I.R.C. § 2701(a) Valuation Rules
I.R.C. § 2701(a)(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—
I.R.C. § 2701(a)(1)(A) —
which is described in subparagraph
(A) or (B) of subsection (b)(1), and
I.R.C. § 2701(a)(1)(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.
I.R.C. § 2701(a)(2) Exceptions For Marketable Retained Interests, Etc. —
Paragraph (1) shall not apply to any right with respect to an applicable retained
interest if—
I.R.C. § 2701(a)(2)(A) —
market quotations are readily available
(as of the date of the transfer) for such interest on an established securities
market,
I.R.C. § 2701(a)(2)(B) —
such interest is of the same class as the transferred interest, or
I.R.C. § 2701(a)(2)(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.
I.R.C. § 2701(a)(3) Valuation Of Rights To Which Paragraph (1) Applies
I.R.C. § 2701(a)(3)(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.
I.R.C. § 2701(a)(3)(B) Valuation Of Certain Qualified Payments —
If—
I.R.C. § 2701(a)(3)(B)(i) —
any applicable retained interest confers a distribution right which consists of the
right to a qualified payment, and
I.R.C. § 2701(a)(3)(B)(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.
I.R.C. § 2701(a)(3)(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.
I.R.C. § 2701(a)(4) Minimum Valuation Of Junior Equity
I.R.C. § 2701(a)(4)(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.R.C. § 2701(a)(4)(A)(i) —
the total value of all of the equity interests in such entity, plus
I.R.C. § 2701(a)(4)(A)(ii) —
the total amount of indebtedness of such entity to the transferor (or an applicable
family member).
I.R.C. § 2701(a)(4)(B) Definitions —
For purposes of this paragraph—
I.R.C. § 2701(a)(4)(B)(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.
I.R.C. § 2701(a)(4)(B)(ii) Equity Interest —
The term “equity interest” means stock or any interest as a partner,
as the case may be.
I.R.C. § 2701(b) Applicable Retained Interests —
For purposes of this section—
I.R.C. § 2701(b)(1) In General —
The term “applicable retained interest”
means any interest in an entity with respect to which there is—
I.R.C. § 2701(b)(1)(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
I.R.C. § 2701(b)(1)(B) —
a liquidation, put, call, or conversion right.
I.R.C. § 2701(b)(2) Control —
For purposes of paragraph (1)—
I.R.C. § 2701(b)(2)(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.
I.R.C. § 2701(b)(2)(B) Partnerships —
In the case of a partnership, the term “control”
means—
I.R.C. § 2701(b)(2)(B)(i) —
the holding of at least 50 percent of the capital or profits interests in the partnership,
or
I.R.C. § 2701(b)(2)(B)(ii) —
in the case of a limited partnership, the holding of any interest as a general partner.
I.R.C. § 2701(b)(2)(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.
I.R.C. § 2701(c) Distribution And Other Rights; Qualified Payments —
For purposes of this section—
I.R.C. § 2701(c)(1) Distribution Right
I.R.C. § 2701(c)(1)(A) In General —
The term “distribution right” means—
I.R.C. § 2701(c)(1)(A)(i) —
a right to distributions from a corporation with respect to its stock, and
I.R.C. § 2701(c)(1)(A)(ii) —
a right to distributions from a partnership with respect to a partner's interest
in the partnership.
I.R.C. § 2701(c)(1)(B) Exceptions —
The term “distribution right” does not include—
I.R.C. § 2701(c)(1)(B)(i) —
a right to distributions with respect to any interest which is junior to the rights
of the transferred interest,
I.R.C. § 2701(c)(1)(B)(ii) —
any liquidation, put, call, or conversion right, or
I.R.C. § 2701(c)(1)(B)(iii) —
any right to receive any guaranteed payment described in section 707(c) of a fixed amount.
I.R.C. § 2701(c)(2) Liquidation, Etc. Rights
I.R.C. § 2701(c)(2)(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.
I.R.C. § 2701(c)(2)(B) Exception For Fixed Rights
I.R.C. § 2701(c)(2)(B)(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.
I.R.C. § 2701(c)(2)(B)(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).
I.R.C. § 2701(c)(2)(C) Exception For Certain Rights To Convert —
The term “liquidation, put, call, or conversion right” does not include
any right which—
I.R.C. § 2701(c)(2)(C)(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),
I.R.C. § 2701(c)(2)(C)(ii) —
is nonlapsing,
I.R.C. § 2701(c)(2)(C)(iii) —
is subject to proportionate adjustments for splits, combinations, reclassifications,
and similar changes in the capital stock, and
I.R.C. § 2701(c)(2)(C)(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.
I.R.C. § 2701(c)(3) Qualified Payment
I.R.C. § 2701(c)(3)(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.
I.R.C. § 2701(c)(3)(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.
I.R.C. § 2701(c)(3)(C) Elections
I.R.C. § 2701(c)(3)(C)(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.
I.R.C. § 2701(c)(3)(C)(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.
I.R.C. § 2701(c)(3)(C)(iii) Elections Irrevocable —
Any election under this subparagraph with respect to an interest shall, once made,
be irrevocable.
I.R.C. § 2701(d) Transfer Tax Treatment Of Cumulative But Unpaid Distributions
I.R.C. § 2701(d)(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):
I.R.C. § 2701(d)(1)(A) —
The taxable estate of the transferor in the case of a taxable event described in
paragraph (3)(A)(i).
I.R.C. § 2701(d)(1)(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).
I.R.C. § 2701(d)(2) Amount Of Increase
I.R.C. § 2701(d)(2)(A) In General —
The amount of the increase determined under this paragraph shall be the excess (if
any) of—
I.R.C. § 2701(d)(2)(A)(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.R.C. § 2701(d)(2)(A)(i)(I) —
all such payments were paid on the date payment was due, and
I.R.C. § 2701(d)(2)(A)(i)(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
I.R.C. § 2701(d)(2)(A)(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.
I.R.C. § 2701(d)(2)(B) Limitation On Amount Of Increase
I.R.C. § 2701(d)(2)(B)(i) In General —
The amount of the increase under subparagraph (A) shall not exceed the applicable
percentage of the excess (if any) of—
I.R.C. § 2701(d)(2)(B)(i)(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
I.R.C. § 2701(d)(2)(B)(i)(II) —
the value of such interests (determined as of the date of the transfer to which subsection
(a)(1) applied).
I.R.C. § 2701(d)(2)(B)(ii) Applicable Percentage —
For purposes of clause (i), the applicable percentage is the percentage determined
by dividing—
I.R.C. § 2701(d)(2)(B)(ii)(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
I.R.C. § 2701(d)(2)(B)(ii)(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.
I.R.C. § 2701(d)(2)(B)(iii) Definition —
For purposes of this subparagraph, the term “equity interest” has the
meaning given such term by subsection (a)(4)(B).
I.R.C. § 2701(d)(2)(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.
I.R.C. § 2701(d)(3) Taxable Events —
For purposes of this subsection—
I.R.C. § 2701(d)(3)(A) In General —
The term “taxable event” means any of the following:
I.R.C. § 2701(d)(3)(A)(i) —
The death of the transferor if the applicable retained interest conferring the distribution
right is includible in the estate of the transferor.
I.R.C. § 2701(d)(3)(A)(ii) —
The transfer of such applicable retained interest.
I.R.C. § 2701(d)(3)(A)(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.
I.R.C. § 2701(d)(3)(B) Exception Where Spouse Is Transferee
I.R.C. § 2701(d)(3)(B)(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).
I.R.C. § 2701(d)(3)(B)(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.R.C. § 2701(d)(3)(B)(ii)(II) —
consideration for the transfer provided by the spouse.
I.R.C. § 2701(d)(3)(B)(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.
I.R.C. § 2701(d)(4) Special Rules For Applicable Family Members
I.R.C. § 2701(d)(4)(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.
I.R.C. § 2701(d)(4)(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.
I.R.C. § 2701(d)(4)(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.
I.R.C. § 2701(d)(5) Transfer To Include Termination —
For purposes of this subsection, any termination of an interest shall be treated
as a transfer.
I.R.C. § 2701(e) Other Definitions And Rules —
For purposes of this section—
I.R.C. § 2701(e)(1) Member Of The Family —
The term “member of the family” means, with respect to any transferor—
I.R.C. § 2701(e)(1)(A) —
the transferor's spouse,
I.R.C. § 2701(e)(1)(B) —
a lineal descendant of the transferor or the transferor's spouse, and
I.R.C. § 2701(e)(1)(C) —
the spouse of any such descendant.
I.R.C. § 2701(e)(2) Applicable Family Member —
The term “applicable family member” means, with respect to any transferor—
I.R.C. § 2701(e)(2)(A) —
the transferor's spouse,
I.R.C. § 2701(e)(2)(B) —
an ancestor of the transferor or the transferor's spouse, and
I.R.C. § 2701(e)(2)(C) —
the spouse of any such ancestor.
I.R.C. § 2701(e)(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.
I.R.C. § 2701(e)(4) Effect Of Adoption —
A relationship by legal adoption shall be treated as a relationship by blood.
I.R.C. § 2701(e)(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—
I.R.C. § 2701(e)(5)(A) —
receives an applicable retained interest in such entity pursuant to such transaction,
or
I.R.C. § 2701(e)(5)(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.
I.R.C. § 2701(e)(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).
I.R.C. § 2701(e)(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.
(Added by Pub. L. 101-508, title XI, Sec. 11602(a), Nov. 5, 1990, 104 Stat. 1388-491; amended by Pub. L. 104-188, title I, Sec. 1702(f), Aug. 20, 1996, 110 Stat. 1755.)
BACKGROUND NOTES
AMENDMENTS
1996--Subsec. (a)(3)(B). Pub. L. 104-188, 1702(f)(1), inserted “CERTAIN” before “QUALIFIED"
in the heading.
Subsec. (a)(3)(C). Pub. L. 104-188, 1702(f)(1), added subpar. (C).
Subsec. (a)(4)(B)(i). Pub. L. 104-188, 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, 1702(f)(3), added subpar. (C).
Subsec. (c)(1)(B)(i). Pub. L. 104-188, 1702(f)(4), amended clause (i). Before amendment clause (i) read as follows:
“(i) 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, 1702(f)(5), amended clause (i). Before amendment, clause (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, 1702(f)(5), amended the first sentence. Before amendment, the 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, 1702(f)(1), substituted
“subsection (a)(3)(B) or (C)” for “subsection (a)(3)(B)”.
Subsec. (d)(3)(A)(iii). Pub. L. 104-188, 1702(f)(6), struck “the period ending on the date of” before “such
payment”.
Subsec. (d)(3)(B)(ii)(I). Pub. L. 104-188, 1702(f)(7), inserted “or the exclusion under section 2503(b),” after
“section 2523,”.
Subsec. (d)(4). Pub. L. 104-188, 1702(f)(1), substituted
“subsection (a)(3)(B) or (C)” for “subsection (a)(3)(B)”.
Subsec. (d)(4)(C). Pub. L. 104-188, 1702(f)(9), added subpar. (C).
Subsec. (e)(3). Pub. L. 104-188, 1702(f)(3), substituted
“(3) Attribution of indirect holdings and transfers.--An individual"
for “(3) Attribution rules.--(a) Indirect holdings and transfers.--An individual”;
and struck subpar. (B). Before being struck, subpar.
(B) read as follows:
“(B) Control.--For purposes of subsection (b)(1), an individual shall be treated
as holding any interest held by the individual's brothers, sisters, or lineal descendants.”
Subsec. (e)(5). Pub. L. 104-188, 1702(f)(8), substituted
“such transaction” for “such contribution to capital or such redemption,
recapitalization, or other change” in subpar. (A); and substituted
“such transaction” for “the transfer” in subpar. (B).
Subsec. (e)(6). Pub. L. 104-188, 1702(f)(10), inserted
“or to reflect the application of subsection (d)” before the period.
EFFECTIVE DATE OF 1996 AMENDMENT
Section 1702(i) of Pub. L. 104-188 provided that, except as otherwise expressly provided, amendments effective as if
included in the related provision of the Revenue Reconciliation Act of 1990.
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.’
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.'
