§2704 — Title 26 Internal Revenue Code | U.S. Code

Summary

Counts a value drop when someone’s voting or payout rights in a corporation or partnership end, if that person and their family still control the business before and after the change. The amount counted is the difference between the value of the person’s interest right before the right ended (as if the right never ended) and its value right after the end. The Secretary can make rules to apply this idea to other similar rights. Treats some transfers to family the same way when the transferor and their family control the business before the transfer and a restriction that limits liquidation either later ends or can be removed by them. “Applicable restriction” means a rule that limits liquidation and later can lapse or be removed, but it does not include normal lender rules from an unrelated lender or rules required by law. The Secretary can ignore other restrictions that only reduce tax value but don’t really reduce what the family gets. “Control” is as defined in section 2701(b)(2). “Member of the family” means spouse, ancestors or descendants, brothers or sisters, and their spouses. The rule in section 2701(e)(3) applies to counting interests.

Title 26, §2704

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)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,

(2)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)The Secretary may by regulations apply this subsection to rights similar to voting and liquidation rights.

(b)(1)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,

(2)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)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)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)For purposes of this section—

(1)The term “control” has the meaning given such term by section 2701(b)(2).

(2)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)The rule of section 2701(e)(3) shall apply for purposes of determining the interests held by any individual.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1996—Subsec. (c)(3). Pub. L. 104–188 substituted “section 2701(e)(3)” for “section 2701(e)(3)(A)”.

Statutory Notes and Related Subsidiaries

Effective Date

of 1996 AmendmentAmendment 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.

§2704 Treatment of certain lapsing rights and restrictions