Table of Contents Volume 1 CHAPTER 1. INTRODUCTION I. GENERALLY § 1:1 Economics of the family enterprise § 1:2 The transactional setting § 1:3 Philosophical setting of the family business § 1:4 The family in business and the estate succession process § 1:5 —The planning process § 1:6 Planning priorities § 1:7 Counseling—The role of the attorney § 1:8 —Who is the client? § 1:9 Representation of an association § 1:10 The basic nature of an association II. ETHICAL RESPONSIBILITIES IN REPRESENTING ASSOCIATIONS § 1:11 Representation of business entities § 1:12 Lawyer as intermediary § 1:13 Confidentiality of communication § 1:14 Potential liabilities in representing business organizations § 1:14.50 —Return preparer penalties § 1:15 Identity of client—Unincorporated association § 1:16 Lawyer’s relationship with nonclients § 1:17 Responses to the issue § 1:18 —Use of nontraditional disciplines § 1:19 Effect of tax factors § 1:20 Summary § 1:21 Practice aids § 1:22 Recommended reading § 1:23 Internet reference list CHAPTER 2. MEMBERS OF THE FAMILY BUSINESS ENTITY § 2:1 Introduction ix K 2019 Thomson Reuters, 10/2019
Transcript
Table of Contents
Volume 1
CHAPTER 1. INTRODUCTION
I. GENERALLY§ 1:1 Economics of the family enterprise§ 1:2 The transactional setting§ 1:3 Philosophical setting of the family business§ 1:4 The family in business and the estate succession
process§ 1:5 —The planning process§ 1:6 Planning priorities§ 1:7 Counseling—The role of the attorney§ 1:8 —Who is the client?§ 1:9 Representation of an association§ 1:10 The basic nature of an association
II. ETHICAL RESPONSIBILITIES INREPRESENTING ASSOCIATIONS
§ 1:11 Representation of business entities§ 1:12 Lawyer as intermediary§ 1:13 Confidentiality of communication§ 1:14 Potential liabilities in representing business
organizations§ 1:14.50 —Return preparer penalties§ 1:15 Identity of client—Unincorporated association§ 1:16 Lawyer’s relationship with nonclients§ 1:17 Responses to the issue§ 1:18 —Use of nontraditional disciplines§ 1:19 Effect of tax factors§ 1:20 Summary§ 1:21 Practice aids§ 1:22 Recommended reading§ 1:23 Internet reference list
CHAPTER 2. MEMBERS OF THE FAMILYBUSINESS ENTITY§ 2:1 Introduction
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§ 2:2 Transactional situations§ 2:3 Typical pattern of family business entity§ 2:4 The mechanics of dealing with nonmanaging co-owners§ 2:5 —Nonmanaging family members retaining business
ownership§ 2:6 —Nonmanaging family members to be eliminated from
business ownership§ 2:7 Alternative approaches to stock reconsolidation§ 2:8 Arrangements favoring the manager over other family
members§ 2:9 Business purchase options§ 2:10 —Liquidation or sale of the business as an alternative§ 2:11 Restrictions on transferability of business interests§ 2:12 Principal devices for restricting transferability§ 2:13 —Absolute prohibition against transfer§ 2:14 —Requirement for consent by other owners§ 2:15 —Right of first refusal§ 2:16 —Option to repurchase§ 2:17 Transition of ownership to non-family members§ 2:18 —Estate planning aspects of noncash executive
compensation§ 2:19 —Alternative methods of compensation§ 2:20 —Plans transferring actual interests in business
equity§ 2:21 —Plans transferring rights to monetary payment§ 2:22 Special problems of S corporations§ 2:23 Transfer of business organization ownership to charity§ 2:24 Recommended reading§ 2:25 Internet reference list
Appendix 2-1. Checklist of factors to identify in preparationfor succession planning
CHAPTER 3. CHOICE OF BUSINESSENTITY
I. INTRODUCTION TO ENTITY SELECTION§ 3:1 Introduction§ 3:2 The business entity as a medium of ownership
transition
II. DETAILED ANALYSIS—NON-TAX FACTORS§ 3:3 Business organizational entities§ 3:4 Non-tax factors, generally
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§ 3:5 —Formation of the Entity§ 3:6 —Number of owners§ 3:7 —Management§ 3:8 —Period of existence§ 3:9 —Legal entity§ 3:10 —Transfer of interests§ 3:11 —Operating capital§ 3:12 —Possible application of securities law§ 3:13 —Limited liability§ 3:14 Dissolution§ 3:15 —Factors relating to organizational structure
III. DETAILED ANALYSIS—TAX FACTORS§ 3:16 Tax factors, generally§ 3:17 Formation of the organization§ 3:18 —Partnerships (general or limited)§ 3:19 —Corporations (S and C)§ 3:20 Taxation of business income at the entity level§ 3:21 —Partnerships (general and limited)§ 3:22 —C corporations§ 3:23 —S corporations§ 3:24 —Limited liability company§ 3:25 Special allocations§ 3:26 Business losses, generally§ 3:27 —Partnerships (general and limited)§ 3:28 —C corporations§ 3:29 —S corporations§ 3:30 —Limited liability company§ 3:31 Passive loss rules§ 3:32 —Corporations§ 3:33 —Limited liability companies§ 3:34 Tax rates§ 3:35 —Inversion of tax rates§ 3:36 —FICA and Medicare§ 3:36.50 —3.8% Net Investment Income Tax and 0.9%
Hospital Insurance Tax§ 3:37 —Corporate alternative minimum tax computation§ 3:38 —Corporate alternative minimum tax adjustments§ 3:39 —Tax rate planning summary§ 3:40 Methods of accounting§ 3:41 Choice of tax years§ 3:42 Fringe benefits§ 3:43 Compensation plans§ 3:44 Qualified plans
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§ 3:45 Income allocation
IV. TECHNICAL CONTRAST BETWEEN SCORPORATIONS AND C CORPORATIONS
§ 3:46 S and C corporations§ 3:47 —Single tier of tax§ 3:48 —Allocation of income among related entities§ 3:49 —The repeal of the general utilities doctrine§ 3:50 —Capital gains exclusion§ 3:51 —Anticipated start-up losses§ 3:52 —S corporation eligibility, generally§ 3:53 —Material participation requirements in the S
corporation§ 3:54 —Qualified subchapter S trust considerations§ 3:55 —Method of accounting§ 3:56 —Fringe benefits§ 3:57 —State taxes
V. TECHNICAL CONTRAST BETWEEN SCORPORATIONS AND PARTNERSHIPS
§ 3:58 Choosing between the S corporation and thepartnership
§ 3:59 —Corporate attributes§ 3:60 —Reorganization treatment§ 3:61 —Calculation of basis§ 3:62 —Comparison of special allocations§ 3:63 —Eligibility for S treatment§ 3:64 —Income taxation at the entity level
§ 3:76 —Self-employment tax and social security payments§ 3:77 —Self-employment income of specific entities§ 3:78 —Investment interest limitations§ 3:79 —Deferred payment of estate tax§ 3:80 —Material participation under the passive loss rules
VIII. SUMMARY OF PLANNING ANALYSES§ 3:81 Estate planning considerations§ 3:82 Income tax planning§ 3:83 Comparison of entity attributes§ 3:84 Other planning implications§ 3:85 —Planning for existing entities§ 3:86 —C versus S review§ 3:87 —Liquidation tax review§ 3:88 —Dividend review§ 3:89 —Equity and control§ 3:90 —Penalty tax§ 3:91 —S corporations and FICA taxes§ 3:92 —Shifting of income§ 3:93 —Conversion of an existing C corporation to an S
corporation§ 3:94 Summary of entity choice—Specific examples§ 3:95 Classification of entities§ 3:96 Conclusion
IX. RECOMMENDED RESOURCES§ 3:97 Practice aids§ 3:98 Recommended reading§ 3:99 Internet reference list
X. FORMS§ 3:100 Form 3-1-Client Handout—Choice of Business Entity§ 3:101 Form 3-2-Client Handout—Advantages of Family
Business Entities
Appendix 3-1. Graphic Analysis of the Relative Taxation of Sand C Corporations
Appendix 3-2. List of Code References to Various ActivityTests
Appendix 3-3. Comparison of the Features of S Corporationsand Limited Partnerships
Appendix 3-4. S Corporation versus C CorporationInformation Planning Checklist
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Appendix 3-5. Checklist of Entity Choice FactorsAppendix 3-6. Information Review ChecklistAppendix 3-7. Comparison of net cash flow over 10-year
period with entity liquidation—C corporationvs. S corporation vs. Sole Proprietorship
CHAPTER 4. PARTNERSHIPS IN FAMILYBUSINESS PLANNING
I. GENERALLY§ 4:1 Introduction—Family partnerships§ 4:2 Mechanics of formal partnership formation§ 4:3 Informal partnership formation§ 4:4 Family limited partnerships under attack§ 4:5 Informal partnerships between husband and wife§ 4:6 —Judicial support§ 4:7 Basics of partner liability and exposure to partner
creditors
II. THE GENERAL PARTNERSHIP—SUBSTANCEAND ORGANIZATION
§ 4:8 Preparation and drafting§ 4:9 Partnership flexibility§ 4:10 Capital structure of the partnership§ 4:11 Description of partner interests§ 4:12 Special asset designations among partners§ 4:13 Partnership capital accounts§ 4:14 Title to partnership property§ 4:15 Management of the general partnership§ 4:16 Partners as agents of the partnership§ 4:17 Transfer of partnership capital interests§ 4:18 Rights of assignee of a general partnership interest
III. THE LIMITED PARTNERSHIP—SUBSTANCEAND ORGANIZATION
§ 4:19 Content and drafting of the partnership agreement§ 4:20 —Statement of capital§ 4:21 —Requirements of the certificate§ 4:22 —Filing of the certificate§ 4:23 —Substantial compliance§ 4:24 —Acknowledgment§ 4:25 —Time of filing
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§ 4:26 —Amendment of the certificate§ 4:27 The capital structure, generally§ 4:28 —Specific examples§ 4:29 —Other factors in the capital structure
IV. TRANSFER OF PARTNERSHIP INTERESTS§ 4:30 Transfer of general partner interests§ 4:31 Transfer of a limited partnership interest§ 4:32 Restrictions on transfer§ 4:33 Death of a limited partner§ 4:34 Succession of ownership at death
V. OTHER ASPECTS OF LIMITED PARTNERSHIPS§ 4:35 Interrelationship between UPA and ULPA§ 4:36 Foreign limited partnerships—Registration§ 4:37 —Operation
VI. VALUATION OF PARTNERSHIPS§ 4:38 Valuation, generally§ 4:39 Partnership sale agreements§ 4:40 Valuation of frozen partnership interests§ 4:41 Inadvertent gifts on partnership formation§ 4:41.50 Internet reference list
VII. RECOMMENDED RESOURCES§ 4:42 Practice aids§ 4:43 Recommended reading
VIII. FORMS§ 4:44 Form 4-1—Forms for all partnerships—Partnership
information list§ 4:45 Form 4-2—Forms for all partnerships—Partnership
checklist§ 4:46 Form 4-3—Forms for all partnerships—Partnership
opening balance sheet§ 4:47 Form 4-4—Forms for general partnerships—General
partnership capitalization exhibit§ 4:48 Form 4-5—Forms for general partnerships—Basic
general partnership agreement§ 4:49 Form 4-6—Forms for general partnerships—General
partnership certificate§ 4:50 Form 4-7—Forms for general partnerships—Alternate
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multi-class general partnership agreement withproperty allocations
§ 4:51 Form 4-8—Forms for general partnerships—Generalpartnership—Alternate complex partner provisions
§ 4:52 Form 4-9—Forms for general partnerships—Clauseproviding for assignment of partnership units
§ 4:53 Form 4-10—Forms for general partnerships—Generalpartnership bank authorization
§ 4:54 Form 4-11—Forms for general partnerships—Generalpartnership unit issuance forms
§ 4:55 Form 4-12—Forms for general partnerships—Assignment of general percentage partnershipinterest
§ 4:56 Form 4-13—Forms for general partnerships—Assignment of general partnership partner units
§ 4:57 Form 4-14—Forms for general partnerships—Articlesof admission of new partner—General partnership
§ 4:58 Form 4-15—Forms for general partnerships—Cancellation of general partnership
§ 4:59 Form 4-16—Forms for limited partnerships—Simpleone-class limited partnership
§ 4:60 Form 4-17—Forms for limited partnerships—Complexone class limited partnership
§ 4:61 Form 4-18—Forms for limited partnerships—One-classlimited partnership agreement—Percentage interests
§ 4:62 Form 4-19—Forms for limited partnerships—Complexmulti-class limited partnership agreement
§ 4:63 Form 4-20—Forms for limited partnerships—Centralized management provisions
§ 4:64 Form 4-21—Forms for limited partnerships—Limitedpartnership certificate
§ 4:65 Form 4-22—Forms for limited partnerships—Limitedpartnership bank authorization resolution
§ 4:66 Form 4-23—Forms for limited partnerships—Assignment of limited partnership units
§ 4:67 Form 4-24—Forms for limited partnerships—Receiptfor limited partnership units
§ 4:68 Form 4-25—Forms for limited partnerships—Limitedpartnership unit certificate
§ 4:69 Form 4-26—Forms for limited partnerships—Limitedpartnership capitalization exhibit
§ 4:70 Form 4-27—Forms for limited partnerships—Certificate of limited partnership
§ 4:71 Form 4-28—Forms for limited partnerships—Amendment to limited partnership agreement
§ 4:72 Form 4-29—Forms for limited partnerships—Agreement for dissolution—Limited partnership
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§ 4:73 Form 4-30—Forms for limited partnerships—Clausefor non-prorata distribution of partnership propertyupon dissolution
§ 4:74 Form 4-31—Forms for limited partnerships—Cancellation of limited partnership certificate
§ 4:75 Form 4-32—Forms for limited partnerships—Modelmemorandum to partnership accountant
§ 4:76 Form 4-33—Forms for limited partnerships—Clientletter re LLP statute
§ 4:77 Form 4-34-Client Handout—Family LimitedPartnership Planning
Appendix 4-1. Typical Request for Information—Estate TaxExamination of Limited Partnership Interest
CHAPTER 5. LIMITED LIABILITYCOMPANIES AND LIMITED LIABILITYPARTNERSHIPS IN THE FAMILY BUSINESSPLAN
I. GENERALLY§ 5:1 Family business planning goals§ 5:2 Introduction to limited liability companies§ 5:3 Limited liability partnership§ 5:4 Limited liability company defined§ 5:5 Non-tax factors
II. LLC TAXATION§ 5:6 Tax factors§ 5:7 Formation of organization§ 5:8 Taxation of business income and losses§ 5:9 Methods of accounting, tax year and due date of
III. OWNERSHIP STRUCTURE AND GIFTING§ 5:17 Use of a limited liability company as a family
business organization
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§ 5:18 —Management§ 5:19 —Tax flexibility§ 5:20 —Member ownership§ 5:21 —Capital structure alternatives§ 5:22 —Valuation§ 5:23 —Control§ 5:24 —Gifting of member interests§ 5:25 —Dissolution§ 5:25.50 —Conversion from LLC to limited partnership§ 5:26 —Limited liability§ 5:27 —Real estate holding and activity
IV. OTHER ASPECTS OF LLCS§ 5:28 Conversion of a partnership or S corporation to an
LLC§ 5:29 Self-employment tax§ 5:29.50 LLC as disregarded entity—Motor vehicle sales tax§ 5:30 Practice aids§ 5:31 Recommended reading
V. RECOMMENDED RESOURCES§ 5:31.50 Internet reference list
VI. FORMS§ 5:32 Form 5-1 LLC master information list§ 5:33 Form 5-2 Limited liability company capitalization
exhibit§ 5:34 Form 5-3 Basic LLC articles of organization§ 5:35 Form 5-4 Basic LLC operating agreement§ 5:36 Form 5-5 LLC alternate operating agreement
provisions§ 5:37 Form 5-6 LLC unit certificate§ 5:38 Form 5-7 Receipt for LLC unit certificate§ 5:39 Form 5-8 LLC original documents, member managed;
Articles/operating agreement, minutes, ledgers, units§ 5:40 Form 5-9 Medical professional LLC organization
documents, member managed§ 5:41 Form 5-10 Manager managed LLC documents§ 5:42 Form 5-11 Multi-class manager managed LLC with
officers; Mandating distributions, put and call rights,buy-sell and price
§ 5:43 Form 5-12 Dissolution of LLC§ 5:44 Form 5-13 Uniform Limited Liability Company Act-
Formation of LLC-Manager-Managed
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§ 5:45 Form 5-14 Uniform Limited Liability Company Act-Formation of LLC-Manager-Managed (Alternateform)
§ 5:46 Form 5-15 Uniform Limited Liability Company Act-Formation of LLC-Member-Managed
§ 5:47 Form 5-16 Uniform Limited Liability Company Act—Formation of LLC—Member Managed—Separatetransfer agreement
Appendix 5-1. Are You Subject to Self-Employment Tax onYour LLC Distributive Share?
CHAPTER 6. OPERATIONAL ASPECTS OFTHE FAMILY PARTNERSHIP
I. GENERALLY§ 6:1 The partnership capital structure§ 6:2 Types of partnership interests§ 6:3 Management of the partnership§ 6:4 Excessive retention of income and control§ 6:5 Litigation involving the partnership and liability of
partners§ 6:6 Withdrawal of property from the partnership
II. DISSOLUTION OF THE PARTNERSHIP§ 6:7 Dissolution by act of a partner§ 6:8 Court-directed dissolution§ 6:9 —Passage of title upon dissolution§ 6:10 Death of a partner
III. OPERATION OF THE ONGOING LIMITEDPARTNERSHIP
§ 6:11 Title to property§ 6:12 Limited partnership litigation§ 6:13 Management§ 6:14 Fiduciary obligations of general partners§ 6:15 Participation of limited partners in management§ 6:16 Potential liability of limited partners
IV. DISSOLUTION OF THE LIMITEDPARTNERSHIP OR WITHDRAWAL OFPROPERTY
§ 6:17 Death, retirement, or bankruptcy of a general partner
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§ 6:18 Ability of limited partners to dissolve
V. RETIREMENT INCOME§ 6:19 Generally§ 6:20 Guaranteed payments§ 6:21 Lease arrangements§ 6:22 Consulting fees§ 6:23 Sale of partnership interests
VI. SPECIAL PARTNERSHIP APPLICATIONS§ 6:24 Partnership flexibility§ 6:25 Partnerships as gifting vehicle§ 6:26 Avoidance of ancillary probate§ 6:27 Valuation discounts§ 6:28 Partnerships as a capital raising tool§ 6:29 Real estate investments§ 6:30 Partnership housekeeping
VII. RECOMMENDED RESOURCES§ 6:31 Recommended reading
VIII. FORMS§ 6:32 Form 6-1 Complex multiclass general partnership
agreement§ 6:33 Form 6-2 Limited partnership annual meeting
checklist§ 6:34 Form 6-3 General partnership and nominee
agreements
CHAPTER 7. SPECIAL TAX PROBLEMS OFFAMILY PARTNERSHIPS
I. FUNDAMENTALS OF PARTNERSHIP TAXATION§ 7:1 Generally§ 7:2 Aggregate versus entity approach to partnership
taxation§ 7:3 Computation of partnership income§ 7:3.50 Deduction for Qualified Business Income (QBI)§ 7:4 Tax return filing requirements§ 7:5 Partnership elections§ 7:6 Transactions between partner and partnership§ 7:7 —Areas of nonpartner treatment
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§ 7:8 —Limitations on nonpartner treatment§ 7:9 —Guaranteed payments to a partner§ 7:10 Adjustments to basis of a partnership interest
II. CREATION OF THE PARTNERSHIP§ 7:11 Partnership organizational formality§ 7:12 Partnership formation problems§ 7:13 Contribution of capital§ 7:14 —Gain from the assumption of liabilities§ 7:15 —Avoiding gain from the assumption of liabilities§ 7:16 Indirect transfers of property§ 7:17 Partnership interests received for services§ 7:18 Income on diversification§ 7:19 The tax matters partner§ 7:20 Capital accounts, generally§ 7:21 —Shifting basis problems§ 7:22 Distributive shares of partners§ 7:23 Depreciation recapture on contribution of property
III. ALLOCATIONS OF ECONOMICCONSEQUENCES AND TAX ATTRIBUTES
§ 7:24 Allocations according to partnership interests§ 7:25 Allocations with respect to contributed property§ 7:26 Special allocations with respect to contributed
property§ 7:27 Revaluation of capital accounts§ 7:28 The family partnership§ 7:29 Allocation of income to donor§ 7:30 Allocation with respect to gifted partnership
interests§ 7:31 —Minors as donees§ 7:32 —Requirement of a completed transfer§ 7:33 —Donees as limited partners§ 7:34 —Purchase of a partnership interest from a family
member§ 7:35 The partnership as a medium of tax attribute
allocation§ 7:36 —Gain and loss allocations§ 7:37 —Nonrecourse liabilities§ 7:38 —Possible pitfalls of loss allocations§ 7:39 Allocations of liabilities to partners§ 7:40 Impact of allocations of liabilities on the partners§ 7:41 Partner expenses§ 7:42 The allocation requirements of § 704(b)
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§ 7:43 The economic effect test under § 704(b)§ 7:44 —Substantiality§ 7:45 —Transitory allocations§ 7:46 —Alternate test of qualified income offset§ 7:47 —Allocations in accordance with partnership
interests§ 7:48 —Adjustment of capital accounts under § 704(b)
and (c)§ 7:49 —Treatment of liabilities§ 7:50 —Readjustment of allocations§ 7:50.50 Assessment of tax on partner’s distributive share
IV. DISTRIBUTION OF EARNINGS§ 7:51 Interests in profits§ 7:52 —Guaranteed payments§ 7:53 —Distributions distinguished§ 7:54 Distribution of marketable securities§ 7:55 Treatment of liability reduction
V. TAXATION AS AN ASSOCIATION§ 7:56 Check the box regulations§ 7:57 Hidden tax traps in Check the Box regulations
VI. SALE OF A PARTNERSHIP INTEREST§ 7:58 Collapsible partnerships§ 7:59 —Sale or exchange of a partnership interest§ 7:60 —Distributions which alter proportionate interests in
§ 751 assets
VII. REORGANIZATION AND TERMINATION§ 7:61 Conversion between limited and general partnerships§ 7:62 The partnership anti-abuse rule§ 7:63 Partnership separation§ 7:64 Termination of partnerships for tax purposes§ 7:65 Merger of partnerships into corporations
VIII. RECOMMENDED RESOURCES§ 7:66 Practice aids§ 7:67 Recommended reading§ 7:68 Internet reference list
Appendix 7-1. Allocation of assets and liabilities indissolution of general partnership
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CHAPTER 8. PLANNING FOR THECORPORATE ENTITY
I. GENERALLY§ 8:1 The corporation in family business planning
II. THE CORPORATION AS A MEDIUM FOR THEOPERATION OF THE FAMILY ENTERPRISE
§ 8:2 Retention of management control by the parents§ 8:3 Separation of ownership from management§ 8:4 Advantages of transfers of minority stock§ 8:5 The corporation as a defense against business
fragmentation
III. THE CORPORATION AS A MEANS OFTRANSFER OF THE FAMILY ENTERPRISE
§ 8:6 Gifting with corporate stock§ 8:7 Minority stock valuation as an aid to planning§ 8:8 Gifts to minors§ 8:9 Estate tax consequences of gifts of corporate stock§ 8:10 Gifts resulting from exchange of property for securities§ 8:11 Gifts of stock through a trust§ 8:12 —Withdrawal rights to obtain the annual exclusion§ 8:13 The effect of stock restrictions on the annual exclusion
IV. THE USE OF THE CLOSE CORPORATION TOCONTROL ESTATE TAX VALUATION
§ 8:14 Basic considerations in stock valuation§ 8:15 Valuation leverage of gifted stock§ 8:16 Adjustments to the value of minority-retained stock§ 8:17 Husband and wife stock ownership arrangements§ 8:18 Arrangements involving non-income producing
V. PLANNING ALTERNATIVES: SHAREHOLDERDEBT, THE S CORPORATION, AND NONVOTINGSTOCK
§ 8:20 Effect of shareholder debt on corporate control§ 8:21 Advantages of debt in S corporations§ 8:22 Post-mortem estate tax elections
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§ 8:23 Nonvoting stock§ 8:24 —Valuation§ 8:25 —Effect on corporate control§ 8:26 —Gifts of nonvoting stock§ 8:27 —Effect of chapter 14 on gifts of nonvoting stock
VI. RECOMMENDED RESOURCES§ 8:28 Practice aids§ 8:29 Recommended reading
VII. FORMS§ 8:30 Form 8-1 Memorandum for client upon
incorporating§ 8:31 Form 8-2 Start-up balance sheet—Fair market
value§ 8:32 Form 8-3 Start-up balance sheet—Cost§ 8:33 Form 8-4 New corporation master information list§ 8:34 Form 8-5 Checklist for new corporation§ 8:35 Form 8-6 Stock subscription agreement§ 8:36 Form 8-7 Stock issuance form§ 8:37 Form 8-8 Model articles of incorporation§ 8:38 Form 8-9 Transferor’s and transferee’s statements
under § 351§ 8:39 Form 8-10 Initial resolutions§ 8:40 Form 8-11 Checklist for corporate organizational
meeting§ 8:41 Form 8-12 Model letter to accountant§ 8:42 Form 8-13 Basic by-law provisions§ 8:42.50 Form 8-13A Revised and restated by-laws (alternate
by-law form)§ 8:43 Form 8-14 Complex by-law provisions (S
corporation)§ 8:44 Form 8-15 Corporate master debenture§ 8:45 Form 8-16 Corporate debenture note§ 8:46 Form 8-17 Sample letter from counsel Re: dual
representation
CHAPTER 9. OPERATIONAL ASPECTS OFTHE FAMILY CORPORATION AND OTHERFAMILY ENTITIES
I. GENERALLY§ 9:1 Introduction
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§ 9:2 Concerns in operation of the family business entity
II. HOUSEKEEPING, MAINTENANCE, AND TAXSTATUS
§ 9:3 Good entity housekeeping§ 9:4 Maintenance of bank accounts§ 9:5 Accounting and bookkeeping factors§ 9:6 Ownership records§ 9:7 Fringe benefits§ 9:8 Managing the S corporation§ 9:9 —Material participation§ 9:10 —Shareholder salaries
III. EMPLOYEE OWNERSHIP INCENTIVES§ 9:11 Transfer of ownership interests to employees§ 9:12 Stock arrangements to provide incentive§ 9:13 Qualified options§ 9:14 Nonqualified options
IV. CONTRIBUTION OF ADDITIONAL CAPITAL TOTHE ENTITY
§ 9:15 Background§ 9:16 Contribution at less than fair market value ratio§ 9:17 —Potential gift taxation§ 9:18 —Potential capital gain realization§ 9:19 —Income tax recapture§ 9:20 Excessive retention of control
V. MANAGEMENT OF THE SECURITIESSTRUCTURE
§ 9:21 Recapitalization and reorganization§ 9:22 Corporate debentures
VI. CONTROL AGREEMENTS§ 9:23 Objectives of control agreements§ 9:24 Management control devices§ 9:25 Classification of stock§ 9:26 —Voting and nonvoting stock§ 9:27 —Preferred stock§ 9:28 —Special voting provisions§ 9:29 Representation on the board of directors§ 9:30 —Cumulative voting for directors
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§ 9:31 —Class voting for directors§ 9:32 Extraordinary voting and quorum requirements§ 9:33 Irrevocable proxy§ 9:34 Voting trusts§ 9:35 Stockholder agreements§ 9:36 —Veto agreements§ 9:37 —Voting agreements§ 9:38 Management contracts§ 9:39 Management control through holding company§ 9:40 Management control in a partnership§ 9:41 Modification by agreement§ 9:42 Partnership control devices§ 9:43 Management control devices in estate planning
VII. CONCLUSION AND RESOURCES§ 9:44 Conclusion§ 9:45 Practice aids§ 9:46 Recommended reading
VIII. FORMS§ 9:47 Form 9-1 Letter to new corporation§ 9:48 Form 9-2 Option for corporate separation§ 9:49 Form 9-3 Agreement for dissolution of partnership into
corporation§ 9:50 Form 9-4 Collateral note for stock sale§ 9:51 Form 9-5 Stock purchase option§ 9:52 Form 9-6 Consulting agreement§ 9:53 Form 9-7 Balance sheet for additional capital
contributions§ 9:54 Form 9-8 Annual meeting checklist§ 9:55 Form 9-9 Consent minutes adopting phantom stock
plan§ 9:56 Form 9-10 Phantom stock plan§ 9:57 Form 9-11 Phantom stock ledger§ 9:58 Form 9-12 Stockholder ledger§ 9:59 Form 9-13 Phantom stock plan grant notice§ 9:60 Form 9-14 Power to use electronic means for fund
transfers§ 9:61 Form 9-15 Stock purchase agreement
CHAPTER 10. SELECTED TAX ASPECTS OFC CORPORATIONS
I. GENERALLY§ 10:1 Introduction
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§ 10:2 Decision to incorporate§ 10:3 Tax attributes of a C corporation§ 10:4 Tax-free transfer of assets§ 10:5 Transfer of property§ 10:6 Requirement of control§ 10:7 —Control immediately after the exchange§ 10:8 Solely for stock§ 10:9 Receipt of boot property by the transferor§ 10:10 Basis in transferor stock§ 10:11 Basis of property transferred to the corporation§ 10:12 Recapture of depreciation§ 10:13 Assumption of liabilities§ 10:14 Gains and losses from corporate stock ownership§ 10:15 Selection of assets to be transferred§ 10:16 Debt-equity relationships§ 10:17 Tax benefit rule§ 10:18 Assignment of income§ 10:19 Reallocation under § 482§ 10:20 Expenses of incorporation§ 10:21 Accelerated depreciation and used assets
II. SPECIAL SITUATIONS§ 10:22 Incorporation of a partnership§ 10:23 Contribution of capital to an existing corporation§ 10:24 Alternative minimum tax
III. OPERATIONAL ASPECTS OF CORPORATIONS§ 10:25 Accounting methods and tax year§ 10:26 Salaries of stockholder-employees§ 10:27 Debenture modifications§ 10:28 Loans to and from shareholders§ 10:29 Expenses of shareholders§ 10:30 Medical Reimbursement Plans§ 10:31 Accumulated earnings tax
IV. GETTING OUT OF THE CORPORATION§ 10:32 The problem of the unwanted or unneeded
corporation§ 10:33 Sale of stock§ 10:34 Distribution of assets and subsequent liquidation:
Complete liquidation under § 331§ 10:35 Corporate sale of assets and distribution of
proceeds to the stockholders
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§ 10:35.50 Conversion of a corporation into a partnership
V. STOCK REDEMPTIONS ANDRECAPITALIZATIONS
§ 10:36 Redemption under § 302§ 10:37 —Redemptions from an estate§ 10:38 —Attribution§ 10:39 Recapitalization§ 10:40 —The business purpose requirement
VI. RECOMMENDED RESOURCES§ 10:41 Practice aids§ 10:42 Recommended reading§ 10:42.50 Internet reference list
VII. FORMS§ 10:43 Form 10-1 Checklist for § 302 and § 303 stock
redemptions§ 10:44 Form 10-2 Medical reimbursement plan§ 10:45 Form 10-3 Resolution for C corporation taxation§ 10:46 Form 10-4 Corporate liquidation—Director consent
minutes and liquidation resolution§ 10:47 Form 10-5 Corporate liquidation—Shareholder
consent minutes and resolution§ 10:48 Form 10-6 Corporate liquidation—Articles of
dissolution§ 10:49 Form 10-7 Corporate liquidation—Consent minutes
regarding liquidation distributions§ 10:50 Form 10-8 Corporate liquidation—Schedule of
distribution to shareholders§ 10:51 Form 10-9 Corporation liquidation—Notice of
dissolution§ 10:52 Form 10-10 Corporate liquidation—Attachment to
IRS Form 966§ 10:53 Form 10-11 Corporate liquidation—Letter to IRS
Regarding Form 966§ 10:54 Form 10-12 Corporate liquidation—Waiver of notice—
Director meeting§ 10:55 Form 10-13 Corporate liquidation—Director meeting
minutes§ 10:56 Form 10-14 Corporate liquidation—Director
resolution§ 10:57 Form 10-15 Corporate liquidation—Waiver of notice—
Shareholder meeting
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§ 10:58 Form 10-16 Corporate liquidation—Minutes ofshareholder meeting
§ 10:59 Form 10-17 Corporate liquidation—Shareholderresolution
§ 10:60 Form 10-18 Corporate liquidation—Consent minutesregarding liquidating distributions
§ 10:61 Form 10-19 Corporate liquidation—Exhibit ‘‘A’’§ 10:62 Form 10-20 Corporate liquidation—Liquidating trust
resolution§ 10:63 Form 10-21 Complete liquidation—Liquidating trust
agreement§ 10:64 Form 10-22 Corporate liquidation—Liquidating
trust—Trustee minutes—Partial distribution tobeneficiaries
§ 10:65 Form 10-23 Corporate liquidation—Liquidatingtrust—Notice of distribution to beneficiaries
§ 10:66 Form 10-24 Corporate liquidation—Liquidatingtrust—Beneficiary distribution schedules
§ 10:67 Form 10-25 Corporate liquidation—Liquidatingtrust—Trustee meeting—Final distribution
§ 10:68 Form 10-26 Corporate liquidation—Liquidatingtrust—Final liquidating distribution and beneficiaryschedule
§ 10:69 Form 10-27 Basic recapitalization—Director consentminutes and resolution
§ 10:70 Form 10-28 Basic recapitalization—Shareholderconsent minutes and resolution
§ 10:71 Form 10-29 Basic plan of recapitalization—Preferredstock exchange for common stock
§ 10:72 Form 10-30 Basic recapitalization—IRS informationfilings—Corporation
§ 10:73 Form 10-31 Basic recapitalization—IRS informationfiling for shareholder
§ 10:74 Form 10-32 Basic recapitalization—Form letter toshareholders—IRS filing
§ 10:75 Form 10-33 Shareholder stock purchase agreement§ 10:76 Form 10-34 Stock sale of business held by corporation
(transportation business example)§ 10:77 Form 10-35 Letter of intent, stock of business held by
corporation (ranching example)§ 10:78 Form 10-36 Agreement for purchase and sale of stock
of corporation (ranching business example)§ 10:79 Form 10-37 Stock redemption system: Redemption of
a 50% shareholder—Rental business—Action byunanimous consent of directors
§ 10:80 Form 10-38 Stock redemption system: representationand warranty
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§ 10:81 Form 10-39 Liquidation system—Small corporation
Appendix 10-1. Comparison of Results of Liquidation of Cversus S corporation
CHAPTER 11. SELECTED TAX ASPECTS OFS CORPORATIONS
I. GENERALLY§ 11:1 Introduction
II. ELIGIBILITY§ 11:2 Eligible corporations§ 11:3 Shareholder and ownership restrictions, generally§ 11:4 Trusts as S corporation shareholders§ 11:5 —Grantor trusts§ 11:6 —The qualified subchapter s trust§ 11:7 —Specific applications of the QSST§ 11:8 —Income distribution requirements§ 11:9 —Electing small business trusts§ 11:10 One class of stock§ 11:11 —Nonvoting stock§ 11:12 —Buy-sell agreements§ 11:13 —Stock restriction agreements§ 11:14 —Executive stock plans§ 11:15 Partnerships of S corporations§ 11:15.50 Qualified Subchapter S subsidiaries§ 11:15.60 Transfer of assets to an LLC
III. THE ELECTION§ 11:16 Procedure for election§ 11:17 —Defective elections§ 11:18 Timing the election§ 11:19 Events causing termination of the election§ 11:20 Revocation of the election§ 11:21 Termination of election—Inadvertent termination§ 11:22 Excess passive investment income§ 11:23 Reporting after termination of the election
IV. TAXATION§ 11:24 Taxation at the corporate level, generally§ 11:25 —Tax on built-in gains§ 11:26 Excess passive investment income tax
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§ 11:27 Recapture of investment tax credit§ 11:28 Shareholder computation of S corporation income
and loss items§ 11:28.30 —Wages to shareholder-employees§ 11:28.50 —Fringe benefits for S corporation
shareholder-employees§ 11:29 —Pass-through of income and loss to shareholders§ 11:30 —Effect of basis on losses and deductions§ 11:31 The passive loss rules and S corporations§ 11:32 Distribution of appreciated property§ 11:33 Applicability of other subchapters§ 11:34 Basis of stock and indebtedness§ 11:35 Taxable year of the corporation§ 11:35.50 Tax return filing requirements§ 11:36 Conversion of C corporation to S corporation
V. DISTRIBUTIONS§ 11:37 Overview§ 11:38 —Without accumulated earnings and profits§ 11:39 —With accumulated earnings and profits§ 11:40 —Sample distribution§ 11:41 Dissolution of the S corporation§ 11:42 Separation techniques and the S corporation
VI. RECOMMENDED RESOURCES§ 11:43 Practice aids§ 11:44 Recommended reading§ 11:44.50 Internet reference list
VII. FORMS§ 11:45 Form 11-1–QSST agreement§ 11:46 Form 11-2–S election for QSST§ 11:47 Form 11-3–Attorney QSST election checklist§ 11:48 Form 11-4–General checklist for QSST election§ 11:49 Form 11-5–Checklist for S eligibility§ 11:50 Form 11-6–Checklist for S election§ 11:51 Form 11-7–Voluntary S corporation election
revocation checklist§ 11:52 Form 11-8–Voluntary S corporation election
revocation§ 11:53 Form 11-9–Shareholders’ statement of consent to
revocation of S corporation election§ 11:54 Form 11-10 Resolution for S corporation taxation
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§ 11:55 Form 11-11–S corporation election—Due diligencereview summary
§ 11:56 Form 11-12–S corporation election—Permittedshareholder review schedule
§ 11:57 Form 11-13–S corporation election—Invalid election/inadvertent termination memorandum
§ 11:58 Form 11-14–S corporation election—S electiontransmittal letter to IRS
§ 11:59 Form 11-15–S corporation election—Directorauthorization consent minutes
§ 11:60 Form 11-16–S corporation—Corporate I.R.C.§ 1377(a)(2) election
§ 11:61 Form 11-17–S corporation—Shareholder I.R.C.§ 1377(a)(2) consent
§ 11:62 Form 11-18 Post-death QSST election§ 11:63 Form 11-19 Short client letter regarding grantor trust
reporting§ 11:64 Form 11-20 In-depth client letter regarding grantor
trust reporting
Appendix 11-1. Built-In Gain AnalysisAppendix 11-2. Redemption from Estate—Disproportionate
redemption under § 302(b)(2)Appendix 11-3. S Corporation Deemed Liquidation—
§ 338(h)(10) Election to Treat a Stock Saleas an Asset Sale
CHAPTER 12. THE ONGOINGCORPORATION—PROBLEMS ANDSOLUTIONS
I. GENERALLY§ 12:1 Introduction§ 12:2 Focus of the subject matter§ 12:3 Format of exposition
II. PRACTICAL EXAMPLES OF CORPORATESEPARATION
§ 12:4 The quasi-dispute§ 12:5 —Fact example§ 12:6 Separation alternatives—Liquidation§ 12:7 —Redemption§ 12:8 —Operations without corporate separation§ 12:9 —§ 355
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§ 12:10 Tax-free corporate separation, generally§ 12:11 Division alternatives§ 12:12 Terms§ 12:13 Control requirements§ 12:14 Active business requirement§ 12:14.50 Succession planning through corporate division§ 12:14.70 —Additional guidance§ 12:15 Device test§ 12:16 Business purpose requirement§ 12:17 Other requirements§ 12:18 Tax consequences of taxable and non-taxable
corporate separations
III. TAX EFFECTS OF FAMILY DISPUTES§ 12:19 The Rickey case§ 12:20 The second generation versus the founder—§ 302
redemption§ 12:21 Fact example§ 12:22 —Tentative solutions under § 302 and their problems§ 12:23 —Suggested solution§ 12:24 —Business purpose§ 12:25 —Analysis§ 12:26 Majority—Minority family disputes§ 12:27 —Fact example§ 12:28 —Shareholder tax effects of § 331§ 12:29 —Basis of property received§ 12:30 —Suggested solution
IV. STATE LAW PROBLEMS§ 12:31 State law non-tax aspects of the family dispute§ 12:32 State law rights of minority shareholders§ 12:33 Minority shareholders’ rights in an S corporation§ 12:34 Deadlock§ 12:35 Arbitration
V. OTHER ILLUSTRATIONS AND RECOMMENDEDREADING
§ 12:36 The friendly family§ 12:37 —Fact example§ 12:38 —Suggested solution§ 12:39 Nonfamily successors to the business§ 12:40 The friendly corporate split§ 12:41 —Fact example
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§ 12:42 —Suggested solution§ 12:43 The business to the manager/cash to the
VI. RECOMMENDED RESOURCES§ 12:46 Recommended reading
VII. FORMS§ 12:47 Form 12-1 Option for corporate separation§ 12:48 Form 12-2 Agreement for dissolution of partnership
into corporation§ 12:49 Form 12-3 Collateral note for stock sale§ 12:50 Form 12-4 Stock purchase option§ 12:51 Form 12-5 Consulting agreement§ 12:52 Form 12-6 Balance sheet for capital contributions§ 12:53 Form 12-7 I.R.C. § 355 checklist§ 12:54 Form 12-8 Tax aspects of I.R.C. § 355 division§ 12:55 Form 12-9 I.R.C. § 355—Corporate action by
unanimous consent (directors and shareholders)§ 12:56 Form 12-10 I.R.C. § 355—Agreement and plan of
corporate separation and reorganization§ 12:57 Form 12-11 Private Letter Ruling Request re: I.R.C.
I. ORGANIZATIONAL ASPECTS§ 13:1 Nature of a business trust§ 13:2 Formation of the business trust§ 13:3 Issuance of transferable beneficiary certificates§ 13:4 Management and control of the trust§ 13:5 Dissolution of business trusts
II. LIABILITY OF THE BENEFICIARIES,TRUSTEES, AND TRUST ESTATE
§ 13:6 Liability of the beneficiaries§ 13:7 Liability of the trustee§ 13:8 Liability of the trust estate
III. PLANNING POSSIBILITIES WITH THEBUSINESS TRUST
§ 13:9 Generally§ 13:10 Value freezing
IV. FEDERAL TAX ASPECTS§ 13:11 Income taxation of trusts as business entities§ 13:12 —Taxation as a corporation§ 13:13 —Taxation as a partnership§ 13:14 Gift taxation of donated beneficial interests§ 13:15 Estate taxation of retained beneficial interests§ 13:16 —Retention of control over income§ 13:17 —Retention of control over management§ 13:18 Practice aids
V. RECOMMENDED READING§ 13:19 Recommended reading
VI. FORMS§ 13:20 Form 13-1–Business trust agreement
Volume 2
CHAPTER 14. MULTIPLE ENTITIES§ 14:1 Multiple entities as an alternate
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§ 14:2 Advantages of multiple entities§ 14:3 —The operating corporation§ 14:4 —The real estate partnership§ 14:5 —General or limited real estate partnerships§ 14:6 Alternative multiple-entity devices§ 14:7 Lease arrangements and administrative complexity§ 14:8 Basic lease terms§ 14:9 Options to buy or sell§ 14:10 Allocation of income and deductions in transactions
between related parties§ 14:11 Capital gain versus ordinary income in recognition
transactions between related parties§ 14:12 Nonrecognition of losses§ 14:13 Recommended reading
CHAPTER 15. CONTROL AGREEMENTS:MANAGEMENT AND OWNERSHIP
I. CONTROL AGREEMENTS AND DEVICES§ 15:1 Introduction§ 15:2 Objectives of control agreements§ 15:3 Management control devices
II. VOTING AGREEMENTS AND PROVISIONS§ 15:4 Classification of stock§ 15:5 —Voting and nonvoting stock§ 15:6 —Preferred stock§ 15:7 —Special voting provisions§ 15:8 Representation on the board of directors§ 15:9 —Cumulative voting for directors§ 15:10 —Class voting for directors§ 15:11 Extraordinary voting and quorum requirements§ 15:12 Irrevocable proxy§ 15:13 Voting trusts§ 15:14 Stockholder agreements§ 15:15 —Veto agreements§ 15:16 —Voting agreements
III. MANAGEMENT CONTROL§ 15:17 Management contracts§ 15:18 Management control through holding company§ 15:19 Deadlock§ 15:20 —Buy-sell agreements
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§ 15:21 —Dissolution or reorganization§ 15:22 Management control in a partnership§ 15:23 Management control devices in estate planning§ 15:24 Ownership control devices§ 15:25 Restrictions on transferability§ 15:26 Transfer restriction devices§ 15:27 Stockholder option trap
IV. TRANSFER RESTRICTIONS AND BUY-SELLAGREEMENTS
§ 15:28 Buy-sell agreements§ 15:29 —Option to purchase§ 15:30 —Redemptions§ 15:31 —Nonmanager’s option§ 15:32 S corporation restrictions§ 15:33 Recommended reading
V. FORMS
§ 15:34 Form 15-1—Shareholders’ agreement checklist§ 15:35 Form 15-2—Shareholders’ restrictive agreement§ 15:36 Form 15-3—Consent to restrictive agreement by
later shareholders§ 15:37 Form 15-4—General partnership restrictive
agreement§ 15:38 Form 15-5—Limited partnership restrictive
agreement§ 15:39 Form 15-6—Employee compensation agreement§ 15:40 Form 15-7—Simple right of first refusal§ 15:41 Form 15-8—Complex corporate restrictive
agreement§ 15:42 Form 15-9—S corporation specific restrictive
agreement§ 15:43 Form 15-10—LLC members transfer agreement§ 15:44 Form 15-11—Independent contractor agreement
consent minutes§ 15:45 Form 15-12—Independent contractor agreement—
Trainer example§ 15:45.50 Form 15-12.5—Independent contractor
agreement—Therapist example§ 15:46 Form 15-13— Shareholder voting agreement
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CHAPTER 16. THE FAMILY ASPECT OFTHE FAMILY BUSINESS
I. GENERALLY§ 16:1 Introduction§ 16:2 Understanding the entrepreneur§ 16:3 The dynamics of intergenerational transition§ 16:4 Shared family wealth§ 16:5 Counseling skills needed for family business practice§ 16:6 Personal dynamics of the business family§ 16:7 The intergenerational dialogue§ 16:8 The family business in transition§ 16:9 Family systems basics§ 16:10 The family life cycle§ 16:11 The dynamics of family/closely held business
situations§ 16:12 Mediation as a basic tool§ 16:13 Designing the process§ 16:14 Conclusion
II. RECOMMENDED RESOURCES§ 16:15 Practice aids§ 16:16 Recommended reading§ 16:17 Internet reference list
CHAPTER 17. PLANNING THE BUY-SELLAGREEMENT FOR THE FAMILY BUSINESS
I. GENERALLY§ 17:1 Buy-sell agreements as a means to business continuity§ 17:2 Basic decisions as to buy-out structure§ 17:3 Selection of the method of family business succession
II. THE BASIC CHOICE BETWEEN ENTITY BUY-OUT, CROSS-PURCHASE, AND FLEXIBLEOPTION AGREEMENTS
§ 17:4 General considerations§ 17:4.50 Agreements and documentation accompanying a
§ 17:7 Flexible or option arrangements§ 17:8 —Shotgun agreements§ 17:9 —Wait and see agreements§ 17:10 —Mandatory or permissive buy-sells§ 17:11 —Nonmanager’s option§ 17:12 Choice of technique in the buy-out of a corporate
shareholder§ 17:13 —Purchase of stock by fellow stockholder§ 17:14 —Redemption by the entity§ 17:15 —Transfer of appreciated property§ 17:16 —Part redemption/part shareholder purchase§ 17:17 Redemption after the death of a shareholder
III. SPECIAL CONSIDERATIONS IN THEPLANNING OF CORPORATE BUY-OUTS
§ 17:18 Tax burden on the premiums when funding throughlife insurance
§ 17:19 Differences in amount of shareholding or shareholderages
§ 17:20 Need of insurance cash value in the corporatebusiness
§ 17:21 Relative interests of the surviving shareholders§ 17:22 General corporate tax considerations§ 17:23 Shares passing by gift or purchase prior to the
triggering event
IV. SPECIAL CONSIDERATIONS FORPARTNERSHIP BUY-OUT AGREEMENTS
§ 17:24 Partnership entity or cross-purchase agreements§ 17:25 Income tax considerations of the partnership and
partner years§ 17:26 Basis adjustments at the death of a partner§ 17:27 Allocation of partnership income and loss at death of
a partner
V. SPECIAL CONSIDERATIONS FOR SCORPORATION BUY-OUT AGREEMENTS
§ 17:28 Introduction§ 17:29 Effect of funding method on stock basis§ 17:30 Adjustments to base price§ 17:31 Timing of redemptions§ 17:32 Preservation of the S election§ 17:33 Income in respect of a decedent
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§ 17:34 Fixing the buy-out price
VI. PAYMENT OF THE PURCHASE PRICE§ 17:35 Direct funding from business cash flow§ 17:36 —Payment terms§ 17:37 Integration with estate tax payments§ 17:38 Timing of the buy-out payment§ 17:39 Funding through insurance
VII. FUNDING THE BUY-SELL AGREEMENT WITHINSURANCE
§ 17:40 Use of life insurance, generally§ 17:41 Contrast with other funding methods§ 17:42 Entity versus cross-purchase§ 17:43 Application of life insurance under the entity
agreement§ 17:44 Application of life insurance to cross-purchase
agreements§ 17:45 Taxation of business continuation insurance in the S
corporation§ 17:46 —Premiums§ 17:47 —Proceeds§ 17:48 Special life insurance considerations for S
corporations
VIII. TECHNIQUES IN THE USE OF INSURANCEAND ALTERNATIVE BUY-SELL PLANS
§ 17:49 The cross-purchase approach§ 17:50 Considerations in the use of an entity plan and life
insurance§ 17:51 Disability buy-outs§ 17:52 —Disability insurance§ 17:53 —Drafting the agreement§ 17:54 Split dollar insurance§ 17:55 —Tax consequences of premium payments§ 17:56 —The modified buy-out agreement§ 17:57 Income and estate tax considerations in the use of
insurance
IX. DETERMINATION OF THE BUY-SELLPURCHASE PRICE
§ 17:58 Determining the price§ 17:59 Relation to death tax appraisals
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§ 17:60 The use of par value or book value§ 17:61 Arbitrary valuation§ 17:62 Valuation by professional appraisal§ 17:63 Valuation by agreement with periodic re-evaluation
X. BUSINESS CONTROL ARRANGEMENTS INSMALL BUSINESS ENTITIES
§ 17:64 Introduction§ 17:65 Separation of voting control from economic ownership§ 17:66 Use of nonvoting stock§ 17:67 Use of holding companies§ 17:68 Trust ownership
XI. ENTITY RESTRUCTURING PREPARATORY TOOPTIONS OR BUY-OUTS
§ 17:69 Recapitalization to assign growth to selectedshareholders
§ 17:70 State law considerations
XII. GENERAL INCOME TAX CONSIDERATIONS§ 17:71 Taxation of cross-purchase agreements§ 17:72 Taxation of entity agreements
XIII. ESTATE AND GIFT TAX CONSIDERATIONSOF RESTRICTIONS, OPTIONS, AND BUY-OUTS
§ 17:73 Estate taxability§ 17:74 Effect of post-death sale of stock on estate tax
elections§ 17:75 Gift taxability§ 17:76 Valuation—Rights of first refusal and transfer
restrictions§ 17:77 Stockholder option trap§ 17:78 Agreements restricting transfer before chapter 14§ 17:79 —Value restriction by agreement§ 17:80 —Business purpose§ 17:81 —Partnership sale agreements§ 17:82 Fair market value under § 2703§ 17:83 Statutory exceptions§ 17:84 Substantial modification
XIV. CONCLUSION AND RESOURCES§ 17:85 Conclusion
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§ 17:86 Practice aids§ 17:87 Recommended reading§ 17:87.50 Internet reference list
XV. FORMS§ 17:88 Form 17-1 Buy-sell agreement—Entity (corporate
stock purchase)§ 17:89 Form 17-2 Buy-sell agreement—Cross-purchase
(corporate stock purchase)§ 17:90 Form 17-3 Consent to agreement by later
shareholders§ 17:91 Form 17-4 Clause re: Continued officer, director, or
employee status§ 17:92 Form 17-5 Clause re: Valuation based on earnings§ 17:93 Form 17-6 Clause re: Valuation based on appraisal§ 17:94 Form 17-7 Clause re: Valuation of share purchase
from estate§ 17:95 Form 17-8 Clause re: Repurchase of shares of
surviving spouse§ 17:96 Form 17-9 Statement of purchase price—Annual
price agreement alternate§ 17:97 Form 17-10 Intergenerational buy-sell agreement§ 17:98 Form 17-11 Partnership cross-purchase insurance
funded buy-sell agreement§ 17:99 Form 17-12 Alternate general partnership buy-sell
agreement§ 17:100 Form 17-13 Side agreement between shareholders§ 17:101 Form 17-14 Agreement affecting shareholder voting§ 17:102 Form 17-15 Buy-sell agreement checklist§ 17:103 Form 17-16 Buy-sell and put agreement§ 17:104 Form 17-17 Simple partnership buy-sell at death of
partner§ 17:105 Form 17-18 Basic partnership buy-sell insurance
trust§ 17:106 Form 17-19 Buy-sell agreement—Cross purchase
(LLC interest purchase)
CHAPTER 18. FAMILY BUSINESSPLANNING WITH LIFE INSURANCE
I. GENERALLY§ 18:1 Introduction
II. BUSINESS LIFE INSURANCE PRODUCTS§ 18:2 Basic types of life insurance
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§ 18:3 —Group term§ 18:4 —Key person insurance
III. USING LIFE INSURANCE WITH BUY-SELLAGREEMENTS
§ 18:5 Funding buy-out agreements§ 18:6 —Basic types of buy-out plans§ 18:7 —Alternative buy-out plans§ 18:8 —Modified buy-out agreement§ 18:9 —Advantages of the modified buy-out
IV. SPLIT DOLLAR INSURANCE§ 18:10 Split dollar insurance, generally§ 18:11 Reverse split dollar§ 18:12 —Split dollar tables§ 18:13 —Stock redemption funding§ 18:14 —Cross-purchase buy-outs
V. TAX ASPECTS OF LIFE INSURANCE§ 18:15 Deductibility of premiums§ 18:16 Deductibility of interest on loans§ 18:17 Taxability of premium payments§ 18:18 Insurance purchased by a qualified plan§ 18:19 Impact of the corporate alternative minimum tax§ 18:20 Policy proceeds: Exclusion from gross income§ 18:21 Estate taxability, generally§ 18:22 —Incidents of ownership in group term policies§ 18:23 —Partnership ownership§ 18:24 —Estate taxability of insurance payable to a family
corporation§ 18:25 Estate tax valuation treatment of insurance received
by an entity§ 18:26 Insurance owned by the family corporation payable to
another§ 18:27 —Corporate ownership§ 18:28 —Transfers by a corporation§ 18:29 —Transfer of stock in a controlled corporation§ 18:30 Right to purchase insurance from corporation
VI. GIFT AND INHERITANCE PLANNING WITHLIFE INSURANCE
§ 18:31 Gifting of a life insurance contract
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§ 18:32 Using insurance proceeds as the inheritance fornonmanagers
§ 18:32.50 Life settlement basics
VII. RECOMMENDED RESOURCES§ 18:33 Practice aids§ 18:34 Recommended reading§ 18:34.50 Internet reference list
VIII. FORMS§ 18:35 Form 18-1 Insurance funded cross purchase buy-sell
agreement§ 18:36 Form 18-2 Cross-purchase buy-sell agreement with
insurance trust§ 18:37 Form 18-3 Cross-purchase agreement—Life
insurance—Additional provisions§ 18:38 Form 18-4 Insurance trust for corporate buy-sell
agreement§ 18:39 Form 18-5 Split-dollar agreement§ 18:40 Form 18-6 Collateral security assignment§ 18:41 Form 18-7 Letter to client—Insurance funded cross-
purchase buy-sell agreement§ 18:42 Form 18-8 Partnership insurance trust§ 18:43 Form 18-9 Corporate resolution split dollar insurance
program§ 18:44 Form 18-10 Example of reverse split dollar
agreement§ 18:45 Form 18-11 Model form for illustration of single
premium life insurance policy (with samplenumbers)
§ 18:46 Form 18-12 Client Handout—Planning with LifeInsurance
CHAPTER 19. SHIFTING OF BUSINESSINTEREST VALUE AND OPPORTUNITY
I. INTRODUCTION—MOTIVATION§ 19:1 Why split ownership interests in time and value?§ 19:2 The basic concept of present value versus future
increment§ 19:3 The economics of value control
II. ATTACKS ON VALUE FIXING ARRANGEMENTSBEFORE CHAPTER 14
§ 19:4 The history of legislative attacks—§ 2036(c)
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§ 19:5 Problems raised by the Service§ 19:6 Other problems raised by the Service—Inadvertent
gifts§ 19:7 —Attacks on fixed value arrangements pre-§ 2036(c)§ 19:8 —Interrelated tax and valuation problems in the
issuance of multiclass stock§ 19:9 —Preferred stock valuation in the business context§ 19:10 Planning with voting preferred stock§ 19:11 Other aspects of preferred stock valuation
III. THE APPLICATION OF CHAPTER 14 TOTRANSFERS OF ENTITY INTERESTS
§ 19:12 Chapter 14—Gifts of entity interests§ 19:13 —Gift tax exposure of gifts of business entity
interests§ 19:14 —The subtraction method§ 19:15 —Qualified payments, generally§ 19:16 —Cumulative but unpaid distributions§ 19:17 —Attribution of holding§ 19:18 —Other exceptions to § 2701§ 19:19 —Planning with § 2701§ 19:20 Gift tax exposure of gifts in trust§ 19:21 Other valuation restrictions imposed by chapter 14
IV. OTHER STRATEGIES AND PROBLEMS§ 19:22 Failure to achieve anticipated value control§ 19:23 Alternate value freezing strategies still available
V. THE MECHANICS OF SPLITTING OWNERSHIPVALUE OVER TIME
§ 19:24 Introduction§ 19:25 Common noncorporate devices for value shifting§ 19:26 The C corporation§ 19:27 The S corporation
VI. PLANNING FOR VALUE SHIFTING WITHCORPORATE STOCK SALES AFTER CHAPTER14
§ 19:28 Value shifting through sale of corporate stock
VII. FIXED VALUE PARTNERSHIP INTERESTS§ 19:29 The structure of fixed value partnership interests
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§ 19:30 Tax risks in the creation of fixed value partnershipinterests
§ 19:31 Fixed value partnership interests after chapter 14
VIII. PLANNING FOR VALUE CONTROLTHROUGH THE CORPORATION AFTERCHAPTER 14
§ 19:32 Generally§ 19:33 Value shifting through preferred stock§ 19:34 —Use of the preferred stock liquidation preference§ 19:35 —Distribution of control and income among family
members§ 19:36 —Integration with marital deduction planning§ 19:37 Planning possibilities with nonvoting stock§ 19:38 Voting power as affecting value freezing§ 19:39 Effect on corporate control§ 19:40 Valuation strategy§ 19:41 Transfer of voting power at death§ 19:42 Recapitalization§ 19:43 —Gift taxation in recapitalizations§ 19:44 —Historic valuation in recapitalizations§ 19:45 —Estate tax concerns of recapitalizations§ 19:46 —Voting preferred stock—Continuing gift problems
IX. ALTERNATIVES TO RECAPITALIZATION§ 19:47 Preferred stock dividends§ 19:48 Use of the holding company§ 19:49 —Formation of a holding company§ 19:50 —Other uses of the holding company§ 19:51 Summary—Value shifting through the corporation§ 19:52 Practice aids§ 19:53 Recommended reading
Appendix 19-3. Discussion of the Revenue Reconcilation Actof 1990, Subtitle F—Small BusinessIncentives, Part 1—Treatment of Estate TaxFreezes
Appendix 19-4. Analysis of § 2701 (Chart)
Appendix 19-5. Glossary of § 2701 Terms
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Appendix 19-6. Illustration of Value Control Through theFamily Business Entity
CHAPTER 20. ASPECTS OF ESTATEPLANNING FOR BUSINESSORGANIZATIONS
I. GENERALLY§ 20:1 Introduction§ 20:2 Basic planning techniques§ 20:3 Basic concepts of estate tax control§ 20:4 Post-mortem tax treatment of partnerships
II. NON-TAX FACTORS IN PLANNING§ 20:5 Estate planning for the entrepreneurial family§ 20:6 Family motivation§ 20:7 Ownership of growth§ 20:8 Decision making—Two plateaus§ 20:9 Ultimate transfers among children
III. NON-ENTITY TECHNIQUES FOR VALUESHIFTING
§ 20:10 Lifetime gifts§ 20:11 Intrafamily loans
IV. ADAPTATION OF MARITAL DEDUCTION ANDGENERATION-SKIPPING PLANNING FOR THEFAMILY BUSINESS
§ 20:12 The credit trust§ 20:13 Family members as trustees, generally§ 20:14 The qualified terminable interest in property§ 20:15 Generation-skipping§ 20:16 Basic integration of estate tax benefits§ 20:17 Techniques of plan adaptation for the family business§ 20:18 Multiple business entities
V. ANALYSIS OF BUSINESS ENTITIES FOR § 2032AAND § 2057 PURPOSES
§ 20:19 Feasibility of § 2032A election as to urban real estate§ 20:20 Eligibility of corporate and partnership property for
the election
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§ 20:21 Piercing the corporate veil§ 20:22 Effect of the entity interest being valued§ 20:23 Computation of eligible value in legal entities§ 20:24 Partnerships for § 2032A purposes§ 20:25 Organizational entities and the consent agreement§ 20:26 Effect of encumbrances on corporate property§ 20:27 The recapture tax and business organizations§ 20:28 Material participation for § 2032A purposes through
entities§ 20:29 Methods of § 2032A valuation
VI. ENTITY PLANNING FOR CHARITABLEPURPOSES
§ 20:30 Transfers of corporate ownership to charity§ 20:31 Cases before the 1986 Tax Reform Act§ 20:32 Effect of TRA 1986§ 20:33 Alternative transfer of corporate property only§ 20:34 Effect of sale immediately after the property transfer§ 20:35 Effect of donation of appreciated property on
corporate earnings and profits§ 20:36 Limitations on income tax deductibility of appreciated
property§ 20:37 Contributions from S corporations§ 20:38 Effect of the alternative minimum tax
VII. PLANNING FOR ESTATE AND TRUSTADMINISTRATION OF BUSINESS PROPERTY
§ 20:39 Planning for post-death corporate liquidation§ 20:40 Effect of business entities on post-mortem adjustment
of basis§ 20:41 Estate and trust powers for business property§ 20:42 Business entities as facilitating estate administration§ 20:43 Planning for incapacity§ 20:44 Family-owned business exclusion
VIII. RECOMMENDED RESOURCES§ 20:45 Practice aids§ 20:46 Recommended reading§ 20:46.50 Internet reference list
IX. FORMS§ 20:47 Form 20-1 Power of attorney with business provisions§ 20:48 Form 20-2 Will provisions—Stock purchase option
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§ 20:49 Form 20-3 Model qualified subchapter S trust credittrust provisions (spouse lifetime beneficiary)
§ 20:50 Form 20-4 Right of first refusal§ 20:51 Form 20-5 Right of first refusal as to real estate§ 20:52 Form 20-6 Option to lease with purchase option—
Multi-level option holders§ 20:53 Form 20-7 Option to lease with right of first refusal§ 20:54 Form 20-8 Right of first refusal and right to lease
land not actively used in business, or agriculture, byowner
§ 20:55 Form 20-9 Right of first refusal and right to leaseland not actively farmed by owner—Alternative
§ 20:56 Form 20-10 Letter to client re grantor trust taxation§ 20:57 Form 20-11 Power of attorney—Trust creation and
powers
CHAPTER 21. RETIREMENT PLANNING
I. INTRODUCTION AND TYPES OF PLANS§ 21:1 Planning for retirement§ 21:2 —Debentures for retirement income§ 21:3 —Subchapter S distributions§ 21:4 —Retirement income from the conventional
II. ESTATE TAXABILITY§ 21:26 Estate taxability: Lump sum payment§ 21:27 Estate taxability: Annuity payments§ 21:28 —Income taxation of qualified plan benefits§ 21:29 Estate taxability—Section 2039
III. LIFE INSURANCE AND RETIREMENT PLANS§ 21:30 Life insurance in a qualified plan§ 21:31 Limitations on amount of plan-owned insurance§ 21:32 Requirements for insurance as an incidental
investment§ 21:33 Insurance in a defined benefit plan§ 21:34 Taxation of insurance proceeds§ 21:35 Trust as recipient of proceeds§ 21:36 —Estate and income taxation of a trust§ 21:37 Payment elections of trustee§ 21:38 —Averaging election§ 21:39 —Timing of election as to estate taxability§ 21:40 Mathematics of insurance
IV. RETIREMENT PLANS AND THE MARITALDEDUCTION
§ 21:41 Marital deduction effect of qualified plandistributions
§ 21:42 Disclaimer§ 21:43 Planning with qualified plans and QTIPs§ 21:44 Directions for distribution to a QTIP
V. RECOMMENDED RESOURCES§ 21:45 Practice aids§ 21:46 Recommended reading§ 21:46.50 Internet reference list
VI. FORMS§ 21:47 Form 21–1 Business Succession Planning—Checklist§ 21:48 Form 21-2 Parent Transition/Sale Planning—
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