2704(a)(1), a lapse of any voting or liquidation right
in a corporation or partnership that is controlled by an individual and members of his or her family both before and after the lapse is treated as a transfer by the individual by gift or a transfer includible in the gross estate of the decedent.
Specifically, it was designed to avoid a preferred stock recapitalization, in which a senior generation owner would create a preferred stock class and give that preferred stock a liquidation right
equal to 100% of the company value, then give the common stock, with no value, to the next generation.
Such transactions include an important liquidation right
As a result, the lapse of a voting or liquidation right
in a family controlled corporation will have transfer tax consequences.
UNDER 2704(A), THE LAPSE OF a voting or liquidation right
in a family owned corporation results in a transfer by gift or inclusion in the gross estate.
2704 (3) states that it is intended to overturn the holding of Estate of Harrison, (4) which considered the valuation of partnership interests held by a decedent where the decedent's general partnership interest had the right to liquidate the partnership, but his limited partnership interest had no liquidation right
Another important aspect of Chapter 14, Section 2704, deals with a lapse of any voting or liquidation right
Thus, if exercised, the liquidation right
would reduce the capital and profit/loss sharing ratios as well as the capital account of the donee.
If a retained interest consists of a right to receive a qualified payment and also one or more liquidation rights
(including a put, call, liquidation, conversion or similar right), the value of all such rights must be determined as if each liquidation right
were exercised in the manner resulting in the lowest value for both the right to receive the qualified payment and the liquidation right
If there is a lapse of any voting or liquidation right
in a corporation or partnership and the individual holding such right immediately before the lapse (and members of his family) hold control of the entity both before and after the lapse, the lapse is treated as a transfer (1) by gift or (2) includible in the decedent's estate (whichever is applicable).