The Chapter 14 maze: a visual guide to secs. 2701-2704.

• Author: Weber, Richard P.

Chapter 14 of the Code (Secs. 2701--2704) was enacted to address perceived problems with estate freezes and similar transactions, through which significant amounts of wealth could otherwise be passed to family members without transfer taxes. Chapter 14 replaced Sec. 2036(c), which had been criticized as being overly broad and unworkable. Like its predecessor, Chapter 14 creates many traps for the unwary. Basically, Secs. 2701--2704 operate to revalue (upward) a gift whenever an interest that will appreciate in value is transferred to family members, while the donor retains an interest that will not appreciate.

Various events can trigger Chapter 14; generally, it applies when there has been a transfer that is ordinarily estate or gift taxable. However, situations that would not normally trigger either tax (e.g., joint purchases of property, sales of property for full and adequate consideration (especially between family members) and the lapse of certain rights) may also trigger Chapter 14 and the other transfer tax provisions. Conversely, a gift under the normal gift tax rules may be mitigated or eliminated because of prior taxation under Chapter 14. Likewise, any recapitalization of a corporation controlled by family members, or any situation in which a formula sets a stock price in a closely held, family-controlled corporation, must be examined in light of Chapter 14.

The flowcharts on pages 106--113 attempt to simplify the statute.(1) At a minimum, the flowcharts should allow a practitioner who does not specialize in the area to identify situations in which Chapter 14 may apply. The flowcharts should be consulted whenever there is a redistribution of wealth among family members.(2)

The flowcharts go through all four sections of Chapter 14 at a single pass, because more than one of the sections may apply to a given situation. However, since only one of the sections will apply in most cases, the flowcharts quickly take the user past the inapplicable sections and directly to the details of the applicable section(s). When Chapter 14 does not apply, a pass through Flowchart I will quickly establish that fact.

Readers are cautioned that the flowcharts should get them to the right answer for any particular case, but the results should be verified directly from the statutes and regulations. There is some inconsistency between the statutes and the regulations, however, as shown in the footnotes to the flowcharts. This will have to be resolved, but...