Section of Taxation Publications
  VOL. 58
NO. 2
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Missing the Balance: Smith v. United States and the Misapplication of Section 2703
Robert O. Hadfield


In Smith v. United States, on the government’s motion for partial summary judgment, the District Court for the Western District of Pennsylvania correctly held that section 2703(a) of the Code applied to a family limited partnership (FLP) agreement. Section 2703(a) allows the Service to disregard restrictive provisions found within buy-sell agreements when calculating the estate, gift, or generation-skipping taxes associated with a gift of equity ownership in a company. The court also analyzed the safe harbor exception created by section 2703(b) but was unable, based upon the record, to determine whether the agreement should qualify for this exception. However, before finding the record insufficient, the court defined the evidentiary standards in such a way that it is implausible that even legitimate FLPs could understand or overcome the burden of section 2703(b). These standards, as applied by the court, contravene the express intent of Congress when passing section 2703.

Part I of this Note presents a brief description of buy-sell agreements and a summary of the requirements and legislative history of section 2703. Parts II and III summarize the facts and holding, respectively, of Smith. Part IV discusses the implications of the court’s decision, examining the court’s application of the three tests created in section 2703(b). Part V provides an alternative interpretation of the evidence sufficient to satisfy the third test found in section 2703(b).


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


If you are an ABA member, you can receive The Tax Lawyer and the Section NewsQuarterly, both quarterly publications, when you join the Section of Taxation. Anyone can subscribe to The Tax Lawyer by contacting the ABA Service Center.