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Orchestrating a continuation provision in a partnership agreement for estate tax purposes.

Individuals who conduct business through a partnership should be aware that the death or retirement of one of the general partners could cause the partnership to terminate unless either the partnership agreement or local law expressly provides for its continuation in such an event. Under the Uniform Partnership Act, which most states have adopted, partners can incorporate a continuation provision in their partnership agreements. The continuation provision prevents that which would otherwise happen upon the death of a partner, that is the automatic dissolution of the partnership.

If the partnership is to continue in the event of a death of one of the partners, the partnership can choose between two methods of insuring the continuity of the partnership. By properly constructing the partnership agreement, the partners can either arrange for the heirs to replace the deceased partner or they can have the remaining partners buy the deceased partner's interest. By including the continuation provision in the partnership agreement, the partners can lower the value of the partnership interest being passed on to a deceased partner's estate.

The continuation provision can be an important aspect in determining the valuation of the partnership interest for estate tax purposes. Valuation of a closely held business is an inexact science and is often the subject of dispute between the estate and the IRS. Careful planning coupled with a written, comprehensive and detailed partnership agreement can minimize and control the valuation of the partnership interest being passed on by the decedent to the decedent's estate.

If a partnership is family owned, the partners, for estate tax purposes, will want the lowest valuation possible put on the assets of the business being passed on to the decedent's estate, since the family members are most likely the heirs of the partnership interest. In establishing the lowest valuation possible, an executor should be aware that in certain situations, they may elect to value the real property in a qualified farm or closely held business under IRC Section 2032A. IRC Section 2032A provides for the real property in a farm or closely held business to be valued for estate tax purposes based on its actual use, rather than on its fair market value based on highest and best use.

When parties have not formulated a partnership agreement governing specific matters, the Uniform Partnership Act, if enacted by the state legislature, specifies the rights and duties of the partners. Where an agreement exists, only those provisions not addressed will trigger application of the Uniform Partnership Act, which has control over matters the parties have not contemplated.

Partnership Agreement

An intention by the partners to displace provisions of the Uniform Partnership Act necessitates a written partnership agreement that is comprehensive and detailed. A formalized agreement is tangible proof and the best method for establishing and enforcing allocation terms geared to the particular partnership. A properly drafted partnership should include Code sections under which the parties intend the transactions to be governed. A formalized partnership agreement could effectively provide in detail for the death or retirement of a partner by including a continuation provision in the agreement.

By including a continuation provision in the partnership agreement, the partnership will continue when one of the partners deceases, by either the decedent's heirs continuing in place of the deceased partner or through the acquisition of the deceased partner's interest by the remaining members.

A partnership agreement is a contract among the partners. Like all contracts, it should contain everything necessary and appropriate to the relationship among the parties to the contract. At the very minimum, a partnership agreement should clearly delineate:

* The rights and duties of the partners and the relationships among them;

* The purpose for which the partnership is formed;

* Each partner's contribution to the venture; the terms of management and operation; and

* The termination details.

The agreement also should contain all other provisions which the partners deem advisable, particularly those that are unusual. As with any contract, it should be unambiguous and leave as few opportunities for dispute as possible.

There is no standard form for the structure of a partnership agreement. Some agreements have an index and contain statements of background information. These items are optional and are purely a matter of choice.

The partnership agreement should begin with a paragraph stating what it is, the date on which it is entered into, and the names of the parties to the agreement. Generally, the agreement will contain a statement as to the name, place of business, purpose of the partnership, and term for which it is to exist. The agreement should state clearly the contributions to be made to the partnership by the partners, and the partner's obligation, if any, to make additional contributions.

A provision should be included specifying the partners' distributive shares of profit and losses. The agreement should contain a provision describing the anticipated distributions to the partners, and any special payments to which they may be entitled.

All agreements should contain a provision dealing with the management of the partnership. Even the partnership involving only two partners should provide the manner in which management is to be conducted, even if it is to be by the unanimous consent of both partners. In larger and more complicated situations, such a provision is necessary for no other reason than to explain the percentage of interests that must agree on any course of action.

Most agreements do, and all agreements should, contain a provision with respect to a transfer of a partner's interest in the partnership. Such a provision is absolutely essential to avoid controversy. Whether additional partners may be admitted and, if so, the terms on which that will occur also should be in the agreement. Similarly, the circumstances governing the withdrawal, death, retirement and expulsion of a partner are an essential part of a well-drafted partnership agreement.

Under the Uniform Partnership Agreement, a dissolution consists of a change in the relationship of the partners caused by a partner ceasing to be associated in the carrying on of the business of the partnership. Dissolution does not mean the end of a partnership. Dissolution always occurs by the withdrawal of a partner, but the partnership remains in existence until it has completed its winding up and then terminates.

The partnership agreement should state the events that will cause a dissolution and the consequences of that dissolution. Although the Uniform Partnership Agreement is biased toward the partnership winding-up and terminating upon a dissolution, family-owned partnerships generally do not wish to follow this route. However, the result is inevitable unless the partnership agreement provides, through the inclusion of a continuation provision, that the partnership will not wind-up and terminate but will continue, essentially as a new partnership governed by the same terms as the then-dissolved partnership.

Continuation Provision

In most family farm and closely held partnerships, a primary objective is to facilitate continuation of the business on the death, retirement or early withdrawal of one of the partners. If termination is not desired on dissolution, the partners should include a continuation clause in the partnership agreement. By including a continuation clause in the partnership agreement, the partners could assure the actual value of the interest of a deceased partner and continuity of the enterprise for the survivors. The continuation clause should either provide for the purchase of the interest of a deceased partner by the survivors or include a testamentary disposition by each of the partners.

The continuation provision prevents dissolution of the business upon the death of the partner, thus making it unnecessary to liquidate or to undertake any quasi-fiduciary relationships toward the estate or heirs of a deceased, and prevents the business lives of the survivors from becoming subject to the mortality of the deceased.

Determining the value of a closely held business for Federal estate tax purposes can be one of the most difficult issues facing the business owner and their financial advisors. It can also be one of the most important, since the amount of estate taxes can determine whether the business can continue after the death of a major owner.

A Federal Appeals Court in Estate of Watts,(1) demonstrated the rewards of careful planning for a family business. The decedent (Martha Watts) saved over $7.5 million in estate taxes attributable to careful planning and a properly written partnership agreement that included a continuation provision. The partnership agreement:

1. Restricted the partners from selling or mortgaging their interests without the other partners' consent;

2. Provided for the continuation of the partnership in the event of the death of one the partners; and

3. Stated that each of the partners would make a testamentary disposition of their interests in the partnership, so in the event of a death of any of the partners their respective estates would be represented in due course by trustees or others, who would be authorized to accede to the partnership interests and enable the partnership to be continued without a dissolution or termination.

In accordance with the partnership agreement, the decedent's will further provided:

"My trustee shall hold said interest as the sole asset in this trust and shall be relieved of any fiduciary duty to sell said interest for the purpose of creating a diversity of investments. My trustee shall have no authority to sell said interest except in a transaction in which a majority of the holders of equity in said company (or any successor thereof) sell their interests."(2)

At issue in Estate of Watts was whether the interest in the partnership, for purposes of the estate tax return, be valued at the partnership going-concern value or its liquidation value. The Commissioner appealed the Tax Court's decision to value decedent's interest as part of a going-concern. He contended the tax court's decision to value decedent's interest as part of a going concern was erroneous to the extent that the court based its decision on the subjective intent of the other partners to continue operation of the partnership.

The Federal Appeals Court agreed with the Commissioner that the actual subjective intention of the partners to continue the business rather than liquidate it was irrelevant. The Federal Appeals Court went on to add that the Tax Court's decision to value decedent's interest as part of a going concern was supported by the Uniform Partnership Act, which allows continuation provisions, and the contractual restrictions placed upon the partnership interest by the partnership agreement.

In determining the valuation of the partnership interest, for estate tax purposes, we should note that:

"{B}ecause the estate tax is a tax on the privilege of transferring property upon one's death, the property to be valued for estate tax purposes is that which the decedent actually transfers at his death, rather than the interest held by the decedent before death or that held by the legatee after death."(3)

The partners, under the Uniform Partnership Act, were allowed to incorporate a continuation provision in the partnership agreement. By incorporating the continuation provision, the partnership was able to avoid the automatic dissolution by virtue of a partner's death.

Had the partnership agreement not included the continuation provision, the partnership would have dissolved upon Watts' death and the IRS would have been able to sustain its attempt to impose an additional $7.5 million in estate taxes. But, because the agreement contained the provision, the interest that passed to Watts' estate at the moment of death was, by the very terms of the partnership agreement, an interest in an undissolved partnership, a going concern.

This case highlights an interesting point about going-concern value versus liquidation value. In Watts' case, the liquidation value of her partnership interest was almost eight times its going-concern value. This is often the case in capital-intensive businesses, where the value of the asset, if sold today, is far greater than the projected earnings of the business over a period of time.

In the case of labor-intensive or service-oriented businesses, on the other hand, the going concern value is greater than the liquidation value because it is the personal involvement of the business, that creates the value of the business.

The partners, when drafting their partnership agreement, need to determine whether their partnership is capital-intensive or a service-oriented partnership. After that determination has been made, the partners should put some careful thought in deciding whether to include a continuation agreement in their partnership agreements since the correct decision could save them a bundle in estate taxes by lowering the value of the partnership interest being passed on to their estate.

Restrictive Agreements

Many family owned partnerships have a desire for the partnership to continue even in the event of a death of one of the partners. When the partners want the interest of the deceased partner to transfer to the remaining partners, they should consider including a continuation provision combined with a buy-sell agreement in the partnership agreement.

The buy-sell agreement should be structured whereby the surviving partners are obligated to purchase the interest of the deceased partner. Such an arrangement may set a purchase price, contain a formula for computation of a fair price or provide that the price be determined by a later appraisal of the assets. The buy-sell agreement is binding, assures continuity (thus benefitting remaining partners), and may be mandatory. The buy-sell agreement can control the valuation of the deceased partner's interest for estate tax purposes even if it is below the fair market value.

A partnership agreement, entered into by members of a partnership, will control the estate tax valuation of a partner's interest when a partnership agreement restricts the right of a decedent from transferring or assigning their partnership interest without the consent of the other partners, even if it is below fair market value.(4)

At issue in the Tax Court case Estate of Fiorito,(5) was whether the restrictions in the partnership agreement limited the value of the decedent's interest in the partnership to the option price fixed by the agreement, which was admittedly less than the fair market value of the land, buildings and equipment as of the date of death.

The effect on taxable value of restrictive agreements of this sort has been considered by the courts on a number of occasions, usually, however, involving valuation of stock of closely held corporations. In the Estate of Weil,(6) the Court in considering the value of a partnership interest said:

"{I}t now seems well established that the value of property may be limited for estate tax purposes by an enforceable agreement which fixes the price to be paid therefore, and where the seller if he desires to sell during his lifetime can receive only the price fixed by contract and at his death his estate can receive only the price theretofore agreed on."(7)

"On the other hand, it has been held where the agreement made by the decedent and the prospective purchaser of his property fixed the price to be received therefor by his estate at the time of death, but carried no restriction on the decedent's right to dispose of his property at the best price he could get during his lifetime, the property owned by decedent at the time of his death would be included as a part of his estate at its then fair market value."(8)

It is important to note that a restrictive buy-sell agreement will control the valuation of the deceased partner's interest if the agreement fixes the price the seller could receive if he sold the interest anytime during his life. On the other hand, if the seller was not limited to the restrictive agreement price, but could sell the partnership interest at a higher price on a later date, than the fair market value of the interest at the time of death would be the correct valuation of the partnership interest.

The Treasury Regulations governing the estate tax provides "the value of every item if property includable in a decedent's gross estate ... is its fair market value at the time of death."(9) Further, the fair market value of any interest of a decedent in a business, whether a partnership or proprietorship, is the net amount, "which a willing purchaser, whether an individual or a corporation, would pay for the interest to a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts."(10)

"The estate tax is a tax on the privilege of transferring property upon one's death, the property to be valued for estate tax purposes is that which the decedent actually transfers at his death, rather than the interest held by the decedent before death or that held by the decedent after death."(11)

If the decedent could have disposed of the property for its market value immediately prior to death, the net estate transferred should include the full market value of what decedent owned immediately prior to death unlimited by an agreement which would limit the value that could be realized on the property only after death. When a partnership agreement restricts the right of a decedent to transfer or assign his partnership interest and grants the surviving partners an option to purchase the decedent's interest in the partnership after his death for the book value, that limits the value of decedent's partnership interest for estate tax purposes to the option price even though it was less than the fair market value of the partnership net assets on the date of decedent's death.(12)

The estate tax value of a partnership interest owned by a decedent at his death was properly determined to be the amount established under a buy-sell agreement between the decedent and the surviving partner. This was so because the agreement served a valid business purpose, was not entered into as part of a tax avoidance plan and, under applicable state law, restricted the alienability of the partnership interests during life and death. The only right of an assignee of the partnership interest was the right to receive profits and the partners intended that the business continue until the death of both partners. Thus, the ability to transfer an interest in partnership management and partnership property to anyone other than the other partner was limited.(13)

There are several advantages of having a buy-sell agreement in your partnership agreement. A buy-sell agreement guarantees there will be a ready buyer of the business interest. A buy-sell arrangement ensures liquidity for the estate and it preserves the business for the remaining owners of the business. If the buy-sell agreement is negotiated in an arm's-length transaction, the IRS will accept the valuation for estate tax purposes.

IRC Section 2032A

Family-owned farms and businesses are particularly disadvantaged by high estate tax rates because they are often, cash poor. Prior to 1976, for estate tax purposes, partnership interests were generally valued in the same manner as interests in other business enterprises. The IRS held the position that:

"{t}he fair market value of any interest of a decedent in a business, whether a partnership or a proprietorship, it is the net amount which a willing purchaser, whether an individual or a corporation, would pay for the interest to a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts."(14)

For estate tax purposes, the "net amount" takes into account factors including, "a fair appraisal as of the applicable valuation date of all the assets of the business, tangible and intangible, including goodwill, the demonstrated earning capacity of the business and other relevant factors."(15)

The other relevant factors include:

1. The goodwill of the business;

2. The economic outlook in the particular industry;

3. The company's position in the industry and its management;

4. The degree of control represented by the interest; and

5. A value should also be given to nonoperating assets, including life insurance proceeds payable to the benefit of the company, to the extent they have not been valued elsewhere.(16)

The valuation of family-owned farms and businesses, for estate tax purposes, based on the highest and best use, put an undue hardship on many family-owned businesses. Often the land in the business was valued on its speculative value rather than its actual earning capacity. This caused some estates to pay substantially higher estate taxes on real property that had an inflated price, attributable to the speculative value being higher than the value of the land based on its actual use.

Before the enactment of IRC Section 2032A, many heirs were forced to sell property used in farming or in a closely held business in order to meet the heavy estate tax burden caused by valuing the property on an inappropriate highest and best use basis.

In 1976, Congress enacted a Tax Reform Act (TRA) which added IRC Section 2032A. Congress established IRC Section 2032A to allow estate tax relief to qualified, family-owned businesses by allowing them to value the real property in the estate based upon its true productive use, rather than on the traditional basis of "highest and best" use. The intent of Congress in enacting IRC Section 2032A is twofold - to benefit the estates of farmers and owners of closely-held businesses by substantially reducing estate taxes and, in so doing, to encourage heirs to continue using the property for farm and other small business purposes.

The election of IRC Section 2032A allows real property used for farming or in a closely-held business to be valued not at its highest and best use, but rather at a value based on a selected method of capitalization of the current income from the property. By electing IRC Section 2032A, along with IRC Section 6166, which allows a deferral of tax up to 14 years, a family may be able to keep the farm or business intact and still meet its estate tax obligation.

The qualifications for use of IRC Section 2032A are both restrictive and complex. Congress intended to limit the benefits of the special use valuation to family owned farms and closely-held businesses.

For property to qualify for special use valuation under IRC Section 2032A, the following conditions must be met:

1. The decedent must have been a citizen or resident of the United States at the time of his death.(17)

2. The property, at the date of death, must be located in the United States and be owned by the decedent or a family member and used as a farm or in the closely-held business for 5 of the last 8 years before decedent's death.(18)

3. The real property is designated in an agreement filed with the IRS, where all persons, who have an interest (whether or not in possession) in any property designated in the agreement, consent to the additional tax upon the disposition of any interest in the qualified real property or the failure to use the same for a qualified use.(19)

4. The decedent or a member of his family must have owned the qualifying property and have materially participated in the operation of the farm or other business in five out of the 8 years before the decedent's death.(20)

5. At least 50% of the adjusted value of the gross estate consists of real or personal property which, on the date of death, was being used for a "qualified use" by the decedent or a member of the decedent's family and the property must have been acquired or passed from the decedent to a "qualified heir" of the decedent.(21)

6. At least 25% of the adjusted value of the gross estate consists of the adjusted value of real property, passed to a "qualified heir," as to which, during the eight-year period ending on the date of the decedent's death, there have been periods aggregating five years or more during which such real property was owned by the decedent or a member of the decedent's family in the operation of the farm or other business.(22)

The special use valuation under IRC Section 2032A is optional, and therefore the executor must elect on the estate tax return to have the "qualified real property" valued as such for estate tax purposes. The regulations provide that a "notice of election" can be filed with a timely estate tax return, stating that a protective election under IRC Section 2032A is being made pending final determination of values.(23)

The special use valuations for all qualified real property in the estate cannot reduce the gross estate of a decedent dying after 1982 by an aggregate amount of more than $750,000. Therefore, the amount included in the gross estate is the fair market value of the property minus the amount of the applicable limit.(24) The IRS is allowed to recapture the estate tax revenues lost if the qualified heir should dispose of the property in the estate or fail to use it for the purpose for which Congress intended it to be used. This tax is imposed if, within 10 years (15 for decedent's dying before 1982) after the decedent's death and before the death of the qualified heir, the qualified property is transferred out of the family or ceases to be employed in a qualified use.(25) But there is no recapture if the heir dies without converting the qualified property to a nonqualified use. Failure by the heir or a member of his family to materially participate in the business operation for periods aggregating three years or more during any eight-year ending with the recapture period will trigger the recapture tax.

For purposes of meeting the material participation requirement during the post-death recapture period in estates of decedents dying after December, 31, 1981, active management by a spouse, an heir under age 21 or a full-time student is considered material participation. Active management means the making of business decisions in the business other than daily operations. The real property must be used for a qualified use throughout the recapture period after the decedent's death.

The recapture period can be extended for up to two additional years by using a grace period allowed under IRC Section 2032A(c). During this period, failure to begin qualified use of the specially valued property will not result in recapture. The commencement date is the date the qualified heir begins using the property for a qualified use. Use of the grace period extends the recapture period by a period equal to the time between the decedent's death and the commencement date.(26)

The qualified heir is personally liable for the additional estate tax unless a written application has been made to the IRS. The IRS will then inform the heir of the maximum potential recapture tax, allow the heir to furnish the required amount of bond, and release the heir from personal liability.(27) No additional estate tax will be imposed, however, if there is an involuntary conversion of an interest in qualified real property and the cost of the qualified replacement property exceeds the amount realized on the conversion.(28) Similarly, if an interest in qualified real property is exchanged solely for an interest in other qualified property in a transaction governed by IRC Section 1031, no tax is imposed.

Valuation Under IRC Section 2032A

There are two methods provided for determining the value of real property which qualifies of use valuation:

1. Capitalization of rents,(29) and

2. The five-factor method.(30)

The capitalization of rents method provides an objective procedure for calculating use value, while the five-factor method applies five subjective factors. The capitalization of rents method is limited to the valuation of farmland, while other businesses must be valued using the five-factor method.

The capitalization of rents method values the property by determining the present value of the future cash flows by using cash rent figures for the last five years. The capitalization of rents formula is the average annual gross cash rental for comparable land for the five most recent full calendar years ending prior to death, divided by the average annual effective interest for all new Federal Land Bank loans for the year of death.(31)

Comparable real property is defined as follows:

"Comparable real property must be situated in the same locality (not necessarily the same political subdivision) as the specially valued property. Frequently, it is necessary to value farm property is segments where there are different uses or land characteristics included in the specially valued farm. If the use valuation property has buildings, rented property on which comparable buildings or improvements are located must be identified. In cases involving multiple areas or land characteristics, actual comparable property and taxes for such comparable property must be used in the formula for each segment. Any premium or discount resulting from the presence of multiple uses or other characteristics in one farm is also to be reflected."(32)

The regulation lists 10 factors to be considered in determining comparability:

1. Soil type; 2. Crop type; 3. Soil conservation techniques; 4. Probability of flooding; 5. Slope of the land; 6. Carrying capacity for livestock; 7. Comparability of any timber; 8. Whether the property is a whole or segmented; 9. Existence of improvements; and 10. Local transportation facilities.

The capitalization of rents method can be used only for real property used for a farming purpose. If real property is used in a business other than a farm, if there are no comparables which can be identified, or, if the executor so elects, the property is valued by the closely held business interest or subjective valuation method. Under this method, value is based on an appraisal which takes five criteria into account:

1. Capitalization of expected income yield over a reasonable period of time under prudent management techniques;

2. Capitalization of the fair rental value of the land as a farm or for closely held business purposes;

3. Assessed value of the land for state property tax purposes, if the state makes use value assessments;

4. Comparable sales of similar properties in the area, if the properties are sufficiently removed from any urban areas to prevent undue change in value; and

5. Any other factors which fairly value the farm or closely held business property.(33)

Because of the subjective nature of the criteria and the lack of guidance as to how the criteria are to be applied, the five-factor method is used infrequently in actual practice. However, when an executor does elect to value under the multiple factor method, the executor cannot rely exclusively on one of the factors: the multiple factor method requires a consideration of all factors that are relevant, though greater weight may be given to some factors than others.(34)

Extensions of Time to Pay Estate Tax

In addition to the special use valuation election under IRC Section 2032A, the Code provides for an extension of up to 15 years for the payment of federal estate tax attributable to a closely-held business.(35)

IRC Section 6166 defines an "interest in a closely-held business" as:

"{A}n interest in a partnership carrying on a trade or business if 20% or more of the total capital interest in the partnership is included in the decedent's gross estate or there are 15 or fewer partners."

For estate tax purposes, the value of the interest, which cannot include value attributable to "passive assets" held by the business must exceed 35% of the value of the decedent's gross estate.(36)

Interests in two or more businesses may be combined and treated as an interest in a single closely-held business if 20% or more of the value if each is included in gross estate.(37)

The election to extend the time for payment of estate tax allows the executor, if they so elect, to pay the federal estate tax attributable to the closely-held interest in up to ten equal annual installments, with the first such installment deferred for up to five years from the due date of the estate tax return.(38)

Conclusion

Careful planning coupled with a written, comprehensive and detailed partnership agreement can avoid, or at least minimize, many of the tax problems caused by the death or retirement of a partner. The execution of a written partnership agreement is not a prerequisite to the formation of a partnership but is highly recommended. A well drafted partnership agreement can be beneficial when determining the valuation of a deceased partner's interest for estate tax purposes. Including a continuation provision in the partnership agreement can be beneficial to certain partnerships. If your partnership is capital-intensive, you should consider including a continuation provision in the partnership agreement since the valuation of the interest being passed on to the heir would be lower, hence lower estate taxes. If your partnership is service oriented, you probably should not include a continuation provision in the partnership agreement since the valuation of the interest would be lower with the interest being valued at a liquidation value.

When a partnership includes a restrictive buy-sell agreement in their partnership agreement, that limits the seller of the interest from selling the interest for a price other than that agreed upon, the valuation of the interest, for estate tax purposes, can be lower than the fair market value of the interest.

For estate tax purposes, qualified farm and closely held businesses can elect to value the real property in the business under IRC Section 2032A. IRC Section 2032A allows for the real property to be valued based on its actual use rather than the fair market value based on its highest and best use. This permits a lower valuation to be attached to the real property in the qualified farm and closely held business.

The members of a family owned partnership should now have a better understanding of how to control the valuation of a deceased partner's interest through the use of the partnership agreement and IRC Section 2032A. This will help them to lower the valuation of the deceased partner's interest, ultimately paying lower estate taxes, and allowing them the opportunity to continue the family owned business.

Bibliography

Benesh, Bruce K. and Travis P. Goggans, "The Disposition of a Deceased Partner's Interest," The Tax Advisor, February 1988, p. 129.

Bock, C. Allen, "Farm Partnership Formation and Operation," The Agricultural Law Journal, Fall 1981, p. 504.

Garrison, Larry R., "Later Activities Can Result in Loss of Special-Use Valuation Benefits," Taxation for Accountants, January 1988, p. 38.

Gianelli, L.F., "Treating Children Equally: Estate Planning for the Family Business or Farm," Probate and Property, January/February 198, p. 12.

Tucker, Stefan, "How to Handle the Tax Problems Caused by the Death or Retirement of a Partner," The Practical Accountant, January 1986, p. 18.

Lassee, J.K. "Estate Tax Techniques," Business and Estate Planning, vol. 2, p. 28-74.1

Willis, Arthur B., John S. Pennell and Phillip F. Postewaite, "Death of Partner - Partnership Interest Neither Sold Nor Retired," Partnership Taxation, June 1990, p. 172.

Footnotes

1 Estate of Watts v. Comm., no official citation, (11 Cir., 1987), 87-2 USTC Par. 13,726, aff'g 51 TCM 60.

2 Ibid.

3 Propstra, 680 F. 2d 1248, 82-2 USTC Par. 13,475, aff'g in part & rev'g in part, (no official citation), 82-2 USTC Par. 13,502.

4 Estate of Fiorito, 33 T.C. 440 (1959).

5 Ibid.

6 Estate of Weil, 22 T.C. 1267 (1955).

7 Estate of Albert L. Salt, 17 T.C. 92 (1952). Also see Lomb v. Sugden, 82 F. 2d 166, 36-1 USTC Par. 9158, rev'g 11 F. Supp. 472, 35-2 USTC Par. 9539.

8 City Bank Farmers Trust Co., Executor, 23 B.T.A. 663 (1931) and Estate of George Marshall Trammell, 18 T.C. 662 (1953).

9 Reg. Sec. 20.2031-1.

10 Reg. Sec. 20.2031-3.

11 Propstra, 680 F. 2d 1248, 88-1 USTC Par. 13,755, aff'g (no official citation), 82-2 USTC Par. 13,502.

12 Estate of Fiorito, supra.

13 Estate of Esther Novak, (no official citation), 87-2 USTC Par. 13,728.

14 Reg. Sec. 20.2031-3.

15 Ibid.

16 Reg. Sec. 20.2031-2.

17 I.R.C. Section 2032A(a)(1)(A).

18 I.R.C. Section 2032A(b)(1)(C).

19 I.R.C. Section 2032A(d)(2) and (c) and (b)(1)(D).

20 I.R.C. Section 2032A(b)(1).

21 Ibid.

22 I.R.C. Section 2032A(b)(1)(B) and (C).

23 Reg. Sec. 20.2032A-8.

24 I.R.C. Section 2032A(a)(2).

25 I.R.C. Section 2032A(c).

26 I.R.C. Section 2032A(c)(7)(A).

27 I.R.C. Section 2032A(c)(5) and (g) and I.R.C. Section 6324B.

28 I.R.C. Section 2032A(h).

29 I.R.C. Section 2032A(e)(7) and Reg. Sec. 20.2032A(4).

30 I.R.C. Section 2032A(e)(8).

31 I.R.C. Section 2032A(e)(7)(A) and Reg. Sec. 20.2032A-4(a).

32 Reg. Sec. 20.2032A-4(d).

33 I.R.C. Section 2032A(e)(8).

34 Rev. Rul. 89-30, 1989-1 C.B. 274.

35 I.R.C. Section 6166.

36 I.R.C. Section 6166(a)(1) and (b)(9)(A).

37 I.R.C. Section 6166(c).

38 I.R.C. Section 6166(a)(1) and (3).

Ralph V. Switzer, JD, CPA, is an associate professor of accounting and taxation in the College of Business at Colorado State University. He is a licensed member of the Colorado Bar Association and a member of the Colorado Society of Certified Public Accountants. He is a member of the American Bar Association and the AICPA. The author of several books, he has also published articles in numerous accounting and business journals. He has served as counsel to the U.S. Department of Justice.

Edward D. Jones, MS, is a tax specialist with the firm of Soukup & Associates, CPAs.
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Author:Switzer, Ralph V.; Jones, Edward D.
Publication:The National Public Accountant
Date:Dec 1, 1992
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