Legal & Regulatory Compliance Flashcards

A business owner wants to transfer a minority interest in a closely held LLC to children. Which two valuation discounts are most commonly applied to reduce the taxable gift value of that transfer?

Answer: Lack of control discount and lack of marketability discount

Lack of control (minority interest) and lack of marketability discounts are the two primary discounts applied to minority interests in closely held entities, reducing their fair market value for gift tax purposes.

When a succession plan involves an installment sale of a business to a family member using a promissory note, which IRS rule determines the minimum interest rate that must be charged to avoid imputed interest income to the seller?

Answer: Applicable Federal Rate (AFR) under IRC Section 1274

IRC Section 1274 requires that installment notes between related parties charge at least the Applicable Federal Rate; notes bearing below-market interest trigger imputed interest income rules.

Which legal mechanism in a shareholders' agreement grants existing owners the right to purchase departing owner's shares before they are offered to outside parties, protecting against unwanted third-party ownership?

Answer: Right of first refusal (ROFR)

A right of first refusal (ROFR) requires a selling shareholder to offer shares to existing owners at the proposed terms before selling to an outsider, preserving internal ownership control.

A family business succession plan transfers voting stock to children while the owner retains non-voting stock. Under IRC Section 2036, what risk exists if the owner retains de facto control over the business?

Answer: The transferred voting shares will be included back in the owner's gross estate

IRC Section 2036 includes transferred property back in the decedent's estate if they retained the right, express or implied, to possess, enjoy, or control the property.

In the context of a QDOT (Qualified Domestic Trust) used in a succession plan for a non-citizen surviving spouse, what is the primary estate tax function of the QDOT?

Answer: It defers estate tax on assets left to a non-citizen spouse until distributions are made or the spouse dies

A QDOT defers federal estate tax on assets passing to a non-citizen surviving spouse; tax is collected when assets are distributed or upon the spouse's death.

Which compliance requirement must a succession planner verify when transferring ownership of a business that holds an FCC license, ensuring the transfer does not violate regulatory restrictions on ownership?

Answer: FCC prior consent approval for assignment or transfer of control of the license

The FCC requires prior approval before any assignment or transfer of control of an FCC license; failure to obtain consent can result in license forfeiture.

Under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act), which threshold condition typically triggers a mandatory pre-merger filing with the FTC and DOJ before a succession sale can be completed?

Answer: The transaction value exceeds $119.5 million (adjusted annually for inflation)

The HSR Act requires pre-merger notification when the transaction value exceeds the annually adjusted threshold (approximately $119.5 million as of recent years), subject to size-of-person tests.