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Do you know what your business is worth? Our business valuation experts provide you with an objective, expert view of your company – while helping you understand the value drivers of your business. In addition to preparation for sale, knowing the actual value of your business is crucial for a number of reasons:
Your business' balance sheets and financial statements are not enough to present the true value of your company. An accurate valuation requires a customized approach. Our Certified Valuation Analysts integrate basic valuation principles with the very latest developments in business valuation theory to arrive at the most comprehensive valuation possible. We can also help you comply with the complex requirements of the Statements of Financial Accounting Standards (SFAS) Nos. 141 and 142. These standards require companies to perform a valuation to determine the current fair value of intangible assets and goodwill acquired in a business combination or merger and to periodically test previously recorded goodwill and intangibles with indefinite lives for impairment. For more information about our Business Valuation practice, email BVLS@SCandH.com or call (410) 403-1500 | (800) 832-3008.
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Valuations Insights, First Quarter, 2009 IRS Deems Another FLP as 'Indirect Gift' Gross v. Comm’r, 2008 WL 4388277 (U.S. Tax Ct.) September 29, 2008 For the second time in recent months, the IRS has challenged a Family Limited Partnership (FLP) under IRC Sec. 2511 and related Treasury Regulations as an indirect gift of assets from the founder to family members/limited partners. After her husband’s death in 1996, a wealthy New York investor decided to establish an FLP to encourage her two daughters to preserve the family’s fortune. The widow also wanted to retain control, however, and decided with her daughters that she would be sole general partner (GP) of the FLP, with exclusive power to make distributions. The daughters agreed to substantial transfer restrictions on any LP interests they received. On July 15, 1998, the widow filed a certificate of limited partnership for the FLP (Dimar Holdings, LLP) and followed other New York filing and publication requirements. Shortly afterward, she contributed $100 to the partnership and the daughters each contributed $10. From October through December 4, 1998, the mother transferred over $2.15 million in common shares of well-known, publicly traded companies to the FLP. Eleven days later, on December 15, 1998, she transferred a 22.25% limited partnership interest to each daughter. On that same day, the parties executed the partnership agreement, which imposed severe transfer restrictions on the LP interests and maintained the mother as sole GP. In her 1998 gift tax return, the mother valued each of the 22.25% LP interests at $312,500, after application of a 35% combined discount for lack of marketability, lack of control, and minority interest. (The court does not say whether an independent appraisal accounted for the values, but only that they appeared in a schedule attached to the return.) The IRS asserted a deficiency of $120,583, based on valuing the gifts at a reduced discount. The importance of following partnership formalities. To form a limited partnership, New York law states that the general partners "shall" execute a partnership agreement and a certificate of limited partnership. Still, in a related provision, the statute says the LP is formed on the filing of the certificate and requires publication within 120 days. The IRS construed these provisions together, arguing that the execution of a partnership agreement is a condition precedent to formation of an LP. However, the taxpayer claimed that she properly formed the FLP as a limited partnership in July 1998, when she filed the certificate and agreed with her daughters on its essential terms. In the alternative, if the FLP failed to establish a limited partnership, it nevertheless qualified as a general partnership under New York law in July. The Tax Court found that neither party made a compelling argument for its claims regarding the timing for LP formation. However, it agreed with the taxpayer that New York law recognized a general partnership in July 1998, when all of parties agreed to the essential terms, made their respective contributions, and the taxpayer began contributing her securities portfolio. Holman is controlling on indirect gifts. The IRS maintained that the taxpayer made indirect gifts to her daughters because, under IRC Sec. 2511 and applicable case law, she contributed the securities to the FLP for inadequate consideration. In other words, in making the series of stock transfers to the FLP, the taxpayer received increasing GP interests in return. However, after completing the transfers on December 4th and creating the 22.25% LP interests for her daughters on December 15th, she effectively reduced the value of her GP interest to 55.50%—or less than adequate consideration for the original contribution. The IRS also urged to court to find, under the "step transaction" doctrine, that the events were so intertwined that they composed a single transaction, such that formation and funding effectively occurred on a single day. The Tax Court, in an opinion by Judge Halpbern, relied on the recent Holman v. Comm’r (May 2008) (also by Judge Halpern). In Holman, the court found six days from the funding of an FLP with Dell stock to creation of the limited partnership (LP) interests was sufficient to disqualify the transfer as an indirect gift. The reason: The taxpayers bore a "real economic risk" that the partnership’s value would change during that time. "We reach the same result here," the court concluded, when eleven days elapsed between the taxpayer’s last transfer of securities and her gifts of LP interests to her daughters; and when—as in Holman—the assets comprised common shares of well-known public companies. "The form of the transactions here…accords with their substance." IRS agreed on discounted value. Prior to trial, the parties stipulated that—should the court find the taxpayer to have made gifts of LP interests to her daughters on December 15, 1998—then she had correctly reported their values on her gift tax return, including the 35% combined discount. Although the court found only that the taxpayer made gifts of partnership interests (not necessarily LP interests) on December 15, it accepted the parties’ stipulation. The taxpayer also offered an expert at trial, who testified that whether the court found the daughters’ interests to be in a general or limited partnership, they were each worth only $277,868, given the substantial transfer restrictions. The IRS did not offer any expert to rebut this testimony—and the court accepted it in support of the parties’ stipulation, concluding that the fair market value of the gifted LP interests was $312,500, as reported on the taxpayer’s return. |
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