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U.S. Code as of:
01/19/04
Section 2701. Special valuation rules in case of transfers of certain interests in corporations or partnerships
(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.
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