Reacting to the taxpayer's victory in United States v. Byrum, Congress originally amended § 2036(a)(1) to provide that the retention of voting rights over transferred stock constituted the retention of the “enjoyment” of the transferred stock so as to invoke § 2036(a)(1).15 Congress modified this so-called “anti-Byrum” rule in 1978 to limit its application to the retention of voting rights in controlled corporations.16 The legislation as revised is now contained in § 2036(b). Under § 2036(b)(1), a decedent is treated as having retained the enjoyment of transferred stock if (1) the decedent retained the right to vote the transferred shares, and (2) the corporation whose stock was transferred is a “controlled corporation.”17 The voting-interest threshold for triggering controlled corporation status is fairly low: the decedent need only own or possess the right to vote 20 percent of the total combined voting power of the corporation. IRC § 2036(b)(2). Ownership for this purpose includes direct and indirect ownership, with attribution rules borrowed from corporate taxation determining the latter. Id. (incorporating § 318 stock ownership attribution regime). Even if the decedent dropped below the 20 percent voting power threshold prior to his death, the corporation will still be considered to be controlled by him for purposes of § 2036(b) if the threshold were satisfied at any point after the stock transfer and within three years of his death. In determining whether the decedent possessed the right to vote stock for purposes of § 2036(b), it is immaterial whether the decedent could vote the stock alone or in conjunction with another. Furthermore, the capacity in which the decedent possessed the right to vote the transferred stock is irrelevant as a general matter. Voting rights are counted toward the 20 percent threshold whether the decedent could vote the stock in his individual capacity, as trustee of a voting trust, or as trustee of a trust to which the stock is transferred.18 The requirement that the decedent retain the voting rights over transferred stock as a condition to the application of § 2036(b) undermines the purpose of the legislation significantly. For example, if a 60 percent shareholder transfers a five percent stock interest outright to a trust of which a third party serves as trustee, the transfer does not trigger § 2036(b). That is the case even though the decedent possesses effective voting control over the corporation, rendering the right to vote the five percent transferred interest largely irrelevant.19 See Prop. Treas. Reg. § 20.2036-2(a). On the other hand, if the decedent had retained the right to vote the transferred stock (perhaps by serving as trustee of the trust), the transferred stock interest would be captured under § 2036(a)(1) by way of § 2036(b). Notwithstanding the dramatically different estate tax results, the transfers are virtually indistinguishable as a practical matter. Similarly, § 2036(b) has no application to the transfer of shares of non-voting stock. The Senate report accompanying the enactment of § 2036(b) acknowledged this limitation, 298 which the Service has endorsed. See Rev. Rul. 81-15, 1981-1 C.B. 457; Prop. Treas. Reg. § 20.2036-2(a).20 This limitation significantly undermines the remedial purpose of § 2036(b) by supplying a safe-harbor to accomplish the very estate planning objective that § 2036(b) was intended to curtail. Section 2036(b) therefore has been reduced primarily to a trap for the unwary. explain in detail with example

Section 2036(b) of the tax code deals with the transfer of stock and the retention of voting rights. It was introduced as a response to the case of United States v. Byrum, where the taxpayer was able to transfer stock but retain voting rights without the stock being included in their estate. Let's illustrate this with an example: Suppose David owns 60% of the shares in a corporation. He transfers 5% of his shares to a trust, but retains the right to vote those shares. Under Section 2036(b), because David retains the right to vote more than 20% of the total combined voting power of the corporation, the value of the transferred shares could be included in his estate for tax purposes when he dies. However, if David transfers the 5% of his shares to a trust and does not retain the right to vote those shares, Section 2036(b) would not apply, even though David still effectively controls the corporation with his remaining 55% of shares. Similarly, if David transfers non-voting shares, Section 2036(b) would not apply, because he's not retaining any voting rights. This is seen as a limitation of Section 2036(b), as it allows a way to transfer stock without it being included in the estate, which was what Section 2036(b) was intended to prevent. In essence, Section 2036(b) can be seen as a trap for those who are not aware of

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