The following is an excerpt taken directly from Section 3.8 of the FDIC "Trust Examination Manual" , a section which addresses the valuation of limited partnership assets held in trust accounts with FDIC regulated financial institutions:

Limited partnerships are usually comprised of a general partner, who manages the project, and limited partners, who invest funds in the project. The limited partners are not normally involved in day-to-day management, and usually cannot lose more than their capital contribution. Limited partners normally receive income, capital gains and tax benefits, while the general partner collects fees and a percentage of capital gains and income.

Public limited partnerships are sold through brokerage firms, typically for relatively small investments. Private limited partnerships are generally comprised of fewer than 35 limited partners, and require much more substantial investments than public limited partnerships. Both types of limited partnerships may have limited marketability. Limited partnerships may be difficult to obtain market values for, which has led to the emergence of companies specializing in valuing limited partnership interests.

Limited partnerships are involved in real estate management and development, oil and gas exploration and recovery, and equipment leasing. They also finance movies, and research and development projects. The limited partnership form is extensively used for venture capital and leveraged buyout funds. All types of investors may participate in such investments.

In the early to mid-1980's, when real estate was booming and oil and gas prices were strong, $130 billion in limited partnerships were sold to an estimated 10 million investors. Tax laws initially allowed deductions of limited partnership losses from ordinary income, but this was eliminated by the Tax Reform Act of 1986.

Currently, one major advantage of limited partnerships is that they are excluded from corporate tax by, as its name suggests, qualifying for taxation as a partnership. Principal disadvantages are that partnership tax accounting must be used, and that the sponsor must supply a corporate general partner to hold 1% of the aggregate assets. General partners must make significant cash investments, and they retain unlimited liability for the partnership's obligations.

It is understood that many limited partnerships have little or no market value. In 1995, one source estimated that fair market prices were only 20% to 60% of a partnership's net asset value. The same source concluded that of approximately 2,000 limited partnerships, only an estimated 300 traded with regularity -- and then only by independent dealers using their own clearinghouses for such transactions. These conditions do not contribute to high or competitive selling prices.

The proper valuation of any such investment in trust accounts is especially important. Examiners should ascertain that the institution has a satisfactory ability to obtain a reasonably current fair market value for such investments, and that customer statements reflect such market values. Failure to properly value limited partnerships may also lead to overcharging accounts if management or account fees are based on the market value of assets. It may also engender difficulties for ERISA plans, as noted in the following paragraphs.

Limited partnership investments of employee benefit plans subject to ERISA must be reported by the plan administrator as a plan asset on the plan's Annual Report (Form 5500 series of IRS forms). Form 5500 requires plan assets to be valued at a reasonable market value. If the bank acts as plan administrator, or is responsible for furnishing market values of plan assets to a plan administrator, it must have appropriate procedures for arriving at reasonable and defendable valuations. Since limited partnerships are not traded on a regular basis, it may be difficult for the plan administrator to arrive at a reasonable market value. As many limited partnerships are reported to have little value, it is particularly important for plans to arrive at a reasonable market value for these assets.

Formal annual appraisals are not required, but the plan administrator must be able to demonstrate that a reasonable approach was taken in valuing the asset. IRS Revenue Ruling 59-60, which provides general guidance on valuing non-traded assets, is located on page E-288. It outlines the general factors that must be taken into consideration, and requires a written report detailing the valuation. It also indicates that the assets must be more than simply valued. The valuation should also reflect any "lack of control" or "lack of marketability." While the Revenue Ruling is specifically directed toward valuing estate assets, it is widely acknowledged as a general standard for valuing non-traded assets.

IRS Announcement 92-182 ("Employee Plans Examination Guidelines") provides the following guidance in valuing limited partnership interests and applying Revenue Ruling 59-60:

• An accurate assessment of fair market value is essential to a plan's ability to comply with the requirements set forth in the [Internal Revenue] Code and in Title I of ERISA.
• 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.
• Revenue Ruling 59-60 provides guidance for determining the value of plan assets. Although 59-60 provides methods for valuing shares of stock for closely-held corporations for estate and gift tax purposes, the factors may be used to determine values of assets in qualified plans ...
• The detail of the plan's valuation should be examined in light of the plan assets involved. For example, the valuation should contain substantial detail if it values a limited partnership or a closely held corporation.