1. Federal, State, Local and International Taxation Conference
Real Estate
Problems and Solutions
CalCPA Educational Foundation
November 2– 4, 2016 Sheraton Universal Hotel
Universal City, CA

2. Co-Tenancy vs. Partnership

3. Tenancy In Common
Why is the Distinction Between Co-tenancy and Partnership Important?
Co-tenancy is not usually subject to new 2704(b) Regulations; therefore, discounts are more probable.
Separate exchanges possible.
Separate tax elections possible.
No 754 election required on death.
Ownership of each co-owner can be separately structured, e.g., family LLC owning a co-tenancy interest with others.

4. Definition of a Partnership
A partnership requires two or more persons who jointly carry on a business, financial operation or venture as co- owners for profit. (Code Section 7701(a)(2).) Section 761(a) of the Code further describes a partnership as including:
a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation or venture is carried on, and which is not, within the meaning of [this title], a corporation or a trust or estate.

5. Partnership vs. Co-Tenancy
EXAMPLE #1
Individuals A and B co-own property that is leased out to others. If A and B are not considered to be in a partnership, A and B may each separately determine the allowable depreciation method on his or her interest in the property leased, whereas if A and B are treated as a partnership, the depreciation method and most all other tax elections would be made at the partnership level binding both partners.

6. Tax Factors used to Distinguish Partnerships from Co-Tenancy
In distinguishing a partnership from a mere co-ownership of property, two cases listing a number of the factors that determine a partnership are Comr. v. Tower (1946) 327 U.S. 280, and Comr. v. Culbertson (1949) 337 U.S. 733.
If most of these factors are present, a co-ownership of property or jointly conducted activity will generally be for tax purposes found to be a partnership

7. Tax Factors used to Distinguish Partnerships from Co-Tenancy (Cont’d.)
The factors most frequently taken into account include:
1. Joint contribution of capital or services;
2. The purpose of carrying on a trade or business;
3. Joint ownership of the capital contributions and earning of the enterprise;
Sharing profits and losses;
Mutual control of the business;
6. The parties’ agreement and their conduct relative thereto;
7. Maintaining separate books of accounts for the business;
8. Representing the business to others as a partnership; and
9. Conducting business, holding title to property and filing tax returns in the partnership name.

8. IRS Conditions for Determining Co-Tenancy as opposed to a Partnership
Revenue Procedure , I.R.B (Mar. 19, 2002) specifies 15 conditions under which, if applicable to a situation, the IRS will consider that an undivided fractional interest in rental real property is a co-tenancy and not an interest in a partnership within the meaning of Regs. § (a). Even if the conditions described below are not satisfied, the IRS may still rule that a co-tenancy exists where the facts and circumstances clearly establish such a ruling is appropriate. The conditions include the following:

9. IRS Conditions for Determining Co-Tenancy as opposed to a Partnership (Cont’d.)
Tenancy in Common Ownership. Each co-owner holds property title as a tenant in common under local law.
Number of Co-Owners. The number of co-owners is limited to no more than 35 persons.
No Treatment of Co-Ownership as an Entity. Neither the co- ownership nor the co-owners themselves hold itself or themselves out as a partnership or other form of business entity, or as partners, shareholders or members thereof.
Co-Ownership Agreement. The co-owners may enter into a limited co-ownership agreement that may run with the land. For example, a co-ownership agreement may provide that a co-owner must offer the co-ownership interest for sale to the other co- owners, the sponsor, or the lessee at fair market value.

10. IRS Conditions for Determining Co-Tenancy as opposed to a Partnership (Cont’d.)
Voting. The co-owners retain the right to approve the hiring of any manager, the sale or other disposition of the Property, any leases or the creation or modification of a blanket lien. Any sale, lease, or re-lease of a portion or all of the Property, any negotiation or renegotiation of indebtedness secured by a blanket lien, the hiring of any manager, or the negotiation of any management contract is by unanimous approval of the co-owners. For all other actions on behalf of the co-ownership, the co-owners may agree to be bound by the vote of those holding more than 50 percent of the undivided interests in the Property.
Restrictions on Alienation. Each co-owner has the right to transfer, partition, and encumber the co-owner’s undivided interest in the Property without approval of any person. However, restrictions on the right to transfer, partition, or encumber interests in the Property that are required by a lender and that are consistent with customary commercial lending practices are not prohibited. Moreover, the co-owners, the sponsor, or the lessee may have a right of first refusal with respect to any co-owner’s exercise of the right to transfer the co-ownership interest in the Property. In addition, a co-owner may agree to offer the co- ownership interest for sale to the other co-owners, the sponsor, or the lessee at fair market value, determined as of the time the partition right is exercised, before exercising any right to partition.

11. IRS Conditions for Determining Co-Tenancy as opposed to a Partnership (Cont’d.)
Sharing Proceeds and Liabilities Upon Sale of Property. If the Property is sold, any debt secured by a blanket lien is satisfied and the remaining sales proceeds are distributed to the co-owners.
Proportionate Sharing of Profits and Losses. Each co-owner shares in all revenues generated by the Property and all costs associated with the Property in proportion to the co-owner’s undivided interest in the Property. Neither the other co-owners, nor the sponsor, nor the manager may advance funds to a co- owner to meet expenses associated with the co-ownership interest, unless the advance is recourse to the co-owner and is not for a period exceeding 31 days.
Proportionate Sharing of Debt. The co-owners share in any indebtedness secured by a blanket lien in proportion to their undivided interests.

12. IRS Conditions for Determining Co-Tenancy as opposed to a Partnership (Cont’d.)
Options. A co-owner may issue an option to purchase the co- owner’s undivided interest, provided that the exercise price for the call option reflects the fair market value of the Property determined as of the time the option is exercised. A co-owner may not acquire an option to sell the co-owner’s undivided interest (put option) to the sponsor, the lessee, another co-owner, or the lender, or any person related to the sponsor, the lessee, another co-owner, or the lender.
No Business Activities. The co-owners’ activities are limited to those customarily performed in connection with the maintenance and repair of rental real property. See Rev. Rul ( C.B ). In determining the co-owners’ activities, all activities of the co- owners, their agents, and any persons related to the co-owners with respect to the Property will be taken into account, whether or not those activities are performed by the co-owners in their capacities as co-owners. However, activities of a co-owner or a related person with respect to the Property (other than in the co-owner’s capacity as a co-owner) will not be taken into account if the co-owner owns an undivided interest in the Property for less than 6 months.

13. IRS Conditions for Determining Co-Tenancy as opposed to a Partnership (Cont’d.)
Management and Brokerage Agreements. The co-owners may enter into management or brokerage agreements, which is renewable no less frequently than annually, with an agent, who may be the sponsor or a co- owner (or any person related to the sponsor or a co-owner), but who is not a lessee. The management agreement may authorize the manager to maintain a common bank account for the collection and deposit of rents and to offset expenses associated with the Property against any revenues before disbursing each co- owner’s share of net revenues. In all events, however, the manager will disburse to the co-owners their shares of net revenues within 3 months from the date of receipt of those revenues.
The management agreement may also authorize the manager to prepare statements for the co-owners showing their shares of revenue and costs from the Property. In addition, the management agreement may authorize the manager to obtain or modify insurance on the Property, and to negotiate modifications of the terms of any lease or any indebtedness encumbering the Property, subject to the approval of the co-owners. The determination of any fees paid by the co-ownership to the manager does not depend in whole or in part on the income or profits derived by any person from the Property and will not exceed the fair market value of the manager’s services. Any fee paid by the co-ownership to a broker is comparable to fees paid by unrelated parties to brokers for similar services.

14. IRS Conditions for Determining Co-Tenancy as opposed to a Partnership (Cont’d.)
Leasing Agreements. All leasing arrangements are bona fide leases for federal tax purposes. Rents paid by a lessee reflect the fair market value for the use of the Property. The determination of the amount of the rent does not depend, in whole or in part, on the income or profits derived by any person from the Property leased, other than an amount based on a fixed percentage or percentages of receipts or sales.
Loan Agreements. The lender with respect to any debt that encumbers the Property or with respect to any debt incurred to acquire an undivided interest in the Property is not a related person to any co-owner, the sponsor, the manager, or any lessee of the Property.
Payments to Sponsor. The amount of any payment to the sponsor for the acquisition of the co-ownership interest and the amount of any fees paid to the sponsor for services reflects the fair market value of the acquired co-ownership interest, or the services rendered, and may not depend, in whole or in part, on the income or profits derived by any person from the Property.

15. State Law
The three minimum requirements set forth in the Uniform Partnership Act (“UPA”) essential to a finding of partnership status are: (1) the active conduct of a business; (2) for profit; and (3) by two or more persons as co- owners.

16. State Law (Cont’d.)
1. Active Conduct of a Business. There must be an active business. If an activity involves passive investment by all investors, as co-tenants, partnership treatment may not apply and each co-owner could report his or her separate share of income. For example, in Revenue Ruling ( C.B. 261) a real estate investment trust and a life insurance company each held an undivided one-half interest in an apartment complex. A separate management corporation handled tenant services and charged for the services, making additional profit. The IRS ruled that because these tenants services were provided by a separate entity that was not an agent of the two owners, a passive co-ownership arrangement existed, rather than a partnership.

17. State Law (Cont’d.)
2. Profit Motive. There must generally be a profit motive. An enterprise merely engaged in sharing expenses may not be a partnership. For example, two accountants who merely share the costs of an office and receptionist are generally not partners and do not have a partnership. The absence of a joint profit motive is the critical factor. (Treas. Regs., §§ (a), (a).

18. State Law (Cont’d.)
3. Co-Ownership. Mere co-ownership of property does not create a partnership. The regulations provide that co-owned property that is “maintained, kept in repair, and rented or leased” does not create a partnership. Co-owners who simply provide “customary” services such as heat, water, unattended parking, repairs, trash removal and the cleaning of public areas are not partners. (Treas. Regs, §§ (a), (a).

19. Other Factors
In addition, if other factors evidencing an intention to be treated as partners are present, the arrangement may be deemed a partnership. These factors include maintaining a joint bank account, keeping partnership capital accounts, computing profit and loss on a joint basis, use of a trade or business name and filing a partnership tax return. Further, if a co-owner relinquishes some or all of his liability to deal with his property as a separate owner, by waiving partition rights, agreeing not to encumber the property without consent of the co-owners, delegating management duties to another, or agreeing to other restrictions, a partnership is more likely to result. (McManus v. Comr. (1975) 65 T.C , aff’d. (9th Cir. 1978) 583 F.2d 443, cert. denied (1979) U.S. 959; see Bussing v. Comr. (1987) 89 T.C )).

20. Election to be Excluded from Subchapter K
Why Important? Even if there is an entity, co-tenancy treatment might be obtained if the opt-out provisions can be satisfied.

21. Election to be Excluded from Subchapter K (Cont’d.)
Eligibility for Election
Some co-owners may want to avoid unincorporated organizations may elect to be excluded from all or a portion of Subchapter K. These include:
Investment partnerships not engaged in the active conduct of a business;
Joint production, extraction or use of organizations that do not sell the services or property produced or extracted; and
A joint venture of dealers in securities formed to underwrite, sell or distribute a particular issue of securities.
To elect out, the organization’s members must be able to calculate their income without the need to compute partnership taxable income.

22. Election to be Excluded from Subchapter K (Cont’d.)
Eligibility for Election (Cont.d’)
An investment partnership is a group joined to purchase, retain, sell or exchange investment property and whose participants:
Own the property as co-owners;
Reserve the right to separately take or dispose of their shares of any property acquired or retained; and
Do not actively conduct business or irrevocably authorize some person or persons acting in a representative capacity to purchase, sell or exchange such investment property, although each separate participant may delegate authority to purchase, sell or exchange his share of any such investment property for the time being for his account, but not for a period of more than a year. (Treas. Regs., § (a)(2).)

23. Election to be Excluded from Subchapter K (Cont’d.)
Query: Can requirement #2 be satisfied by a nominee agreement or does the property have to be titled in the name of the co-owner?

24. Election to be Excluded from Subchapter K (Cont’d.)
Mechanics of Election The election out available under Section 761(a) must be made on a timely filed partnership return (including extensions) for the first taxable year for which the exclusion is desired. The election must include the names, addresses and identification numbers of all members of the organization, a statement that the organization qualifies for the exclusion and that all members elect the exclusion, and the location where a copy of the organization’s operating agreement may be obtained.

25. Election to be Excluded from Subchapter K (Cont’d.)
Mechanics of Election (Cont’d.)
If an organization that is qualified and intends to make the election, but fails to do so, the organization will be deemed to have made the election under the following facts:
At the time of the formation of the organization there is an agreement among the members that the organization be excluded from Subchapter K beginning with the first taxable year of the organization; or
The members of the organization owning substantially all of the capital interests report their respective shares on their returns in a manner consistent with the exclusion of the organization from Subchapter K. (Treas. Reg., § (b)(2)(ii).)

26. Election to be Excluded from Subchapter K (Cont’d.)
Effect of Election Generally, once a Section 761(a) election is made, each partner’s share of income and deductions is separately reported. The election allows co-owners to make inconsistent elections, such as whether to depreciate property at straight line or accelerated rates, or to utilize the installment method under Section 453 to report income from the sale of jointly owned property. The election is also use to allow each investor to separately choose to participate or not in a Section 1031 exchange.

27. Negative Basis: The Problem and Some Cures

28. Negative Basis Negative Basis is a Misnomer
Negative Basis is Often Used to Describe a Negative Capital Account
Negative Capital Often Involves Debt in Excess of a Tax Basis Capital Account
Negative Basis Often Arises When Losses Exceed a Partner’s Tax Basis Capital Account and Have Been Allowed as a Result of the Partner’s Allocation of Debt.

29. Negative Basis (Cont’d.)
If there is a transfer of a partnership interest which has negative basis, the amount realized on the sale includes a relief of debt.
Stated more simply, the gain on the sale of a partnership interest with negative basis is the sum of the consideration received plus the negative capital account.

30. Negative Basis (Cont’d.)
The Partnership has Debt of $100K.
Partner has a 10% Partnership Interest.
Partner has a Negative Capital Account of $5K.
The Partnership Interest is Sold for $10,000.
Using the above, if the partnership interest was sold for $10,000, then the gain would be $15,000.

31. Negative Basis (Cont’d.)
Example #1:
In reality, a partner’s basis in a partnership interest is determined under IRC §705 unless there has been an event which affects outside basis (discussed later). Under IRC §705(b), the shortcut method allows you to use the sum of a partner’s tax capital account and that partner’s share of liabilities to determine the outside basis of the partnership interest. In the above example, the partner’s outside basis would be $5K. So, using this format, the amount realized would be $20,000 ($10,000 each and $10,000 of debt) - $5,000 outside basis = $15,000 gain

32. Negative Basis (Cont’d.)
The “Usual Cures”:
Commit suicide or kill your spouse
Stuff the partnership
Grats
IDITs
Estate freezes

33. Negative Basis (Cont’d.)
Cure #1: Commit suicide or kill your spouse

34. Negative Basis (Cont’d.)
A transfer of a partnership interest on death does not affect the capital account of the deceased partner’s interest. There may be an IRC §754 adjustment, but absent that you will end up with an outside basis that cannot be computed under the IRC §705(b) formula.

35. Negative Basis (Cont’d.)
The outside basis would equal the FMV of the partnership interest. In this context, the amount realized on a transfer of a partnership interest includes the consideration received as well as the allocable share of debt. You then have to subtract the outside basis from the total amount realized.

36. Negative Basis (Cont’d.)
Example #1:
In reality, a partner’s basis in a partnership interest is determined under IRC §705 unless there has been an event which affects outside basis (discussed later). Under IRC §705(b), the shortcut method allows you to use the sum of a partner’s tax capital account and that partner’s share of liabilities to determine the outside basis of the partnership interest. In the above example, the partner’s outside basis would be $5K. So, using this format, the amount realized would be $20,000 ($10,000 each and $10,000 of debt) - $5,000 outside basis = $15,000 gain
Under this example, the “value” of the partnership interest for 706 purposes is $10,000 (net of liabilities and ignoring discounts) then the outside basis on the death of the Partner would be stepped up to $20,000 which would consist of $10,000 of stepped up basis plus $10,000 of liabilities. Therefore, death often results in the elimination of “negative basis.”

37. Negative Basis (Cont’d.)
What happens if the Partnership Interest is “worthless” at the date of death? Under Section 1014, the value would be zero. The IRS has not yet delved into the idea that there can be negative value. Therefore, the outside basis is equal to the debt.

38. Negative Basis (Cont’d.)
Cure #2: Stuff the Partnership Assume an equal LLC of A+B (“ABCO”). ABCO has a balance sheet of:
Assets
Building
Basis
Value
$20,000
$100,000
Liabilities and Capital
Mortgage
$80,000 A
($30,000) B

39. Negative Basis (Cont’d.)
Assume further that A wants to do some estate planning by gifting his interest to his son B.

40. Negative Basis (Cont’d.)
If A transfers his interest to B, it is a part sale/part gift. A’s outside basis is $10,000. He is being relieved of $30,000 of debt resulting in $20,000 of gain. The gift to the son (ignoring discounts) would be $10,000.

41. Negative Basis (Cont’d.)
If A contributes an additional $20,000 of cash or property with a basis of $20,000, the negative basis would be eliminated.

42. Negative Basis (Cont’d.)
Cures #3-5: Grats, IDITs and Estate Freezes

43. Real Estate in Corporations
Ownership of real estate by a C corporation is usually a bad idea. (Same for S corporations, but not as bad)
Double taxation is a common problem when real estate is owned by a C corporation. When appreciated real estate is sold, the corporation will pay Federal tax at the corporate tax rates.
Under the rules governing distributions from C corporations, the same income is taxed again at the shareholder level when it is distributed to the shareholders.
There are no easy methods for removing appreciated real estate out of a C corporation. However, the problem usually gets worse if it is not addressed.

44. Real Estate in Corporations (Cont’d.)
Problem: Double taxation on sale/liquidation.
Example: X transfers Blackacre with a value of $1,000,000 and a basis of $400,000 to a corporation. The next date the corporation liquidates.
C Corporations
A liquidating distribution is treated as a sale by the corporation. (§311)
Parity Between C Corporations and S Corporations
Based on the foregoing example, there is relative parity between a C and an S corporation if §1374 applies.

45. Real Estate in Corporations (Cont’d.)
C Corporations
The tax effects of liquidation would be $600,000 of gain to the corporation resulting in tax of 35% x $600,000 = $210,000. This would leave $770,000 of cash. The gain to the shareholder would be $790, $400,000 = $390,000. Assuming long-term capital gains, the highest rate would be 23.8% or $92,820, leaving a net of $697,180. This means that a tax of $305,820 is paid on $600,000 of appreciation: over 50%.

46. Real Estate in Corporations (Cont’d.)
S Corporations
Section 311 still applies. Section 1374 imposes a “Big Tax” on appreciated property contributed to an S corporation which is then “sold” (including distributions to shareholders) within 5 years thereafter.

47. Real Estate in Corporations (Cont’d.)
Options for removing real estate form a corporation include: 1. Distribute the property in kind to the shareholders; 2. Sell the real estate to the shareholder or an unrelated party; or 3. Convert the C corporation into a subchapter S corporation.

48. Real Estate in Corporations (Cont’d.)
In the above example, the corporation would still have to recognize $600,000 of gain and there would still be a 35% tax or $210,000.
Additionally, the shareholder has pass-through capital gains of $600,000
As a result of the deemed sale, the basis of the shareholder’s stock would be increased by $600,000 to $1,000,000.
There would be $790,000 available to be distributed resulting in a loss to the shareholder of $210,000 which would be a capital loss. This would reduce the “pass through” of gain by $210,000, leaving a net of $390,000 of capital gain which would be subject to a tax of $92,280. 

49. Real Estate in Corporations (Cont’d.)
MISMATCHING ISSUE
The “parity” is distorted, however, if there is a mismatching of “capital gain” and “ordinary income.”
Example: Assume the same facts but that the property is improved and the value/basis allocation between the land and building is:
Even assuming no depreciation recapture, IRC §1239 would apply causing the gain in the buildings to be recognized as ordinary income. The loss on the stock would be capital. Hence, the tax burden to the shareholders would be exacerbated.
Asset
Basis
Value
Land
$100,000
$200,000
Building
$300,000
$800,000

50. Real Estate in Corporations (Cont’d.)
POTENTIAL SOLUTIONS TO MITIGATING TAX ISSUES
Commit Suicide
Section 1014 will step up the basis in the stock and, when this is coupled with the adjustment for the pass-through gain, will mitigate the tax bite.

51. Real Estate in Corporations (Cont’d.)
POTENTIAL SOLUTIONS TO MITIGATING TAX ISSUES
Wait 5 Years
The Big Tax burns off after 5 years and will elevate the tax.

52. Real Estate in Corporations (Cont’d.)
POTENTIAL SOLUTIONS TO MITIGATING TAX ISSUES
Freeze Techniques
Have the S corporation form a limited liability company with the shareholders. Use the permissible estate tax IRC §2701 freeze technique to “cap” off further appreciation in the real estate. Beware of business purpose, economic subclause, etc. issues. See Cox case discussed below.

53. Real Estate in Corporations (Cont’d.)
POPE vs. TALBOT
Example:
S or C corporation forms a limited partnership. The General Partner is either a sister entity, a newly found entity, or a shareholder as to a 1% interest—bona fide consideration is paid. The corporation is issued limited partnership shares and thus declares a dividend of 49% of the limited partner shares to the shareholders. What is the “value” of those shares? Is it a discounted value or not?
In both Talbots and TAM , 100% of the limited partnership units were distributed. A case decided after Talbots, Cox Enterprises v. Commissioner, T.C. Memo , may lead to a different result if less than all of the limited partnership units are distributed and the transaction has a business purpose and the transaction is “old and cold.”

54. Real Estate in Corporations (Cont’d.)
In Cox Enterprises, Inc. v. Commissioner, a recent Tax Court memorandum decision, the question of whether the corporation was required to recognize gain in such a transaction arose in the context of the taxpayer’s motion for summary judgment. The taxpayer conceded, for purposes of the motion, that the fair market value of the property transferred by a corporation to the partnership substantially exceeded the fair market value of the partnership interest received by the corporation in exchange. The court concluded that, notwithstanding this concession, no distribution resulting in taxable gain to the corporation would be considered to have occurred, because there was no evidence that the discrepancy resulted from any intention by the controlling shareholders to cause the corporation to confer a benefit on the other partners.

55. Corporation’s Transfer of Value to Shareholders Using Partnership
Pope & Talbot, Inc., 162 F3d 1236 (9th Cir. 1999)
The Ninth Circuit, affirming the Tax Court, held that when a corporation transferred appreciated property to a limited partnership and then distributed the partnership interests to its shareholders, the corporation's recognized gain under Sec is measured by valuing the underlying assets (rather than the partnership interests) on the date of the distribution.
The Ninth Circuit concluded that it would be more appropriate to rely on the testimony of valuation experts to determine the value of the properties transferred to the partnership on the distribution date.
The dissenting opinion argued that the majority's interpretation of the "plain meaning" of the statute leads to an anomaly in which the value of property received by shareholders differs from the value of property distributed by the corporation.

56. Corporation’s Transfer of Value to Shareholders Using Partnership (Cont’d.)
Cox Enterprises, Inc. Subsidiaries v. Comr., T.C. Memo
Court held that a corporation’s contribution of a television station to a partnership did not constitute a dividend even though the partnership interest it received was originally worth $60.5 million less than the assets it contributed.
The IRS argued that the transfer to the partnership should be deemed an indirect distribution to the remainder of the trusts and therefore a distribution to the trusts.

57. Corporation’s Transfer of Value to Shareholders Using Partnership (Cont’d.)
Judge Halpern rejected the IRS’ contention. First, he held that the corporation’s transfer to the partnership “was not intended to provide a gratuitous economic benefit to the other partners....” Second, he held that, even if the corporation had made such a gratuitous transfer, the transfer did not benefit the shareholder trusts.
Several factors demonstrated that the corporation’s directors did not intend a gratuitous transfer:
The partnership’s formation had nontax business reasons. As recommended by independent consultants, the corporation tried to sell these operating assets but was unable to do so. The partnership’s formation allowed the corporation to retain, for use in other areas, the working capital it had previously needed for the television station.
The corporation’s board’s executive committee adopted a resolution that the other partners be required to make cash contributions to the partnership “in an amount corresponding to the fair market value of the partnership interests acquired by” those other partners.

58. Corporation’s Transfer of Value to Shareholders Using Partnership (Cont’d.)
The other partners’ acquisition of partnership interest was to “be on terms and conditions no less favorable to” the corporation “than the terms and conditions that would apply in a similar transaction with persons who are not affiliated with” the corporation.
The corporation retained an outside accounting firm “to render an opinion of appropriate marketability and minority interest discounts applicable to a minority interest” in the partnership as of the date of formation. The partners made contributions based on the appraised amount. Three years later, the corporation’s management discovered errors in computing the other partners’ interests in the partnership and obtained a new appraisal. The other partners made additional contributions to bring their contributions up to the appraised value.
The court relied on United States v. Byrum, 408 U.S. 135, (1972), to find that the controlling shareholders were subject to fiduciary duties to the minority shareholders. In the Cox case, two percent of the stock was owned by people who were not members of the controlling family; these minority shareholders were principally employees of the corporation. Judge Halpern pointed out that the minority shareholders did not own interests in the other partners and “would not be made financially whole for the likely shortfall in income and liquidation (or sale) proceeds” if the corporation’s contribution to the partnership constituted a transfer to the other partners.

59. THANK YOU Questions or Comments?
Belan K. Wagner Wagner Kirkman Blaine Klomparens & Youmans LLP Mather Blvd., Suite 200 Mather, CA