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AN EXAMINATION OF THE STRUCTURE AND VALUATION OF LEGAL AND ECONOMIC RIGHTS OF PARTNERSHIP INTERESTS FOR ESTATE AND GIFT TAX PURPOSES IN IMPLEMENTING A PARTNERSHIP CAPITAL FREEZE FOR FARMING ENTERPRISES
Abstract
The study examines farm partnership capital freezes which minimize estate taxes on inflated assets by converting the rights to such assets into a frozen partnership interest, representing a fixed present value; a growth interest, representing rights to future appreciation; and a control interest. The study addresses the problem of structuring and valuation of the economic rights of the partnership interests in order to fix the frozen interest's value and avoid gift tax problems and other tax risks. The study concludes that a general partnership control interest should be used with limited frozen and growth interests. The values of the interests are estimated by application of certain intrinsic valuation factors including, capitalization rates. Currently used capitalization rates are unrealistically high for farming enterprises. The study concludes that a farm capitalization rate of approximately four percent is justified based on farm income returns and excluding unrealized asset appreciation. The study also examines statistical differences in mean income returns between eight farm types for 1,235 Kansas farms from 1973 through 1980. The study found statistical evidence which justifies higher than average capitalization rates for dryland and irrigated farms, lower rates for general farms and higher rates as gross income increases. Mean income returns ranged from -2.7 percent to 8.8 percent with a grand mean of 5.7 percent. The present value of the frozen interest is sustainable at approximately eighty-five percent of total partnership value if a minimum of approximately fifteen percent equity protection is provided by the growth and control interests, a three percent capitalization rate is applied, unrestricted put rights are assigned and all pre-freeze property appreciation but no operating losses are assigned. This structuring will support the value of the frozen interest and thereby avoid gift tax problems at the time of freeze formation. Because the control and growth interests have exclusive rights to control and future appreciation, they are valued at approximately eight percent and seven percent, respectively, of total partnership value based on court decisions and the opinions of valuation experts.
Subject Area
Accounting
Recommended Citation
HARLINE, NORMAN LAVAR, "AN EXAMINATION OF THE STRUCTURE AND VALUATION OF LEGAL AND ECONOMIC RIGHTS OF PARTNERSHIP INTERESTS FOR ESTATE AND GIFT TAX PURPOSES IN IMPLEMENTING A PARTNERSHIP CAPITAL FREEZE FOR FARMING ENTERPRISES" (1982). ETD collection for University of Nebraska-Lincoln. AAI8220644.
https://digitalcommons.unl.edu/dissertations/AAI8220644