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 Rev. Rul. 79-7

1979-1 C.B. 294

Section 2035 -- Gifts Within 3 Years of Death

IRS Headnote

Valuation; transfer in contemplation of death; stock of closely held corporation. An individual who owned a controlling stock interest in a closely held corporation transferred a minority stock interest that was included in the individual's gross estate as a transfer in contemplation of death. The minority interest transferred and the stock retained by the individual until death are treated as one block of shares in determining the value of the stock interest includible in the gross estate.

Full Text

Rev. Rul. 79-7

ISSUE

Whether the interest in a closely held corporation that is includible in the decedent's gross estate under section 2035 of the Code should be valued as a minority interest in the corporation, under the circumstances described below.

FACTS

The decedent, A, owned 600 shares of the common stock of X corporation, a closely held corporation. The 600 shares represented sixty percent of the outstanding stock of X corporation. In 1974, two years prior to death, A transferred 300 shares to B, A's child, in a transfer that was determined to have been made in contemplation of death. The stock transferred by A was therefore includible in A's gross estate under section 2035 of the Code. In addition, the 300 shares A owned outright at the time of death were included in the gross estate under section 2033 of the Code.

LAW AND ANALYSIS

Section 20.2031-2(f) of the regulations provides that in determining the value of a decedent's stock interest in a closely held corporation for purposes of the federal estate tax, consideration should be given to the degree of control of the corporation represented by the block of stock to be valued. The question presented in the instant case is whether the 300 shares of X corporation stock included in the decedent's gross estate under section 2035 of the Code is to be valued as a minority interest in the corporation, without reference to the stock interest included in the decedent's gross estate under section 2033.

Rev. Rul. 59-60, 1959-1 C.B. 237, sets forth guidelines for the valuation of shares of capital stock of a closely-held corporation. Both section 20.2031-2(f) of the regulations and Rev. Rul. 59-60, state that the determination of value of such closely-held stock is to be made with reference to a range of factors in the absence of an established "market" in the shares. It is assumed that there is no established "market" for closely-held corporate stocks. See Rev. Rul. 59-60, cited above.

At the time of A's death, section 2035(a) of the Code provided that the gross estate shall include the value of any interest in property transferred by the decedent (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth) in contemplation of death. Section 20.2035-1(e) of the Estate Tax Regulations provides that the value of an interest in transferred property includible in a decedent's gross estate under section 2035 is the value of the interest as of the applicable valuation date, determined in accordance with section 2031 of the Code and the regulations thereunder.

Underlying the provisions of section 2035 of the Code is the intent to prevent the avoidance of the estate tax by taxing inter vivos gifts made as substitutes for testamentary transfers as if they were testamentary transfers. Milliken v. United States, 283 U.S. 15 (1931). Consequently, the value of property included in the decedent's gross estate under section 2035 should be treated, for purposes of the estate tax, in the same manner as it would have been if the transfer had not been made and the property had been owned by the decedent at the time of death. Humphrey's Estate v. Commissioner, 162 F. 2d 1 (5th Cir. 1947). Ingleheart v. Commissioner, 77 F. 2d 704 (5th Cir. 1935); Rev. Rul. 76-235, 1976-1 C.B. 277.

In the situation presented here, the stock interest in X corporation transferred by A to B represented a minority interest in the corporation. However, pursuant to the court's decisions in Humphrey's Estate and Ingleheart, the value of the stock included in the gross estate under section 2035 of the Code should be taxed as if the decedent had retained the stock until death. If A had not transferred the 300 shares, then a total of 600 shares of stock would have been included in A's gross estate under section 2033. That block of shares would represent a controlling interest in X corporation and would be valued, in accordance with Rev. Rul. 59-60, cited above, taking into account the controlling interest the shares represent.

HOLDING

The 300 shares of X corporation stock includible in A's gross estate under section 2033 of the Code, and the 300 shares includible under section 2035, are to be treated as 1 block of 600 shares of stock for purposes of determining whether the stock includible in A's gross estate represents a minority or majority interest in X corporation. Under these circumstances, the inclusion of the 300 shares of stock under section 2035 of the Code will have the same tax effect as if the decedent had retained the 300 shares until death.

The conclusion of this ruling would be the same under section 2035 of the Code as amended by the Tax Reform Act of 1976 for that amendment merely eliminated the requirement that the transfer be in contemplation of death. The purpose of the statute, as amended, remains the same as it was prior to modification.