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laid out fundamental objective requirements that, if met,
permitted the formula price provided by a buy-sell agreement to
establish fair market value under predecessors of section 2031.
Other cases and the estate tax regulations have expanded those
requirements to address such subjective concerns as whether the
buy-sell agreement was a bona fide business arrangement and not
merely a device to make a testamentary disposition at a bargain
price.
1. Case Law Preceding Issuance of Regulations
Before the issuance of regulations under section 2031,
courts addressed the effect of option contracts or buy-sell
agreements on the valuation of business interests by examining
whether restrictions in the agreement put a ceiling on the price
the owner (or his estate) could receive at disposition.
Specifically, buy-sell agreements were required (1) to be
enforceable against the parties, (2) to specify a price, and (3)
to bind transferors both during life and at death in order to be
given dispositive effect for estate tax valuation purposes. See
Lomb v. Sugden, 82 F.2d 166, 167 (2d Cir. 1936); Wilson v.
Bowers, 57 F.2d 682, 683 (2d Cir. 1932); Estate of Salt v.
Commissioner, 17 T.C. 92, 99-100 (1951) (generally, the Wilson-
Lomb test). Although these requirements were developed in the
context of corporate buy-sell agreements, they were also applied
to partnership buy-sell agreements. See Brodrick v. Gore, 224
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