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the value to some degree. Respondent takes the position that the
option provision should be disregarded in determining the fair
market values of decedent’s interests.
It is well settled that an option agreement may fix the
value of a business interest for Federal estate tax purposes if
the following conditions are met: (i) The price must be fixed
and determinable under the agreement; (ii) the agreement must be
binding on the parties both during life and after death; and
(iii) the agreement must have a bona fide business purpose and
must not be a substitute for a testamentary disposition. See
Estate of Bischoff v. Commissioner, 69 T.C. 32, 39 (1977); see
also sec. 20.2031-2(h), Estate Tax Regs.6 Respondent does not
dispute that petitioner meets the first two conditions but
challenges whether the option provision had a bona fide business
purpose and whether it was a substitute for testamentary
disposition. According to petitioner, the option provision was
inserted in each of the partnership agreements for the purpose of
allowing Fred Jr. to maintain control of the businesses without
the possibility of interference from other family members. The
maintenance of family ownership and control constitutes a bona
6 Sec. 2703, relating to the valuation of property subject
to options, is not applicable to an agreement entered into before
Oct. 9, 1990, unless there has been substantial modification
since Oct. 8, 1990. See Omnibus Budget Reconciliation Act of
1990, Pub. L. 101-508, sec. 11602(e)(1)(A)(ii)(I), 104 Stat.
1388-500. The options in issue were executed before Oct. 9,
1990, and were not substantially modified thereafter.
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