Wife's gift recharacterized as gift by husband
In Smaldino v. Commissioner, T.C. Memo 2021-127 (Nov. 10, 2021), the Tax Court deemed a gift made by Wife as having been made by Husband and as a result generated a large gift tax liability for Husband.
Husband accumulated a significant portfolio of real estate properties in California. Husband and Wife agreed that the real estate portfolio should pass to Husband’s children and grandchildren from his prior marriage. To accomplish this, Husband transferred the real estate portfolio to an LLC. Husband also created a Dynasty Trust to benefit his children and grandchild and appointed his son as trustee. Husband then proceeded to transfer LLC interests so that the Dynasty Trust would own 49% of the LLC. Husband intended to transfer only 49% so as not to trigger a property tax reassessment.
First, Husband gifted to Wife that number of LLC units having a value of $5,249,118.42, effective April 14, 2013. Second, Wife gifted to the Dynasty Trust the same number of LLC units effective April 15, 2013. Third, Husband gifted to the Dynasty Trust that number of LLC units having a value of $1,031,881.58, effective April 15, 2013. An August 22, 2013 valuation report opined that a 49% interest in the LLC had a value of $6,281,000. The gift tax exemption amount in 2013 was $5,250,000.
The IRS asserted that Husband’s 2013 taxable gifts consisted of his gift to the Dynasty Trust and Wife’s gift to the Dynasty Trust. The Tax Court agreed to treat Wife’s gift as having been made by Husband for five reasons: (1) Wife was not a “permitted transferee” as defined by the LLC operating agreement and therefore could not have owned the LLC interest; (2) the LLC operating agreement was amended on April 15, 2013 and reflected Husband as the sole member; (3) the assignments had effective dates, but were otherwise undated; (4) the assignments were likely signed after the valuation report was prepared in August which means that Wife had no real ownership rights in the LLC; and (5) the 2013 LLC income tax return did not allocate any income to Wife.
This case is a reminder that assignments and other related corporate documents must be prepared meticulously in implementing gifting strategies. Please contact me for assistance in gifting and other tax planning.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: David B. Shiner, Principal