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Last Updated: January 8, 2012

-STATUTE

(a) Treatment of lapsed voting or liquidation rights
      (1) In general
        For purposes of this subtitle, if - 
          (A) there is a lapse of any voting or liquidation right in a
        corporation or partnership, and
          (B) the individual holding such right immediately before the
        lapse and members of such individual's family hold, both before
        and after the lapse, control of the entity,

      such lapse shall be treated as a transfer by such individual by
      gift, or a transfer which is includible in the gross estate of
      the decedent, whichever is applicable, in the amount determined
      under paragraph (2).
      (2) Amount of transfer
        For purposes of paragraph (1), the amount determined under this
      paragraph is the excess (if any) of - 
          (A) the value of all interests in the entity held by the
        individual described in paragraph (1) immediately before the
        lapse (determined as if the voting and liquidation rights were
        nonlapsing), over
          (B) the value of such interests immediately after the lapse.
      (3) Similar rights
        The Secretary may by regulations apply this subsection to
      rights similar to voting and liquidation rights.
    (b) Certain restrictions on liquidation disregarded
      (1) In general
        For purposes of this subtitle, if - 
          (A) there is a transfer of an interest in a corporation or
        partnership to (or for the benefit of) a member of the
        transferor's family, and
          (B) the transferor and members of the transferor's family
        hold, immediately before the transfer, control of the entity,

      any applicable restriction shall be disregarded in determining
      the value of the transferred interest.
      (2) Applicable restriction
        For purposes of this subsection, the term "applicable
      restriction" means any restriction - 
          (A) which effectively limits the ability of the corporation
        or partnership to liquidate, and
          (B) with respect to which either of the following applies:
            (i) The restriction lapses, in whole or in part, after the
          transfer referred to in paragraph (1).
            (ii) The transferor or any member of the transferor's
          family, either alone or collectively, has the right after
          such transfer to remove, in whole or in part, the
          restriction.
      (3) Exceptions
        The term "applicable restriction" shall not include - 
          (A) any commercially reasonable restriction which arises as
        part of any financing by the corporation or partnership with a
        person who is not related to the transferor or transferee, or a
        member of the family of either, or
          (B) any restriction imposed, or required to be imposed, by
        any Federal or State law.
      (4) Other restrictions
        The Secretary may by regulations provide that other
      restrictions shall be disregarded in determining the value of the
      transfer of any interest in a corporation or partnership to a
      member of the transferor's family if such restriction has the
      effect of reducing the value of the transferred interest for
      purposes of this subtitle but does not ultimately reduce the
      value of such interest to the transferee.
    (c) Definitions and special rules
      For purposes of this section - 
      (1) Control
        The term "control" has the meaning given such term by section
      2701(b)(2).
      (2) Member of the family
        The term "member of the family" means, with respect to any
      individual - 
          (A) such individual's spouse,
          (B) any ancestor or lineal descendant of such individual or
        such individual's spouse,
          (C) any brother or sister of the individual, and
          (D) any spouse of any individual described in subparagraph
        (B) or (C).
      (3) Attribution
        The rule of section 2701(e)(3) shall apply for purposes of
      determining the interests held by any individual.

-SOURCE

(Added Pub. L. 101-508, title XI, Sec. 11602(a), Nov. 5, 1990, 104
    Stat. 1388-498; amended Pub. L. 104-188, title I, Sec.
    1702(f)(3)(C), Aug. 20, 1996, 110 Stat. 1871.)

-MISC1

AMENDMENTS                            
      1996 - Subsec. (c)(3). Pub. L. 104-188 substituted "section
    2701(e)(3)" for "section 2701(e)(3)(A)".

                     EFFECTIVE DATE OF 1996 AMENDMENT                 
      Amendment by Pub. L. 104-188 effective, except as otherwise
    expressly provided, as if included in the provision of the Revenue
    Reconciliation Act of 1990, Pub. L. 101-508, title XI, to which
    such amendment relates, see section 1702(i) of Pub. L. 104-188, set
    out as a note under section 38 of this title.