Authored by Fawnel Romero
and
Chris D. Treharne, ASA, MCBA
of Gibraltar Business Appraisals, Inc., a member firm of the Financial
Consulting Group
CITATION:
Pierre v. Commissioner, 133 T.C. No. 2,
August 24, 2009
The Tax Court was asked to determine whether transfers of interests in a
single-member LLC should be valued as direct transfers valued as an
undiscounted, proportionate share of the LLCs assets or as transfers of
interests in the LLC, thus being subject to valuation discounts.
THE FACTS:
Suzanne J. Pierre formed the single-member Pierre
Family, LLC (Pierre LLC), a New York limited liability company, on July 31,
2000. Both parties agreed Pierre LLC was validly formed under New York state
law, which recognizes the entity as being separate and apart from its
members.
Pierre LLC was treated as a disregarded entity
under the check-the-box regulations for federal income tax purposes.
On September 15, 2000, Ms. Pierre transferred cash and marketable securities
to the entity. To use her available generation-skipping transfer tax
exemption, 9.5-percent interests were transferred to two trusts 12 days
after the LLC was capitalized. Ms. Pierre then sold 40.5 percent interests
to each trust in exchange for promissory notes.
The IRS Because
Pierre LLC is a single-member LLC and a disregarded entity under the
check-the-box regulations, the IRS argued the gifts should be treated as
direct, undiscounted transfers of cash and securities rather than discounted
transfers of LLC member interests. As a result, lack of control and
marketability discounts were not appropriate.
The Taxpayer The
taxpayer argued that state law - rather that federal tax law - determines
the nature of a taxpayers transferred ownership. More explicitly, because
New York state law recognizes the entity as being separate and apart from
its owner, the subject LLC ownership interests were subject to discounts for
lack of control and lack of marketability.
Court Analysis The
courts majority ruled the check-the-box regulations do not apply to
transferred property ownership interest for federal gift tax purposes, but
rather govern how the entity will be taxed for federal income tax purposes.
The courts minority argued that Pierre LLC and Ms.
Pierre constitute only one actor for federal tax purposes, which includes
federal gift tax purposes as well. As a result, the gift of an interest in
Pierre LLC should be treated as a direct gift of cash and securities. More
explicitly, the courts minority indicated the taxpayer should bear the
burden - as well as the benefits - of the check-the-box regulations.
CONCLUSION
Neither the regulations nor previous court rulings
cited by the IRS or the courts minority provided the courts majority with
evidence that the existence of the entity (validly formed under state law)
should be ignored for federal gift tax purposes. If the check-the-box
regulations apply, federal law - rather than state law - would define
property rights and interests transferred for federal gift tax purposes.
Accordingly, the court allowed the valuation discounts.
EHTC offers expert business
valuation and litigation support services. Contact Diane L. Friar,
CPA/ABV/CFF
(dianef@ehtc.com)
for more information.
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Financial Consulting Group's members provide Business Valuation, Expert
Testimony, and Litigation Consulting services nationally and
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