Chapter 14: lapsing rights....

• Author: Gardner, John C.
• Position: Brief Article

Sec. 2704(a) provides that if there is a lapse of any voting or liquidation right in connection with a family-controlled corporation or partnership, the lapse will be treated as a transfer for estate and gift tax purposes.

Sec. 2704 was enacted to prevent results similar to that in Harrison, TC Memo 1987-8. In Harrison, the decedent and his children each held a general and limited partnership interest immediately before the decedent's death. The Tax Court held that the decedent's right as a general partner to liquidate the partnership, which lapsed at death, could not be taken into account in determining the value of the decedent's limited partnership interest. Thus, the value of the decedent's interest was determined to be less than its value immediately before the decedent's death or its value in the hands of his family immediately after his death.

Sec. 2704(b) provides that certain restrictions on liquidation are disregarded in valuing transferred interests in an entity. The amount of the transfer is the value of all interests in the entity before the lapse over the value of the interests after the lapse.

Prop. Regs. Sec. 25.2704-1(f)(2)(ii) provides that, in case of a lapse during life, the value of any consideration received by the holder of the interests...