Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
A Gift to be Returned: Single-Member LLCs and Gift Tax Valuation in Pierre v. Commissioner
On August 24, 2009, the United States Tax Court gave an unexpected gift to taxpayers, holding that a gift of an interest in a disregarded, single-member limited liability corporation should be valued, for purposes of the federal gift tax, as a transfer of a minority share in an LLC, rather than a transfer of the underlying assets of the LLC. In Pierre v. Commissioner, a taxpayer placed assets in a single-member LLC (Pierre LLC), which she disregarded under the check-the-box regulations. After gifting and selling her entire interest in the LLC to trusts for family members, she valued the gifts as the value of a minority share in the LLC, rather than as a proportional share of the underlying assets. The Service unsuccessfully argued that the gift should have been valued as a transfer of the underlying assets of the LLC because the LLC was a disregarded entity, which should be indistinguishable from its owner for tax purposes.
This Note will argue that the Tax Court decided Pierre incorrectly, given the purpose and meaning behind the check-the-box regulations. The Tax Court should have: (1) awarded Chevron deference to the check-the-box regulations as they related to the gift tax; or, (2) awarded Chevron-level deference to the check-the-box regulations as an interpretive regulation under National Muffler. Having done so, the Tax Court should have applied disregarded entity status to the LLC and valued the transfer of interest in the LLC accordingly.
This Note will further argue that any benefit to taxpayers derived from the decision in Pierre will be short-lived. The Tax Court built an opportunity to rectify its mistake into the decision in Pierre. In a footnote, the Tax Court stated an intent to issue a separate opinion in which it will discuss “whether the step-transaction doctrine applies to collapse the separate transfers to the trusts.” This Note will argue that, in this separate opinion, the Tax Court should find that the step-transaction doctrine applies to this case, and that the taxpayer should accordingly have to value the transfer as a transfer of the underlying assets of the LLC.