[WSBAPT] Gifting of LLC Interest and 754 Election

Mon Feb 6 11:48:01 PST 2017

I have an estate with an LLC with A and B units. Decedent owned about 25%.  All the members have the same % of A and B units.  There is no fixed rate dividend.  There has been no gifting. Should we show/report the value as 0% for A units and all value in the B units?

From: David Sweeney 
Sent: Saturday, February 04, 2017 2:53 PM
To: WSBA Probate & Trust Listserv 
Subject: Re: [WSBAPT] Gifting of LLC Interest and 754 Election

Unless the Class A units have a dividend determined at a fixed rate, under Sec. 2701, would the value of the Class A units be determined to be zero, so that all of the value was transferred with the gifts of the Class B  units?  This would just go to the value to be reported on the gift tax returns.

David B. Sweeney 
Smith & Zuccarini, P.S. 
2155-112th Avenue NE 
Bellevue, Washington 98004 

Telephone:  425-453-4455 
Direct Line: 425-990-1586 
Facsimile:   425-453-4454 
E-mail:D.sweeney at smithzuccarini.com 
www.smithzuccarini.com 

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of John J. Sullivan
Sent: Saturday, February 04, 2017 2:04 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Gifting of LLC Interest and 754 Election

It wouldn't. 

Sent from my iPhone

On Feb 4, 2017, at 12:13 PM, Jennifer Sohn <jennifer at sohn-law.com> wrote:

  Thanks for the input... I don't think the management structure would pose a problem in this case. But, I am not understanding the 754 issue. In a gift, the basis is carried over, and 754 is an election to step-up basis which does not apply here. I am not sure how the 754 would invalidate the gift?

  Best regards,

  Jennifer Sohn

  206.617.7874

  On Feb 4, 2017, at 10:13 AM, John J. Sullivan, Esq. <sullaw at comcast.net> wrote:

    What the CPA may be thinking of is that the management structure may render the gifts not of “present interests” denying the donor annual exclusion. 

    I would be very reluctant to consider rescinding the gifts retroactively. 

    There is a Sec. 754 issue, but I’m not convinced it applies here. 

    http://www.thetaxadviser.com/issues/2008/jun/handlinggiftsandbequestsofllcinterests.html

    John J. Sullivan

    From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Jennifer Sohn
    Sent: Friday, February 3, 2017 11:24 PM
    To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
    Subject: [WSBAPT] Gifting of LLC Interest and 754 Election

    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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