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If the Agreement restricted the sale of stock during lifetime and at death and was between unrelated individuals, the agreed purchase price was normally binding on Internal Revenue Service.  See Broderick v. Gore (55-2 USTC ¶ 11, 555).


Treasury Regulations (§ 20.2031-2(h)) also provide that the agreement must be a bona fide business arrangement and not a device for passing the decedent’s shares to the natural object of his bounty for less than adequate and full consideration.


In St. Louis County Bank v. U.S., (82-1 USTC 13,459) the shares of a closely held corporation were owned by Mr. Sloan (265 shares) and his children (201 shares).  The agreement provided for a right of first refusal in the event of a voluntary lifetime transfer as well as an option to purchase the shares of a deceased Shareholder at a formula price equal to ten times the average annual net earnings for the previous five years.

At the date of Mr. Sloan’s death, the average annual net earnings for the prior five years was $0.  The Corporation exercised its option to repurchase the Shares for $0.  Although the District Court held that the Agreement had a valid business purpose and provided for a reasonable price, the Court of Appeals held that under the circumstances presented, including the health of the testator at the time of the agreement and the discrepancy between the purchase price and book value, “a reasonable inference could be drawn that the agreement was testamentary in nature and a device for the avoidance of estate taxes.”  The decision was, therefore, reversed and remanded.

4.Applicability of IRC Section 2703.


Purpose of this provision was to prevent a business owner from creating an artificially low value for estate tax purposes by providing for a purchase price in the Shareholders Agreement that was lower than the actual market value.


Section 2703 will apply (and buy-sell value will be disregarded) unless the agreement:

Scca/99999.008/Doc#82/Speech for Lake County Estate Planning Council

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