Section 2704 Tackles Estate For A Claims Court Loss

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EXECUTIVE SUMMARY: A company formed to operate an NFL franchise runs afoul of Section 2704 at the death of its principal stockholder. While the estate put forth some creative arguments to elude the grasp of Section 2704, the Claims Court sides with the IRS and applies Section 2704 to substantially increase the estate tax value of the decedent's shares of stock.

FACTS: The Five Smith's, Inc. was formed in 1965 to own and operate an NFL franchise. The decedent owned Class A common stock. Pursuant to a 1986 recapitalization, that stock had 11.64 votes per share, while the Class B common stock only had 1 vote per share. In 1991, third parties purchased Class B shares of 6% each. At that time, the company amended its Articles of Incorporation to provide that upon the decedent's death, or his sale or transfer of any of his Class A shares, the Class A shares would convert to Class B shares. The effect of the conversion would be a lapse of the enhanced voting power of the Class A shares.

The decedent died in 1997. The IRS disputed the estate tax value of the decedent's Class A shares. The IRS argued that Section 2704 applied, so that the enhanced voting power of the Class A shares should be included in valuing the shares. If Section 2704 applied, the estate and the IRS agreed that the the shares were worth $30 million on the date of death. The estate argued that Section 2704 did not apply. If that was correct, since the enhanced voting power disappeared at death it should not be included in value. This resulted in an agreed valuation of only $22.5 million.

The estate asserted several arguments, both as to whether Section 2704 applied, or if it did, whether its effects could be overridden by creating an inter vivos gift instead of a testamentary transfer, or by creating an arms-length exception to the statute. The Court of Claims rejected all of the estate's arguments and applied Section 2704 to the valuation.

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Published In: Art, Entertainment & Sports Updates, Business Organization Updates, Franchise Updates, Tax Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Charles (Chuck) Rubin, Gutter Chaves Josepher Rubin Forman Fleisher P.A. | Attorney Advertising

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Charles (Chuck) Rubin
Gutter Chaves Josepher Rubin Forman Fleisher P.A.

A tax and business attorney who assists clients in preserving & enhancing individual, family &... View Profile »


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