In the first phase of Linton v. United States, the federal district court (Washington) granted summary judgment for the government, finding that the taxpayers made indirect gifts of cash and property to their children when they signed documents on one day, purporting to authorize the transfer of assets to a family LLC, and then signed (but did not date) the documents that transferred equal LLC interests to each of their children. In the alternative, even if—by having their attorney date the LLC transfer documents nine days after the funding documents, the court found that the step transaction doctrine collapsed the transactions into a single occurrence and gift. Either way, the taxpayers lost their claim for 47% combined discounts applied to the transfer of LLC interests, and they appealed to the U.S. Court of Appeals for the Ninth Circuit.
The 9th Circuit reversed the district court on both points.  First, there was incomplete evidence regarding when the taxpayers objectively intended to effectuate their gifts, and the court remanded the case for further findings under applicable (Washington State) law. Second and more importantly, “the placing of assets into a limited liability entity such as an LLC is an ordinary and objectively reasonable business activity that makes sense with or without any subsequent gift,” the court held, citing the Tax Court’s decision in Holman v. Commissioner, 130 T.C. 170 (2008) (available at BVLaw). Accordingly, the step transaction doctrine did not apply to this case. Read the complete digest of Linton v. United States, 2011 WL 182314 (C.A. 9)(Jan. 21, 2011) in the May 2011 Business Valuation Update; the court’s decision will be posted soon at BVLaw.