ROBERT L. SOMMERS
Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.
This World Wide Web Server is the creation and property of Robert L. Sommers , attorney-at-law. Copyright © 1995-7 Robert L. Sommers, all rights reserved.
For amounts less than $10,000 (this amount could expand to $25,000 in 1996), explore using an Installment Agreement Request, Form 9465, rather than Form 1127. These usually require equal monthly payments of principal and interest with the total paid in 2 or 3 years, with less paperwork and fewer legal requirements.
The IRS will respect buy-sell provisions if they set a fair price for Member's shares. Fairness is measured at the time the agreement is executed. You should use an appraiser to develop a price per share formula for the buy-out, but even if you don't, you need to document the pricing. Note: Although the purchase formula may exclude intangibles or property appreciation, the fairness of the price may be questioned when intangibles (goodwill or trademarks) have great value compared to the book value of other assets.
A buy-sell agreement will be ignored by the IRS for estate tax valuations of your interest in the company, unless there are valid business reasons for the agreement. These include the desire to have: (1) active participants in the company; (2) experienced or knowledgeable participants in the company; (3) continuity of company management, or (4) retention of control within the Member's family in the company. Once a valid business purpose is established, the IRS must prove the provisions should be disregarded for estate tax purposes. Buy-sell provisions must apply to a Member's interest during life and upon death. The provisions must also be binding on the Member and the Member's estate.
In addition, there cannot be a clause that "releases" the valuation if it is later challenged by the IRS; otherwise, the purchase price formula will not be respected. For example, if the formula price results in a valuation of $1 million, but the IRS claims the value is $2 million, the sales price must remain at $1 million.
If 50% or more of the company is owned by "family members" (defined below), then the buy-sell provisions must be comparable to similar arrangements entered into by persons in an arm's length transaction. Factors such as independent legal representation, use of independent appraisers to develop the purchase price formula, evidence of a negotiation process and strict compliance with the terms of the buy-out provisions all indicate that an arm's length transaction has occurred. Comparables for similar businesses may demonstrate general business practices in the industry. In addition, tax regulations state that the agreement must represent a "fair bargain."
Family members include a Member's spouse, lineal descendants of the Member or the Member's spouse, spouse of a lineal descendant, any ancestor of the Member or Member's spouse, spouse of any ancestor or any individual who is the natural object of the decedent's bounty.
Alternatively, the parent's brother or sister (provided they are neither U.S. residents nor citizens) may qualify under the portfolio interest exception, since there is no attribution of ownership between brothers and sisters. Individually, neither the brother nor the sister may own 10% or more of the corporation for them to remain exempt from the U.S.'s 30% tax on interest paid to a foreign person.
For U.S. estate tax purposes, it is advantageous for the stock of a U.S. corporation to be owned by a foreign corporation. Also, the U.S. corporation should file annual income tax returns with respect to its real estate holdings. Transfer of any stock to a foreign corporation is considered a taxable event; consequently, the fair market value of the U.S. real estate and its adjusted basis (its tax basis) must be determined to ascertain whether such a transfer will cause any taxable gain.
| Home Page | Search |
E-mail Form | Firm
**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**