Valuations are a critical element of successful tax planning strategies. Objective third party valuation opinions are vital to transferring the burden of proof to the IRS. Vantage Point Advisors has extensive experience performing valuations for estate and gift tax purposes. We can assist business owners in determining the current value of their business, so they can plan for gifting or the eventual sale of the business. Additionally, we can value limited partner interests, undivided interests in real estate, or LLC member interests for gifting or estate tax purposes.
It is in the best interests of the taxpayer to minimize IRS challenges; therefore, it is essential that the business valuation report is comprehensive and defendable. The Tax Court generally accepts the best valuation and does not split the difference. Taxpayers need to give careful consideration to selecting a valuation firm. Our philosophy is to provide a detailed valuation report with the data and analysis necessary to support the value conclusions in Tax Court if necessary. We utilize empirical databases to support lack of marketability and minority discount rates, among others.
The following are some of tax related services we offer:
• Closely Held Business Valuations
• The Family Limited Partnerships, Limited Liability Company or Undivided Interests in Real Estate
• “C” to “S” Corporation Valuations
• Stock Options and Deferred Compensation (409A) and other equity-linked instruments
• Restricted Stock Valuations
THE FAMILY LIMITED PARTNERSHIP
The cost of transferring wealth from one generation to another can be substantial without proper planning. In addition to estate and gift taxes, a generation-skipping transfer tax is imposed on certain transfers to grandchildren and other "skip-persons." The family limited partnership (or limited liability company), when coupled with a strategy for gifting non-controlling interests, may be used to minimize such transfer taxes. The key transfer tax benefit of the family limited partnership units may be accomplished at discounted values, thus allowing a greater amount to be transferred. Expressed another way, the value of the limited partnership interests being gifted will be less than the fair market value of the proportionate share of the assets they represent.
A family limited partnership is a legal entity most often formed to manage family wealth and to serve as a building block for wealth transfer planning. The appropriateness of establishing a family partnership is dependent on many variables, including the willingness of the owner to part with a portion of his or her ownership interest and the identification of assets with appreciation potential.
Senior family members, typically parents, contribute assets to the family limited partnership in exchange for general and limited partnership units. After formation, the parents often retain the role of general partner and transfer partial ownership of their assets - via limited partnership interests - to children, other family members or trusts for their benefit (the limited partners). The donor, as general partner, retains control over the partnership assets, controls cash flows to the limited partners, determines the ability of the limited partners to transfer their interests and may even be entitled to a management fee. While almost any type of property can be placed in a family limited partnership, the assets assigned most frequently are those with appreciation potential, such as marketable securities, real estate, family businesses and interests in non-family businesses (except stock in an S corporation).
The IRS has ruled that family limited partnerships must be established for valid, underlying business reasons, not for the sole purpose of minimizing taxes. Acceptable business reasons can include enhancing the management of a family-owned enterprise, promoting family involvement in investment decisions for a portfolio of securities (although limited partners do not have ultimate decision-making authority) and ensuring sound decisions regarding family-owned property. In several private letter rulings, the IRS has disallowed a claimed discount where a family limited partnership was formed shortly before the death of an individual in what the IRS found to be an artificial attempt to depress the value of the individual's assets. With proper planning, gifts of limited partnerships that are not hastily formed in anticipation of an individual's death should withstand IRS scrutiny.
VALUE DISCOUNTING
Valuation discounting begins with an analysis of the fair market value of the underlying partnership assets. Once the fair market value of the assets has been determined, a discount analysis is performed to arrive at the fair market value of the interests being gifted, typically the limited partnership interests. The two discounts applied most often in the family limited partnership context include minority/non-controlling interest and lack of marketability. Generally, the minority interest discount corresponds to the degree of control or influence inherent in the transferred interest, whereas the lack of marketability discount corresponds to the transferred interest's degree of liquidity and transferability. The two are interrelated because a minority interest tends to be harder to sell and is therefore less marketable.
In determining the appropriateness and level of each discount, the rights of the limited partners, as delineated by state law and the partnership agreement, are reviewed. Specific attention is focused on the relevant provisions that restrict transfers and withdrawals by limited partners. Since limited partners exercise no control over partnership assets and the marketability of their interests are often limited, the value of a limited partnership interest is discounted for tax purposes.
STOCK OPTIONS 409A
Private companies are required to show that stock options are not being issued "in-the-money" or with an exercise price set below fair market value as this is a taxable event according to the Internal Revenue Code Section 409A. A formal valuation opinion is suggested every 12 months, or more often if there is a material change in either the business or the implied market value of the common stock. IRC Section 409A also effects financial reporting requirements via SFAS123R.
83(B) – RESTRICTED STOCK VALUATION
While restricted stock grants are exempt from the new rules governing nonqualified deferred compensation under Internal Revenue Code Section 409A, the administrative requirements and tax implications to executives and the employer are not always obvious. Vantage Point Advisors determines the fair market value of the grant so the client’s CPA can determine the tax consequences of the grant. The following outlines some common issues that companies granting restricted stock awards will face.
Recognizing income from a restricted stock grant
The excess of the fair market value of the stock (determined without regard to any restriction other than a restriction which by its terms will never lapse) over the amount (if any) paid for the stock is included in income and reported on a Form W-2 for employees or Form 1099 for independent contractors at the first time the rights of the person having the beneficial interest in the stock are transferable or are not subject to a substantial risk of forfeiture (i.e. vested), whichever occurs earlier. Any dividend income received by the employee while the stock is still restricted is treated as compensation to the employee, reported on Form W-2 and 1099 and deductible as a compensation expense to the employer. Once the stock is no longer subject to a substantial risk of forfeiture, dividends are treated as dividend income and no longer as compensation income.
Recognizing Income from a restricted stock grant for which the employee made an 83(b) election
An 83(b) election changes the timing of income inclusion and Form W-2 or 1099 reporting to the taxable year in which restricted stock is transferred, i.e. it is taxed up-front on the date of grant, rather than when it vests. If such election is made, there is no additional income recognized when the stock later becomes transferable or no longer subject to a substantial risk of forfeiture. The income included at the time of transfer should be the excess of the fair market value of such stock at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) over the amount (if any) paid for it. An 83(b) election can be made even if the fair market value of the stock equals the amount paid for the stock and no income is actually recognized. If the stock is subsequently forfeited, the employee cannot claim a loss with respect to the amount previously included in income. The employee is treated as the owner of the stock when an 83(b) election is made. Therefore, any dividends paid on the stock are dividend income subject to tax at the dividend tax rate and any subsequent appreciation in the stock is eligible for capital gain treat.
