The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
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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