Steve Akers' Summary of Heckerman v. U.S., U.S. Dist. Ct., W.D. Washington, Cause No. C08-0211-JCC (July 27, 2009)

Contributions of Property to LLC and Gifts of LLC Interests on the Same Day Resulted in Application of Indirect Gift and Step Transaction Doctrines to Eliminate Any Discounts for Gift Tax Purposes

This gift tax refund case is very similar to a case decided in the same federal district court (though by a different judge) earlier in July, Linton v. U.S. 104 AFTR2d 2009-5176 (W.D. Washington July 1, 2009). Not surprisingly, the Heckerman case reaches a very similar result as the Linton case -- the court granted the IRS's motion for summary judgment eliminating any discount for gift tax purposes as to cash contributed to an LLC on the same day that interests in the LLC were transferred to trusts for the donors' children.

Parents transferred liquid assets in the form of mutual funds to an LLC and made gifts of LLC interests to trusts for their children on the same day (at least the taxpayer could not establish otherwise). The IRS argued that the transfer of cash constituted an indirect gift to the trusts, and alternatively that the step transaction doctrine applied to eliminate discounts as to the cash transfers. (The IRS did not make the indirect gift or step transaction arguments as to a similar transfer of real estate made fifteen days before the assignment of LLC interests to the trusts.)

The court concluded that the transfer of cash was an indirect gift (because the taxpayer could not establish that the transfer of the mutual funds occurred before the assignment of LLC interests to the trusts.) The court also concluded that the step transaction doctrine applied, using very broad reasoning, like the Linton case. Also like Linton, the court distinguished Holman and Gross because those cases involved some delay in the gifts after funding (6 days and 11 days, respectively), and because they involved volatile stocks rather than cash.

Unlike Linton, the case specifically observes that the presence of an "independent purpose or effect" in addition to the tax savings may be sufficient to avoid the application of the step transaction doctrine, so we may begin seeing a discussion of non-tax purposes in relevant gift tax cases.

Please click here for a more detailed analysis of the Heckerman case.

Posted by Lewis J. Saret, General Editor, Wealth Strategies Journal.