§ 2704. — Treatment of certain lapsing rights and restrictions.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 26USC2704]
TITLE 26--INTERNAL REVENUE CODE
Subtitle B--Estate and Gift Taxes
CHAPTER 14--SPECIAL VALUATION RULES
Sec. 2704. Treatment of certain lapsing rights and restrictions
(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.
(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.)
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.
Section Referred to in Other Sections
This section is referred to in section 2702 of this title.
