Buy-Sell Agreements.

• Author: Vinso, Joseph D.
• Position: Brief Article

Impact for Family Corporate and Partnership Interests

The recent case of Estate of H.A. True, Jr. et al v. Commissioner, T.C. Memo 2001-167 (July 6, 2001) examined the role of a buy-sell (buyback) agreement in corporate redemptions among family members, as well as the buy-sell requirements in partnership agreements.

Case Specifics

In particular, the Tax Court considered the following items:

* Does a book value provision control for estate and gift tax purposes (in 1993 and 1994)?

* If it does not, what role do the other provisions of these agreements have on determining value?

* If there is a provision for delay in payment, how should it be treated? And,

* What would determine liability for underpayment penalties? The buyback agreements included not only buyback agreements for corporate stock but also the buyback provisions included in partnership agreements.

Henry True, Jr. died in 1994, and was survived by his wife, children, grandchildren and great-grandchildren. He had worked in the oil and gas business since 1938, and had formed more than 20 companies. These companies were in the oil and gas business, a drilling supplies wholesaler, an environmental cleanup firm, a bank holding company, a number of cattle ranches, and he co-owned a dude ranch with his wife, brother and sister-in-law. They were organized as corporations and partnerships.

The Trues used buy-sell provisions to restrict a related owner's ability to sell outside the True family. Furthermore, these agreements that were in existence for a long time, were adjudicated in a U.S. District Court as controlling in 1971 and 1973, and were used to effect an actual redemption in 1984.

Court's Analysis

The court went to great lengths to analyze when a buyback provision has a business purpose or is testamentary, immaterial of whether a corporation or partnership is involved, since both were at issue here. Following is a summary of the Tax Court's very lengthy--336-page--opinion:

* A buyback provision involving family members has a high standard to meet to qualify as a business purpose agreement rather than a testamentary disposition. In essence, the result controls, not the provision's form.

* If an agreement is found to be testamentary, any provision providing for redemption at less than fair market value will not control for estate or gift tax purposes and will be ignored in the valuation of the interest bequeathed.

* It has been argued that the existence of the buyback agreement...