In Pierre v. Commissioner, T.C. Memo 2010-106 (May 13, 2010), the Tax Court held that the step transaction doctrine applied to collapse the taxpayer's gifts and sales of LLC membership interests to trusts. This case addresses different issues related to the transaction involved in Pierre v. Commissioner, 133 T.C. No. 2 (August 24, 2009), whereby the Tax Court held that gifts and sales of membership interests in a single member LLC did not preclude valuation discounts because, for gift tax purposes, the single member LLC was not a disregarded entity.
Twelve days after funding a single member LLC, the taxpayer – on the same day – transferred her entire interest in the LLC to two trusts. The taxpayer gifted a 9.5% interest to each trust, and sold a 40.5% interest to each trust for a promissory note.
The Tax Court collapsed the gift and sale to each trust for valuation purposes and treated the transfers as an aggregate transfer of a 50% interest to each trust. The lack of control discount was decreased from 10% to 8%. The taxpayer's valuation expert admitted that the control discount would be lower for a 50% interest because, for example, it could block the appointment of a new LLC manager. The IRS did not contest the 30% lack of marketability discount.
The Tax Court stated that the main reasons for collapsing the gifts and sale were:
- The gifts and sales occurred on the same day.
- No time elapsed between the gifts and sales other than the time it took to sign four documents.
- The taxpayer intended to transfer her entire interest in the LLC without paying gift tax. There was no non-tax reason for splitting the transfer.
Each trust's capital account in the LLC ledger was labeled "gift transaction."