## Facts

- The decedent held super-voting Class A shares in a family-controlled S corporation that owned the Atlanta Falcons.
- The corporation had two classes of common stock: Class A with enhanced voting rights and Class B with ordinary voting rights.
- A shareholders’ agreement provided that the decedent’s Class A shares would convert to Class B shares upon his death.
- Immediately before death, the family held about 97.4% of the corporation’s voting power; immediately after death (post-conversion), the family held about 88%.
- The estate reported the stock at its post-conversion value (ordinary voting rights).
- The IRS valued the stock as if it retained the enhanced voting rights and assessed additional estate tax.
- The estate paid the assessment and filed a refund suit; the parties filed cross-motions for partial summary judgment on whether IRC § 2704(a) governed the voting-rights lapse.

## Issues

1. Whether the conversion of the decedent’s super-voting shares to ordinary-voting shares at death constituted a “lapse of voting rights” occurring “by reason of” death in a family-controlled corporation under IRC § 2704(a).
2. If § 2704(a) applied, whether the shares had to be valued for estate-tax purposes as if the enhanced voting rights were nonlapsing.
3. Whether the corporation satisfied § 2704’s family-control requirement immediately before and immediately after the lapse, and whether any claimed exception removed the transaction from § 2704(a).

## Decision

- The court granted the United States’ motion for partial summary judgment and denied the estate’s cross-motion.
- The court held that the enhanced voting rights lapsed at death within the meaning of IRC § 2704(a).
- The court found the corporation remained family-controlled both immediately before and immediately after the lapse.
- The court ruled that the stock must be valued as if the enhanced voting rights were nonlapsing, resulting in a higher estate-tax valuation than the estate reported.

## Legal Principles

- IRC § 2704(a) treats a death-triggered lapse of voting (or liquidation) rights in a family-controlled entity as a transfer occurring immediately before death.
- A voting right “lapses” when an interest held by the decedent loses voting power at death (including through automatic conversion from high-vote to low-vote shares).
- For valuation under § 2704(a)(2), the interest is valued as though the lapsed right were nonlapsing; the lapse is ignored in determining estate-tax value.
- Family control for § 2704 purposes depends on control thresholds and may be satisfied even if the family’s voting percentage drops after death, so long as the family retains control before and after the lapse.
- A contractual provision established during life does not prevent application of § 2704(a) when the operative event eliminating the right is the decedent’s death.

## Conclusion

The Court of Federal Claims held that a shareholders’ agreement causing super-voting shares to convert to ordinary-voting shares at death triggered IRC § 2704(a), requiring the estate to value the stock as if the enhanced voting rights did not lapse at death.


Estate of Smith v. United States, 103 Fed. Cl. 533 (Fed. Cl. 2012)