Nevada Senate Bill 350: Why You Should Care

The governor of Nevada recently approved Nevada Senate Bill 350, which was effective Oct. 1, 2009. The bill creates two new types of business entities: a restricted limited liability company (restricted LLC) and a restricted limited partnership. We will focus on LPs for simplicity; however, the following discussion also applies to restricted limited liability companies.

The restricted LP is an ordinary Nevada LP that elects to be restricted by checking the appropriate box on the Certificate of Partnership. Once the election is made, unless otherwise stated in the Certificate of Partnership, the LP cannot make any distributions to the partners with respect to their partnership interest until 10 years after the formation of the LP or amendments of the Certificate of Partnership of an existing partnership are made. The 10-year lock-in is a ceiling and a default restriction period that can be reduced by stating a shorter restriction period in an attachment to the Certificate of Partnership. The limited partnership agreement must also state the additional restrictions.

Why would anyone want to set up a limited partnership that restricts distributions for 10 years? The reason is that Internal Revenue Code Sec. 2704(b) states that when valuing a limited partnership interest for gift or estate tax purposes, the liquidation restrictions in the operating agreement will be disregarded if the person is transferring the interest in the partnership to a family member, and the transferor and members of the transferor’s family control the entity immediately before the transfer.

In other words, the transferred partnership interest will be valued without considering any applicable restrictions. Since the restrictions in the partnership agreement will be ignored under Sec. 2704(b), there will be no valuation discounts. However, under Sec. 2704(b) (3) (B), restrictions imposed under state or federal laws are not considered applicable restrictions.

This exception acknowledges that restrictions imposed by state law cannot be ignored. Therefore, if the restrictions on liquidation in the partnership agreement are no more restrictive than those imposed under state law, then these restrictions are not considered applicable restrictions, thus allowing for a greater possibility of estate and gift tax valuation discounts.

The result is that the 10-year default lock-in period for the partnership’s underlying assets is significantly more restrictive than those available in most other states. This should result in higher discounts than those that would have been available before the bill was passed.

It should be noted that the U.S. Treasury Department’s Green Book released in May proposes to modify the application of Sec. 2704(b) by adding a new category of restrictions called “disregarded restrictions.” These restrictions would be measured against standards prescribed by the treasury regulations rather than against the default state law. Also, on Jan. 9, 2009 Rep. Pomeroy of North Dakota introduced HR 436 Jan. 9, which is named the Certain Estate Tax Relief Act of 2009. Passage of the bill would, among other things, eliminate discounts associated with the transfer of most family limited partnership interests.

If enacted, these proposals would blunt the new Nevada statute and other state law provisions.

This entry was posted on Friday, October 23rd, 2009 at 12:20 pm and is filed under Chapter News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.