Page 16 - Business Valuation for Estates & Gift Taxes

 has retained the right to the income from the property,

 can control who is able to enjoy the property, or

 can control the income from the property.

IRC Section 2036 does not apply to any transfer that is part of a "bona fide sale for an adequate and full
consideration in money." fn 3 Although not directly a valuation issue, valuation analysts need to be par-
ticularly careful when assisting clients with transfers that could be subject to IRC Section 2036. If the
transfers are not done properly, those assets could be clawed back into the estate with unplanned valua-
tion and tax consequences.

IRC Section 2512 (Chapter 12)

This section governs the applicable valuation date when a gift is made. According to the Internal Reve-
nue Code, the value of the property as of the date of the gift shall be used as the gift amount for federal
tax purposes. When property is transferred for less than adequate consideration, the amount by which
the property value exceeds the consideration is deemed a gift.

IRC Section 2701 (Chapter 14)

This section was enacted as part of the Omnibus Budget Reconciliation Act of 1990 to deal with special-
ized valuation rules that pertain to transfers of interests in corporations or partnerships when the trans-
feror or an applicable family member (defined as any lineal descendant of any parent of the transferor or
the transferor’s spouse fn 4 ) retains an applicable retained interest (including a distribution, liquidation,
put, call, or conversion right) after the transfer and the transferor or applicable family members (or both)
control the corporation or partnership after the transfer. To avoid the implications of IRC Section 2701,
a family limited partnership (FLP) needs to ensure, among other things, that all partnership allocations
and distributions are done pro-rata based on the partners’ ownership interests (see chapter 8, “Family
Limited Partnerships and Limited Liability Companies,” for more discussion on FLPs).

IRC Section 2702 (Chapter 14)

This section deals with special valuation rules that pertain to transfers of interests in trusts. IRC Section
2702(2) states that the value of any retained interest which is not a qualified interest shall be treated as
being zero, and the value of a qualified interest shall be determined under IRC Section 7520. fn 5 IRC
Section 2702 defines a qualified interest as

1. any interest which consists of the right to receive fixed amounts payable no less frequently than
annually,

fn 3
IRC Section 2036(a).
fn 4 IRC Section 2701(b)(2)(C).

fn 5
IRC Section 2702(a)(2).

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