Bona Fide Business Arrangement Exception

IRC §2703

Buy-sell agreements or options to acquire property at less than fair market value are respected for valuation purposes if they are bona fide business arrangements, not a gift device, and comparable to arms-length terms.

Eligibility

Requires a written agreement that meets specific statutory tests for business purpose and arm's length comparability.

Frequently Asked Questions

Who is eligible for the Bona Fide Business Arrangement Exception?

Requires a written agreement that meets specific statutory tests for business purpose and arm's length comparability.

How does the Bona Fide Business Arrangement Exception work?

Buy-sell agreements or options to acquire property at less than fair market value are respected for valuation purposes if they are bona fide business arrangements, not a gift device, and comparable to arms-length terms.

What law authorizes the Bona Fide Business Arrangement Exception?

The Bona Fide Business Arrangement Exception is authorized under IRC §2703 of the Internal Revenue Code (Title 26, United States Code).

Statutory Text — IRC §2703

Source: Internal Revenue Code, Title 26, United States Code

§ 2703. Certain rights and restrictions disregarded(a) General ruleFor purposes of this subtitle, the value of any property shall be determined without regard to—(1) any option, agreement, or other right to acquire or use the property at a price less than the fair market value of the property (without regard to such option, agreement, or right), or (2) any restriction on the right to sell or use such property. (b) ExceptionsSubsection (a) shall not apply to any option, agreement, right, or restriction which meets each of the following requirements:(1) It is a bona fide business arrangement. (2) It is not a device to transfer such property to members of the decedent’s family for less than full and adequate consideration in money or money’s worth. (3) Its terms are comparable to similar arrangements entered into by persons in an arms’ length transaction. (Added Pub. L. 101–508, title XI, § 11602(a), Nov. 5, 1990, 104 Stat. 1388–498.)

Legal Sources

US Code (Official) — 26 USC §2703 → Cornell Law Institute — 26 USC §2703 → Search IRS.gov for IRC §2703 → Treasury Regulations (26 CFR) →

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