Peter H. Agrapides, MBA, CVA Stephanie Loomis-Price, Esq.

Transcription

1 Peter H. Agrapides, MBA, CVA Stephanie Loomis-Price, Esq. All rights reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means graphically, electronically or mechanically, including photocopying, audio/video recording or information storage and retrieval of any kind without the express written permission of the National Association of Certified Valuators and Analysts.

2 DISCLAIMER All rights reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means graphically, electronically, or mechanically, including photocopying, audio/video recording, or information storage and retrieval of any kind without the express written permission of the Consultants Training Institute (CTI ), the National Association of Certified Valuators and Analysts (NACVA ), the Institute of Business Appraisers (IBA ), and the presenter. The information contained in this presentation is only intended for general purposes. It is designed to provide authoritative and accurate information about the subject covered. It is sold with the understanding that the copyright holder is not engaged in rendering legal, accounting, or other professional service or advice. If legal or other expert advice is required, the services of an appropriate professional person should be sought. The material may not be applicable or suitable for the reader s specific needs or circumstances. Readers/viewers may not use this information as a substitute for consultation with qualified professionals in the subject matter presented here. Although information contained in this publication has been carefully compiled from sources believed to be reliable, the accuracy of the information is not guaranteed. It is neither intended nor should it be construed as either legal, accounting, and/or tax advice, nor as an opinion provided by the Consultants Training Institute (CTI), the National Association of Certified Valuators and Analysts (NACVA), the Institute of Business Appraisers (IBA), the presenter, or the presenter s firm. The authors specifically disclaim any personal liability, loss, or risk incurred as a consequence of the use, either directly or indirectly, of any information or advice given in these materials. The instructor s opinion may not reflect those of the CTI, NACVA, IBA, their policies, other instructors, or materials. Each occurrence and the facts of each occurrence are different. Changes in facts and/or policy terms may result in conclusions different than those stated herein. It is not intended to reflect the opinions or positions of the authors and instructors in relation to any specific case, but, rather, to be illustrative for educational purposes. The user is cautioned that this course is not all inclusive.. All rights reserved South State Street, Suite 400, SLC, UT, The Consultants' Training Institute (CTI) is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted through its web site: learningmarket.org. 2

3 Participants will be able to: a. Analyze pertinent sections of a Partnership/Operating Agreement to support the analysts discounts for lack of control & marketability. b. Understand the various Tax Code sections pertinent to these valuations. c. Be able to summarize their analysis of the Agreement and Tax Code sections in their valuation report. 3

4 Common Provisions 1. Term of existence Definite period Perpetual 2. Business purpose 3. Transfers of partnership interests 4. Capital contributions General and Limited Partners 5. Management Authority: 1. General v. Limited Partners 2. Managing v. Non-Managing Members 3. Voting v. Non-Voting Members 4. Preferred Interests 4

5 Common Provisions (Continued) 7. Amendments 8. Non-partition of assets 9. New member/partner admission 5

6 What to Look For No guarantee by the General Partner (Manager) of a return of any partner s (member s) capital contribution, nor allocations of profits or losses, nor any distributions Limited partners (non-managing members) excluded from participation in management (including distributions) Election & Removal provisions for new General Partners (Managing Members) Limitations on transfers (voluntary or involuntary) of partnership (membership) interests 6

7 What to Look For Transferee or assignee will not become a substituted limited partner (member) unless approved by all partners Managing partners (members) are required to make an IRC Sec. 754 election (basis adjustment). This affects discount for built-in capital gains. Limitations on Limited Partners (members) to withdraw prior to the expiration of the stated term Dissolution mirrors state law 7

8 Purpose Term Management Transfer of interests Admission of new partners/members Amendments Partition Conclusion 8

9 Chapter 14 Section 2701 taxation of certain transfers of corporate and partnership interests Section 2703 impact of buy-sell agreements on transfers Section 2704 effect of certain lapsing rights have on property subject to transfers 9

10 Chapter 14 Section 2701 Applies to: Where the transferor retains an applicable retained interest after the transfer and, Where the transferor and applicable family members control the corporation or partnership following the transfer If applicable Special valuation rules apply 10

11 Transfer of an interest in a corporation or partnership. An applicable family member. When the transferor retains an applicable retained interest. Where the transferor and family members control the entity after the transfer. 11

12 Value of the entity must be calculated on an Enterprise or Controlling Interest Basis. Value of the interest containing regular and fixed cumulative distribution rights interest must be deducted. Used in Estate Tax Freeze transactions. 12

13 Chapter 14 Section 2703 Value of property is determined without regard to any restrictions unless: 1. Restriction is a bona fide business arrangement; 2. Restriction is not a device to transfer property for less than full and adequate consideration and 3. Restriction must be comparable to similar arrangements entered into in an arm s-length transaction. 13

14 The committee is aware of the potential of buy-sell agreements for distorting the transfer tax value. Therefore, the committee establishes rules that attempt to distinguish between arrangements designed to avoid estate taxes and those with legitimate business arrangements. The rules generally disregard a buy-sell agreement that would not have been entered into by unrelated parties acting at arm s length 136 Cong. Rec. S15681 (10/18/90) 14

15 Senate Report states that, apart from the restrictions concerning acquisition or use of the property, addressed in the bill, the bill does not otherwise alter the requirements for giving weight to a buy-sell agreement. 15

16 Congress intent was to combat potential abuses with overly-restrictive buy-sell agreements. The IRS interpretation of the statute, as set forth in the Technical Advice Memorandums ( TAMs ) is contrary to Congress intent. 16

17 Supersedes the need for Sec If the IRS, interpretation of Sec. 2703(a) is adopted and the existence of a partnership can be ignored, all restrictions affecting the rights of partners are covered by Sec. 2703(a) and noting remains to be addressed by Sec. 2704(b). 17

18 Since the IRS interpretation of IRC Code Sec. 2703(a) is contrary to Congress s and Treasury s intent and to the statutory construction of the Code and regulations, it should be rejected, and Sec 2703(a) should not be applied in a manner that disregards the creation of a partnership. - Financial Application Applications & Models, James R. Hitchner, Wiley,

19 Chapter 14 Section 2704 Section 2704(a) treats the lapse of certain rights as a gift by, or as includible in the estate of, the owner of the lapsed right. Section 2704 (b) disregards certain restrictions on the ability of an entity to liquidate when determining the estate or gift tax value of the interest to which the restriction applies. 19

20 Section 2704(a) provides that, if certain control criteria exist, a lapse of any voting, liquidation, or similar right in a partnership will be treated as a transfer for gift tax purposes by the individual who held the right immediately before the lapse. Section 2704(a) applies only if, both before and after the lapse, the individual holding the lapsed right immediately before the lapse and the members of such individual's family control the partnership. 20

21 Control has different definitions for a General Partnership and for a Limited Partnership. General Partnership the holding of at least 50 percent of the capital or profit interests of the partnership. Limited Partnership the holding of any interest as a general partner. 21

22 Most agreements contain provisions that cause a general partnership interest to convert to a limited partnership interest upon the occurrence of certain triggering events (e.g., transfer, death, bankruptcy). The conversion does constitute a lapse of voting and liquidation rights and is subject to Sec. 2704(a). HOW DO YOU VALUE THE GP INTEREST (i.e., as a GP or LP)? 22

23 The interest must be valued as if there had been no lapse in the general partner s voting and liquidation rights. This assumes that any lapsed rights will be assumed to have not lapsed (thus increasing value). 23

24 Under Section 2704(b), if a person transfers an interest to a family member and the transferor and members of the transferor s family control the entity immediately before the transfer, then the transferred interest will be valued without considering any applicable restriction 24

25 An applicable restriction means any restriction that limits the ability of a partnership to liquidate if: The restriction lapses, in whole or in part, after a transfer of an interest in the partnership to a member of the transferor s family, or After the transfer, the transferor or any member of the transferor s family (either alone or collectively) has the right to remove the restriction in whole or in part. 25

26 The restriction does not include a commercially reasonable restriction that arises as part of any corporate or partnership financing with a person who is not related to the transferor, the transferee, or family member. An applicable restriction does not include any restriction imposed, or required to be imposed, by federal or state law. 26

27 When one or more of the GPs are not family members. A liquidation restriction is imposed as part of a financing arrangement with an unrelated party. A liquidation restriction is imposed under federal or state law. 27