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ESTATE AND GIFT TAX CONSIDERATIONSexpected to appreciate over time, the amount of appreciation in the asset can befrozen at its current level and the appreciation potential conveyed away at littleor no tax cost.One technique involves the recapitalization of stock in a corporation. All ofthe original owners of the stock in the corporation could arrange for the deliveryof their stock to the corporation in return for the reissuance of two new classes ofstock, often called common and preferred. Each class of stock is granted differentattributes. This is a type of recapitalization.For example, the preferred stock could have been designed to have a rightto receive a fixed specified rate of return prior to any of the corporation’sprofit being shared with respect to the common stock. Only after the right toincome of the preferred stock was met could the balance be allocated amongthe shares of common stock. But the value of the preferred stock could notincrease as the corporation grew, because the return with respect to the preferredstock was fixed. Therefore, the growth of the corporation would bereflected only in the value of the shares of common stock. As a result, at thetime of recapitalization, most of the value of the company would be absorbedby the preferred stock and, until the company’s value grew over the future,the common shares would be attributed very little value. In this way, the originalshareholders could give the common stock to their children and grandchildrenat a low value, and therefore a reduced gift tax cost, while retainingpreferred rights to the company’s profits. Thus, the parents effectively frozethe value of the preferred stock to prevent its growth in their estates anddiverted appreciation of the company to the common stock that was transferredby gifts to their children.These estate freeze techniques were viewed as abusive rules, enacted toregulate their use with respect to intrafamily transactions. Rules apply to thetaxation of intrafamily transfers of equity interest in corporations and partnerships,173 the effect of intrafamily agreements restricting transfer of these interests(buy-sell agreements), 174 the taxation of transfers in trust, 175 and the effectof lapsing rights. 176 The overall focus of these rules with respect to intrafamilytransfers is on determining whether a gift has been made and, if so, the value ofthat gift. In effect, the law provides a set of special valuation rules for intrafamilytransfers under circumstances in which the transferor retains an interest inproperty with characteristics that differ from the transferred interest in thatproperty. In general, the framework of the special valuation rules for intrafamilytransfers is organized so as to ignore, for transfer tax purposes, attributes oftransferred property interests that otherwise would reduce the value of thoseinterests. Thus, the special valuation rules do not prohibit transfers; the rulesmerely govern the valuation of certain transfers. These same special valuationrules also provide for certain statutory transfers that are allowed to escapeapplication of the special valuation rules.173 IRC § 2701.174 IRC § 2703.175 IRC § 2702.176 IRC § 2704. 250