Frequently Asked Questions
Who is eligible for the Qualified Payment Election for Family Business Transfers?
Applies to transfers of interests in controlled corporations or partnerships to family members where the transferor retains a preferred interest.
How does the Qualified Payment Election for Family Business Transfers work?
Taxpayers can elect to treat certain distribution rights as 'qualified payments' (fixed-rate cumulative dividends), which allows these rights to have a non-zero value when calculating the gift tax on a transfer of junior equity to family members.
What law authorizes the Qualified Payment Election for Family Business Transfers?
The Qualified Payment Election for Family Business Transfers is authorized under IRC §2701 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §2701
Source: Internal Revenue Code, Title 26, United States Code
§ 2701. Special valuation rules in case of transfers of certain interests in corporations or partnerships(a) Valuation rules(1) In generalSolely for purposes 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 such transfer), the value of any right—(A) which is described in subparagraph (A) or (B) of subsection (b)(1), and
(B) which is with respect to any applicable retained interest that is held by the transferor or an applicable family member immediately after the transfer,
shall be determined under paragraph (3). This paragraph shall not apply to the transfer of any interest for which market quotations are readily available (as of the date of transfer) on an established securities market.
(2) Exceptions for marketable retained interests, etc.Paragraph (1) shall not apply to any right with respect to an applicable retained interest if—(A) market quotations are readily available (as of the date of the transfer) for such interest on an established securities market,
(B) such interest is of the same class as the transferred interest, or
(C) such interest is proportionally the same as the transferred interest, without regard to nonlapsing differences in voting power (or, for a partnership, nonlapsing differences with respect to management and limitations on liability).
Subparagraph (C) shall not apply to any interest in a partnership if the transferor or an applicable family member has the right to alter the liability of the transferee of the transferred property. Except as provided by the Secretary, any difference described in subparagraph (C) which lapses by reason of any Federal or State law shall be treated as a nonlapsing difference for purposes of such subparagraph.
(3) Valuation of rights to which paragraph (1) applies(A) In generalThe value of any right described in paragraph (1), other than a distribution right which consists of a right to receive a qualified payment, shall be treated as being zero.
(B) Valuation of certain qualified paymentsIf—(i) any applicable retained interest confers a distribution right which consists of the right to a qualified payment, and
(ii) there are 1 or more liquidation, put, call, or conversion rights with respect to such interest,
the value of all such rights shall be determined as if each liquidation, put, call, or conversion right were exercised in the manner resulting in the lowest value being determined for all such rights.
(C) Valuation of qualified payments where no liquidation, etc. rightsIn the case of an applicable retained interest which is described in subparagraph (B)(i) but not subparagraph (B)(ii), the value of the distribution right shall be determined without regard to this section.
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