[Federal Register Volume 81, Number 150 (Thursday, August 4, 2016)]
[Proposed Rules]
[Pages 51413-51425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18370]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 25
[REG-163113-02]
RIN 1545-BB71
Estate, Gift, and Generation-Skipping Transfer Taxes;
Restrictions on Liquidation of an Interest
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations concerning the
valuation of interests in corporations and partnerships for estate,
gift, and generation-skipping transfer (GST) tax purposes.
Specifically, these proposed regulations concern the treatment of
certain lapsing rights and restrictions on liquidation in determining
the value of the transferred interests. These proposed regulations
affect certain transferors of interests in corporations and
partnerships and are necessary to prevent the undervaluation of such
transferred interests.
DATES: Written and electronic comments must be received by November 2,
2016. Outlines of topics to be discussed at the public hearing
scheduled for December 1, 2016, must be received by November 2, 2016.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-163113-02), Room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions also may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:PA:LPD:PR
(REG-163113-02), Courier's Desk, Internal Revenue
[[Page 51414]]
Service, 1111 Constitution Avenue NW., Washington, DC 20224, or sent
electronically via the Federal eRulemaking portal at
www.regulations.gov (IRS REG-163113-02). The public hearing will be
held in the Auditorium, Internal Revenue Service Building, 1111
Constitution Avenue NW., Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
John D. MacEachen, (202) 317-6859; concerning submissions of comments,
the hearing, and/or to be placed on the building access list to attend
the hearing, Regina L. Johnson at (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 2704 of the Internal Revenue Code provides special
valuation rules for purposes of subtitle B (relating to estate, gift,
and GST taxes) for valuing intra-family transfers of interests in
corporations and partnerships subject to lapsing voting or liquidation
rights and restrictions on liquidation. Lapses of voting or liquidation
rights are treated as a transfer of the excess of the fair market value
of all interests held by the transferor, determined as if the voting or
liquidation rights were nonlapsing, over the fair market value of such
interests after the lapse. Certain restrictions on liquidation are
disregarded in determining the fair market value of the transferred
interest. The legislative history of section 2704 states that the
provision is intended, in part, to prevent results similar to that in
Estate of Harrison v. Commissioner, T.C. Memo. 1987-8. Informal S. Rep.
on S. 3209, 136 Cong. Rec. S15629-4 (October 18, 1990); H.R. Conf. Rep.
No. 101-964, 2374, 2842 (October 27, 1990).
In Harrison, the decedent and two of his children each held a
general partner interest in a partnership immediately before the
decedent's death. The decedent also held all of the limited partner
interests in the partnership. Because any general partner could
liquidate the partnership during life, each general partner could cause
all partners to obtain the full value of such partner's partnership
interests. A general partner's right to liquidate the partnership
lapsed on the death of that partner. In determining the estate tax
value of the decedent's limited partner interest, the court concluded
that the right of the decedent to liquidate the partnership (and thus
readily obtain the full value of the limited partner interest) could
not be taken into account because that right lapsed at death. As a
result, the Court determined the value for transfer tax purposes of the
limited partner interest to be less than its value either in the hands
of the decedent immediately before death or in the hands of his family
(the other general partners) immediately after death.
Section 2704(a)(1) provides generally that, if there is a lapse of
any voting or liquidation right in a corporation or a partnership and
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, whichever is applicable. The amount of the transfer is
the fair market value of all interests held by the individual
immediately before the lapse (determined as if the voting and
liquidation rights were nonlapsing) over the fair market value of such
interests after the lapse.
Section 25.2704-1(a)(2)(v) of the current Gift Tax Regulations
defines a liquidation right as the right or ability, including by
reason of aggregate voting power, to compel the entity to acquire all
or a portion of the holder's equity interest in the entity, whether or
not its exercise would result in the complete liquidation of the
entity.
Section 25.2704-1(c)(1) provides a rule that a lapse of a
liquidation right occurs at the time a presently exercisable
liquidation right is restricted or eliminated. However, under Sec.
25.2704-1(c)(1), a transfer of an interest that results in the lapse of
a liquidation right generally is not subject to this rule if the rights
with respect to the transferred interest are not restricted or
eliminated. The effect of this exception is that the inter vivos
transfer of a minority interest by the holder of an interest with the
aggregate voting power to compel the entity to acquire the holder's
interest is not treated as a lapse even though the transfer results in
the loss of the transferor's presently exercisable liquidation right.
The Treasury Department and the IRS, however, believe that this
exception should not apply when the inter vivos transfer that results
in the loss of the power to liquidate occurs on the decedent's
deathbed. Cf. Estate of Murphy v. Commissioner, T.C. Memo. 1990-472
(rejecting ``attempts to avoid taxation of the control value of stock
holdings through bifurcation of the blocks''). Such transfers generally
have minimal economic effects, but result in a transfer tax value that
is less than the value of the interest either in the hands of the
decedent prior to death or in the hands of the decedent's family
immediately after death. See Harrison, supra. The enactment of section
2704 was intended to prevent this result. See Informal S. Rep. on S.
3209, supra; H.R. Conf. Rep. No. 101-964, supra. See also section
2704(a)(3) (conferring on the Secretary broad regulatory authority to
apply section 2704(a) to the lapse of rights similar to voting and
liquidation rights). The Treasury Department and the IRS have concluded
that the regulatory exception created in Sec. 25.2704-1(c)(1) should
apply only to transfers occurring more than three years before death,
where the loss of control over liquidation is likely to have a more
substantive effect. A bright-line test will avoid the fact-intensive
inquiry underlying a determination of a donor's subjective motive which
is administratively burdensome for both taxpayers and the IRS. Cf.
section 2035(a) (replacing the contemplation of death presumption of
prior law with a bright-line, three-year test). Accordingly, the
proposed regulations treat transfers occurring within three years of
death that result in the lapse of a liquidation right as transfers
occurring at death for purposes of section 2704(a).
Section 2704(b)(1) provides generally that, if a transferor
transfers an interest in a corporation or partnership to (or for the
benefit of) a member of the transferor's family, and the transferor and
members of the transferor's family hold, immediately before the
transfer, control of the entity, any ``applicable restriction'' is
disregarded in valuing the transferred interest. Under section
2704(b)(2), an applicable restriction is defined as a restriction that
effectively limits the ability of the entity to liquidate, but which,
after the transfer, either in whole or in part, will lapse or may be
removed by the transferor or the transferor's family, either alone or
collectively. Section 2704(b)(3)(B) excepts from the definition of an
applicable restriction any restriction ``imposed, or required to be
imposed, by any Federal or State law.''
Section 2704(b)(4) provides that the Secretary may by regulations
provide that other restrictions shall be disregarded in determining the
value of any interest in a corporation or a partnership transferred to
a member of the transferor's family if the restriction has the effect
of reducing the value of the transferred interest for transfer tax
purposes but does not ultimately reduce the value of the interest to
the transferee.
Section 25.2704-2(b) provides, in part, that an applicable
restriction ``is a limitation on the ability to liquidate the entity
(in whole or in part) that is more restrictive than the limitations
that would apply under the State law
[[Page 51415]]
generally applicable to the entity in the absence of the restriction.''
The Treasury Department and the IRS have determined that the
current regulations have been rendered substantially ineffective in
implementing the purpose and intent of the statute by changes in state
laws and by other subsequent developments. First, courts have concluded
that, under the current regulations, section 2704(b) applies only to
restrictions on the ability to liquidate an entire entity, and not to
restrictions on the ability to liquidate a transferred interest in that
entity. Kerr v. Commissioner, 113 T.C. 449, 473 (1999), aff'd, 292
F.3rd 490 (5th Cir. 2002). Thus, a restriction on the ability to
liquidate an individual interest is not an applicable restriction under
the current regulations.
Second, as noted above, the current regulations except from the
definition of an applicable restriction a restriction on liquidation
that is no more restrictive than that of the state law that would apply
in the absence of the restriction. The Tax Court viewed this as a
regulatory expansion of the statutory exception to the application of
section 2704(b) contained in section 2704(b)(3)(B) that excepts ``any
restriction imposed, or required to be imposed, by any Federal or State
law.'' Kerr, 113 T.C. at 472. Since the promulgation of the current
regulations, many state statutes governing limited partnerships have
been revised to allow liquidation of the entity only on the unanimous
vote of all owners (unless provided otherwise in the partnership
agreement), and to eliminate the statutory default provision that had
allowed a limited partner to liquidate his or her limited partner
interest. Instead, statutes in these jurisdictions typically now
provide that a limited partner may not withdraw from the partnership
unless the partnership agreement provides otherwise. See, e.g., Tex.
Bus. Orgs. Ann. Sec. 153.110 (West 2016) (limited partner may withdraw
as specified in the partnership agreement); Uniform Limited Partnership
Act (2001) Sec. 601(a), 6A U.L.A. 348, 448 (Supp. 2015) (limited
partner has no right to withdraw before completion of the winding up of
the partnership). Further, other state statutes have been revised to
create elective restrictions on liquidation. See, e.g., Nev. Rev. Stat.
Sec. 87A.427 (2016) (limited partnership electing to be restricted
limited partnership may not make any distributions for a 10-year
period). Each of these statutes is designed to be at least as
restrictive as the maximum restriction on liquidation that could be
imposed in a partnership agreement. The result is that the provisions
of a partnership agreement restricting liquidation generally fall
within the regulatory exception for restrictions that are no more
restrictive than those under state law, and thus do not constitute
applicable restrictions under the current regulations.
Third, taxpayers have attempted to avoid the application of section
2704(b) through the transfer of a partnership interest to an assignee
rather than to a partner. Again relying on the regulatory exception for
restrictions that are no more restrictive than those under state law,
and the fact that an assignee is allocated partnership income, gain,
loss, etc., but does not have (and thus may not exercise) the rights or
powers of a partner, taxpayers argue that an assignee's inability to
cause the partnership to liquidate his or her partnership interest is
no greater a restriction than that imposed upon assignees under state
law. Kerr, 113 T.C. at 463-64; Estate of Jones v. Commissioner, 116
T.C. 121, 129-30 (2001). Taxpayers thus argue that the assignee status
of the transferred interest is not an applicable restriction.
Finally, taxpayers have avoided the application of section 2704(b)
through the transfer of a nominal partnership interest to a nonfamily
member, such as a charity or an employee, to ensure that the family
alone does not have the power to remove a restriction. Kerr, 292 F.3rd
at 494.
As the Tax Court noted in Kerr, Congress granted the Secretary
broad discretion in section 2704(b)(4) to promulgate regulations
identifying restrictions not covered by section 2704(b) that
nevertheless should be disregarded for transfer tax valuation purposes.
113 T.C. at 474. The Treasury Department and the IRS have concluded
that, as was recognized by Congress when enacting section 2704(b),
there are additional restrictions that may affect adversely the
transfer tax value of an interest but that do not reduce the value of
the interest to the family-member transferee, and thus should be
disregarded for transfer tax valuation purposes. H.R. Conf. Rep. No.
101-964, supra, at 1138. The Treasury Department and the IRS have
determined that such restrictions include: (a) A restriction on the
ability to liquidate the transferred interest; and (b) any restrictions
attendant upon the nature or extent of the property to be received in
exchange for the liquidated interest, or the timing of the payment of
that property.
Further, the Treasury Department and the IRS have concluded that
the grant of an insubstantial interest in the entity to a nonfamily
member should not preclude the application of section 2704(b) because,
in reality, such nonfamily member interest generally does not constrain
the family's ability to remove a restriction on the liquidation of an
individual interest. Cf. Kerr, 292 F.3rd at 494 (noting that a charity
receiving a partnership interest would ``convert its interests into
cash as soon as possible, so long as it believed the transaction to be
in its best interest and that it would receive fair market value for
its interest''). The interest of such nonfamily members does not affect
the family's control of the entity, but rather, when combined with a
requirement that all holders approve liquidation, is designed to reduce
the transfer tax value of the family-held interests while not
ultimately reducing the value of those interests to the family member
transferees. The enactment of section 2704 was intended to prevent this
result. See section 2704(b)(4) (conferring on the Secretary broad
regulatory authority to apply section 2704(b) to other restrictions if
the restriction has the effect of reducing the value of the transferred
interest for transfer tax purposes but does not ultimately reduce the
value of the interest to the transferee). The Treasury Department and
the IRS have concluded that the presence of a nonfamily-member interest
should be recognized only where the interest is an economically
substantial and longstanding one that is likely to have a more
substantive effect. A bright-line test will avoid the fact-intensive
inquiry underlying a determination of whether the interest of the
nonfamily member effectively constrains the family's ability to
liquidate the entity. Accordingly, the proposed regulations disregard
the interest held by a nonfamily member that has been held less than
three years before the date of the transfer, that constitutes less than
10 percent of the value of all of the equity interests, that when
combined with the interests of other nonfamily members constitutes less
than 20 percent of the value of all of the equity interests, or that
lacks a right to put the interest to the entity and receive a minimum
value.
Finally, since the promulgation of Sec. Sec. 301.7701-1 through
301.7701-3 of the Procedure and Administration Regulations (the check-
the-box regulations), an entity's classification for federal tax
purposes may differ substantially from the entity's structure or form
under local law. In addition, many taxpayers now utilize a limited
liability company (LLC) as the preferred entity to hold family assets
or business
[[Page 51416]]
interests. The Treasury Department and the IRS have concluded that the
regulations under section 2704 should be updated to reflect these
significant developments.
Explanation of Provisions
The proposed regulations would amend Sec. 25.2701-2 to address
what constitutes control of an LLC or other entity or arrangement that
is not a corporation, partnership, or limited partnership. The proposed
regulations would amend Sec. 25.2704-1 to address deathbed transfers
that result in the lapse of a liquidation right and to clarify the
treatment of a transfer that results in the creation of an assignee
interest. The proposed regulations would amend Sec. 25.2704-2 to
refine the definition of the term ``applicable restriction'' by
eliminating the comparison to the liquidation limitations of state law.
Further, the proposed regulations would add a new section, Sec.
25.2704-3, to address restrictions on the liquidation of an individual
interest in an entity and the effect of insubstantial interests held by
persons who are not members of the family.
Covered Entities
The proposed regulations would clarify, in Sec. Sec. 25.2704-1
through 25.2704-3, that section 2704 applies to corporations,
partnerships, LLC's, and other entities and arrangements that are
business entities within the meaning of Sec. 301.7701-2(a), regardless
of whether the entity or arrangement is domestic or foreign, regardless
of how the entity or arrangement is classified for other federal tax
purposes, and regardless of whether the entity or arrangement is
disregarded as an entity separate from its owner for other federal tax
purposes.
Classification of the Entity
Section 2704 speaks in terms of corporations and partnerships.
Under the proposed regulations, a corporation is any business entity
described in Sec. 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8),
an S corporation within the meaning of section 1361(a)(1), and a
qualified subchapter S subsidiary within the meaning of section
1361(b)(3)(B). For this purpose, a qualified subchapter S subsidiary is
treated as a corporation that is separate from its parent owner. For
most purposes under the proposed regulations, a partnership would be
any other business entity within the meaning of Sec. 301.7701-1(a),
regardless of how the entity is classified for federal tax purposes.
However, these proposed regulations address two situations in which
it is necessary to go beyond this division of entities into only the
two categories of corporation and partnership. These situations
(specifically, the test to determine control of an entity, and the test
to determine whether a restriction is imposed under state law) require
consideration of the differences among various types of business
entities under the local law under which those entities are created and
governed. As a result, for purposes of the test to determine control of
an entity and to determine whether a restriction is imposed under state
law, the proposed regulations would provide that in the case of any
business entity or arrangement that is not a corporation, the form of
the entity or arrangement would be determined under local law,
regardless of how it is classified for other federal tax purposes, and
regardless of whether it is disregarded as an entity separate from its
owner for other federal tax purposes. For this purpose, local law is
the law of the jurisdiction, whether domestic or foreign, under which
the entity or arrangement is created or organized. Thus, in applying
these two tests, there would be three types of entities: Corporations,
partnerships (including limited partnerships), and other business
entities (which would include LLCs that are not S corporations) as
determined under local law.
Control of the Entity
Section 2704(c)(1) incorporates the definition of control found in
section 2701(b)(2). Control of a corporation, partnership, or limited
partnership is defined in sections 2701(b)(2)(A) and (B). The proposed
regulations would clarify, in Sec. 25.2701-2, that control of an LLC
or of any other entity or arrangement that is not a corporation,
partnership, or limited partnership would constitute the holding of at
least 50 percent of either the capital or profits interests of the
entity or arrangement, or the holding of any equity interest with the
ability to cause the full or partial liquidation of the entity or
arrangement. Cf. section 2701(b)(2)(B)(ii) (defining control of a
limited partnership as including the holding of any interest as a
general partner). Further, for purposes of determining control, under
the attribution rules of existing Sec. 25.2701-6, an individual, the
individual's estate, and members of the individual's family are treated
as holding interests held indirectly through a corporation,
partnership, trust, or other entity.
Lapses Under Section 2704(a)
The proposed regulations would amend Sec. 25.2704-1(a) to confirm
that a transfer that results in the restriction or elimination of any
of the rights or powers associated with the transferred interest (an
assignee interest) is treated as a lapse within the meaning of section
2704(a). This is the case regardless of whether the right or power is
exercisable by the transferor after the transfer because the statute is
concerned with the lapse of rights associated with the transferred
interest. Whether the lapse is of a voting or liquidation right is
determined under the general rules of section 25.2704-1.
The proposed regulations also would amend Sec. 25.2704-1(c)(1) to
narrow the exception in the definition of a lapse of a liquidation
right to transfers occurring three years or more before the
transferor's death that do not restrict or eliminate the rights
associated with the ownership of the transferred interest. In addition,
the proposed regulations would amend Sec. 25.2704-1(c)(2)(i)(B) to
conform the existing provision for testing the family's ability to
liquidate an interest with the proposed elimination of the comparison
with local law, to clarify that the manner in which liquidation may be
achieved is irrelevant, and to conform with the proposed provision for
disregarding certain nonfamily-member interests in testing the family's
ability to remove a restriction in proposed Sec. 25.2704-3 regarding
disregarded restrictions.
Applicable Restrictions Under Section 2704(b)
The proposed regulations would remove the exception in Sec.
25.2704-2(b) that limits the definition of applicable restriction to
limitations that are more restrictive than the limitations that would
apply in the absence of the restriction under the local law generally
applicable to the entity. As noted above, this exception is not
consistent with section 2704(b) to the extent that the transferor and
family members have the power to avoid any statutory rule. The proposed
regulations also would revise Sec. 25.2704-2(b) to provide that an
applicable restriction does include a restriction that is imposed under
the terms of the governing documents, as well as a restriction that is
imposed under a local law regardless of whether that restriction may be
superseded by or pursuant to the governing documents or otherwise. In
applying this particular exception to the definition of an applicable
restriction, this proposed rule is intended to ensure that a
restriction that is not imposed or required to be imposed by federal or
state law is disregarded without regard to its source.
Further, with regard to the exception for restrictions ``imposed,
or required to
[[Page 51417]]
be imposed, by any Federal or State law,'' in section 2704(b)(3)(B),
the proposed regulations would clarify that the terms ``federal'' and
``state'' refer only to the United States or any state (including the
District of Columbia (see section 7701(a)(10)), but do not include any
other jurisdiction.
A restriction is imposed or required to be imposed by law if the
restriction cannot be removed or overridden and it is mandated by the
applicable law, is required to be included in the governing documents,
or otherwise is made mandatory. In addition, a restriction imposed by a
state law, even if that restriction may not be removed or overridden
directly or indirectly, nevertheless would constitute an applicable
restriction in two situations. In each situation, although the statute
itself is mandatory and cannot be overridden, another statute is
available to be used for the entity's governing law that does not
require the mandatory restriction, thus in effect making the
purportedly mandatory provision elective. The first situation is that
in which the state law is limited in its application to certain narrow
classes of entities, particularly those types of entities most likely
to be subject to transfers described in section 2704, that is, family-
controlled entities. The second situation is that in which, although
the state law under which the entity was created imposed a mandatory
restriction that could not be removed or overridden, either at the time
the entity was organized or at some subsequent time, that state's law
also provided an optional provision or an alternative statute for the
creation and governance of that same type of entity that did not
mandate the restriction. Thus, an optional provision is one for the
same category of entity that did not include the restriction or that
allowed it to be removed or overridden, or that made the restriction
optional, or permitted the restriction to be superseded, whether by the
entity's governing documents or otherwise. For purposes of determining
whether a restriction is imposed on an entity under state law, there
would be only three types of entities, specifically, the three
categories of entities described in Sec. 25.2701-2(b)(5) of the
proposed regulations: Corporations; partnerships (including limited
partnerships); and other business entities. A similar proposed rule
applies to the additional restrictions discussed later in this
preamble.
If an applicable restriction is disregarded, the fair market value
of the transferred interest is determined under generally applicable
valuation principles as if the restriction does not exist (that is, as
if the governing documents and the local law are silent on the
question), and thus, there is deemed to be no such restriction on
liquidation of the entity.
Disregarded Restrictions
A new class of restrictions is described in the proposed
regulations that would be disregarded, described as ``disregarded
restrictions.'' This class of restrictions is identified pursuant to
the authority contained in section 2704(b)(4). Note that, although it
may appear that sections 2703 and 2704(b) overlap, they do not. While
section 2703 and the corresponding regulations currently address
restrictions on the sale or use of individual interests in family-
controlled entities, the proposed regulations would address
restrictions on the liquidation or redemption of such interests.
Under Sec. 25.2704-3 of the proposed regulations, in the case of a
family-controlled entity, any restriction described below on a
shareholder's, partner's, member's, or other owner's right to liquidate
his or her interest in the entity will be disregarded if the
restriction will lapse at any time after the transfer, or if the
transferor, or the transferor and family members, without regard to
certain interests held by nonfamily members, may remove or override the
restriction. Under the proposed regulations, such a disregarded
restriction includes one that: (a) Limits the ability of the holder of
the interest to liquidate the interest; (b) limits the liquidation
proceeds to an amount that is less than a minimum value; (c) defers the
payment of the liquidation proceeds for more than six months; or (d)
permits the payment of the liquidation proceeds in any manner other
than in cash or other property, other than certain notes.
``Minimum value'' is the interest's share of the net value of the
entity on the date of liquidation or redemption. The net value of the
entity is the fair market value, as determined under section 2031 or
2512 and the applicable regulations, of the property held by the
entity, reduced by the outstanding obligations of the entity. Solely
for purposes of determining minimum value, the only outstanding
obligations of the entity that may be taken into account are those that
would be allowable (if paid) as deductions under section 2053 if those
obligations instead were claims against an estate. For example, and
subject to the foregoing limitation on outstanding obligations, if the
entity holds an operating business, the rules of Sec. 20.2031-2(f)(2)
or 20.2031-3 apply in the case of a testamentary transfer and the rules
of Sec. 25.2512-2(f)(2) or 25.2512-3 apply in the case of an inter
vivos transfer. The minimum value of the interest is the net value of
the entity multiplied by the interest's share of the entity. For this
purpose, the interest's share is determined by taking into account any
capital, profits, and other rights inherent in the interest in the
entity.
A disregarded restriction includes limitations on the time and
manner of payment of the liquidation proceeds. Such limitations include
provisions permitting deferral of full payment beyond six months or
permitting payment in any manner other than in cash or property. For
this purpose, the term ``property'' does not include a note or other
obligation issued directly or indirectly by the entity, other holders
of an interest in the entity, or persons related to either. An
exception is made for the note of an entity engaged in an active trade
or business to the extent that (a) the liquidation proceeds are not
attributable to passive assets within the meaning of section
6166(b)(9)(B), and (b) the note is adequately secured, requires
periodic payments on a non-deferred basis, is issued at market interest
rates, and has a fair market value (when discounted to present value)
equal to the liquidation proceeds. A fair market value determination
assumes a cash sale. See Section 2 of Rev. Rul. 59-60, 1959-1 C.B. 237
(defining fair market value and stating that ``[c]ourt decisions
frequently state in addition that the hypothetical buyer and seller are
assumed to be able, as well as willing to trade . . .''). Thus, in the
absence of immediate payment of the liquidation proceeds, the fair
market value of any note falling within this exception must equal the
fair market value of the liquidation proceeds on the date of
liquidation or redemption.
Exceptions that apply to applicable restrictions under the current
and these proposed regulations also apply to this new class of
disregarded restrictions. One of the exceptions applicable to the
definition of a disregarded restriction applies if (a) each holder of
an interest in the entity has an enforceable ``put'' right to receive,
on liquidation or redemption of the holder's interest, cash and/or
other property with a value that is at least equal to the minimum value
previously described, (b) the full amount of such cash and other
property must be paid within six months after the holder gives notice
to the entity of the holder's intent to liquidate any part or all of
the holder's interest and/or withdraw from the entity, and (c) such
other property does not include a note or other obligation issued
directly or
[[Page 51418]]
indirectly by the entity, by one or more holders of interests in the
entity, or by a person related either to the entity or to any holder of
an interest in the entity. However, in the case of an entity engaged in
an active trade or business, at least 60 percent of whose value
consists of the non-passive assets of that trade or business, and to
the extent that the liquidation proceeds are not attributable to
passive assets within the meaning of section 6166(b)(9)(B), such
proceeds may include a note or other obligation if such note is
adequately secured, requires periodic payments on a non-deferred basis,
is issued at market interest rates, and has a fair market value on the
date of the liquidation or redemption equal to the liquidation
proceeds. A similar exception is made to the definition of an
applicable restriction in proposed Sec. 25.2704-2(b)(4).
In determining whether the transferor and/or the transferor's
family has the ability to remove a restriction included in this new
class of disregarded restrictions, any interest in the entity held by a
person who is not a member of the transferor's family is disregarded
if, at the time of the transfer, the interest: (a) Has been held by
such person for less than three years; (b) constitutes less than 10
percent of the value of all of the equity interests in a corporation,
or constitutes less than 10 percent of the capital and profits
interests in a business entity described in Sec. 301.7701-2(a) other
than a corporation (for example, less than a 10-percent interest in the
capital and profits of a partnership); (c) when combined with the
interests of all other persons who are not members of the transferor's
family, constitutes less than 20 percent of the value of all of the
equity interests in a corporation, or constitutes less than 20 percent
of the capital and profits interests in a business entity other than a
corporation (for example, less than a 20-percent interest in the
capital and profits of a partnership); or (d) any such person, as the
owner of an interest, does not have an enforceable right to receive in
exchange for such interest, on no more than six months' prior notice,
the minimum value referred to in the definition of a disregarded
restriction. If an interest is disregarded, the determination of
whether the family has the ability to remove the restriction will be
made assuming that the remaining interests are the sole interests in
the entity.
Finally, if a restriction is disregarded under proposed Sec.
25.2704-3, the fair market value of the interest in the entity is
determined assuming that the disregarded restriction did not exist,
either in the governing documents or applicable law. Fair market value
is determined under generally accepted valuation principles, including
any appropriate discounts or premiums, subject to the assumptions
described in this paragraph.
Coordination With Marital and Charitable Deductions
Section 2704(b) applies to intra-family transfers for all purposes
of subtitle B relating to estate, gift and GST taxes. Therefore, to the
extent that an interest qualifies for the gift or estate tax marital
deduction and must be valued by taking into account the special
valuation assumptions of section 2704(b), the same value generally will
apply in computing the marital deduction attributable to that interest.
The value of the estate tax marital deduction may be further affected,
however, by other factors justifying a different value, such as the
application of a control premium. See, e.g., Estate of Chenoweth v.
Commissioner, 88 T.C. 1577 (1987).
Section 2704(b) does not apply to transfers to nonfamily members
and thus has no application in valuing an interest passing to charity
or to a person other than a family member. If part of an entity
interest includible in the gross estate passes to family members and
part of that interest passes to nonfamily members, and if (taking into
account the proposed rules regarding the treatment of certain interests
held by nonfamily members) the part passing to the decedent's family
members is valued under section 2704(b), then the proposed regulations
provide that the part passing to the family members is treated as a
property interest separate from the part passing to nonfamily members.
The fair market value of the part passing to the family members is
determined taking into account the special valuation assumptions of
section 2704(b), as well as any other relevant factors, such as those
supporting a control premium. The fair market value of the part passing
to the nonfamily member(s) is determined in a similar manner, but
without the special valuation assumptions of section 2704(b). Thus, if
the sole nonfamily member receiving an interest is a charity, the
interest generally will have the same value for both estate tax
inclusion and deduction purposes. If the interest passing to nonfamily
members, however, is divided between charities and other nonfamily
members, additional considerations (not prescribed by section 2704) may
apply, resulting in a different value for charitable deduction
purposes. See, e.g., Ahmanson Foundation v. United States, 674 F.2d 761
(9th Cir. 1981).
Effective Dates
The amendments to Sec. 25.2701-2 are proposed to be effective on
and after the date of publication of a Treasury decision adopting these
rules as final regulations in the Federal Register. The amendments to
Sec. 25.2704-1 are proposed to apply to lapses of rights created after
October 8, 1990, occurring on or after the date these regulations are
published as final regulations in the Federal Register. The amendments
to Sec. 25.2704-2 are proposed to apply to transfers of property
subject to restrictions created after October 8, 1990, occurring on or
after the date these regulations are published as final regulations in
the Federal Register. Section 25.2704-3 is proposed to apply to
transfers of property subject to restrictions created after October 8,
1990, occurring 30 or more days after the date these regulations are
published as final regulations in the Federal Register.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required. Pursuant to the Regulatory Flexibility Act (5 U.S.C.
chapter 6), it is hereby certified that this regulation will not have a
significant economic impact on a substantial number of small entities.
The proposed regulations affect the transfer tax liability of
individuals who transfer an interest in certain closely held entities
and not the entities themselves. The proposed regulations do not affect
the structure of such entities, but only the assumptions under which
they are valued for federal transfer tax purposes. In addition, any
economic impact on entities affected by section 2704, large or small,
is derived from the operation of the statute, or its intended
application, and not from the proposed regulations in this notice of
proposed rulemaking. Accordingly, a regulatory flexibility analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
this regulation has been submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8)
[[Page 51419]]
copies) or electronic comments that are submitted timely (in the manner
described in ADDRESSES) to the IRS. The Treasury Department and the IRS
request comments on all aspects of the proposed regulations. All
comments will be available at www.regulations.gov, or upon request.
A public hearing on these proposed regulations has been scheduled
for December 1, 2016, beginning at 10 a.m. in the Auditorium, Internal
Revenue Building, 1111 Constitution Avenue NW., Washington, DC 20224.
Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present
photo identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For
information about having your name placed on the building access list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit comments by
November 2, 2016, and submit an outline of the topics to be discussed
and the time to be devoted to each topic (signed original and eight (8)
copies) by November 2, 2016.
A period of 10 minutes will be allotted to each person for making
comments. Copies of the agenda will be available free of charge at the
hearing.
Drafting Information
The principal author of these proposed regulations is John D.
MacEachen, Office of the Associate Chief Counsel (Passthroughs and
Special Industries). Other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 25
Gift taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 25 is proposed to be amended as follows:
PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954
0
Paragraph 1. The authority citation for part 25 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Section 25.2701-2 also issued under 26 U.S.C. 2701(e).
Section 25.2704-1 also issued under 26 U.S.C. 2704(a).
Sections 25.2704-2 and 25.2704-3 also issued under 26 U.S.C.
2704(b).
* * * * *
0
Par. 2. Section 25.2701-2 is amended as follows:
0
1. In paragraph (b)(5)(i), the first sentence is revised and five
sentences are added before the last sentence.
0
2. Paragraph (b)(5)(iv) is added.
The revision and additions read as follows:
Sec. 25.2701-2 Special valuation rules for applicable retained
interests.
* * * * *
(b) * * *
(5) * * *
(i) * * * For purposes of section 2701, a controlled entity is a
corporation, partnership, or any other entity or arrangement that is a
business entity within the meaning of Sec. 301.7701-2(a) of this
chapter controlled, immediately before a transfer, by the transferor,
applicable family members, and/or any lineal descendants of the parents
of the transferor or the transferor's spouse. The form of the entity
determines the applicable test for control. For purposes of determining
the form of the entity, any business entity described in Sec.
301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) of this chapter, an S
corporation within the meaning of section 1361(a)(1), and a qualified
subchapter S subsidiary within the meaning of section 1361(b)(3)(B) is
a corporation. For this purpose, a qualified subchapter S subsidiary is
treated as a corporation separate from its parent corporation. In the
case of any business entity that is not a corporation under these
provisions, the form of the entity is determined under local law,
regardless of how the entity is classified for federal tax purposes or
whether it is disregarded as an entity separate from its owner for
federal tax purposes. For this purpose, local law is the law of the
jurisdiction, whether domestic or foreign, under whose laws the entity
is created or organized. * * *
* * * * *
(iv) Other business entities. In the case of any entity or
arrangement that is not a corporation, partnership, or limited
partnership, control means the holding of at least 50 percent of either
the capital interests or the profits interests in the entity or
arrangement. In addition, control means the holding of any equity
interest with the ability to cause the liquidation of the entity or
arrangement in whole or in part.
* * * * *
0
Par. 3. Section 25.2701-8 is amended as follows:
0
1. The existing text is designated as paragraph (a).
0
2. The first sentence of newly designated paragraph (a) is revised and
paragraph (b) is added.
The revision and addition reads as follows:
Sec. 25.2701-8 Effective dates.
(a) Except as provided in paragraph (b) of this section, Sec. Sec.
25.2701-1 through 25.2701-4 and Sec. Sec. 25.2701-6 and 25.2701-7 are
effective as of January 28, 1992. * * *
(b) The first six sentences of Sec. 25.2701-2(b)(5)(i) and (iv)
are effective on the date these regulations are published as final
regulations in the Federal Register.
0
Par. 4. Section 25.2704-1 is amended as follows:
0
1. In paragraph (a)(1), the first two sentences are revised and four
sentences are added before the third sentence.
0
2. In paragraph (a)(2)(i), a sentence is added at the end.
0
3. Paragraph (a)(2)(iii) is removed.
0
4. Paragraphs (a)(2)(iv) through (vi) are redesignated as paragraphs
(a)(2)(iii) through (v), respectively.
0
5. In newly designated paragraph (a)(2)(iii), a sentence is added
before the third sentence.
0
6. Paragraph (a)(4) is revised.
0
7. Paragraph (a)(5) is added.
0
8. In paragraph (c)(1), the second sentence is revised and a sentence
is added at the end.
0
9. Paragraph (c)(2)(i)(B) is revised.
0
10. In paragraph (f) Example 4, the third and fourth sentences are
revised and a sentence is added at the end.
0
11. In paragraph (f) Example 6, the third sentence is removed.
0
12. In paragraph (f) Example 7, the third and fourth sentences are
revised and a sentence is added at the end.
The revisions and additions read as follows:
Sec. 25.2704-1 Lapse of certain rights.
(a) * * *
(1) * * * For purposes of subtitle B (relating to estate, gift, and
generation-skipping transfer taxes), the lapse of a voting or a
liquidation right in a corporation or a partnership (an entity),
whether domestic or foreign, is a transfer by the individual directly
or indirectly holding the right immediately prior to its lapse (the
holder) to the extent provided in paragraphs (b) and (c) of this
section. This section applies only if the entity is controlled by the
holder and/or members of the holder's family immediately before and
after the lapse. For purposes of this section, a
[[Page 51420]]
corporation is any business entity described in Sec. 301.7701-2(b)(1),
(3), (4), (5), (6), (7), or (8) of this chapter, an S corporation
within the meaning of section 1361(a)(1), and a qualified subchapter S
subsidiary within the meaning of section 1361(b)(3)(B). For this
purpose, a qualified subchapter S subsidiary is treated as a
corporation separate from its parent corporation. A partnership is any
other business entity within the meaning of Sec. 301.7701-2(a) of this
chapter regardless of how that entity is classified for federal tax
purposes. Thus, for example, the term partnership includes a limited
liability company that is not an S corporation, whether or not it is
disregarded as an entity separate from its owner for federal tax
purposes. * * *
(2) * * *
(i) * * * For purposes of determining whether the group consisting
of the holder, the holder's estate and members of the holder's family
control the entity, a member of the group is also treated as holding
any interest held indirectly by such member through a corporation,
partnership, trust, or other entity under the rules contained in Sec.
25.2701-6.
* * * * *
(iii) * * * In the case of a limited liability company, the right
of a member to participate in company management is a voting right. * *
*
* * * * *
(4) Source of right or lapse. A voting right or a liquidation right
may be conferred by or lapse by reason of local law, the governing
documents, an agreement, or otherwise. For this purpose, local law is
the law of the jurisdiction, whether domestic or foreign, that governs
voting or liquidation rights.
(5) Assignee interests. A transfer that results in the restriction
or elimination of the transferee's ability to exercise the voting or
liquidation rights that were associated with the interest while held by
the transferor is a lapse of those rights. For example, the transfer of
a partnership interest to an assignee that neither has nor may exercise
the voting or liquidation rights of a partner is a lapse of the voting
and liquidation rights associated with the transferred interest.
(c) * * *
(1) * * * Except as otherwise provided, a transfer of an interest
occurring more than three years before the transferor's death that
results in the lapse of a voting or liquidation right is not subject to
this section if the rights with respect to the transferred interest are
not restricted or eliminated. * * * The lapse of a voting or
liquidation right as a result of the transfer of an interest within
three years of the transferor's death is treated as a lapse occurring
on the transferor's date of death, includible in the gross estate
pursuant to section 2704(a).
(2) * * *
(i) * * *
(B) Ability to liquidate. Whether an interest can be liquidated
immediately after the lapse is determined under the local law generally
applicable to the entity, as modified by the governing documents of the
entity, but without regard to any restriction (in the governing
documents, applicable local law, or otherwise) described in section
2704(b) and the regulations thereunder. The manner in which the
interest may be liquidated is irrelevant for this purpose, whether by
voting, taking other action authorized by the governing documents or
applicable local law, revising the governing documents, merging the
entity with an entity whose governing documents permit liquidation of
the interest, terminating the entity, or otherwise. For purposes of
making this determination, an interest held by a person other than a
member of the holder's family (a nonfamily-member interest) may be
disregarded. Whether a nonfamily-member interest is disregarded is
determined under Sec. 25.2704-3(b)(4), applying that section as if, by
its terms, it also applies to the question of whether the holder (or
the holder's estate) and members of the holder's family may liquidate
an interest immediately after the lapse.
* * * * *
(f) * * *
Example 4. * * * More than three years before D's death, D
transfers one-half of D's stock in equal shares to D's three
children (14 percent each). Section 2704(a) does not apply to the
loss of D's ability to liquidate Y because the voting rights with
respect to the transferred shares are not restricted or eliminated
by reason of the transfer, and the transfer occurs more than three
years before D's death. However, had the transfers occurred within
three years of D's death, the transfers would have been treated as
the lapse of D's liquidation right occurring at D's death.
* * * * *
Example 7. * * * More than three years before D's death, D
transfers 30 shares of common stock to D's child. The transfer is
not a lapse of a liquidation right with respect to the common stock
because the voting rights that enabled D to liquidate prior to the
transfer are not restricted or eliminated, and the transfer occurs
more than three years before D's death. * * * However, had the
transfer occurred within three years of D's death, the transfer
would have been treated as the lapse of D's liquidation right with
respect to the common stock occurring at D's death.
0
Par. 5. Section 25.2704-2 is amended as follows:
0
1. Paragraphs (a) and (b) are revised.
0
2. Paragraphs (c) and (d) are designated as paragraphs (e) and (g),
respectively.
0
3. New paragraphs (c), (d), and (f) are added.
0
4. The first sentence of newly designated paragraph (e) is revised.
0
5. The third sentences of newly designated paragraph (g) Example 1. and
Example 3. are removed.
0
6. The third sentence of newly designated paragraph (g) Example 5. is
revised.
The revisions and additions read as follows:
Sec. 25.2704-2 Transfers subject to applicable restrictions.
(a) In general. For purposes of subtitle B (relating to estate,
gift, and generation-skipping transfer taxes), if an interest in a
corporation or a partnership (an entity), whether domestic or foreign,
is transferred to or for the benefit of a member of the transferor's
family, and the transferor and/or members of the transferor's family
control the entity immediately before the transfer, any applicable
restriction is disregarded in valuing the transferred interest. For
purposes of this section, a corporation is any business entity
described in Sec. 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) of
this chapter, an S corporation within the meaning of section
1361(a)(1), and a qualified subchapter S subsidiary within the meaning
of section 1361(b)(3)(B). For this purpose, a qualified subchapter S
subsidiary is treated as a corporation separate from its parent
corporation. A partnership is any other business entity within the
meaning of Sec. 301.7701-2(a) of this chapter, regardless of how that
entity is classified for federal tax purposes. Thus, for example, the
term partnership includes a limited liability company that is not an S
corporation, whether or not it is disregarded as an entity separate
from its owner for federal tax purposes.
(b) Applicable restriction defined--(1) In general. The term
applicable restriction means a limitation on the ability to liquidate
the entity, in whole or in part (as opposed to a particular holder's
interest in the entity), if, after the transfer, that limitation either
lapses or may be removed by the transferor, the transferor's estate,
and/or any member of the transferor's family, either alone or
collectively. See Sec. 25.2704-3 for restrictions on the ability to
liquidate a particular holder's interest in the entity.
(2) Source of limitation. An applicable restriction includes a
restriction that is
[[Page 51421]]
imposed under the terms of the governing documents (for example, the
corporation's by-laws, the partnership agreement, or other governing
documents), a buy-sell agreement, a redemption agreement, or an
assignment or deed of gift, or any other document, agreement, or
arrangement; and a restriction imposed under local law regardless of
whether that restriction may be superseded by or pursuant to the
governing documents or otherwise. For this purpose, local law is the
law of the jurisdiction, whether domestic or foreign, that governs the
applicability of the restriction. For an exception for restrictions
imposed or required to be imposed by federal or state law, see
paragraph (b)(4)(ii) of this section.
(3) Lapse or removal of limitation. A restriction is an applicable
restriction only to the extent that either the restriction by its terms
will lapse at any time after the transfer, or the restriction may be
removed after the transfer by any one or more members, either alone or
collectively, of the group consisting of the transferor, the
transferor's estate, and members of the transferor's family. For
purposes of determining whether the ability to remove the restriction
is held by any member(s) of this group, members are treated as holding
the interests attributed to them under the rules contained in Sec.
25.2701-6, in addition to interests held directly. The manner in which
the restriction may be removed is irrelevant for this purpose, whether
by voting, taking other action authorized by the governing documents or
applicable local law, removing the restriction from the governing
documents, revising the governing documents to override the restriction
prescribed under local law in the absence of a contrary provision in
the governing documents, merging the entity with an entity whose
governing documents do not contain the restriction, terminating the
entity, or otherwise.
(4) Exceptions. A restriction described in this paragraph (b)(4) is
not an applicable restriction.
(i) Commercially reasonable restriction. An applicable restriction
does not include a commercially reasonable restriction on liquidation
imposed by an unrelated person providing capital to the entity for the
entity's trade or business operations, whether in the form of debt or
equity. An unrelated person is any person whose relationship to the
transferor, the transferee, or any member of the family of either is
not described in section 267(b), provided that for purposes of this
section the term fiduciary of a trust as used in section 267(b) does
not include a bank as defined in section 581 that is publicly held.
(ii) Imposed by federal or state law. An applicable restriction
does not include a restriction imposed or required to be imposed by
federal or state law. For this purpose, federal or state law means the
laws of the United States, of any state thereof, or of the District of
Columbia, but does not include the laws of any other jurisdiction. A
provision of law that applies only in the absence of a contrary
provision in the governing documents or that may be superseded with
regard to a particular entity (whether by the shareholders, partners,
members and/or managers of the entity or otherwise) is not a
restriction that is imposed or required to be imposed by federal or
state law. A law that is limited in its application to certain narrow
classes of entities, particularly those types of entities (such as
family-controlled entities) most likely to be subject to transfers
described in section 2704, is not a restriction that is imposed or
required to be imposed by federal or state law. For example, a law
requiring a restriction that may not be removed or superseded and that
applies only to family-controlled entities that otherwise would be
subject to the rules of section 2704 is an applicable restriction. In
addition, a restriction is not imposed or required to be imposed by
federal or state law if that law also provides (either at the time the
entity was organized or at some subsequent time) an optional provision
that does not include the restriction or that allows it to be removed
or overridden, or that provides a different statute for the creation
and governance of that same type of entity that does not mandate the
restriction, makes the restriction optional, or permits the restriction
to be superseded, whether by the entity's governing documents or
otherwise. For purposes of determining the type of entity, there are
only three types of entities, specifically, the three categories of
entities described in Sec. 25.2701-2(b)(5): Corporations; partnerships
(including limited partnerships); and other business entities.
(iii) Certain rights under section 2703. An option, right to use
property, or agreement that is subject to section 2703 is not an
applicable restriction.
(iv) Put right of each holder. Any restriction that otherwise would
constitute an applicable restriction under this section will not be
considered an applicable restriction if each holder of an interest in
the entity has a put right as described in Sec. 25.2704-3(b)(6).
(c) Other definitions. For the definition of the term controlled
entity, see Sec. 25.2701-2(b)(5). For the definition of the term
member of the family, see Sec. 25.2702-2(a)(1).
(d) Attribution. An individual, the individual's estate, and
members of the individual's family are treated as also holding any
interest held indirectly by such person through a corporation,
partnership, trust, or other entity under the rules contained in Sec.
25.2701-6.
(e) * * * If an applicable restriction is disregarded under this
section, the fair market value of the transferred interest is
determined under generally applicable valuation principles as if the
restriction (whether in the governing documents, applicable law, or
both) does not exist. * * *
(f) Certain transfers at death to multiple persons. Solely for
purposes of section 2704(b), if part of a decedent's interest in an
entity includible in the gross estate passes by reason of death to one
or more members of the decedent's family and part of that includible
interest passes to one or more persons who are not members of the
decedent's family, and if the part passing to the members of the
decedent's family is to be valued pursuant to paragraph (e) of this
section, then that part is treated as a single, separate property
interest. In that case, the part passing to one or more persons who are
not members of the decedent's family is also treated as a single,
separate property interest. See paragraph (g) Ex. 4 of Sec. 25.2704-3.
(g) * * *
Example 5. * * * The preferred stock carries a right to
liquidate X that cannot be exercised until 1999. * * *
* * * * *
Sec. 25.2704-3 [Redesignated as Sec. 25.2704-4]
0
Par. 6. Section 25.2704-3 is redesignated as Sec. 25.2704-4.
0
Par. 7. New Sec. 25.2704-3 is added to read as follows.
Sec. 25.2704-3 Transfers subject to disregarded restrictions.
(a) In general. For purposes of subtitle B (relating to estate,
gift and generation-skipping transfer taxes), and notwithstanding any
provision of Sec. 25.2704-2, if an interest in a corporation or a
partnership (an entity), whether domestic or foreign, is transferred to
or for the benefit of a member of the transferor's family, and the
transferor and/or members of the transferor's family control the entity
immediately before the transfer, any restriction described in paragraph
(b) of this section is disregarded, and the transferred interest is
valued as provided in paragraph (f) of this section.
[[Page 51422]]
For purposes of this section, a corporation is any business entity
described in Sec. 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) of
this chapter, an S corporation within the meaning of section
1361(a)(1), and a qualified subchapter S subsidiary within the meaning
of section 1361(b)(3)(B). For this purpose, a qualified subchapter S
subsidiary is treated as a corporation separate from its parent
corporation. A partnership is any other business entity within the
meaning of Sec. 301.7701-2(a) of this chapter, regardless of how that
entity is classified for federal tax purposes. Thus, for example, the
term partnership includes a limited liability company that is not an S
corporation, whether or not it is disregarded as an entity separate
from its owner for federal tax purposes.
(b) Disregarded restrictions defined--(1) In general. The term
disregarded restriction means a restriction that is a limitation on the
ability to redeem or liquidate an interest in an entity that is
described in any one or more of paragraphs (b)(1)(i) through (iv) of
this section, if the restriction, in whole or in part, either lapses
after the transfer or can be removed by the transferor or any member of
the transferor's family (subject to paragraph (b)(4) of this section),
either alone or collectively.
(i) The provision limits or permits the limitation of the ability
of the holder of the interest to compel liquidation or redemption of
the interest.
(ii) The provision limits or permits the limitation of the amount
that may be received by the holder of the interest on liquidation or
redemption of the interest to an amount that is less than a minimum
value. The term minimum value means the interest's share of the net
value of the entity determined on the date of liquidation or
redemption. The net value of the entity is the fair market value, as
determined under section 2031 or 2512 and the applicable regulations,
of the property held by the entity, reduced by the outstanding
obligations of the entity. Solely for purposes of determining minimum
value, the only outstanding obligations of the entity that may be taken
into account are those that would be allowable (if paid) as deductions
under section 2053 if those obligations instead were claims against an
estate. For example, and subject to the foregoing limitation on
outstanding obligations, if the entity holds an operating business, the
rules of Sec. 20.2031-2(f)(2) or Sec. 20.2031-3 of this chapter apply
in the case of a testamentary transfer and the rules of Sec. 25.2512-
2(f)(2) or Sec. 25.2512-3 apply in the case of an inter vivos
transfer. The minimum value of the interest is the net value of the
entity multiplied by the interest's share of the entity. For this
purpose, the interest's share is determined by taking into account any
capital, profits, and other rights inherent in the interest in the
entity. If the property held by the entity directly or indirectly
includes an interest in another entity, and if a transfer of an
interest in that other entity by the same transferor (had that
transferor owned the interest directly) would be subject to section
2704(b), then the entity will be treated as owning a share of the
property held by the other entity, determined and valued in accordance
with the provisions of section 2704(b) and the regulations thereunder.
(iii) The provision defers or permits the deferral of the payment
of the full amount of the liquidation or redemption proceeds for more
than six months after the date the holder gives notice to the entity of
the holder's intent to have the holder's interest liquidated or
redeemed.
(iv) The provision authorizes or permits the payment of any portion
of the full amount of the liquidation or redemption proceeds in any
manner other than in cash or property. Solely for this purpose, except
as provided in the following sentence, a note or other obligation
issued directly or indirectly by the entity, by one or more holders of
interests in the entity, or by a person related to either the entity or
any holder of an interest in the entity, is deemed not to be property.
In the case of an entity engaged in an active trade or business, at
least 60 percent of whose value consists of the non-passive assets of
that trade or business, and to the extent that the liquidation proceeds
are not attributable to passive assets within the meaning of section
6166(b)(9)(B), such proceeds may include such a note or other
obligation if such note or other obligation is adequately secured,
requires periodic payments on a non-deferred basis, is issued at market
interest rates, and has a fair market value on the date of liquidation
or redemption equal to the liquidation proceeds. See Sec. 25.2512-8.
For purposes of this paragraph (b)(1)(iv), a related person is any
person whose relationship to the entity or to any holder of an interest
in the entity is described in section 267(b), provided that for this
purpose the term fiduciary of a trust as used in section 267(b) does
not include a bank as defined in section 581 that is publicly held.
(2) Source of limitation. A disregarded restriction includes a
restriction that is imposed under the terms of the governing documents
(for example, the corporation's by-laws, the partnership agreement, or
other governing documents), a buy-sell agreement, a redemption
agreement, or an assignment or deed of gift, or any other document,
agreement, or arrangement; and a restriction imposed under local law
regardless of whether that restriction may be superseded by or pursuant
to the governing documents or otherwise. For this purpose, local law is
the law of the jurisdiction, whether domestic or foreign, which governs
the applicability of the restriction. For an exception for restrictions
imposed or required to be imposed by federal or state law, see
paragraph (b)(5)(iii) of this section.
(3) Lapse or removal of limitation. A restriction is a disregarded
restriction only to the extent that the restriction either will lapse
by its terms at any time after the transfer or may be removed after the
transfer by any one or more members, either alone or collectively, of
the group consisting of the transferor, the transferor's estate, and
members of the transferor's family. For purposes of determining whether
the ability to remove the restriction is held by any one or more
members of this group, members are treated as holding interests
attributed to them under the rules contained in Sec. 25.2701-6, in
addition to interests held directly. See also paragraph (b)(4) of this
section. The manner in which the restriction may be removed is
irrelevant for this purpose, whether by voting, taking other action
authorized by the governing documents or applicable local law, removing
the restriction from the governing documents, revising the governing
documents to override the restriction prescribed under local law in the
absence of a contrary provision in the governing documents, merging the
entity with an entity whose governing documents do not contain the
restriction, terminating the entity, or otherwise.
(4) Certain interests held by nonfamily members disregarded--(i) In
general. In the case of a transfer to or for the benefit of a member of
the transferor's family, for purposes of determining whether the
transferor (or the transferor's estate) or any member of the
transferor's family, either alone or collectively, may remove a
restriction within the meaning of this paragraph (b), an interest held
by a person other than a member of the transferor's family (a
nonfamily-member interest) is disregarded unless all of the following
are satisfied:
(A) The interest has been held by the nonfamily member for at least
three years immediately before the transfer;
(B) On the date of the transfer, in the case of a corporation, the
interest
[[Page 51423]]
constitutes at least 10 percent of the value of all of the equity
interests in the corporation, and, in the case of a business entity
within the meaning of Sec. 301.7701-2(a) of this chapter other than a
corporation, the interest constitutes at least a 10-percent interest in
the business entity, for example, a 10-percent interest in the capital
and profits of a partnership;
(C) On the date of the transfer, in the case of a corporation, the
total of the equity interests in the corporation held by shareholders
who are not members of the transferor's family constitutes at least 20
percent of the value of all of the equity interests in the corporation,
and, in the case of a business entity within the meaning of Sec.
301.7701-2(a) of this chapter other than a corporation, the total
interests in the entity held by owners who are not members of the
transferor's family is at least 20 percent of all the interests in the
entity, for example, a 20-percent interest in the capital and profits
of a partnership; and
(D) Each nonfamily member, as owner, has a put right as described
in paragraph (b)(6) of this section.
(ii) Effect of disregarding a nonfamily-member interest. If a
nonfamily-member interest is disregarded under this section, the rules
of this section are applied as if all interests other than disregarded
nonfamily-member interests constitute all of the interests in the
entity.
(iii) Attribution. In applying the 10-percent and 20-percent tests
when the property held by the corporation or other business entity is,
in whole or in part, an interest in another entity, the attribution
rules of paragraph (d) of this section apply both in determining the
interest held by a nonfamily member, and in measuring the interests
owned through other entities.
(5) Exceptions. A restriction described in this paragraph (b)(5) is
not a disregarded restriction.
(i) Applicable restriction. A disregarded restriction does not
include an applicable restriction on the liquidation of the entity as
defined in and governed by Sec. 25.2704-2.
(ii) Commercially reasonable restriction. A disregarded restriction
does not include a commercially reasonable restriction on liquidation
imposed by an unrelated person providing capital to the entity for the
entity's trade or business operations whether in the form of debt or
equity. An unrelated person is any person whose relationship to the
transferor, the transferee, or any member of the family of either is
not described in section 267(b), provided that for purposes of this
section the term fiduciary of a trust as used in section 267(b) does
not include a bank as defined in section 581 that is publicly held.
(iii) Requirement of federal or state law. A disregarded
restriction does not include a restriction imposed or required to be
imposed by federal or state law. For this purpose, federal or state law
means the laws of the United States, of any state thereof, or of the
District of Columbia, but does not include the laws of any other
jurisdiction. A provision of law that applies only in the absence of a
contrary provision in the governing documents or that may be superseded
with regard to a particular entity (whether by the shareholders,
partners, members and/or managers of the entity or otherwise) is not a
restriction that is imposed or required to be imposed by federal or
state law. A law that is limited in its application to certain narrow
classes of entities, particularly those types of entities (such as
family-controlled entities) most likely to be subject to transfers
described in section 2704, is not a restriction that is imposed or
required to be imposed by federal or state law. For example, a law
requiring a restriction that may not be removed or superseded and that
applies only to family-controlled entities that otherwise would be
subject to the rules of section 2704 is a disregarded restriction. In
addition, a restriction is not imposed or required to be imposed by
federal or state law if that law also provides (either at the time the
entity was organized or at some subsequent time) an optional provision
that does not include the restriction or that allows it to be removed
or overridden, or that provides a different statute for the creation
and governance of that same type of entity that does not mandate the
restriction, makes the restriction optional, or permits the restriction
to be superseded, whether by the entity's governing documents or
otherwise. For purposes of determining the type of entity, there are
only three types of entities, specifically, the three categories of
entities described in Sec. 25.2701-2(b)(5): Corporations; partnerships
(including limited partnerships); and other business entities.
(iv) Certain rights described in section 2703. An option, right to
use property, or agreement that is subject to section 2703 is not a
restriction for purposes of this paragraph (b).
(v) Right to put interest to entity. Any restriction that otherwise
would constitute a disregarded restriction under this section will not
be considered a disregarded restriction if each holder of an interest
in the entity has a put right as described in paragraph (b)(6) of this
section.
(6) Put right. The term put right means a right, enforceable under
applicable local law, to receive from the entity or from one or more
other holders, on liquidation or redemption of the holder's interest,
within six months after the date the holder gives notice of the
holder's intent to withdraw, cash and/or other property with a value
that is at least equal to the minimum value of the interest determined
as of the date of the liquidation or redemption. For this purpose,
local law is the law of the jurisdiction, whether domestic or foreign,
that governs liquidation or redemption rights with regard to interests
in the entity. For purposes of this paragraph (b)(6), the term other
property does not include a note or other obligation issued directly or
indirectly by the entity, by one or more holders of interests in the
entity, or by one or more persons related either to the entity or to
any holder of an interest in the entity. However, in the case of an
entity engaged in an active trade or business, at least 60 percent of
whose value consists of the non-passive assets of that trade or
business, and to the extent that the liquidation proceeds are not
attributable to passive assets within the meaning of section
6166(b)(9)(B), the term other property does include a note or other
obligation if such note or other obligation is adequately secured,
requires periodic payments on a non-deferred basis, is issued at market
interest rates, and has a fair market value on the date of liquidation
or redemption equal to the liquidation proceeds. See Sec. 25.2512-8.
The minimum value of the interest is the interest's share of the net
value of the entity, as defined in paragraph (b)(1)(ii) of this
section.
(c) Other definitions. For the definition of the term controlled
entity, see Sec. 25.2701-2(b)(5). For the definition of the term
member of the family, see Sec. 25.2702-2(a)(1).
(d) Attribution. An individual, the individual's estate, and
members of the individual's family, as well as any other person, also
are treated as holding any interest held indirectly by such person
through a corporation, partnership, trust, or other entity under the
rules contained in Sec. 25.2701-6.
(e) Certain transfers at death to multiple persons. Solely for
purposes of section 2704(b), if part of a decedent's interest in an
entity includible in the gross estate passes by reason of death to one
or more members of the decedent's family and part of that includible
interest passes to one or more persons who are nonfamily members of the
[[Page 51424]]
decedent, and if the part passing to the members of the decedent's
family is to be valued pursuant to paragraph (f) of this section, then
that part is treated as a single, separate property interest. In that
case, the part passing to one or more persons who are not members of
the decedent's family is also treated as a single, separate property
interest. See paragraph (g) Example 4 of this section.
(f) Effect of disregarding a restriction. If a restriction is
disregarded under this section, the fair market value of the
transferred interest is determined under generally applicable valuation
principles as if the disregarded restriction does not exist in the
governing documents, local law, or otherwise. For this purpose, local
law is the law of the jurisdiction, whether domestic or foreign, under
which the entity is created or organized.
(g) Examples. The following examples illustrate the provisions of
this section.
Example 1. (i) D and D's children, A and B, are partners in
Limited Partnership X that was created on July 1, 2016. D owns a 98
percent limited partner interest, and A and B each own a 1 percent
general partner interest. The partnership agreement provides that
the partnership will dissolve and liquidate on June 30, 2066, or by
the earlier agreement of all the partners, but otherwise prohibits
the withdrawal of a limited partner. Under applicable local law, a
limited partner may withdraw from a limited partnership at the time,
or on the occurrence of events, specified in the partnership
agreement. Under the partnership agreement, the approval of all
partners is required to amend the agreement. None of these
provisions is mandated by local law. D transfers a 33 percent
limited partner interest to A and a 33 percent limited partner
interest to B.
(ii) By prohibiting the withdrawal of a limited partner, the
partnership agreement imposes a restriction on the ability of a
partner to liquidate the partner's interest in the partnership that
is not required to be imposed by law and that may be removed by the
transferor and members of the transferor's family, acting
collectively, by agreeing to amend the partnership agreement.
Therefore, under section 2704(b) and paragraph (a) of this section,
the restriction on a limited partner's ability to liquidate that
partner's interest is disregarded in determining the value of each
transferred interest. Accordingly, the amount of each transfer is
the fair market value of the 33 percent limited partner interest
determined under generally applicable valuation principles taking
into account all relevant factors affecting value including the
rights determined under the governing documents and local law and
assuming that the disregarded restriction does not exist in the
governing documents, local law, or otherwise. See paragraphs
(b)(1)(i) and (f) of this section.
Example 2. The facts are the same as in Example 1, except that,
both before and after the transfer, A's partnership interests are
held in an irrevocable trust of which A is the sole income
beneficiary. The trustee is a publicly-held bank. A is treated as
holding the interests held by the trust under the rules contained in
Sec. 25.2701-6. The result is the same as in Example 1.
Example 3. The facts are the same as in Example 1, except that,
on D's subsequent death, D's remaining 32 percent limited partner
interest passes outright to D's surviving spouse, S, who is a U.S.
citizen. In valuing the 32 percent interest for purposes of
determining both the amount includible in the gross estate and the
amount allowable as a marital deduction, the analysis and result are
as described in Example 1.
Example 4. (i) The facts are the same as in Example 1, except
that D made no gifts and, on D's subsequent death pursuant to D's
will, a 53 percent limited partner interest passes to D's surviving
spouse who is a U.S. citizen, a 25 percent limited partner interest
passes to C, an unrelated individual, and a 20 percent limited
partner interest passes to E, a charity. The restriction on a
limited partner's ability to liquidate that partner's interest is a
disregarded restriction. In determining whether D's estate and/or
D's family may remove the disregarded restriction after the transfer
occurring on D's death, the interests of C and E are disregarded
because these interests were not held by C and E for at least three
years prior to D's death, nor do C and E have the right to withdraw
on six months' notice and receive their respective interest's share
of the minimum value of X. Thus, the 53 percent interest passing to
D's surviving spouse is subject to section 2704(b). D's gross estate
will be deemed to include two separate assets: A 53 percent limited
partner interest subject to section 2704(b), and a 45 percent
limited partner interest not subject to section 2704.
(ii) The fair market value of the 53 percent interest is
determined for both inclusion and deduction purposes under generally
applicable valuation principles taking into account all relevant
factors affecting value, including the rights determined under the
governing documents and local law, and assuming that the disregarded
restriction does not exist in the governing documents, local law, or
otherwise. The 45 percent interest passing to nonfamily members is
not subject to section 2704(b), and will be valued as a single
interest for inclusion purposes under generally applicable valuation
principles, taking into account all relevant factors affecting value
including the rights determined under the governing documents and
local law as well as the restriction on a limited partner's ability
to liquidate that partner's interest. The 20 percent passing to
charity will be valued in a similar manner for purposes of
determining the allowable charitable deduction. Assuming that, under
the facts and circumstances, the 45 percent interest and the 20
percent interest are subject to the same discount factor, the
charitable deduction will equal four-ninths of the value of the 45
percent interest.
Example 5. (i) D and D's children, A and B, are partners in
Limited Partnership Y. D owns a 98 percent limited partner interest,
and A and B each own a 1 percent general partner interest. The
partnership agreement provides that a limited partner may withdraw
from the partnership at any time by giving six months' notice to the
general partner. On withdrawal, the partner is entitled to receive
the fair market value of his or her partnership interest payable
over a five-year period. Under the partnership agreement, the
approval of all partners is required to amend the agreement. None of
these provisions are mandated by local law. D transfers a 33 percent
limited partner interest to A and a 33 percent limited partner
interest to B. Under paragraph (b)(1)(iii) of this section, the
provision requiring that a withdrawing partner give at least six
months' notice before withdrawing provides a reasonable waiting
period and does not cause the restriction to be disregarded in
valuing the transferred interests. However, the provision limiting
the amount the partner may receive on withdrawal to the fair market
value of the partnership interest, and permitting that amount to be
paid over a five-year period, may limit the amount the partner may
receive on withdrawal to less than the minimum value described in
paragraph (b)(1)(ii) of this section and allows the delay of payment
beyond the period described in paragraph (b)(1)(iii) of this
section. The partnership agreement imposes a restriction on the
ability of a partner to liquidate the partner's interest in the
partnership that is not required to be imposed by law and that may
be removed by the transferor and members of the transferor's family,
acting collectively, by agreeing to amend the partnership agreement.
(ii) Under section 2704(b) and paragraph (a) of this section,
the restriction on a limited partner's ability to liquidate that
partner's interest is disregarded in determining the value of the
transferred interests. Accordingly, the amount of each transfer is
the fair market value of the 33 percent limited partner interest,
determined under generally applicable valuation principles taking
into account all relevant factors affecting value, including the
rights determined under the governing documents and local law, and
assuming that the disregarded restriction does not exist in the
governing documents, local law, or otherwise. See paragraph (f) of
this section.
Example 6. The facts are the same as in Example 5, except that
D sells a 33 percent limited partner interest to A and a 33 percent
limited partner interest to B for fair market value (but without
taking into account the special valuation assumptions of section
2704(b)). Because section 2704(b) also is relevant in determining
whether a gift has been made, D has made a gift to each child of the
excess of the value of the transfer to each child as determined in
Example 5 over the consideration received by D from that child.
Example 7. The facts are the same as in Example 5, except, in a
transaction unrelated to D's prior transfers to A and B, D withdraws
from the partnership and immediately receives the fair market value
(but without taking into account the special valuation assumptions
of section 2704(b)) of D's remaining 32 percent limited partner
interest. Because a gift to a partnership is deemed to
[[Page 51425]]
be a gift to the other partners, D has made a gift to each child of
one-half of the excess of the value of the 32 percent limited
partner interest as determined in Example 5 over the consideration
received by D from the partnership.
Example 8. D and D's children, A and B, organize Limited
Liability Company X under the laws of State Y. D, A, and B each
contribute cash to X. Under the operating agreement, X maintains a
capital account for each member. The capital accounts are adjusted
to reflect each member's contributions to and distributions from X
and each member's share of profits and losses of X. On liquidation,
capital account balances control distributions. Profits and losses
are allocated on the basis of units issued to each member, which are
not in proportion to capital. D holds 98 units, A and B each hold 1
unit. D is designated in the operating agreement as the manager of X
with the ability to cause the liquidation of X. X is not a
corporation. Under the laws of State Y, X is neither a partnership
nor a limited partnership. D and D's family have control of X
because they hold at least 50 percent of the profits interests (or
capital interests) of X. Further, D and D's family have control of X
because D holds an interest with the ability to cause the
liquidation of X.
Example 9. The facts are the same as in Example 8, except that,
under the operating agreement, all distributions are made to members
based on the units held, which in turn is based on contributions to
capital. Further, X elects to be treated as a corporation for
federal tax purposes. Under Sec. 25.2701-2(b)(5), D and D's family
have control of X (which is not a corporation and, under local law,
is not a partnership or limited partnership) because they hold at
least 50 percent of the capital interests in X. Further, D and D's
family have control of X because D holds an interest with the
ability to cause the liquidation of X.
Example 10. D owns a 1 percent general partner interest and a
74 percent limited partner interest in Limited Partnership X, which
in turn holds a 50 percent limited partner interest in Limited
Partnership Y and a 50 percent limited partner interest in Limited
Partnership Z. D owns the remaining interests in partnerships Y and
Z. A, an unrelated individual, has owned a 25 percent limited
partner interest in partnership X for more than 3 years. The
governing documents of all three partnerships permit liquidation of
the entity on the agreement of the owners of 90 percent of the
interests but, with the exception of A's interest, prohibit the
withdrawal of a limited partner. A may withdraw on 6-months' notice
and receive A's interest's share of the minimum value of partnership
X as defined in paragraph (b)(1)(ii) of this section, which share
includes a share of the minimum value of partnership Y and of
partnership Z. Under the governing documents of all three
partnerships, the approval of all partners is required to amend the
documents. D transfers a 40 percent limited partner interest in
partnership Y to D's children. For purposes of determining whether D
and/or D's family members have the ability to remove a restriction
after the transfer, A is treated as owning a 12.5 percent (.25 x.50)
interest in partnership Y, thus more than a 10 percent interest, but
less than a 20 percent interest, in partnership Y. Accordingly,
under paragraph (b)(4)(i)(C) of this section, A's interest is
disregarded for purposes of determining whether D and D's family
hold the right to remove a restriction after the transfer (resulting
in D and D's children being deemed to own 100 percent of Y for this
purpose). However, if D instead had transferred a 40 percent limited
partner interest in partnership X to D's children, A's ownership of
a 25 percent interest in partnership X would not have been
disregarded, with the result that D and D's family would not have
had the ability to remove a restriction after the transfer.
Example 11. (i) D owns 85 of the outstanding shares of X, a
corporation, and A, an unrelated individual, owns the remaining 15
shares. Under X's governing documents, the approval of the
shareholders holding 75 percent of the outstanding stock is required
to liquidate X. With the exception of nonfamily members, a
shareholder may not withdraw from X. Nonfamily members may withdraw
on six months' notice and receive their interest's share of the
minimum value of X as defined in paragraph (b)(1)(ii) of this
section. D transfers 10 shares to C, a charity. Four years later, D
dies. D bequeaths 10 shares to B, an unrelated individual, and the
remaining 65 shares to trusts for the benefit of D's family.
(ii) The prohibition on withdrawal is a restriction described in
paragraph (b)(1)(i) of this section. In determining whether D's
estate and/or D's family may remove the restriction after the
transfer occurring on D's death, the interest of B is disregarded
because it was not held by B for at least three years prior to D's
death. The interests of A and C, however, are not disregarded,
because each held an interest of at least 10 percent for at least
three years prior to D's death, the total of those interests
represents at least 20 percent of X, and each had the right to
withdraw on six months' notice and receive their interest's share of
the minimum value of X. As a result, D and D's family hold 65 of the
deemed total of 90 shares in X, or 72 percent, which is less than
the 75 percent needed to liquidate X. Thus, D and D's family do not
have the ability to remove the restriction after the transfer, and
section 2704(b) does not apply in valuing D's interest in X for
federal estate tax purposes.
0
Par. 8. Newly designated Sec. 25.2704-4 is amended as follows:
0
1. The undesignated text is designated as paragraph (a).
0
2. In the first and second sentences of newly designated paragraph (a),
the language ``Section'' is removed and the language ``Except as
provided in paragraph (b) of this section, Sec. '' is added in its
place.
0
3. Paragraph (b) is added.
The addition reads as follows:
Sec. 25.2704-4 Effective date.
* * * * *
(b)(1) With respect to Sec. 25.2704-1, the first six sentences of
paragraph (a)(1), the last sentence of paragraph (a)(2)(i), the third
sentence of paragraph (a)(2)(iii), the first and last sentences of
paragraph (a)(4), paragraph (a)(5), the second and last sentences of
paragraph (c)(1), paragraph (c)(2)(i)(B), and Examples 4, 6 and 7 of
paragraph (f), apply to lapses of rights created after October 8, 1990,
occurring on or after the date these regulations are published as final
regulations in the Federal Register.
(2) With respect to Sec. 25.2704-2, paragraphs (a), (b), (c), (d),
and (f), the first sentence of paragraph (e), and Examples 1, 3 and 5
of paragraph (g) apply to transfers of property subject to restrictions
created after October 8, 1990, occurring on or after the date these
regulations are published as final regulations in the Federal Register.
(3) Section 25.2704-3 applies to transfers of property subject to
restrictions created after October 8, 1990, occurring 30 or more days
after the date these regulations are published as final regulations in
the Federal Register.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-18370 Filed 8-2-16; 11:15 am]
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