common for the preferred) he owns only 51% of the common, having given the rest of the common away before creating the preferred What happens in this case when he dies holding just interest? the preferred interest? It is unclear how the spousal rules of §2701(d) (3) will work when the surviving spouse is not a U.S. citizen. The rules do not seem to fit with the qualified domestic trust rules of §2056A under which the tax at the death of the surviving spouse is treated as being the tax of the first spouse to die. IV. Comments Relating to Family Member Retained Interests 1. The family consent rules of §2701(b) (3) (B) and Further, the placement of §2701(c) are very complex. The consent to special treatment §2701(b) (3) (B) is confusing. should not be under a title called "Waiver of Special Treatment." Moreover, if a family member consents to the application of the rules, it exposes to potential further transfer tax preferred interests that already belong to the family member and presumably have already been taxed in some fashion or earned by that person. The "dueling siblings" situation needs to be dealt with. For example, assume that parent and daughter (who is not active in business) own preferred; parent gives common to son and daughter consents under §2701(b) (3) (B) . Son causes corporation 2. to pass by a dividend. Is daughter deemed to have made a gift to son? If so, this is very unfair. The solution may be to eliminate from §2701 preferred stock owned by any person in the same generation as the common stock owner. 3. Shouldn't the need for the consent of a non-transferor family member under §2701 (b) (3) (B) be treated as waived if such individual is incapacitated? A guardian ad litem would never be able to approve having the incapacitated family member consent because there are only negative implications for the family member. On the other hand, the problem with a deemed or automatic consent is that it might hurt the incapacitated family member through later deemed gifts or additional gift or estate tax. One answer might be to have any later deemed gift be considered to be made by the original transferor rather than by the family member. a. The concept of electing QFP treatment set forth in §2701(b)(4) of the Discussion Draft could be broadened to include income trusts, partnerships with other contingencies and joint purchases with other income-producing assets. Deemed gifts would then occur where the table rate applicable to the elected QFP is not met. However, any such provision should be coupled with a refund (and unified credit adjustment) where the table rate is exceeded. Similarly, refunds (and unified credit adjustments) should be available with respect to interests valued at zero where payments are in fact made or interests transferred. Section 2701(e) appears to do this to a limited extent. P b. If the transferor elects under §2701 (b) (3) (A) to have "payments" not treated as QFPs, when he later makes a transfer of the right to those payments, he should be able to treat them as being worth zero. With respect to non-QFPs which are treated as being zero by §2701(a), a later adjustment in value of §2701(e) is available. If the transferor elects under §2701(b) (3)(A), it is unclear whether §2701(e) applies. a. Under what circumstances does an individual become a family member under §2703 (a) (2) by reason of a gift? It should be limited to a gift of an interest in an entity subject to Chapter 14; otherwise, unrelated business partners who give each other birthday gifts could be subject to Chapter 14. b. Once a non-family member becomes a family member under §2703(a)(2), is he a family member solely for the purpose of the transfer to that person, or does that person become a family member for purposes of all other transfers made by the transferor at any time after the transferor makes him a family member? Similarly, is he a family member for purposes of determining whether an entity has the requisite family ownership? Presumably, he should just be a family member for the transfer. c. As presently written, it appears that a charitable donee would be treated as a family member under §2703(a)(2). It should be made explicit that a charity cannot become a family member. d. How do the indirect ownership rules of Do they operate pro rata, as we believe they §2703 (b) operate? should? How do they operate for spray and discretionary trusts? We do not favor the treatment of a spray or discretionary trust in IRS Notice 89-99 in which a permissible distributee beneficiary was treated as though the discretion would be exercised to the maximum extent in that beneficiary's favor thereby attributing the whole trust to each discretionary distributee beneficiary. 3. Tax Liability. The ability to pay the transfer tax under Chapter 14 is endangered by §2701 (c) (3) (B) . For example, assume that the major asset of a transferor's estate is his interest in a closely held corporation (he is the founder's son). He transfers all of his common stock in that corporation (which represents 15% of the common stock of that corporation) to his daughter. He retains a compensation arrangement which is subject to the gross sales of the corporation. The preferred owners of the corporation (who are family members and have 55% of the common stock ownership) refuse to elect into the system. As a consequence, the transferor (the son) is deemed to own 70% of the equity interest of the corporation. Neither the transferor, nor the transferee, have the ability to pay the transfer taxes associated with that transaction. Who pays the tax? It appears possible for a transferee, under this system, to receive a gift, for which the transferee will be liable, which is |