935 / What special valuation rules apply to the transfer of an interest in a corporation or partnership under Chapter 14?

As a general rule, the value of a transferred residual interest is equal to the value of the transferor’s entire interest prior to the transfer reduced by the value of the interest retained by the transferor. For the purpose of determining whether a transfer of an interest in a corporation or partnership to (or for the benefit of) a “member of the transferor’s family” is a gift (and the value of the transfer), the value of any “applicable retained interest” (see below) that is held by the transferor or an “applicable family member” (see below) immediately after the transfer is treated as being zero unless the applicable retained interest is a “distribution right” which consists of the right to receive a “qualified payment.”¹ Where an applicable retained interest consists of a distribution right which consists of the right to receive a qualified payment and there are one or more liquidation, put, call, or conversion rights with respect to such interest, the value of all such rights is to be determined by assuming that each such liquidation, put, call, or conversion right is exercised in a manner which results in the lowest value.² IRC Section 2701 does not apply to distribution rights with respect to qualified payments where there is no liquidation, put, call, or conversion right with respect to the distribution right.³ If the transfer subject to these rules is of a junior equity interest in a corporation or partnership, the transfer must be assigned a minimum value under the “junior equity rule.”⁴

These rules do not apply if, for either the transferred interest or the applicable retained interest, market quotations are readily available (as of the date of transfer) on an established securities market. Also, the rules do not apply if the applicable retained interest is of the same class as the transferred interest, or if the applicable retained interest is proportionally the same as the transferred interest (disregarding nonlapsing differences with respect to voting in the case of a corporation, or with respect to management and limitations on liability in the case of a partnership).⁵ An exception from the rules is also provided for a transfer of a vertical slice of interests in an entity (defined as a proportionate reduction of each class of equity interest held by the transferor and applicable family members in the aggregate).⁶

Definitions and Rules

Transfers