Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

Tax Court: single-member LLCs aren't 'disregarded' for gift taxes

August 25, 2009

In a rare decision by the full court, the Tax Court yesterday ruled that single-member limited liability companies, which are ignored for income tax purposes under the "check-the-box" rules, are to be respected under the gift tax rules. This opens up the door to using single-member LLCs to obtain estate and gift tax valuation discounts.

The case involves a taxpayer who as part of her estate planning put investment assets into a single-member LLC and then gifted LLC interests to trusts. The taxpayer claimed a 30% valuation discount. Such discounts are a common estate planning tool when corporations or partnerships are involved, but it has never been clear that this works with "disregarded entities" like single-member LLCs. The Tax Court was divided, with a concurring opinion and nine judges participating in two separate dissenting opinions. The majority opinion says:

While we accept that the check-the-box regulations govern how a single-member LLC will be taxed for Federal tax purposes, i.e., as an association taxed as a corporation or as a disregarded entity, we do not agree that the check-the-box regulations apply to disregard the LLC in determining how a donor must be taxed under the Federal gift tax provisions on a transfer of an ownership interest in the LLC. If the check-the-box regulations are interpreted and applied as respondent contends, they go far beyond classifying the LLC for tax purposes. The regulations would require that Federal law, not State law, apply to define the property rights and interests transferred by a donor for valuation purposes under the Federal gift tax regime. We do not accept that the check-the-box regulations apply to define the property interest that is transferred for such purposes.

The Tax Court only ruled on whether the LLC could be taken into account in determining the value of the gifts. In a footnote, the court said it would rule separately on whether the "step-transaction doctrine" would apply to disallow a discount, and on what amount any discount allowed will be.

On further consideration, we should probably temper our enthusiasm a bit. Congress is likely to pass some estate tax legislation this fall to keep the estate tax from expiring for next year; disregarded entity valuation discounts will be a big fat target as a revenue raiser.

The TaxProf has more.

Cite: Pierre, 133 T.C. No. 2.