More and more, courts are asking for concrete, empirical data to back-up a business appraiser’s adjustments and assumptions, particularly in the tax context. A recent article by Francis X. Burns, along with two colleagues at Charles River Associates, tries to answer the call regarding the safe harbor provisions in IRC Sec. 2703(b)(3), which generally requires the tax appraiser to ignore a partnership’s transfer restrictions unless they are 1) a bona fide business arrangement, 2) not just a tax-avoidance device, and 3) comparable to similar arm’s length agreements among unrelated parties.
Frequently, parties will introduce experts to testify that, based on their general experience, a transfer restriction such as a right of first refusal (ROFR) with an extended pay-out period is typical among independent parties. “A more direct means…is to compare the LP terms with those found in arm’s length agreements,” writes Burns, a frequent expert for the IRS. He and his co-authors reviewed public SEC filings and identified over 1,100 restricted LP agreements covering a range of industries and businesses. Their findings? “While ROFRs aren’t uncommon, it’s rare to find ROFR terms that restrict the liquidity of transfers through installment payments.” In fact, nearly three out of four agreements with ROFR provisions mandate that the partnership buy-back the interest at the same price and terms as a third-party party. For the authors’ complete research and conclusions, read “Valuing Limited Partnership Interests,” in the Oct. 2010 Trusts & Estates (article available by subscription only).
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