§ 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—
(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,
(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.
(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—
(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.
(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—
(c)
Distribution and other rights; qualified payments
For purposes of this section—
(1)
Distribution right
(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
(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),
(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.
(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):
(2)
Amount of increase
(A)
In general
The amount of the increase determined under this paragraph shall be the excess (if any) of—
(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—
(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.
(3)
Taxable events
For purposes of this subsection—
(A)
In general
The term “taxable event” means any of the following:
(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—
(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.
(e)
Other definitions and rules
For purposes of this section—
(2)
Applicable family member
The term “applicable family member” means, with respect to any transferor—
(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—
(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).