by
Ron J. Lint, ASA
Business Valuation and ESOP Specialist
ATI Capital Group of Colorado, LLC
453 E. Wonderview Ave., PMB 312
970-577-8030
ron@aticolorado.com
Issue: Exactly how should a Corporate General Partner (CGP) be
structured to avoid problems with §2704 or with triggering an estate/gift
tax valuation? It is my opinion that not enough attention is paid to the
proper structuring of the CGP. It is not uncommon to see CGPs poorly structured,
with little thought given to the process.
Discussion: Timing is all important to the process of structuring
a CGP. For example ,to avoid problems with §2704, we advise setting
up the CGP prior to starting or funding the Family Limited Partnership
(FLP).
Setting up the CGP includes choosing an appropriate non-family-member
shareholder and making sure that it (assuming a charity) is properly established
as a shareholder prior to conducting any transaction whatsoever with the
FLP. In addition, all other shareholders should be determined along with
their percentage ownership and method of acquiring that interest.
Shares in a CGP can be acquired basically by purchase or gift. If by
purchase, the shareholders involved will simply purchase shares from the
corporation. Consider the case of Mr. and Mrs. Dough. They desire to fund
the CGP with the purchase of their shares and then to gift a 10% interest
to each of their two children and a 1% interest to a non-family-member
charity.
On day one, the Doughs contribute $2,000 to the CGP in return for 1,000
shares each (50%) of the capital stock of the corporation.
On day two, each gifts 10.5% of his/her shares (105 shares) to each child
and 0.5% to the charity. Following the gifts, each child owns 100 shares
and the charity owns 10 shares. Since the corporation had no other assets
or liabilities as of the date of the gifts, one can assume that the value
of the gifts would equal the per share value of the capital stock purchased
by the Doughs. This greatly simplifies the acquisition process and, in
addition, nullifies the need for a formal valuation.
In addition to the valuation issue, it is very important that the CGP
be completely structured, to include the non-family-member, prior to undertaking
any transaction with the FLP. It stands to reason that the issues surrounding
§2704 become relevant only when the corporation becomes the general
partner of a funded FLP. Accordingly, the CGP should be set up and operational
prior to the creation and funding of the FLP.
Continuing with our example, on day three, the FLP is created and funded
with contributions from the Doughs. At this point, the CGP acquires a
1% (or more) interest in the FLP. In order to determine the exact amount
required to purchase a 1% interest in the FLP, we developed the following
formula:
X = .01 (A + X)
where: X = the cost of a 1% purchase of FLP interest; and
A = the initial contributions made to the FLP
Conclusion: If this structure is followed, the process is greatly
simplified. The cost of shares of stock in the CGP is easily determined.
The method of getting stock to children and/or a non-family member is
clarified. The need for a valuation of the CGP is completely nullified,
and the exact cost of the CGP's 1% interest in the FLP is easily determined.
