowed under section 2523, or the

exclusion under section 2503(b), or

(II) consideration for the transfer provided by the

spouse.

(iii) Spouse succeeds to treatment of transferor

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.

(4) Special rules for applicable family members

(A) Family member treated in same manner as transferor

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.

(B) Transfer to applicable family member

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.

(C) Transfer to transferors

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.

(5) Transfer to include termination

For purposes of this subsection, any termination of an interest

shall be treated as a transfer.

(e) Other definitions and rules

For purposes of this section -

(1) Member of the family

The term "member of the family" means, with respect to any

transferor -

(A) the transferor's spouse,

(B) a lineal descendant of the transferor or the transferor's

spouse, and

(C) the spouse of any such descendant.

(2) Applicable family member

The term "applicable family member" means, with respect to any

transferor -

(A) the transferor's spouse,

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

and

(C) the spouse of any such ancestor.

(3) Attribution of indirect holdings and transfers

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.

(4) Effect of adoption

A relationship by legal adoption shall be treated as a

relationship by blood.

(5) Certain changes treated as transfers

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 -

(A) receives an applicable retained interest in such entity

pursuant to such transaction, or

(B) under regulations, otherwise holds, immediately after

such transaction, an applicable retained interest in such

entity.

This paragraph shall not apply to any transaction (other than a

contribution to capital) if the interests in the entity held by

the transferor, applicable family members, and members of the

transferor's family before and after the transaction are

substantially identical.

(6) Adjustments

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).

(7) Treatment as separate interests

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.

-SOURCE-

(Added Pub. L. 101-508, title XI, Sec. 11602(a), Nov. 5, 1990, 104

Stat. 1388-491; amended Pub. L. 104-188, title I, Sec.

1702(f)(1)-(3)(B), (4)-(5)(B), (6)-(10), Aug. 20, 1996, 110 Stat.

1870-1872.)

-MISC1-

AMENDMENTS

1996 - Subsec. (a)(3)(B). Pub. L. 104-188, Sec. 1702(f)(1)(B),

inserted "certain" before "qualified" in heading.

Subsec. (a)(3)(C). Pub. L. 104-188, Sec. 1702(f)(1)(A), added

subpar. (C).

Subsec. (a)(4)(B)(i). Pub. L. 104-188, Sec. 1702(f)(2), inserted

"(or, to the extent provided in regulations, the rights as to

either income or capital)" after "income and capital".

Subsec. (b)(2)(C). Pub. L. 104-188, Sec. 1702(f)(3)(A), added

subpar. (C).

Subsec. (c)(1)(B)(i). Pub. L. 104-188, Sec. 1702(f)(4), amended

cl. (i) generally. Prior to amendment, cl. (i) read as follows: "a

right to distributions with respect to any junior equity interest

(as defined in subsection (a)(4)(B)(i)),".

Subsec. (c)(3)(C)(i). Pub. L. 104-188, Sec. 1702(f)(5)(A),

amended cl. (i) generally. Prior to amendment, cl. (i) read as

follows:

"(i) Waiver of qualified payment treatment. - A transferor or

applicable family member may elect with respect to payments under

any interest specified in such election to treat such payments as

payments which are not qualified payments."

Subsec. (c)(3)(C)(ii). Pub. L. 104-188, Sec. 1702(f)(5)(B),

amended first sentence generally. Prior to amendment, first

sentence read as follows: "A transferor or any applicable family

member may elect to treat any distribution right as a qualified

payment, to be paid in the amounts and at the times specified in

such election."

Subsec. (d)(1). Pub. L. 104-188, Sec. 1702(f)(1)(C), substituted

"subsection (a)(3)(B) or (C)" for "subsection (a)(3)(B)".

Subsec. (d)(3)(A)(iii). Pub. L. 104-188, Sec. 1702(f)(6), struck

out "the period ending on the date of" after "with respect to".

Subsec. (d)(3)(B)(ii)(I). Pub. L. 104-188, Sec. 1702(f)(7),

inserted "or the exclusion under section 2503(b)," after "section

2523,".

Subsec. (d)(4)(A). Pub. L. 104-188, Sec. 1702(f)(1)(C),

substituted "subsection (a)(3)(B) or (C)" for "subsection

(a)(3)(B)".

Subsec. (d)(4)(C). Pub. L. 104-188, Sec. 1702(f)(9), added

subpar. (C).

Subsec. (e)(3). Pub. L. 104-188, Sec. 1702(f)(3)(B), substituted

"Attribution of indirect holdings and transfers" for "Attribution

rules" in par. heading, struck out subpar. (A) designation and

heading which read "Indirect holdings and transfers", and struck

out subpar. (B) which read as follows:

"(B) Control. - For purposes of subsections (b)(1), an individual

shall be treated as holding any interest held by the individual's

brothers, sisters, or lineal descendants."

Subsec. (e)(5)(A). Pub. L. 104-188, Sec. 1702(f)(8)(A),

substituted "such transaction" for "such contribution to capital or

such redemption, recapitalization, or other change".

Subsec. (e)(5)(B). Pub. L. 104-188, Sec. 1702(f)(8)(B),

substituted "such transaction" for "the transfer".

Subsec. (e)(6). Pub. L. 104-188, Sec. 1702(f)(10), inserted "or

to reflect the application of subsection (d)" before period at end.

EFFECTIVE DATE OF 1996 AMENDMENT

Amendment by Pub. L. 104-188 effective, except as otherwise

expressly provided, as if included in the provision of the Revenue

Reconciliation Act of 1990, Pub. L. 101-508, title XI, to which

such amendment relates, see section 1702(i) of Pub. L. 104-188, set

out as a note under section 38 of this title.

EFFECTIVE DATE

Section 11602(e)(1) of Pub. L. 101-508 provided that:

"(A) In general. - The amendments made by subsection (a)

[enacting this chapter] -

"(i) to the extent such amendments relate to sections 2701 and

2702 of the Internal Revenue Code of 1986 (as added by such

amendments), shall apply to transfers after October 8, 1990,

"(ii) to the extent such amendments relate to section 2703 of

such Code (as so added), shall apply to -

"(I) agreements, options, rights, or restrictions entered

into or granted after October 8, 1990, and

"(II) agreements, options, rights, or restrictions which are

substantially modified after October 8, 1990, and

"(iii) to the extent such amendments relate to section 2704 of

such Code (as so added), shall apply to restrictions or rights

(or limitations on rights) created after October 8, 1990.

"(B) Exception. - For purposes of subparagraph (A)(i), with

respect to property transferred before October 9, 1990 -

"(i) any failure to exercise a right of conversion,

"(ii) any failure to pay dividends, and

"(iii) any failure to exercise other rights specified in

regulations,

shall not be treated as a subsequent transfer."

TIME FOR ELECTION UNDER SUBSECTION (C)(3)(C)(I)

Section 1702(f)(5)(C) of Pub. L. 104-188 provided that: "The time

for making an election under the second sentence of section

2701(c)(3)(C)(i) of the Internal Revenue Code of 1986 (as amended

by subparagraph (A)) shall not expire before the due date

(including extensions) for filing the transferor's return of the

tax imposed by section 2501 of such Code for the first calendar

year ending after the date of enactment [probably means the date of

enactment of Pub. L. 104-188, Oct. 20, 1996]."

STUDY OF METHODS USED TO DISTORT VALUATION OF PROPERTY FOR PURPOSES

OF ESTATE AND GIFT TAX

Section 11602(d) of Pub. L. 101-508 provided that: "The Secretary

of the Treasury shall conduct a study of -

"(1) the prevalence and types of options and agreements used to

distort the valuation of property for purposes of subtitle B of

the Internal Revenue Code of 1986, and

"(2) other methods using discretionary rights to distort the

value of property for such purposes.

The Secretary shall, not later than December 31, 1992, report the

results of such study, together with such legislative

recommendations as the Secretary considers necessary, to the

Committee on Finance of the Senate and the Committee on Ways and

Means of the House of Representatives."

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 2001, 2504, 2702, 2704,

6501 of this title.

-End-

-CITE-

26 USC Sec. 2702 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle B - Estate and Gift Taxes

CHAPTER 14 - SPECIAL VALUATION RULES

-HEAD-

Sec. 2702. Special valuation rules in case of transfers of

interests in trusts

-STATUTE-

(a) Valuation rules

(1) In general

Solely for purposes of determining whether a transfer of an

interest in trust 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 interest in such trust retained by the

transferor or any applicable family member (as defined in section

2701(e)(2)) shall be determined as provided in paragraph (2).

(2) Valuation of retained interests

(A) In general

The value of any retained interest which is not a qualified

interest shall be treated as being zero.

(B) Valuation of qualified interest

The value of any retained interest which is a qualified

interest shall be determined under section 7520.

(3) Exceptions

(A) In general

This subsection shall not apply to any transfer -

(i) if such transfer is an incomplete gift,

(ii) if such transfer involves the transfer of an interest

in trust all the property in which consists of a residence to

be used as a personal residence by persons holding term

interests in such trust, or

(iii) to the extent that regulations provide that such

transfer is not inconsistent with the purposes of this

section.

(B) Incomplete gift

For purposes of subparagraph (A), the term "incomplete gift"

means any transfer which would not be treated as a gift whether

or not consideration was received for such transfer.

(b) Qualified interest

For purposes of this section, the term "qualified interest" means

-

(1) any interest which consists of the right to receive fixed

amounts payable not less frequently than annually,

(2) any interest which consists of the right to receive amounts

which are payable not less frequently than annually and are a

fixed percentage of the fair market value of the property in the

trust (determined annually), and

(3) any noncontingent remainder interest if all of the other

interests in the trust consist of interests described in

paragraph (1) or (2).

(c) Certain property treated as held in trust

For purposes of this section -

(1) In general

The transfer of an interest in property with respect to which

there is 1 or more term interests shall be treated as a transfer

of an interest in a trust.

(2) Joint purchases

If 2 or more members of the same family acquire interests in

any property described in paragraph (1) in the same transaction

(or a series of related transactions), the person (or persons)

acquiring the term interests in such property shall be treated as

having acquired the entire property and then transferred to the

other persons the interests acquired by such other persons in the

transaction (or series of transactions). Such transfer shall be

treated as made in exchange for the consideration (if any)

provided by such other persons for the acquisition of their

interests in such property.

(3) Term interest

The term "term interest" means -

(A) a life interest in property, or

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

(4) Valuation rule for certain term interests

If the nonexercise of rights under a term interest in tangible

property would not have a substantial effect on the valuation of

the remainder interest in such property -

(A) subparagraph (A) of subsection (a)(2) shall not apply to

such term interest, and

(B) the value of such term interest for purposes of applying

subsection (a)(1) shall be the amount which the holder of the

term interest establishes as the amount for which such interest

could be sold to an unrelated third party.

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

In the case of a transfer of an income or remainder interest with

respect to a specified portion of the property in a trust, only

such portion shall be taken into account in applying this section

to such transfer.

(e) Member of the family

For purposes of this section, the term "member of the family"

shall have the meaning given such term by section 2704(c)(2).

-SOURCE-

(Added Pub. L. 101-508, title XI, Sec. 11602(a), Nov. 5, 1990, 104

Stat. 1388-497; amended Pub. L. 104-188, title I, Sec. 1702(f)(11),

Aug. 20, 1996, 110 Stat. 1872.)

-MISC1-

AMENDMENTS

1996 - Subsec. (a)(3)(A)(i). Pub. L. 104-188, Sec.

1702(f)(11)(A)(i), (ii), (B)(i), substituted "if" for "to the

extent" and "incomplete gift" for "incomplete transfer", and struck

out "or" at end.

Subsec. (a)(3)(A)(ii). Pub. L. 104-188, Sec. 1702(f)(11)(A)(iii),

substituted ", or" for period at end.

Subsec. (a)(3)(A)(iii). Pub. L. 104-188, Sec. 1702(f)(11)(A)(iv),

added cl. (iii).

Subsec. (a)(3)(B). Pub. L. 104-188, Sec. 1702(f)(11)(B),

substituted "incomplete gift" for "incomplete transfer" in heading

and text.

EFFECTIVE DATE OF 1996 AMENDMENT

Amendment by Pub. L. 104-188 effective, except as otherwise

expressly provided, as if included in the provision of the Revenue

Reconciliation Act of 1990, Pub. L. 101-508, title XI, to which

such amendment relates, see section 1702(i) of Pub. L. 104-188, set

out as a note under section 38 of this title.

-End-

-CITE-

26 USC Sec. 2703 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle B - Estate and Gift Taxes

CHAPTER 14 - SPECIAL VALUATION RULES

-HEAD-

Sec. 2703. Certain rights and restrictions disregarded

-STATUTE-

(a) General rule

For purposes of this subtitle, the value of any property shall be

determined without regard to -

(1) any option, agreement, or other right to acquire or use the

property at a price less than the fair market value of the

property (without regard to such option, agreement, or right), or

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

(b) Exceptions

Subsection (a) shall not apply to any option, agreement, right,

or restriction which meets each of the following requirements:

(1) It is a bona fide business arrangement.

(2) It is not a device to transfer such property to members of

the decedent's family for less than full and adequate

consideration in money or money's worth.

(3) Its terms are comparable to similar arrangements entered

into by persons in an arms' length transaction.

-SOURCE-

(Added Pub. L. 101-508, title XI, Sec. 11602(a), Nov. 5, 1990, 104

Stat. 1388-498.)

-End-

-CITE-

26 USC Sec. 2704 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle B - Estate and Gift Taxes

CHAPTER 14 - SPECIAL VALUATION RULES

-HEAD-

Sec. 2704. Treatment of certain lapsing rights and restrictions

-STATUTE-

(a) Treatment of lapsed voting or liquidation rights

(1) In general

For purposes of this subtitle, if -

(A) there is a lapse of any voting or liquidation right in a

corporation or partnership, and

(B) the individual holding such right immediately before the

lapse and members of such individual's family hold, both before

and after the lapse, control of the entity,

such lapse shall be treated as a transfer by such individual by

gift, or a transfer which is includible in the gross estate of

the decedent, whichever is applicable, in the amount determined

under paragraph (2).

(2) Amount of transfer

For purposes of paragraph (1), the amount determined under this

paragraph is the excess (if any) of -

(A) the value of all interests in the entity held by the

individual described in paragraph (1) immediately before the

lapse (determined as if the voting and liquidation rights were

nonlapsing), over

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

(3) Similar rights

The Secretary may by regulations apply this subsection to

rights similar to voting and liquidation rights.

(b) Certain restrictions on liquidation disregarded

(1) In general

For purposes of this subtitle, if -

(A) there is a transfer of an interest in a corporation or

partnership to (or for the benefit of) a member of the

transferor's family, and

(B) the transferor and members of the transferor's family

hold, immediately before the transfer, control of the entity,

any applicable restriction shall be disregarded in determining

the value of the transferred interest.

(2) Applicable restriction

For purposes of this subsection, the term "applicable

restriction" means any restriction -

(A) which effectively limits the ability of the corporation

or partnership to liquidate, and

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

(i) The restriction lapses, in whole or in part, after the

transfer referred to in paragraph (1).

(ii) The transferor or any member of the transferor's

family, either alone or collectively, has the right after

such transfer to remove, in whole or in part, the

restriction.

(3) Exceptions

The term "applicable restriction" shall not include -

(A) any commercially reasonable restriction which arises as

part of any financing by the corporation or partnership with a

person who is not related to the transferor or transferee, or a

member of the family of either, or

(B) any restriction imposed, or required to be imposed, by

any Federal or State law.

(4) Other restrictions

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.

(c) Definitions and special rules

For purposes of this section -

(1) Control

The term "control" has the meaning given such term by section

2701(b)(2).

(2) Member of the family

The term "member of the family" means, with respect to any

individual -

(A) such individual's spouse,

(B) any ancestor or lineal descendant of such individual or

such individual's spouse,

(C) any brother or sister of the individual, and

(D) any spouse of any individual described in subparagraph

(B) or (C).

(3) Attribution

The rule of section 2701(e)(3) shall apply for purposes of

determining the interests held by any individual.

-SOURCE-

(Added Pub. L. 101-508, title XI, Sec. 11602(a), Nov. 5, 1990, 104

Stat. 1388-498; amended Pub. L. 104-188, title I, Sec.

1702(f)(3)(C), Aug. 20, 1996, 110 Stat. 1871.)

-MISC1-

AMENDMENTS

1996 - Subsec. (c)(3). Pub. L. 104-188 substituted "section

2701(e)(3)" for "section 2701(e)(3)(A)".

EFFECTIVE DATE OF 1996 AMENDMENT

Amendment by Pub. L. 104-188 effective, except as otherwise

expressly provided, as if included in the provision of the Revenue

Reconciliation Act of 1990, Pub. L. 101-508, title XI, to which

such amendment relates, see section 1702(i) of Pub. L. 104-188, set

out as a note under section 38 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in section 2702 of this title.

-End-

-CITE-

26 USC Subtitle C - Employment Taxes 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle C - Employment Taxes

-HEAD-

Subtitle C - Employment Taxes

-MISC1-

Chapter Sec.(!1)

21. Federal insurance contributions act 3101

22. Railroad retirement tax act 3201

23. Federal unemployment tax act 3301

23A. Railroad Unemployment Repayment Tax 3321

24. Collection of income tax at source on wages 3401

25. General provisions relating to employment taxes 3501

AMENDMENTS

1983 - Pub. L. 98-76, title II, Sec. 231(c), Aug. 12, 1983, 97

Stat. 429, added item for chapter 23A.

Pub. L. 98-67 repealed amendments made by Pub. L. 97-248. See

1982 Amendment note below.

1982 - Pub. L. 97-248, title III, Secs. 307(b)(1), (6), 308(a),

Sept. 3, 1982, 96 Stat. 590, 591, provided that, applicable to

payments of interest, dividends, and patronage dividends paid or

credited after June 30, 1983, the heading of subtitle C is amended

to read "Employment Taxes and Collection of Income Tax at Source",

the caption of chapter 24 is amended by striking out "On Wages",

and the caption of chapter 25 is amended by inserting "And

Collection Of Income Taxes At Source" after "Employment Taxes".

Section 102(a), (b) of Pub. L. 98-67, title I, Aug. 5, 1983, 97

Stat. 369, repealed subtitle A (Secs. 301-308) of title III of Pub.

L. 97-248 as of the close of June 30, 1983, and provided that the

Internal Revenue Code of 1954 [now 1986] [this title] shall be

applied and administered (subject to certain exceptions) as if such

subtitle A (and the amendments made by such subtitle A) had not

been enacted.

-SECREF-

SUBTITLE REFERRED TO IN OTHER SECTIONS

This subtitle is referred to in sections 139, 1314, 1398, 6242,

6305, 6331, 6656, 7436, 7508, 7512, 7519, 7873 of this title; title

33 section 902.

-FOOTNOTE-

(!1) Section numbers editorially supplied.

-End-