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(i)  is a bona fide business arrangement;

(ii)is not simply a device to transfer stock to natural objects of bounty for less than full and adequate consideration;


its terms (including valuation determination) are comparable to similar arrangements entered into by persons in an arms-length transaction.


Bona fide business arrangement.  To satisfy the “bona fide business arrangement” test, the arrangement must bear some nexus to a business and not be motivated simply by estate tax transfer savings.  Courts have held hat maintaining control and management of the business in the existing owners is a legitimate business purpose.


Device to transfer business.  (i) The second test is related to the first test and depends on the circumstances surrounding the execution of the agreement.  Clearly, this test applies predominately when the parties to the agreement are related and the purchase price and/or terms of payment for the older parties shares in the event of death are more favorable than what unrelated parties might agree upon.

(ii) The lead case on the topic is Estate of Lauder v. Comm. TC Memo 1992-736(1992).  There the decedent, Joseph Lauder, who along with his wife, Estee Lauder, and founder of the world famous cosmetic company, was subject to a Shareholders Agreement which restricted the transfer of shares during lifetime and required the estate of a deceased Shareholder to sell his or her shares back to the Company at a price set by a formula based on book value, with certain adjustments, in particular the exclusion of any factor for intangibles, including the company name.  When the taxpayer died the estate valued his shares on the basis of the Agreement which resulted in a date of death value of $29,000,000.  The IRS disagreed on the basis that the Agreement was not binding and established a value of $89,500,000.  The Tax Court agreed with the Service and held that the Agreement was a device for transferring the business to family members at a discount.  Critical to the court’s decision was the fact that the purchase price was arrived at without any negotiation (and indeed, by one of Joseph’s sons

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

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