Tax Law Update 2009-09-01 (1)Tax Law Update 2009-09-01 (1)

A case reprises Linton and is distinguished from Holman — In Heckerman v. United States, Case No. C08-0211-JCC (July 27, 2009), the District Court for the Western District of Washington once again granted the government's motion for summary judgment in a case involving indirect gifts of assets made via contributions to a limited liability company (LLC). The same court recently reached the same conclusion in the Linton case, reported in this column last month. (Linton v. United States, U.S. District Court for the Western District of Washington, C08-227Z, July 1, 2009.)

In Heckerman, David and Susan Heckerman, on Nov. 28, 2001, formed three LLCs: Heckerman Investments LLC, Heckerman Real Estate LLC and Heckerman Family LLC. Family LLC was an umbrella LLC that owned the other two LLCs. On the same day, they transferred a Malibu beach house to Real Estate LLC.

On Jan. 11, 2002, the Heckermans transferred mutual funds to Investments LLC, and on the same date, transferred units in Family LLC to trusts for their children. On the basis that they transferred LLC interests to the trusts, a 58 percent valuation discount was applied when reporting the gifts on their gift tax returns.

The Internal Revenue Service denied the discounts in part, claiming that the contribution of the mutual funds to the LLC on Jan. 11, 2002 was an indirect gift of those funds. But the portion of the gifted LLC interests that represented the real estate in the LLC was not treated as an indirect gift of the real estate, but rather a gift of LLC units.

The Heckermans paid the tax deficiency and sued for a refund. The IRS moved for summary judgment.

The district court granted summary judgment, holding that there is no genuine issue of material fact related to the Heckermans' subjective intent, or the contemplated and actual sequence of events. Under state law, the LLC did not exist until it owned property. Therefore, the creation and funding of the LLC and the purported transfers of LLC interests all occurred on the same day. The court analogized to Shepherd v. Commissioner, 115 T.C. 376 (2000), which had similar facts. The Heckermans argued that the intent was to make the transfers a few days after Jan. 11, 2002, but the court did not find any evidence to support this.

Just as in Linton, the court also granted summary judgment based on the step-transaction doctrine.

The court distinguished decisions in Holman and Gross, in which several days passed between the contributions to the partnerships and the gifts of partnership interests. During that time, the taxpayers bore real economic risk that the value of a limited partnership unit could change; thus the Tax Court refused to disregard the passage of time or treat the contributions and subsequent gifts as occurring simultaneously.

In Heckerman, the conveyances of the mutual funds to the LLC and of the LLC interests to the trusts were simultaneous, and thus there was no economic risk of a change in value of the LLC interests before the gifts.

Too bad about the bankruptcy, now pay those estates taxes — In Carroll v. United States, 2009-2 USTC par. 60,577 (May 6, 2009), the District Court for the Northern District of Alabama held that David Blain, co-executor of his father's estate who filed for bankruptcy, was nonetheless personally liable for unpaid estate tax liabilities. The estate had made an election under Internal Revenue Code Section 6166 to pay the estate taxes on an installment basis. After several years, the estate stopped making payments because the companies were faring poorly. The executors had distributed cash to themselves, as beneficiaries of the estate, and to the companies to keep them running. The companies ceased operations and David filed for personal bankruptcy.