Page 17 - Business Valuation for Estates & Gift Taxes

2. any interest which consists of the right to receive amounts which are payable not less frequently
than annually and are a fixed percentage of the fair market value of the property in trust (deter-
mined annually), and

3. any non-contingent remainder interest if all of the other interests in the trust consist of interests
described in list item 1 or 2. fn 6

IRC Section 2703 (Chapter 14)

According to Section 2703(a), property should be valued regardless of any options or agreements to ac-
quire or use the property at a price less than the property’s fair market value. Section 2703(b) provides a
safe harbor from application of 2703(a) by providing that 2703(a) shall not apply to any option, agree-
ment, right or restriction that (1) is a bona fide business arrangement, (2) is not a device meant to trans-
fer the property at less than full consideration, and (3) has terms comparable to similar arrangements
made at arm’s length. Any restriction that meets the three safe harbor requirements will be considered in
determining the value of the interest.

IRC Section 2704 (Chapter 14)

This section covers the treatment of lapsed voting or liquidation rights in a corporation or partnership.
IRC Section 2704(1) states that if an individual holds the right immediately before the lapse and mem-
bers of the individual’s family have control of the entity before and after the lapse, the lapse shall be
treated as a gift transfer or a transfer includible in the gross estate of the decedent, whichever is applica-
ble. IRC Section 2704(2) defines the transfer amount as the excess of the value of all interests held by
the individual immediately before the lapse, determined as if the rights were non-lapsing, over the value
of such interests immediately after the lapse. IRC Section 2704(b) restricts appraisers from considering
any restrictions on liquidation in excess of the prevailing state law.

IRC Section 6662 (Subtitle F)

This section provides for taxpayer penalties for the underpayment of income tax. Penalties vary based on
the underpayment being "substantial underpayment" or a "gross underpayment" as defined in this sec-
tion. Penalties under this section range from 20 percent of the underpayment for substantial underpay-
ments to 40 percent of the underpayment for gross underpayments.

IRC Section 6694 (Subtitle F)

This section provides for tax preparer penalties for the preparation of any tax return that results in an un-
derstatement of a tax liability due to taking an unreasonable position as defined in this section. Penalties
will be the greater of $5,000 or 50 percent of the income derived by the preparer for preparing the re-
turn.

IRC Section 6695A (Subtitle F)

This section provides for preparer penalties for the preparation of an appraisal of property used in con-
nection with a tax return or claim for refund if the claimed value of the property results in a substantial

fn 6
IRC Section 2702(a)(3)(b).

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