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that the terms of the Modified 1981 Agreement are comparable to
similar agreements entered into by persons at arm’s length, as
required by section 2703(b)(3).
Section 2703(b)(3) provides that the terms of a buy-sell
agreement must be “comparable to similar arrangements entered
into by persons in an arms’ length transaction.” Section
2703(b)(3) appears to contemplate a taxpayer’s production of
evidence of agreements actually negotiated by persons at arm’s
length under similar circumstances and in similar businesses that
are comparable to the terms of the challenged agreement.
The legislative history supports this interpretation. The
committee report from the Senate, where section 2703 originated,
states:
In addition, the bill adds a third requirement,
not found in present law, that the terms of the option,
agreement, right or restrictions be comparable to
similar arrangements entered into by persons in an
arm’s length transaction. This requires that the
taxpayer show that the agreement was one that could
have been obtained in an arm’s length bargain. Such
determination would entail consideration of such
factors as the expected term of the agreement, the
present value of the property, its expected value at
the time of exercise, and the consideration offered for
the option. It is not met simply by showing isolated
comparables but requires a demonstration of the general
practice of unrelated parties. Expert testimony would
be evidence of such practice. In unusual cases where
comparables are difficult to find because the taxpayer
owns a unique business, the taxpayer can use
comparables from similar businesses. [136 Cong. Rec.
S15683 (daily ed. Oct. 18, 1990).]
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