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42 Va. Tax Rev. 1 (2022-2023)
The Zero Value Tax Fantasy

handle is hein.journals/vrgtr42 and id is 5 raw text is: THE ZERO VALUE TAX FANTASY 'Rodney P. Mock,t David Chamberlain, and Kathryn Kisska- Schulzett This article analyzes the practice of assigning a zero value to a partner- ship profits-only interest. The authors suggest all property has an underly- ing value. A zero value is not per se synonymous with it being too specula- tive. Only in the rarest of circumstances is the value of property so speculative that it cannot be readily determined. When value cannot be as- certained, the transaction remains open under U.S. Supreme Court doc- trine established in Burnet v. Logan. However, the current legal status of a profits-only interest has largely ignored the open transaction doctrine, re- sulting in the Internal Revenue Service (Service) issuing a series of revenue procedures (Rev. Proc. 93-27 and Rev. Proc. 2001-43), and a proposed reg- ulation that generally consider the receipt of such as a non-taxable event. Taxpayers have interpreted these administrative procedures to indicate a zero fair market value on profits-only interests. The authors suggest this in- terpretation is incorrect. Assigning zero value distorts the proper character- ization of service-related income and does not reflect true fair market value. The authors recommend that the Service withdrawal Rev. Proc. 93-27 and Rev. Proc. 2001-43 and the proposed regulation involving a profits-only in- terest, and instead apply fair market value determinations on a case-by-case basis based upon well-founded valuation methods such as those used in fi- nancial analysis or option pricing contexts. TABLE OF CONTENTS I. IN TRO D U CTIO N ..................................................................................... 2 II. ZERO REQUIRES LESS THAN 50 CENTS OF VALUE ............................. 8 III. THE REVENUE PROCEDURE FANTASY ............................................. 16 IV. THE INITIAL BURDEN OF VALUATION IS ON THE TAXPAYER.............. 24 V. THE OPEN TRANSACTION DOCTRINE: A DEUS Ex MACHINA ............ 33 © @ COPYRIGHT (2022) t Author: Rodney P. Mock, J.D., LL.M., Professor, California Polytechnic State Uni- versity, Orfalea College of Business. tt Author: David Chamberlain, J.D., LL.M., Assistant Professor, California Polytech- nic State University, Orfalea College of Business. t++ Author: Kathryn Kisska-Schulze, J.D., LL.M., Associate Professor, Clemson Uni- versity, Wilbur O. and Ann Powers College of Business, School of Accountancy. 1

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