26 U.S.C. § 2704

Treatment of certain lapsing rights and restrictions

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(a) Treatment of lapsed voting or liquidation rights(1) In generalFor 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 transferFor 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 generalFor 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 restrictionFor 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) ExceptionsThe 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.

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

(2) Member of the familyThe 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, § 11602(a), Nov. 5, 1990, 104 Stat. 1388–498; amended Pub. L. 104–188, title I, § 1702(f)(3)(C), Aug. 20, 1996, 110 Stat. 1871.)Editorial NotesAmendments

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

Statutory Notes and Related SubsidiariesEffective 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.

Notes of Decisions

Cited in 8 cases, 1931–2012 · leading case: Est. of Smith v. United States, 103 Fed. Cl. 533 (Fed. Cl. 2012).

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Est. of Smith v. United States, 103 Fed. Cl. 533 (Fed. Cl. 2012). · cites it 61× “The parties have stipulated to two different fair market values for the relevant shares of stock depending on whether 26 U.S.C. § 2704 (2006) applies, and have agreed to the fair market value of the real property at issue owned by Falcons Nest I.”

Sloan v. Comm'r of Internal Revenue, 63 F.2d 666 (9th Cir. 1933). · cites it 2× “On March 15, 1929, the trustees executed and caused to be filed with the Collector of Internal Revenue at Los Angeles and with the revenue agent in charge at the same city, an election to be taxed for the years 1923, 1924 and 1925 as a trust under the provisions of section 704…”

Comm'r of Internal Revenue v. Brouillard, 70 F.2d 154 (10th Cir. 1934). “The trustee filed notice in 1929 of election to have the organization taxed as a trust for the years 1925, 1926 and 1927, as provided for in section 704 (b) of the Revenue Act of 1928 (26 USCA § 2704 (b). The Commissioner determined that at all times the enterprise was taxable…”

Lansdowne Realty Trust v. Comm'r of Int. Rev., 50 F.2d 56 (1st Cir. 1931). “227 , 252), § 2 (a) (2) of 1924 and 1926, and section 230 of the Revenue Acts of 1921, 1924, and 1926 (26 USCA §§ 1262 (a) (2), 981 note), and section 704 (a) of the Revenue Act of 1928, 26 USCA § 2704 (a). The question is whether the petitioner, a Massachusetts trust, is an…”

Joseph Stern v. United States, 260 F.2d 365 (6th Cir. 1958). “The single issue presented is whether or not the trial judge abused'his discretion in denying the motion of appellant [who had been convicted of and sentenced for violation of the Anti-Narcotic Laws of the United States ( 26 U.S.C.A. § 2704 and 21 U.S.C.A. § 174 )] for a new…”

Morrissey v. Comm'r, 74 F.2d 803 (9th Cir. 1935). “Congress thereafter recognized and validated this change in the ruling by section 704 (a) of the Revenue Act of 1928 (26 US CA § 2704 (a); the force of such change being pointed out in Sloan v.”

Comm'r of Internal Revenue v. Neal, 65 F.2d 761 (1st Cir. 1933). “I doubt whether a specific ruling can be said to be “reversed” or “revoked” under section 704 (a), Revenue Act 1928 (26 US CA § 2704 (a), (which is quoted in the majority opinion), by a change in the general practice or views of the Department, even though such change be known…”

Gray v. Hopkins, 68 F.2d 561 (5th Cir. 1934). “880 (26 US CA § 2704 (a), in support of his position that the Beacon Refining Company is taxable as a trust rather than as an association.”

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