Single-Member LLC Respected For Gift Tax Purposes, But Step-Transaction Doctrine Applied

The full Tax Court, in August of 2009, knocked the IRS off its heels when the court said that a single-member LLC must be respected for gift tax purposes.   Such entities are ignored for federal income tax purposes - they are treated as a disregarded entity under the so-called "check-the-box" regulations.  But, the court said, the entity is separate from the single-member for gift tax purposes with the result that the taxpayer in the case was not responsible for gift tax on transfer of membership interests in the LLC – she didn’t have an interest in the LLC’s underlying assets.  The court was split - issuing four opinions (10-judge majority, 9-judge concurrence, 6-judge dissent, and 3-judge separate dissent).  The Tax Court said, however, that it was reserving for another day whether the step-transaction should be applied to collapse the separate transfers and what, if any, is the appropriate amount of any valuation discount.  That day has now arrived.