Valuing a Limited partnership

[K-t-F]

A client who has a PS plan and is the only participant has been investing in LPs for years. He has substantial value in his plan and most of the investments are LPs. He just recently was audited and the IRS agent has come down hard on how my client has valued the LPs over the years.

My understanding of valuing a LP is that it is not definitive. Each year the investment issues a K-1 which shows the "Limited Partner's" "Ending Capital Account" value. It is my understanding that at any time a LP can hit it big... can fail miserably... or just continue to be. Of course everyone wants their LP to hit it big and pay out huge dividends... "yea". But until that happens the limited partner crosses their fingers and hopes they dont lose everything.

For years I have been consistent with how these assets have been valued. I am looking for any help arguing my case that the way I have accounted for these assets is ok. Any help is greatly appreciated.

[QDROphile]

With the Department of Labor, I have been successful with arguing that the valuation does not matter unless it is used for something that has consequences, primarily distribution because that determines tax liability. Other uses might be determining contribution or funding requirements or limits, the maximum loan available under a plan, the amount of fidelity bond, or taxes on prohibited transactions.

[K-t-F]

This client is not devaluing the investments to reduce any RMD.... there are no loans... its a very vanilla PS plan. We have valued them based on the K-1s capital account analysis or at cost if that info is not available.... consistently. There are NO employees besides the owner. I feel the IRS is making a mountain out of a molehill.

Thanks for chiming in.

[mbozek]

My understanding is that IRS requires retirement assets which are not publically traded to be appraised every three years. I always remind clients who want to invest in non traditional assets, e.g, RE, promissory notes, LPs, etc of this rule, because it is their duty to get an appraisal, not the duty of the custodian. Some IRA custodians will not accept odd assets which are not publically traded because of this requirement while others require the IRA owner to pay for an appraiser hired by the custodian.

[Bird]

I'd argue that the capital account is utterly meaningless, as is cost. But as noted, it shouldn't really make any difference...what do they propose to do about it? Maybe they want to make a mountain just for the scenery.

[K2retire]

This client is not devaluing the investments to reduce any RMD.... there are no loans... its a very vanilla PS plan. We have valued them based on the K-1s capital account analysis or at cost if that info is not available.... consistently. There are NO employees besides the owner. I feel the IRS is making a mountain out of a molehill.

Thanks for chiming in.

For this particular plan, it would feel like making a mountain out of a molehill. Business owners often struggle with the idea that their plans are not merely extensions of themselves and must follow rules. A business owner with no employees would find that concept even more foreign.

However it is still the fiduciary's duty to accurately value the plan assets. The value of the assets would determine the need to file a 5500 EZ. Even in this plan, if you ever have multiple beneficiaries or a QDRO, the assets will need to given an accurate market value.

[mbozek]

I'd argue that the capital account is utterly meaningless, as is cost. But as noted, it shouldn't really make any difference...what do they propose to do about it? Maybe they want to make a mountain just for the scenery.

client has two choices:

1. ask the agent what is the IRS authority for valuing the LP

2. having the LP appraised. Maybe the LP can provide a recent valuation.

[K-t-F]

This plan has been in existence for many many years and it has always filed en EZ. Not shirking that requirement.

The agent closes his letter with "I have proposed several options and there could be other options which I did not think of" which leaves the onus on me to find a more favorable resolution.

[ESOP Guy]

I am with K2 on this one.

Even if one can show it doesn't make any difference at this point there is a legal requirement to know the value of the assets as a fiduciary.

Although if the IRS agent has proposed options and you are sure the value won't make a difference why not just use one of his methods and move on?

[PensionPro]

It is a fiduciary's responsibility to accurately value the plan's assets. This cite from the DOL is on point: “It would be difficult, if not impossible, for a fiduciary to fulfill these fiduciary responsibilities if the fiduciary lacked correct information concerning the value of a plan's assets, including hard-to-value assets such as real estate holdings, private equity funds, limited partnerships and closely held employer stock.” As is this one "a process which merely uses the general partner's established value for all funds without additional analysis may not insure that the alternative assets are valued at fair market value."

[mbozek]

This plan has been in existence for many many years and it has always filed en EZ. Not shirking that requirement.

The agent closes his letter with "I have proposed several options and there could be other options which I did not think of" which leaves the onus on me to find a more favorable resolution.

Authority to require annual valuation of assets in DC plan:

Rev. rul 80-155

IRM 4.72.8 Valuation of assets

Where there is dispute is the question of how often non publically traded assets must be appraised by an independent appraiser (See Rev. rul 59-60) to determine FMV. Some valuation experts claim that an appraisal of odd assets by an independent appraiser is only required every 3 years.

Reason that IRS request for recent appraisals is a surprise is that until recently IRS did not ask for current valuations of non traditional assets in audits. Recent activity by plan participants to convert plan assets to Roth accounts has highlighted undervaluing of assets in qual plans and IRAs so now IRS asks for current valuations in routine audits.

[jpod]

I didn't think the rule that required a valuation was an independent qualification requirement. I thought it was only a qualification requirement if some operational event keyed off of the value, such as an RMD, or allocating gains/losses to individual participants for purposes of determining the amount of a distribution. In this context, with one participant, what qualification requirement is the agent saying is not being followed?

[K-t-F]

There is no operational even happening. The plan is a one participant plan and the one participant is 64 year old. He is not required to take a distribution nor calculate anyone else's account balance for administrative purposes... because there is no one else. We have been faithfully consistent valuing all his LPs the same way from the beginning of time.

In the agent's letter to my client he refers to Revenue Ruling 80-155 which states:

In a defined contribution plan, Rev. Rul. 80–155, 1980–1 C.B. 84, provides that since amounts allocated or distributed to a participant must be ascertainable, the plans must value their trust investments—

• at least once a year,

• on a specified date,

• in accordance with a method consistently followed and uniformly applied.

He provided the quote above but neglected to include the 3rd option.... "• in accordance with a method consistently followed and uniformly applied"

We technically have complied with all 3 above!

Im beginning to think Uncle Sam is trying to generate some revenue on the back of this one man plan.

[mbozek]

There is no operational even happening. The plan is a one participant plan and the one participant is 64 year old. He is not required to take a distribution nor calculate anyone else's account balance for administrative purposes... because there is no one else. We have been faithfully consistent valuing all his LPs the same way from the beginning of time.

In the agent's letter to my client he refers to Revenue Ruling 80-155 which states:

In a defined contribution plan, Rev. Rul. 80–155, 1980–1 C.B. 84, provides that since amounts allocated or distributed to a participant must be ascertainable, the plans must value their trust investments—

• at least once a year,

• on a specified date,

• in accordance with a method consistently followed and uniformly applied.

He provided the quote above but neglected to include the 3rd option.... "• in accordance with a method consistently followed and uniformly applied"

We technically have complied with all 3 above!

Im beginning to think Uncle Sam is trying to generate some revenue on the back of this one man plan.

How has plan complied with RR 80-155 if LP has not been valued at least once a year?

Are you stating that the ending capital account is the appraised value fo the LP?

[TPAMan]

If you are expecting the agent to tell you there are valid reasons for not periodically valuing plan assets, don't hold your breath. If the assets have not been properly valued in the past, the agent really has no reason to expect they will be in the future. I know, you know, we all know it doesn't make any difference until an event occurs that will require that valuation. The agent is not going to walk away and say, "Go ahead and wait until then." Just because LPs are hard to value doesn't mean they don't have to be. It is just means more time and money.

[K-t-F]

With the Department of Labor, I have been successful with arguing that the valuation does not matter unless it is used for something that has consequences

QDRO... would you be willing to share with me the favorable response the DOL had provided?

[QDROphile]

There is nothing to share. After explanation, the DOL took no adverse action when the plans allowed the participants to provide a value for interim valuation purposes, such as the annual value. The plans provided for independent professional valuation when it mattered, such as distributiions. It is not the DOL's style to provide an an explanation for any action not taken.