June 2nd, 2015

As a general proposition, the common parent of a consolidated group for a consolidated return year is, in fact, the sole agent with regard to an affiliated group’s income tax liability. Regs. §1.1502-77(a)(1).

Furthermore, the common parent generally must remain as the agent for a consolidated return year that had ended, even if in a later year another corporation became the common parent or the group terminated.

An exception to this point was, however, demonstrated with the adoption of the final regulations in Treasury Decision 7517.

Suppose, for instance, that as of January 1 of Year 1, P had been the common parent and agent for the P consolidated group comprised of P and its two subsidiaries, S and S-1.

Assume P had filed a consolidated return for the P affiliated group for Year 1.

On January 1 of Year 3, P merged with and into Z-1, a subsidiary of Z, in a forward triangular merger.

As a consequence, the merger transaction constituted a reverse acquisition under Regs. §1.1502-75(d)(3)(i) that resulted in a group structure change, because P’s shareholders received more than fifty percent of Z’s stock in exchange for all of P’s stock.

As the corporation, which survived in the merger, and the successor of P, Z–1 qualified as a default successor for the P affiliated group for Years 1 and 2.

Z not only became the new common parent for the P affiliated group for consolidated return years after the merger, but also became the new agent as a result of the group structure change.

Therefore, P was not permitted to designated an agent for Years 1 or 2, because Z-1 was P’s default successor and the agent for the P affiliated group for Years 1 and 2.

Particularly important, Z-1 must file the P group’s consolidated return for Year 2. Regs. §1.1502-77(g), exp. 8.

Expressed another way, a common parent cannot act as agent for a completed year or any subsequent completed years if it ceased to exist or had resigned.

Five new rules were adopted by T.D. 9716, when Regs. §1.1502-77 became effective. The changes made were as follows:

1) Expanded the circumstances under which the Commissioner may replace an agent on the Commissioner’s own accord.

2) Clarified that a terminating agent without a default successor may only designate an agent with respect to a completed year.

3) Organized the provisions that permit the Commissioner to designate an agent into two categories: (a) those provisions that authorize the Commissioner to replace an agent on the Commissioner’s own accord, with or without a written request from a member; and (b) a provision permitting the Commissioner to replace an agent pursuant to a member’s written request.

4) Allowed an agent to resign under certain circumstances.

5) Clarified that an agent other than the common parent generally serves as agent under the same terms and with the same rights as the common parent.

An exception to the above fifth change must be applied in the case of an agent designated by the Commissioner. Under this special rule, an agent may not designate an agent upon its termination, unless the Commissioner had designated the agent solely because a prior agent terminated without a default successor and without designating an agent.

Nevertheless, this special exception must not be applied in the case of a group structure change as defined in Regs. §1.1502–33(f)(1).


May 21st, 2015

While there has been a great deal of litigation regarding the discounted value of a minority limited partnership interest, a holder of a limited partnership interest may realize an economic benefit only if the controlling general partners approve of the transaction. This restriction is severe and certainly limits the ability of a minority limited partner to find a willing and able buyer to purchase such an interest.
What is a minority partnership interest worth to a willing and able buyer, who cannot:

1) Sell the partnership interest,

2) Force a liquidation of the partnership to obtain a pro-rata share of partnership assets,

3) Make a general partner distribute cash in an amount equal to pro-rata share of current income,

4) Withdraw from partnership as a partner and obtain a pro-rata share of partnership assets, or

5) Cause a premature termination of partnership before the earlier of its 30 year duration or the termination of its business activities? Practically nothing.

Not only does the minority partnership interest, subject to the above conditions, have a limited value to a willing and able buyer, but also the minority partnership interest may have no significant future or present value to the holder of the minority interest. The value of a minority partnership interest to a family member will depend upon subsequent events. If the cash flow from the minority partnership interest proved to be positive, the minority partner realized the economic benefits of owning the investment. Even where there was no cash flow to a minority partner, the investment may be satisfactory to the minority partner if the income was properly reinvested.

In rare situations, a family limited partnership may became a financial disaster. To illustrate, suppose the father was the general partner. After the formation of the family limited partnership, the father was subsequently divorced from the mother in the aftermath of a family dispute over the control of various business enterprises. Furthermore, assume the father subsequently remarried and disinherited his first family as a result of the family dispute. What was the value of the minority interest to a family member, who became a minority limited partner? Practically nothing.

In a worse case scenario, the minority partnership interest could have a negative value. This could transpire if the holder of the minority interest had partnership income reported on a K-1 each year but never received any cash distributions from the family limited partnership. In some instances, this has driven the holder of the minority interest to the brink of financial disaster.

These type of unexpected, rare situations have occurred and will continue to happen, due to unexpected subsequent events.