Venable partner Chris Sega was among several practitioners quoted in an August 31 story published on Taxanalysts.com who agreed with the recent Tax Court decision that a single-member limited liability company used to transfer assets to two trusts is not a disregarded entity under check-the-box regulations.
At the same time, many of the practitioners questioned whether the transaction would be upheld against an IRS challenge under the step transaction doctrine and whether a budget-conscious Congress might tighten the rules on valuation discounts.
The IRS argued that because the single-member LLC was a disregarded entity under the check-the-box regulations, the transfer should have been treated as a transfer of the LLC's underlying assets and no valuation discounts should be applied. (For the opinion in Suzanne J. Pierre v. Commissioner, 133 T.C. No. 2 (Aug. 24, 2009), see Doc 2009-19089 [PDF] or 2009 TNT 162-4.)
The Defendant, however, contended that for gift tax valuation purposes, state, not federal law, determines the nature of a taxpayer's interest in the transferred property and the legal rights attached to that interest.
The case resulted in a 10-member majority, 9-member concurrence, 6-member dissent, and 3-member dissent.
"I'm glad to see everyone on the court agrees," Sega said. Sega was not surprised by the majority's decision given that state laws control property rights. Because the single-member LLC was a valid state entity, its form was respected in the transfer.
Sega said he was surprised, however, that the Tax Court took the case away from the trial court. That could lead practitioners to infer that the outcome of a case depends on which judge is assigned, he said. 'One wonders what else might be going on,' he added.
From a practical standpoint, the decision 'is helpful in one respect: If you agree with the decision and you're in the Second Circuit, you don't need to transfer assets to a second party, such as a spouse [in order to have] two members when you make the transfer,' Sega said. That outcome is especially significant for unmarried taxpayers, he noted.
Sega, like many of the practitioners quoted in the piece, believes that additional legislation to prevent abuse of LLCs and boost tax revenues may be on the horizon, but his feeling it that the legislation may be narrowly targeted. This, he said, is because of the common perception that LLCs holding only cash or marketable securities are a tax-avoidance device while LLCs holding business assets, including real estate, are created for more legitimate purposes.