post-death interest in determining the amounts "allowable" as deductions under $2053. 3. Sections 302 and 318 Closely-held stock included in a decedent's gross estate may fail to qualify under $303. In such a case, $302(b) (3) permits a redemption to be treated as an exchange (capital gain) if it is in "complete redemption of all the stock of the corporation owned by the shareholder." The constructive ownership rules of $318(a) are applicable in determining whether a complete redemption has occurred. Section 318(a)(3) provides that stock directly or indirectly owned by a beneficiary of an estate or trust is deemed owned by the estate or trust. The Tax Court has held in two cases that an estate or trust may file an agreement under $302(c) (2) waiving family attribution, with the result that a waiver by the estate or trust and a beneficiary prevents attribution to the estate or trust through the beneficiary. Lillian M. Crawford, 59 T.C. 830 (1973); Rodgers P. Johnson Trust, 71 T.C. 941 (1979). These decisions should be "codified" by amending $302(c) (2) to refer specifically to an estate or trust as a "distributee". 4. Section 2011 Credit As previously noted, some states permit the payment of a state death tax attributable to a closelyheld business to be deferred and paid in installments. The usefulness of these statutes has been lessened by the Service's policy regarding allowance of the state death tax credit authorized by $2011. The Service has taken the position that a credit under this section will be allowed only to the extent a state death tax has been paid at the time of the allowance. See Gibbs, Emerging IRS Attitude Toward State Death Tax Credit and Its Impact on Installment Payment of Estate Taxes, U. Miami 14th Inst. on Est. Plan. 1800 (1980). $2011 credit should also be allowed for deferred tax provided the executor certifies that a state death tax in an amount at least equal to the credit will be paid. My name is Stewart Dunn. I am a partner in the law firm of Ivins, Phillips & Barker in Washington, D.C. For approximately 25 years, I have been involved in estate planning for owners of closely held businesses. At no time during these years have the problems of our economy and estate tax structure had a greater adverse impact on family business owners than today. The estate tax has been affected by inflation in the same way as the income tax. Due to "bracket creep," the effective tax rate increases as the nominal value of the gross estate increases. Valuation problems and illiquidity of closely held business interests make the effect of inflation and bracket creep particularly severe on owners of family businesses. Based upon inflation alone, if the value of a closely held business interest was $1,000,000 in 1956 when I entered practice, it would have a value of $3,300,000 today. Assuming this business interest in 1956 constituted the entire value of a decedent's taxable estate, the estate tax would have been $326,000, with a 37% marginal estate tax and a 33% average rate. Assuming the owner of this same business interest died at the end of this year and his business increased in value only by the general rate of inflation, his estate tax on a taxable estate of $3,300,000 would increase to $1.5 million, with a 53% marginal estate tax and a 45% average rate. In twenty-five years, inflation and progressive estate taxes will have quintupled the estate tax owed by this family business owner even though his business interest will have only tripled in value and no greater amount of liquid assets will be available to pay the estate If a business increases in value due to factors other tax. tax dilemma will be even more acute. The estate tax law with respect to valuation of closely held businesses is stated in very simple terms. As defined in the Treasury Regulations, value is "the price at which. . property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Though the language of the law may be simple, valuation of closely held businesses is probably the source of more controversy than any other single issue arising under the estate tax law. For many estates, the only issues to be raised on audit are issues concerning the valuation of a family business. The reason for controversy is that there is no established market for such an interest. In the absence of an actual sale between a willing and informed seller and buyer, the definition poses a highly conjectural factual question. What a hypothetical buyer would pay and a hypothetical seller take is a question on which reasonable and expert opinions vary widely. Furthermore, it is a question to which a large number of factors all the things that might seem important to any potential buyer or seller are relevant. - For a decedent's estate containing a minority interest in a closely held business, the key estate tax issue is the impact of this theoretical "fair market value" standard in the absence of any actual market for such interest. The critical factor to note today is that the law which has determined how much discount should be accorded a minority interest in a closely held corporation developed over a period when interest rates were low. During such times, a willing buyer would compare a return of say 6% on certifi- |