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Before proceeding with our analysis, we will briefly review
the legislative history underlying section 2704. The special
valuation rules, of which section 2704 is a part, were enacted in
OBRA 1990 section 11602(a), in conjunction with the repeal of
section 2036(c).9 The latter provision, enacted as part of the
Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203, sec.
10402(a), 101 Stat. 1330, 1330-431, represented Congress' attempt
to discourage taxpayers' use of “estate freeze” transactions for
the purpose of reducing or avoiding Federal transfer taxes. See H.
Conf. Rept. 100-495, at 994 (1987), 1987-3 C.B. 193, 274. By 1990,
Congress felt compelled to repeal section 2036(c) on the ground
that “the statute's complexity, breadth, and vagueness posed an
unreasonable impediment to the transfer of family businesses.”
Informal S. Rept. on S. 3209, 136 Cong. Rec. S15629, S15679-S15680
(daily ed. Oct. 18, 1990).
Although the special valuation rules were enacted as a more
targeted substitute for section 2036(c), there is little in the way
of direct legislative history relating to the enactment of section
2704. In particular, there was no provision for the special
9 Sec. 2036(c) generally provided that if a person
transferred property having a disproportionately large share of
the potential appreciation in an enterprise while retaining an
interest or right in the enterprise, then the transferred
property would be included in the transferor's gross estate, or
upon the disposition of either the transferred property or the
retained interest, the transferor would be deemed to have made a
gift.
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