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family.” Lauder II, T.C. Memo. 1992-736, 64 T.C.M. (CCH) 1643,
1657, 1992 T.C.M. (RIA) par. 92,736, at 92,3731 (quoting 5
Bittker, Federal Taxation of Income, Estates & Gifts, par.
132.3.10, at 132-54 (1984)). As a result, courts required
taxpayers independently to satisfy both the business purpose and
nontestamentary disposition prongs of the Lauder II test.
b. Was Agreement a Substitute for
Testamentary Dispositions?
In evaluating whether buy-sell agreements were substitutes
for testamentary dispositions, greater scrutiny was applied to
intrafamily agreements restricting stock transfers in closely
held businesses than to similar agreements between unrelated
parties. See Dorn v. United States, 828 F.2d. 177, 182 (3d Cir.
1987); Lauder II; Hoffman v. Commissioner, 2 T.C. at 1178-1179
(“The fact that the option is given to one who is the natural
object of the bounty of the optionor requires substantial proof
to show that it rested upon full and adequate consideration.”).
Courts analyzed several factors and employed various tests
to ascertain whether buy-sell agreements were meant to serve as
substitutes for testamentary dispositions. In Lauder II, we
organized the analysis into two categories: (1) Factors
indicating that a buy-sell agreement was not the result of arm’s-
length dealing and was designed to serve a testamentary purpose
(testamentary purpose test), and (2) tests to determine whether a
buy-sell agreement’s formula price reflected full and adequate
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