The problems associated with designing a purchase-sale contract are complex and difficult. This article analyzes some of the main concerns, for example. B the purpose of the agreement, the types of agreements and methods for determining the share price. The AMT effects of share withdrawals are avoided. As already mentioned, one of the disadvantages of a stock withdrawal agreement is the potential of amt to obtain life insurance income. AmT is not a problem for cross purchase contracts and all insurance received is generally not taxed (unless a transfer of value is made, as said above). Disadvantages of a purchase-sale contract. It is also necessary to analyze the potential disadvantages of a buy-sell agreement. Contractors should consider the cost of insurance and the possible use of premiums for other commercial or personal purposes. In addition, circumstances may change after a purchase-sale contract is concluded, causing potential buyers to regret the obligation to purchase shares of a deceased owner.
A purchase-sale agreement will probably exclude (1) the possible extension of the period provided for in Article 6166 for the payment of inheritance tax due to narrow commercial interests (2) the deduction provided for in Article 2057 for qualified shares in the family business and (3) the application of the rules for the valuation of special uses of § 2032A. The general rule applicable to a share withdrawal agreement varies widely. A shareholder who returns his shares receives a dividend. The treatment of dividends is detrimental because (1) dividends are treated as ordinary income (subject to higher tax rates than capital gains) and (2) the total amount received is taxed without compensation for the base of the repaid shares. Fortunately, there are several exceptions to the general rule that imposes dividend treatment and, if carefully planned, dividend processing can often be avoided. Evaluation. To achieve safer results, shareholders can regularly use the services of a qualified business auditor. Business valuations are not necessarily expensive and can lead to as accurate an assessment as possible. Corporate auditors often provide routine assessment updates for only a portion of the fee collected for the initial assessment. The disadvantage of using expertise is the perception that the costs will be high.
Clients who already pay lawyers and life insurance companies for the implementation of a buy-sell agreement sometimes take revenge for the idea of paying additional fees to an expert. One of the most important issues in the design of a purchase-sale contract is the determination of the purchase price. In accordance with Section 2703, purchase-sale agreements for valuation purposes are not considered unless all of the requirements described below are met. An important point in the application of the section 2703 tests is that an agreement is considered fulfilled as the three tests when it exists between people who are not part of the family of the contemptuous and if the non-members possess more than 50% of the value of the object. First, the purchase-sale contract must not be designed to serve a « testamentary purpose ». Among the factors that are taken into account in determining whether a buy-sell contract has a « testamentary purpose » are: in a buy-sell contract, there are usually two potential buyers. The business entity itself may purchase the shares under a « share repurchase agreement », or the remaining shareholders may purchase the shares under a « Cross Purchase » contract. The office potential upon receipt of insurance income by the company. As a general rule, a company does not assume a tax liability on the receipt of life insurance income related to a share refund contract. . . .