Steve Akers, Associate Fiduciary Counsel, Bessemer Trust, provides the following summary of Pierre v. Commissioner, T.C. Memo. 2010-106 (May 13, 2010) - "Pierre II":
In "Pierre I", the court held that gifts and sales of interests in a single member LLC treated as a "disregarded entity" would be entitled to valuation discounts. In this follow-up case, the IRS addressed whether the step transaction doctrine applies to aggregate gifts and sales made to each of two trusts for valuation purposes and addresses the valuation discount.
The major significance of the case is its continuing the recent trend of cases saying that the step transaction applies (or potentially can apply in the right fact situation) in gift tax cases. The court gave four reasons that the step transaction doctrine applied in this case: (1) Same day transactions; (2) No time lapse at all in signing gift and sale documents; (3) taxpayer's intent; and (4) poor documentation. The most difficult of those reasons is the intent factor: "petitioner intended to transfer her entire interest in Pierre LLC to the trusts without paying any gift taxes."
Applying the step transaction doctrine in this case to aggregate the gift and sale assets for valuation purposes meant that the transfers to each trust were valued as 50% of the LLC rather than as separate 9.5% and 40.5% interests. The impact was negligible -- to reduce the lack of control discount from 10% to 8%.
The concern is that the reasoning of applying the step transaction doctrine to situations because of the client's intent to make transfers without paying gift taxes is extremely broad and could apply in a variety of estate planning transactions designed to minimize transfer taxes.
Please click here for a more detailed analysis of Pierre II and planning suggestions to help avoid application of the step transaction doctrine in these types of transactions.
Posted by Marc Patterson, General Associate Editor, Wealth Strategies Journal.
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