Steve Akers, Associate Fiduciary Counsel, Bessemer Trust, provides the following summary of Linton v. U.S., U.S. Dist. Ct. W.D. Washington, Cause No. C08-227Z (July 1, 2009).
This is the third case that has addressed the IRS's indirect gift and step transaction arguments to eliminate discounts for gift tax purposes with respect to gifts of partnership and LLC interests when the gifts are made soon after (or simultaneous with) the funding of the entity. In a gift tax refund action, the court upheld the government's motion for summary judgment, finding that no discount should be allowed with respect to the LLC interests.
The court concluded that the gifts constituted indirect gifts of the underlying assets (the facts are particularly similar to those in Senda where the contribution and gift occurred on the same day and the facts did not make clear which occurred first).
The most significant impact of this case is its analysis of how the step transaction doctrine applies to gifts of partnership or LLC interests. Although not necessary to grant the government's motion for summary judgment, the court also added that the step transaction would apply. The Holman and Gross cases were the first cases (both decided by the same judge) to address the application of the step transaction doctrine in this context. Even though various commentators have criticized the analysis in Holman and Gross, the court's analysis followed the same general approach as in the Holman and Gross cases. The court distinguished Holman and Gross because those cases involved some delay (6 days and 11 days, respectively) between the date of funding of volatile stocks to the entities and the date of the gifts. The court specifically observed that the assets involved in this case (real property, cash, and municipal bonds) were not as volatile as the assets involved in Holman and Gross.
The court's reasoning regarding the application of some of the tests that have been used for the step transaction doctrine might leave open an argument by the IRS in future cases that the step transaction doctrine could apply to gifts of partnership or LLC interests made long after the time that the entities are funded. In any event, the case extends the uncertainty over how long a delay is needed between the time of funding and making gifts of partnership or LLC interests in order to avoid a step transaction attack.
Please click here for a more detailed analysis of the Linton case.
Posted by Lewis J. Saret, General Editor, Wealth Strategies Journal.
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