A contract is the one source of a standard of value the parties choose for themselves. For transfer tax the Code starts by disregarding that choice and lets it back in only through a statutory exception.
Start a conversation with the Valuation Concierge, already scoped to buy-sell agreements. Pick a starting point, or describe the matter directly.
Everywhere else on this site the definition of value is imposed — by a statute, a cause of action, a forum. A buy-sell agreement is the exception: the parties fix it themselves, in advance, for a trigger that may be decades away. That is also where the drafting has the furthest to travel. IRC §2703 starts from the position that the agreement is ignored, and lets it back in only through a three-part exception. The older regulation it is read alongside requires a price that is fixed or determinable and binding in life and at death. And validity is not the end of it: how a buyout is funded is a separate question from whether the agreement is respected, and in Connelly the agreement never got past §2703 at all before the funding structure made the result worse.
Six things that decide whether a contractual price becomes the taxable value, and what happens when it does not.
IRC §2703(a) directs that the value of property be determined without regard to (1) any option, agreement or other right to acquire or use the property at a price less than fair market value determined without regard to that right, or (2) any restriction on the right to sell or use the property. The agreement is disregarded unless it earns its way back in.
Section 2703(b) disapplies the general rule only where the option, agreement, right or restriction meets each of three requirements: it is a bona fide business arrangement; it is not a device to transfer the property to members of the decedent’s family for less than full and adequate consideration in money or money’s worth; and its terms are comparable to similar arrangements entered into by persons in an arm’s-length transaction.
Treas. Reg. §25.2703-1(b)(4)(i) asks whether the agreement’s terms ‘could have been obtained in a fair bargain among unrelated parties in the same business’ and whether they conform to ‘the general practice of unrelated parties’. That is why a book-value formula lives or dies on whether book value is how unrelated parties in that industry actually price a buyout — not on whether the formula seems fair.
Treas. Reg. §25.2703-1(b)(3) deems all three requirements satisfied where more than 50% by value of the property subject to the restriction is held by individuals who are not members of the transferor’s family. Where genuinely unrelated owners hold the majority, the §2703 fight largely disappears.
Courts read §2703 together with Treas. Reg. §20.2031-2(h), so the agreement must also supply a price that is fixed or determinable and be binding both during life and at death. In Connelly the Eighth Circuit held the company’s value had to be determined ‘without regard’ to the shareholders’ agreement: it ‘fixed no price nor prescribed a formula for arriving at one’, and the parties had ignored the appraisal mechanism it did contain, settling on a figure by agreement after the death. 70 F.4th 412 (8th Cir. 2023).
Affirming on the valuation question, the Supreme Court held that a corporation’s obligation to redeem shares is not necessarily a liability offsetting the life insurance proceeds set aside to fund it, so corporate-owned insurance increased the value of the decedent’s own shares. Connelly v. United States, No. 23-146 (U.S. 6 June 2024). The Court observed that a cross-purchase structure would have avoided the problem, while noting it was not holding that a redemption obligation can never reduce value.
What is actually read when a buy-sell price is contested, and in what order.
A buy-sell agreement can decide the taxable value, or be treated as though it did not exist.
Courts read §2703 alongside Treas. Reg. §20.2031-2(h), so an agreement must also fix a price that is determinable and be binding in life and at death. The Eighth Circuit in Connelly held the agreement had to be disregarded because it fixed no price and prescribed no formula, and the parties ignored the appraisal mechanism it did contain.
Not by itself. IRC §2703(a) begins by valuing the property without regard to any option, agreement or right to acquire it at less than fair market value, or any restriction on the right to sell or use it. The agreement is respected only where §2703(b)’s three requirements are all met: a bona fide business arrangement; not a device to transfer the property to members of the decedent’s family for less than full and adequate consideration in money or money’s worth; and terms comparable to similar arrangements entered into by persons in an arm’s-length transaction. Treas. Reg. §25.2703-1(b)(3) deems all three met where more than 50% by value of the affected property is held by non-family members. Whether a particular agreement clears the test is a question for counsel on the actual terms.
Because two distinct things went wrong, and it is worth keeping them apart. First, validity: the Eighth Circuit held the corporation’s value had to be determined without regard to the shareholders’ agreement, because it fixed no price and prescribed no formula for arriving at one, and because the parties ignored the appraisal mechanism it did contain and instead settled on a figure by agreement after the death (70 F.4th 412 (8th Cir. 2023)). Second, funding: the Supreme Court then held unanimously that a corporation’s contractual obligation to redeem shares is not necessarily a liability reducing the corporation’s value for estate tax purposes, so the corporate-owned life insurance bought to fund the redemption increased the value of the very shares being redeemed. Connelly v. United States, No. 23-146 (U.S. 6 June 2024).
It names a standard and leaves the operative questions open, which is how most of these disputes start. Fair market value is a definition; it does not by itself say what level of value applies — whether the interest is valued as a proportionate share of the whole or as the minority block it actually is — and it does not say whether adjustments for lack of control or lack of marketability are permitted. Those are three separate questions, and an agreement can answer the first while leaving the other two to be argued at the worst possible moment. The same clause usually also omits the date, the appraiser selection process and the tie-breaker. Drafting is counsel’s work; what this Institute maps is what each of those silences does to the valuation.
Often not, and the difference decides how much of the dispute that person may resolve. Where the agreement provides that an accountant or appraiser acts ‘as an expert and not as an arbitrator’, the clause is drafted to confine the appointee to a specified determination rather than to the interpretation of contract language or the resolution of legal arguments — which means questions such as what the valuation clause means, or whether discounts are permitted under it, may sit outside the referral entirely. The label is not self-executing. What the appointee may decide, and whether the result is final, is determined under the law of the forum on the authority the agreement actually grants, so the drafted scope matters more than the words chosen to describe it. The practical consequence of a poorly scoped referral is a number that does not resolve the disagreement.
Describe what the agreement says about price, timing and who decides. The Institute will help you see which questions it answered and which it left open.