Check-the-Box Overruled for Gift Tax Purposes for Single Member
LLC
By Steven B. Gorin, Esq.
Thompson Coburn LLP, St. Louis, MO
Pierre v. Comr., 133 T.C. No. 2 (8/24/2009), a reviewed
opinion, holds that gifts and sales of interests in a single-member
limited liability company (LLC) be treated for gift tax purposes as
transfers of interests in an entity rather than transfers of the
underlying assets.
Initially, the transferor was the LLC's sole owner. Some LLC
interests were gifted, and the rest were sold. The IRS asserted that
the transfers were of the LLC's underlying assets, not interests in
the LLC. It tried to apply the principles of Rev. Rul. 99-5, Situation
1, which provides:
In
this situation, the LLC, which, for federal tax purposes, is
disregarded as an entity separate from its owner, is converted to a
partnership when the new member, B, purchases an interest in the
disregarded entity from the owner, A. B”s purchase of 50% of
A”s ownership interest in the LLC is treated as the purchase of
a 50% interest in each of the LLC”s assets, which are treated as
held directly by A for federal tax purposes. Immediately thereafter, A
and B are treated as contributing their respective interests in those
assets to a partnership in exchange for ownership interests in the
partnership.
The Tax Court majority rejected the application of the
check-the-box rules, Regs. §§301.7701-1 through -3, to this
gift. Section 7701 states that its provisions apply only “where
not otherwise distinctly expressed or manifestly incompatible with the
intent” of other provisions in the tax law. Fundamental gift tax
precepts require that one look to the bundle of rights transferred.
The Tax Court held that, under state law, an LLC interest (not an
interest in the underlying assets) was transferred; applying the
check-the-box regulations would be manifestly incompatible with
fundamental gift tax precepts.
The court distinguished between classifying the entity and
describing the nature of the assets that were transferred. This fine
line is likely to breed litigation in the transfer tax area for many
years to come.
For more information, in the Tax Management Portfolios, see
Mezzullo, 812 T.M., Family Limited Partnerships and Limited
Liability Companies, and in Tax Practice Series, see ¶4095,
Family Business Entities.
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