[WSBAPT] Gifting of LLC Interest and 754 Election

[Jennifer Sohn]

Hi, I have client (a married couple) who own a building through an LLC. The
LLC interests consist of Class A and Class B units, Class A having voting
and management rights and Class B having none. Over the last couple of
years, they made 2 substantial gifts of the LLC interest to their 2
children, which resulted in them gifting 98% of LLC interests (all of which
were Class B units) and the clients retaining Class A units. The children
received actual distributions based on their percentage interests and paid
income taxes on them.

For some reason, their CPA had never filed the gift tax returns, and they
are currently in the process of filing them. The CPA is telling me that I
need to un-do the gifts, because they will be deemed incomplete under
Section 754. I am not sure how Section 754 applies to this type of gifting
situation. (Based on my understanding, Section 754 refers to an election to
step-up the basis of assets within a partnership when there is a
distribution of partnership property (which is not the case here) or a
transfer/sale or exchange of an interest by a partner (which also is not
the case here)). I am not quite understanding how the inability to make the
Section 754 election can make the gift incomplete?

I understand that the children will not get the benefit of the step-up
basis because they were gifts and not sales, which would result in higher
capital gains tax for the children. However, the clients did not want to
structure them as sales, and without these gifting, his estate tax
liability would be significantly higher (as he has a taxable estate).

In any case, before I pick up the phone and talk to the CPA, I just wanted
to see if I was missing something about the 754 election and gifting in
this context. Any input would be welcome.

Thanks.


-- 

Best regards,



Jennifer Y. Sohn

Attorney at Law

(Licensed in CA and WA)

Sohn Law PLLC

10900 NE 4th Street, Suite 1850

Bellevue, WA 98004

Tel: 425.522.3861

Fax: 425.732.9748

Email: jennifer at sohn-law.com

http://www.sohn-law.com



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