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Restrictions
Under the conference agreement, any restriction that
effectively limits the ability of a corporation or
partnership to liquidate is ignored in valuing a transfer
among family members if (1) the transferor and family
members control the corporation or partnership, and (2)
the restriction either lapses after the transfer or can
be removed by the transferor or members of his family,
either alone or collectively.
Example 8.–-Mother and Son are partners in a two-
person partnership. The partnership agreement provides
that the partnership cannot be terminated. Mother dies
and leaves her partnership interest to Daughter. As the
sole partners, Daughter and Son acting together could
remove the restriction on partnership termination. Under
the conference agreement, the value of Mother's
partnership interest in her estate is determined without
regard to the restriction. Such value would be adjusted
to reflect any appropriate fragmentation discount.
This rule does not apply to a commercially
reasonable restriction which arises as part of a
financing with an unrelated party or a restriction
required under State or Federal law. The provision also
grants to the Treasury Secretary regulatory authority to
disregard other restrictions which reduce the value of
the transferred interest for transfer tax purposes but
which do not ultimately reduce the value of the interest
to the transferee.
With the foregoing as background, we return to our analysis.
Section 2704(b)(2)(A) broadly defines an applicable
restriction as “any restriction which effectively limits the
ability of the corporation or partnership to liquidate”. However,
section 2704(b)(3)(B) excepts from the definition of an applicable
restriction “any restriction on liquidation imposed, or required to
be imposed, by any Federal or State law”.
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