The problems associated with drafting a purchase-sale contract are complex and difficult. This article analyzes some of the main concerns, such as .B purpose of the agreement, the types of agreements, and the methods of determining the share price. One. State law may limit a company`s ability to buy back its shares. Book value. The book value allocates the equity as shown on the company`s balance sheet to the share to be valued. Although the carrying amount is easy to calculate, it probably does not accurately reflect fair value because it does not take into account current values and many intangible assets such as goodwill. The book value may also not determine the value of shares for inheritance tax purposes in purchase and sale agreements, in particular between related parties. Consequently, no inheritance tax is levied on the proceeds of this domestic policy. Suppose A, B and C own shares in a company and wish to enter into a cross-purchase agreement.
A cannot transfer a policy from his life to B (and vice versa) to start the deal without initiating a transfer of value. Similarly, after A`s death, A`s estate cannot transfer the policy that A had to B to C and policy A to C to B without triggering a transfer of value. However, suppose A, B, and C form an LLC before transferring the fonts. A, B and C would then be associated at the time of the transfer of the policies, and depending on the exception to the transfer to value rule, which allows the transfer of insurance policies to the insured`s partners or to a partnership of the insured, A, B and C could transfer the policies to each other or let the LLC own the policies. It is also possible to save. 20.2031-2(h) as a simple requirement that the shares must first be offered to the Company or the remaining shareholders at the transfer price applicable at the time of death. If the offer is rejected, the shareholder should be able to sell the shares for a higher price. A right of first refusal in the company and/or the remaining shareholders at the contract price – even if the price of a third party is higher – probably means that the testator is not “free to dispose of the underlying securities at the price he chooses during his lifetime”. The first two of these previous criteria are relatively easy to fulfill: the agreement must determine the value or mechanism for determining the value of the shares, and the estate of the deceased shareholder must be required to sell the shares after the death of the deceased.
The third requirement is more difficult to understand and comes from Reg. 20.2031-2 (h), which states: (2) In such a situation, it is unlikely that the purchase price set under the agreement will be accepted by the IRS for the assessment of inheritance tax, as the price actually paid for interest could be higher. In general, there are two types of buy-sell agreements: (1) agreements that only limit the transfer of shares, and (2) agreements that also determine the value of shares for inheritance tax purposes. (2) Another method bases the purchase price on the value of the inheritance tax of the deceased owner`s interest. (3) Percentage of gross receipts or other objective factors. However, where a policy is taken out for the life of a partner or shareholder who holds the shares in a personal capacity, the exception should apply. On the other hand, a takeover agreement has two main advantages. First of all, it`s simple and fair. The company simply buys the deceased owner`s interest and the remaining owners don`t have to worry about collecting the money for it. Second, when an owner leaves the entity, it is relatively easy to manage policies. This is different from a cross-purchase agreement, which is the subject of value transfer issues discussed below. The cross-purchase agreement solves all the important issues raised by the takeover agreement.
When owners buy the shares of a deceased owner, they receive a base equal to the purchase price of that interest, which can reduce capital gains tax in the future when the corporation is sold. Since the company does not make the purchase, the restrictions imposed on the company due to loans would not prevent the remaining owners from using the proceeds of the insurance to purchase the shares of the deceased owner. Cross-purchase agreements also include questions that must be considered: 4. Provide cash to the estate of the owner who is retiring or deceased. Another exception in general regarding insurance policies, where:3 In addition to the two policies, the shares of both companies are the property of the estate of the deceased at the time of death. The next question is what value should be used for estate tax purposes. One factor that complicates the use of an LLC in the context of a cross-purchase agreement is that the IRS has issued an income procedure stating that it will not issue written guidance on whether the use of an LLC or partnership avoids the problem of transfer of value when virtually all of the assets of the LLC or partnership consist of members` life insurance policies. The IRS`s reluctance to make decisions on the issue of business purpose may indicate that the IRS will take the position that the receipt of insurance proceeds is subject to income tax based on a transfer of value in situations where an LLC or partnership does not have an independent business purpose. It is expressly stated that the price obtained by a sale, as set out in paragraph 5(1)(a) of the Act, cannot be used as an assessment of the properties in question.
The explanatory memorandum to the Tax (Amendment) Act 1993 stated that “section 5(1)(f)bis of the Inheritance Tax Act 1955 serves as a guideline for determining the value of shares held by a deceased person in an unlisted company”. The first observation to be made in this context is that the contract of sale and sale is not a provision of the articles of association, declaration of incorporation, contract of association or articles of association of the company, according to which or the value of the shares of the deceased or of another partner must be determined in accordance with paragraph (ii) (or paragraph (ii)). article 5(1)(f)bis. If this were the case, no provision of the association agreement or the statutes of the company can be complied with according to which or according to which the value of the shares of the testator or another partner must be determined. Buybacks have complex tax implications and a high potential for adverse tax consequences: the general rule that applies to a share buyback contract is very different. A shareholder who buys back his shares receives a dividend. The treatment of dividends is detrimental because (1) dividends are treated as ordinary income (subject to higher tax rates than capital gains) and (2) the entire amount received is taxed without compensation for the basis of the repaid shares. .