Transfers of Interests Family Entities Under Chapter 14: Sections 2701, 2703 and 2704 (Portfolio 835)

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Tax Management Portfolio, Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704, No. 835-4th, analyzes the historical and current federal estate and gift tax treatment of “estate freezing” transactions. 

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Tax Management Portfolio, Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704, No. 835-4th, analyzes the historical and current federal estate and gift tax treatment of “estate freezing” transactions. After reviewing the development of estate freezing techniques, the portfolio briefly discusses former §2036(c), which was designed to bring back into a transferor's estate property he or she had actually or constructively transferred in certain “freeze” transactions. The portfolio then analyzes in detail §§2701, 2703, and 2704, effective generally for transactions taking place after October 8, 1990.
In the context of discussing the valuation rules imposed by §§2701, 2703, and 2704 and the associated regulations, the portfolio describes relevant special issues in estate and business planning. These include retained interests, transfers of equity interests in corporations where market quotations are not available to value the retained interests, the impact of buy-sell agreements, and the treatment of “lapsing” rights and restrictions in corporations and partnerships.
For a detailed discussion of §2702, see T.M., Partial Interests — GRATs, GRUTs, QPRTs (Section 2702).
This portfolio may be cited as Mezzullo, 835-4th T.M., Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704.


Louis A. Mezzullo, Esq.

Louis A. Mezzullo, University of Maryland (B.A. 1967, M.A. 1976), University of Richmond (J.D. 1976); Partner, Luce, Forward, Hamilton & Scripps LLP, 2006 to present; Partner, McGuireWoods LLP, Richmond, Virginia, 2003 to 2006; Member, Mezzullo & Guare, PLC, Richmond, Virginia, 2000 to 2003; Founding Member, Mezzullo & McCandlish, Richmond, Virginia, 1982 to 2000; Adjunct Professor, University of Miami School of Law, University of Richmond Law School. Author, T.M. The Mobile Client: Tax, Community Property, and Other Considerations; T.M., Estate Planning for Owners of Closely Held Business Interests; T.M., Family Limited Partnerships and Limited Liability Companies; T.M., Estate and Gift Tax Issues for Employee Benefit Plans; T.M. Valuation of Corporate Stock. Author, An Estate Planner's Guide to Buy-Sell Agreements; An Estate Planner's Guide to Life Insurance; An Estate Planner's Guide to Qualified Retirement Plan Benefits; An Estate Planner's Guide to Family Business Entities; Valuation Rules Under Chapter 14, all published by the American Bar Association; Author, Limited Liability Companies in Virginia, published by the Virginia Law Foundation; Co-author, Advising the Elderly Client, published by Clark, Boardman, Callaghan; Fellow and Chair, American College of Tax Counsel; Vice President, American College of Trust and Estate Counsel; Charter Fellow, American College of Employee Benefits Counsel; Past Chair, ABA Section of Real Property, Probate and Trust Law (2000–01); former Vice Chair of Publications, ABA Section of Taxation; Academician and Vice President, International Academy of Trust and Estate Law.

Table of Contents

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

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






Treasury Regulations:

Legislative History:

Treasury Rulings:

















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