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interest in the remainder shifts from a value of $250,000
preredemption to a value of $500,000 postredemption.
The error with respect to B’s shares in the example lies in
the treatment of X’s redemption obligation as a claim on
corporate assets when valuing the very shares that would be
redeemed with those assets. With respect to A’s shares, a
willing buyer would pay $500,000 upon B’s death (not $250,000)
because he would take account of both the liability arising from
X’s redemption obligation and the shift in the proportionate
ownership interest of A’s shares occasioned by the redemption--
but never the former without the latter.36
The estate’s reliance on Estate of Cartwright v.
Commissioner, 183 F.3d 1034 (9th Cir. 1999), is misplaced, as
that case is distinguishable. Estate of Cartwright involved a
law firm (organized as a C corporation) that entered into a buy-
sell agreement with its majority shareholder. The parties agreed
that the firm would purchase from the shareholder’s estate his
shares and his interest in the fees for the firm’s work in
36 In this simplified example, a willing buyer of A’s shares
would pay $500,000 for A’s shares whether the redemption
obligation existed or not. But that is only because, in this
example, X is obligated to redeem B’s shares at their fair market
value of $500,000. If X were obligated to redeem B’s shares at a
price greater or less than $500,000, then a willing buyer of A’s
shares would pay less than $500,000, or more than $500,000,
respectively, for A’s shares.
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