IRC Chapter 14

Chapter 14 Issues. Chapter 14 of the Internal Revenue Code, containing Sections 2701 through 2704, is a complicated and commonly misunderstood group of Code sections. These Code sections attempt to deal with some of the estate and gift tax issues created when family controlled businesses create multiple equity interests, or contractually restricted ownership rights, in order to transfer future growth to a younger generation at a minimal cost in estate and gift taxes.

While all of these sections must be reviewed, particular attention must be given to Section 2701(a)(4) and the regulations thereunder which require that in certain controlled entities, any junior equity interest created will be taxed as if it has a value of not less than 10% of the sum of the total value of all of the equity interest in such entity plus the total amount of indebtedness of such entity to the transferor or any applicable family member.

The aforementioned has the result of valuing an entity at the combination of the value of the debt and equity, and then places a minimum cost on a transfer of growth or equity interests to a younger generation.