... Buy-sell agreements and....

A buy-sell agreement entered into or substantially modified after Oct. 8, 1990 will not be recognized unless all of the following conditions are met. * It is a bona fide business arrangement. * It is not a device to transfer property to family members for less than full consideration. * Its terms are comparable to similar arrangements entered into by persons in an arm's-length transaction.

These first two requirements are similar to those contained in current regulations. Prop. Regs. Sec. 25.2703-1(b)(1)(iii) clarifies the new "similar arrangement" requirement by limiting it to the time the right or restriction is created. In addition, Prop. Regs. Sec. 25.2703-1(b)(4)(i) provides that relevant factors for determining whether terms are comparable to similar arrangements will be the agreement's expected term, the property's current fair market value (FMV), anticipated changes in value during the term of the arrangement, and the adequacy of any consideration given in exchange for the rights created.

Buy-sell agreements entered into before Oct. 9, 1990, and not substantially modified after that date, will not fall under the new rules. Prop. Regs. Sec. 25.2703-1(c)(1) provides that any discretionary modification of a right or restriction, whether or not authorized by the agreement's terms, that results in other than a de minimis change to the quality, value or timing of the right or restriction, is a substantial modification. Prop. Regs. Sec. 25.2703-1(c)(2) provides exceptions f or four modifications that will not be considered substantial. 1. A modification required by the terms of a right or restriction. 2. A discretionary modification of the agreement that does not change the right or restriction. 3. A modification of a capitalization rate, if the rate is modified in a manner that bears a fixed relationship to a specified market interest rate. 4. A modification that results in an option price that more closely approximates FMV. Consequently, revisions to existing agreements should be considered carefully to make certain they fall within the exceptions.

The Sec. 2703 rules apply to more than just buy-sell arrangements; they apply to any option, agreement, rights or restrictions to acquire, sell or use property. Prop. Regs. Sec. 25.2703-1(a)(3) provides that such rights or restrictions may be found in partnership agreements, articles of incorporation, bylaws, shareholders' agreement or any other agreement, or may be implicit in the entity's capital structure. If such agreements are at less than FMV, they will not affect the Service's determination of the entity's value.