
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 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.
