Issue: Exactly how should a Corporate General Partner (CGP) be structured to avoid problems with §2704 or with triggering an estate/gift tax valuation? It is my opinion that not enough attention is paid to the proper structuring of the CGP. It is not uncommon to see CGPs poorly structured, with little thought given to the process.
Discussion: Timing is all important to the process of structuring a CGP. For example ,to avoid problems with §2704, we advise setting up the CGP prior to starting or funding the Family Limited Partnership (FLP).
Setting up the CGP includes choosing an appropriate non-family-member shareholder and making sure that it (assuming a charity) is properly established as a shareholder prior to conducting any transaction whatsoever with the FLP. In addition, all other shareholders should be determined along with their percentage ownership and method of acquiring that interest.
Shares in a CGP can be acquired basically by purchase or gift. If by purchase, the shareholders involved will simply purchase shares from the corporation. Consider the case of Mr. and Mrs. Dough. They desire to fund the CGP with the purchase of their shares and then to gift a 10% interest to each of their two children and a 1% interest to a non-family-member charity.
On day one, the Doughs contribute $2,000 to the CGP in return for 1,000 shares each (50%) of the capital stock of the corporation.
On day two, each gifts 10.5% of his/her shares (105 shares) to each child and 0.5% to the charity. Following the gifts, each child owns 100 shares and the charity owns 10 shares. Since the corporation had no other assets or liabilities as of the date of the gifts, one can assume that the value of the gifts would equal the per share value of the capital stock purchased by the Doughs. This greatly simplifies the acquisition process and, in addition, nullifies the need for a formal valuation.
In addition to the valuation issue, it is very important that the CGP be completely structured, to include the non-family-member, prior to undertaking any transaction with the FLP. It stands to reason that the issues surrounding §2704 become relevant only when the corporation becomes the general partner of a funded FLP. Accordingly, the CGP should be set up and operational prior to the creation and funding of the FLP.
Continuing with our example, on day three, the FLP is created and funded with contributions from the Doughs. At this point, the CGP acquires a 1% (or more) interest in the FLP. In order to determine the exact amount required to purchase a 1% interest in the FLP, we developed the following formula:
X = .01 (A + X)
where: X = the cost of a 1% purchase of FLP interest; and
A = the initial contributions made to the FLP
Conclusion: If this structure is followed, the process is greatly simplified. The cost of shares of stock in the CGP is easily determined. The method of getting stock to children and/or a non-family member is clarified. The need for a valuation of the CGP is completely nullified, and the exact cost of the CGP's 1% interest in the FLP is easily determined.
