Opening Comments Welcome to our Winter 2010 issue of Valuation/Litigation Insights. Through this publication, our hope is to bring our friends in the business community original, internally prepared perspectives that are brief, meaningful and useful. With each article we identify our intended audience, allowing you to focus on what is relevant for your practice or business. Please let us know if there are any topics you would like to see addressed in future issues.
Family Limited Partnership Valuations Case Update Murphy v. U.S., 2009 WL 3366099 (W.D. Ark.) (Oct. 2, 2009) [This article is intended for advisors who consult in the areas of gifting and estates]
I am not in the habit of providing case updates, but this recent case was such a win for the taxpayer I thought the readers would appreciate it.
The facts are relatively straight forward. The case involves an estate exceeding $135 million. In the 1990s the controlling shareholder of The Murphy Oil Corporation began planning to preserve assets for his children. He established an FLP. The general partner was an LLC, which was owned 49% by him and 51% by two of his children. Those children ran the organization and made decisions about its investments. Ultimately, the father owned a 95.2% limited partnership interest in the FLP.
The FLP operated as a business and it was demonstrated in court that the business was created to accomplish several non-tax business purposes including to:
· Perpetuate an investment philosophy,
· Permit gifting while maintaining centralized management,
· Educate family members about wealth,
· Transfer management responsibility to the next generation, and
· Protect family assets.
As a result of the legitimate non-tax purposes, the court concluded the FLPs assets could be excluded from the fathers gross estate. The court then allowed for the taxpayers experts discount for lack of control of 12.5% (versus the IRSs experts 10.0%), discount for lack of marketability of 32.5% (versus the IRSs experts 12.5%) and other applicable discounts. After final analysis, the court found the fair market value of a 95.2% limited partner interest to be $74.5 million.
Encouraging and Ethical Culture [This article is intended for all readers serving in leadership roles]
Of late, my fraud related articles have focused more on how to prevent fraud and less on how fraud is committed. This trend reflects a trend among our clients who are becoming increasingly cognizant of the need to be proactive in strengthening controls. I recently came across an article in Fraud Magazine written by Oliver Bungartz that provides four key recommendations for creating a fraud intolerant culture. To help my readers who are acting on the need to strengthen controls, I summarize Mr. Bungartzs four recommendations and provide my insights.
Create a Risk Culture Team
Bungartz recommends a team composed of management, board members, internal auditors and external accountants. He also recommends an external consultant to lead this team.
Rays Observation: I know this can seem like more red tape or an additional cost. It neednt be. This team can be a reinvigorated audit committee (see my Fall 2009 article). Regarding cost can the fiscal well being and the good name of your organization afford not to take action Also, if this team does not have the full support of top management, forget it. Changes will not take place if management is not setting the right tone.
Diagnose
The risk culture team should work with employees to diagnose the organizations ethical environment. Employees should be surveyed, management should be consulted with and key executives should be interviewed. All of this should be done with a focus on what perceptions are held about the ethics of an organization and what opportunities exist to improve such perceptions.
Rays Observation: For my black and white, debit and credit minded accounting friends, we tend to want policies and procedureswhich are fine; however, one of the best indicators as to whether or not an organization will be victimized by fraud is whether or not employees believe that they work for an ethical organization. Also, it is amazing what can be learned using an inexpensive employee survey. I do believe, however, that a critical analysis of policies and procedures is also essential for protecting an organizations assets and reputation.
Evaluate
Once data is gathered, it should be evaluated. Items to consider:
· Is the current culture one that creates anxiety for the employee, and thus indifference by the employee Is it one of thoughtlessness, and therefore carelessness Is it fine
· Is leadership encouraging prudent calculated risks or is it creating barriers to efficiency
· Are members of management viewed as positive role models
· Do open channels of communication exist
· Are all departments addressing significant risks and appropriately mitigating them
· Does the organization recognize risks created by changes in the business environment and does it react appropriately
Rays Observation: Few people like to have their cheese moved. As a result, none of this will be understood unless an organization has strong leadership with the self-confidence to handle constructive feedback.
Act
Once the team analyzes the situation and evaluates the findings, top management is responsible for creating a change in the culture. This change can include new policies, improved procedures, employee training and better segregation of duties. Changes reflecting feedback from employees can motivate them to continue to seek what is best for the organization. All of this creates a positive tone at the top.
Rays Observation: Did I mention that few people like to move their cheese Taking action is not only the last step, it is also the first.
Disclaimer: These articles are intended for our friends in the legal, banking and professional services community and merely reflect our observations. These articles should not be construed as legal counsel. Contact an attorney whenever legal advice is needed.
