Year of Award
Master of Science in Taxation (MST)
College of Business & Professional Studies
estate, interest, property, recapitalization
In 1987, Congress enacted §2036(c) to enable the Internal Revenue Service to combat estate freezing. The original statute was broad in scope, vague, and poorly drafted. In 1988, Congress amended and added to the law. In 1989, the IRS interpreted the law in an Advance Notice.
Many practitioners believe that this code provision unfairly penalizes small business owners and will be extremely difficult to administer.
Congress and the IRS have, however, added several methods by which business owners may transfer interests to the next generation and not suffer the harsh consequences of §2036(c). The statutory exceptions provided by Congress include the grantor retained income trust, certain qualified buy-sell agreements, qualified debt, qualified startup debt, and certain employment contracts, sales, and leases.
Other exceptions to the statute were provided in Notice 89-99. The IRS created a permissible limited preferred equity interest and excepted personal use property and life insurance from the scope of the statute.
While these exceptions provide some opportunity for planning the transfer of a closely-held interest, other kinds of transfers should also be acceptable. In order for §2036(c) to apply, a transfer must meet five criteria: 1) the property transferred must constitute an enterprise; 2) the transferor must hold a substantial interest in the enterprise; 3) the transferor must "in effect" transfer the property; 4) the transfer must convey disproportionate appreciation to the next generation family member; and 5) the transferor must retain an interest in the income from or the rights in the enterprise. If the transfer fails any one of the criteria, §2036 (c) will not apply.
Business planning opportunities still exist, but the pervasiveness of the statute has many business owners and practitioners up in arms.
Representative Rostenkowski is aware of the problems inherent to §2036 (c) and has recently proposed an alternative method for treating family—related transfers. Hopefully, in the near future, a more workable solution will be enacted and the analysis of this work will be obsolete.
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This work is licensed under a Creative Commons Attribution-No Derivative Works 4.0 License.
Skwiot, Claudia J., "The Future of Asset Value Freezes in Light of Section 2036(c) and Internal Revenue Notice 89-99" (1990). Theses, Dissertations, and Capstone Projects. 452.
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