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CHECK-THE-BOX REGS WON'T STAND IN THE WAY OF DISCOUNTS APPLICABLE TO TRANSFERS OF INTERESTS IN SINGLE-MEMBER LLC

09 / 09 / 2009

Pierre v. Commissioner, 133 T.C. No. 2 (8/24/09)
 
The United States Tax Court has held that when the taxpayer transferred $4.25 million of cash and publicly traded securities into a single-member LLC, and then subsequently* made 4 transfers of her interests in the LLC to trusts established for the benefit of her son and grandchild, the transfers would be treated as transfers of interests and NOT as transfers of the underlying assets, because of the check-the-box regulations otherwise applicable to entity classification.
 
* The taxpayer waited 12 days after funding, and then transferred her entire interest in the LLC to the trusts, by first giving a 9.5% membership interest to each trust, followed by a sale to each of a 40.5% interest in return for a secured promissory note (with face amount of $1,092,133), established by valuing a 1% non-managing interest (applying a 30% discount to the value of the LLC's underlying assets).  Compare, how in Heckerman v. IRS (W.D.Wash. 2009), where "same day" gifting led to a finding that the transaction would be subject to collapse, and where no discounts would apply when determining the value of the underlying gifts.
 
The IRS attempted to claim that the gifts were of the underlying assets in the LLC, and as to the purported sales, that gifts were made to the extent thta the value of the 40.5% of the underlying assets exceeded the value of the promissory notes.