Buy-Sell Agreements and the Web of Federal Estate and Gift Tax Exposure
Anthony J. Testa, Jr.
Parties that unite to conduct business define their respective rights and obligations by entering into a buy-sell or restrictive agreement. Essential terms of a buy-sell agreement restrict alienability of shares, articulate conditions for permissive or mandatory redemption, and establish a unit value or formula to determine exit consideration. Moreover, a properly structured buy-sell agreement considers the income and estate tax interests of the parties. The closer the relationship between the parties, the greater the likelihood that the IRS will disregard the value ascribed by the exiting stockholder.
Many provisions in the Internal Revenue Code exact a clear-cut tax. The Code imposes, however, vague litmus tests to determine federal tax liability as a consequence of a transfer of business interests pursuant to a buy-sell agreement. From the dawn of the nineteenth century through the birth of the new millennium, the IRS and taxpayers continue to litigate over a series of subjective standards to contend with the valuation rules for transfers of business interests. This note identifies and analyzes federal tax considerations concerning the value ascribed to the transfer of closely held business interests.
Specifically, this note examines non-Code authority that is still relevant for many agreements in effect today. Following a brief review of the first arguably over broad attempt by Congress to curb perceived estate freeze abuses, the focus of this note shifts to contemporary standards. The Code now provides a concise rule to govern values established under a buy-sell agreement. This note will also analyze the contemporary rule, its legislative history, and scant but available case law. Although succinct, the Code standard is highly subjective and fertile ground for controversy. Due to the subjective, yet untested, nature of the rule, this note identifies numerous areas through which one should proceed with caution. Finally, in January 2001, President Bush implored Congress to repeal the estate tax. This note also reviews the controversy and considerations surrounding the prospects for imminent legislative relief.