United States

Nontax purpose of a family LLC and gifts of LLC interest respected

TAX BLOG  | 

In a recent case out of Washington state, the IRS challenged the nontax purpose for the creation of a family limited liability company (LLC) and the present interest treatment for gifts of the family LLC interest.

Prior to the formation of the LLC, the decedent held five brokerage accounts at three management firms, as well as commercial real estate. Following contribution, the assets were consolidated under one management group, and the financial decisions were made jointly by the decedent’s children. The children, along with their advisors, held documented annual meetings.

The court ruled the transfer of assets to the LLC was a bona fide sale for full and adequate consideration. While a Crummey notice was issued for each gift, the IRS also challenged the present interest of the LLC interest gifts transferred to the family trust over a series of years.

The court ruled the recipients received a present interest in the income because the cash flow from the LLC interest was consistently distributed to the beneficiaries. On both IRS assertions, the nontax purpose and management actions were respected and documented, leading to an unsuccessful challenge.

This case demonstrates the need for consistent documentation and respecting the nontax purposes for creating family LLCs.


Rebecca Warren

Manager