Dear Friend,
Imagine you’ve spent thirty years building a business or a legacy foundation. You have a succession plan in place. You’ve even sat down with your partners – perhaps your siblings or children – and agreed on a specific price for your shares. It’s written in ink, signed, and tucked away in a safe. You feel secure knowing exactly what that business interest is worth for estate tax purposes.
Then the IRS knocks. They don’t care about your signed agreement. They don’t care about your “gentleman’s handshake.” They see a number that looks suspiciously low, and they decide to rewrite your financial future.
This isn’t a hypothetical horror story. It’s the reality of how the IRS views internal price agreements under Internal Revenue Code (IRC) §2703.
To understand how to protect your organization and your heirs, we have to look at the landmark case of Estate of Littick v. Commissioner – and more importantly, why the “win” in that case wouldn’t happen today.
The Littick Case: A Shortcut That No Longer Exists
In 1958, the Estate of Littick v. Commissioner centered on a family-owned corporation. Three brothers entered into a buy-sell agreement. They agreed that if any of them died, the corporation would buy back their shares at a fixed price of $200,000.
When one brother passed away, his estate valued the stock at that $200,000 price tag. The IRS took one look at the books and argued the shares were actually worth closer to $257,000. The IRS claimed the agreement was a “testamentary substitute” – a fancy way of saying they thought the brothers were just trying to pass value to each other without paying the full estate tax.
In a surprising turn for the time, the Tax Court actually sided with the Littick estate. They ruled that since the agreement was legally binding and applied to everyone equally, the $200,000 price stood.
Here is the catch: If you try that today, you will lose!!
The IRS hated the Littick ruling because it created a massive loophole. Business owners could simply set an artificially low price in a buy-sell agreement to “freeze” the value of their estate. To kill this strategy, Congress eventually passed IRC §2703.
The Reality of IRC §2703
Today, Section 2703 is the wall you hit when you try to use an internal price agreement to lower your tax bill. The law essentially says that the IRS can ignore any option, agreement, or right to acquire property at a price less than fair market value. If you want the IRS to respect your price agreement, you can’t just pick a number that feels right.
You have to prove it meets three very strict criteria. If you miss even one, your agreement is disregarded for valuation purposes.
1. It Must Be a Bona Fide Business Arrangement
This sounds simple, but it’s a high bar. You have to prove that the agreement exists for a legitimate business reason – like ensuring the continuity of management – rather than just being a tax dodge. If the only reason the agreement exists is to keep the value low for the IRS, you’ve already lost.
2. It Cannot Be a Device to Transfer Property to Family for Less Than Full Consideration
This is where most family-run organizations and businesses stumble. The IRS looks for “sweetheart deals.” If you’re selling shares to a stranger for $100 but telling your son he can buy them for $40, the IRS sees a gift, not a business deal. They call this a “device” to shift wealth, and they will blow right through it.
3. The Terms Must Be Comparable to Similar Arm’s Length Transactions
This is the “Pro Standard.” You have to prove that if two strangers were negotiating this deal, they would have come to the same terms. You need data. You need evidence of what other businesses in your industry are doing. Without “arm’s length” comparability, your internal agreement is just a piece of paper.
The Common Pitfalls To Avoid
In our work with growing organizations and non-profit leaders, we see the same mistakes repeated. The Littick mindset – the idea that “if we all sign it, it’s legal” – is a dangerous relic.
- The “Set It and Forget It” Error
Many organizations write a buy-sell agreement when they get started and never look at it again. By 2026, the business has grown tenfold, but the “agreed price” is still stuck your original number. The IRS will argue that no rational business person would keep a 30-year-old price tag on a booming asset. - The Lack of Professional Appraisal
If you and your board members decide on a price over lunch, you have no defense. The IRS has a fleet of valuation experts. If you don’t have a qualified, third-party appraisal to back up your number, you’re bringing a knife to a gunfight. - Ignoring the “Comparability” Rule
Most people ignore the third prong of Section 2703 because it’s the hardest to prove. It’s not enough to say the price is “fair.” You have to show that it mirrors the real world.
5 Practical Tips to Get It Right
We want your organization to be sustainable and your succession plans to be bulletproof. To avoid the ghost of Littick and the hammer of Section 2703, follow these steps:
1. Use a Formula, Not a Fixed Number
Stop picking a flat dollar amount. Instead, use a valuation formula – like a multiple of EBITDA or a book value adjustment – that updates automatically as the business grows or shrinks. This shows the IRS that the price is tied to the actual health of the organization, not a pre-planned tax outcome.
2. Get a Periodic Qualified Appraisal
We recommend a professional valuation every two to three years, or whenever a major “trigger event” occurs. Having a contemporaneous appraisal (one done at the time of the agreement, not years later during an audit) is your strongest shield. It proves you acted in good faith based on market data.
3. Document the “Why”
When you create or update your agreement, document the business necessity. Are you trying to prevent a hostile takeover? Are you ensuring that only active participants in the organization hold voting rights? Are you protecting the liquidity of the non-profit? Write these reasons down in your corporate minutes.
4. Conduct a “Comparability Study”
Have your tax advisor or appraiser look at similar buy-sell agreements in your industry. If you can show that “Company X” and “Company Y” use similar restrictive covenants and pricing tiers, the IRS will have a much harder time claiming your deal is a “device” for tax evasion.
5. Keep It “Arm’s Length”
Even if you are dealing with family, treat the negotiation like you’re dealing with a competitor. If the terms are too generous – like 0% interest on a buyout or a 20-year payment plan – the IRS will flag it. Make sure the interest rates and payment terms reflect current market conditions.
Building for the Long Term
The lesson from Littick v. Comm. isn’t that you can’t have a buy-sell agreement. It’s that your agreement must be rooted in reality. We’ve seen too many brilliant succession plans fall apart because the creators tried to be too clever with the valuation.
When you align your internal agreements with the standards of IRC §2703, you aren’t just avoiding an audit. You are building a professional, sustainable structure that can survive for generations. You’re ensuring that when the time comes to pass the torch, the only thing your heirs or successors have to worry about is the mission—not a massive, unexpected tax bill from the IRS.
Don’t let a “sweetheart deal” turn into a bitter legal battle. Get your valuation right, back it up with data, and keep your focus on the growth and sustainability of your organization. Transparency with the IRS isn’t just about compliance; it’s about protecting your legacy.
Law and Tax Magazine 
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