[WSBAPT] estate taxation of LLC interests

[Thomas M. Culbertson]

Hi Phil, welcome to the listserv.

You might consider this . . .

RCW 83.100.040 says that "any intangible property owned by a resident is located in Washington." Not unreasonable to assume the converse; intangible property owned by a non-resident is not located in Washington. Several years ago DOR floated to members of the WSBA Estate & Gift Tax Committee this business purpose test to be part of a proposed regulation. We pointed out that there is no statutory support for a business purpose test. We also pointed out that DOR may be shooting itself in the foot - lots of Washington residents own-out-of-state (CA & AZ desert; ID lakes and ski condos; etc) vacation homes (ie non-business) in LLCs, and all of those would go from WA situs to out of state under the proposed rule.  DOR dropped the idea of its proposed regulation, but a couple of years later the business purpose test showed up in instructions to the return.  Obviously a rule of dubious authority as a regulation doesn't somehow gain authority as an instruction.

Tom

________________________________________
THOMAS M. CULBERTSON  I  Lukins & Annis, PS
717 W. Sprague Ave, Suite 1600, Spokane, WA 99201
(509) 455-9555  I  fax (509) 363-2500  I  tculbertson at lukins.com<mailto:tculbertson at lukins.com>


From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Eric Nelsen
Sent: Thursday, March 15, 2018 4:39 PM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] estate taxation of LLC interests

Yikes--nice first post! I have no wisdom to offer but am looking forward to other responses.

Sincerely,

Eric

Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1417 31st Ave South
Seattle WA  98144-3909
phone 206-625-0092
fax 206-625-9040

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Philip N. Jones
Sent: Thursday, March 15, 2018 4:26 PM
To: wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>
Subject: [WSBAPT] estate taxation of LLC interests

I have been an Oregon-resident member of the WSBA for decades (I practice estate planning in Portland), and a member of this section for decades, but I have only now joined the estate/probate listserv.  I look forward to the future discussions.
So here is my first post.  This is a hypothetical; I do not really have this client.
Ralph lives in Washington.  He owns a vacation house in Bend, Oregon.  He puts the house in a single-member LLC.
Ralph promptly and expeditiously dies.
The Washington Department of Revenue states on their website and in their instructions to Addendum #4 of the Washington estate tax return that real estate in a non-true-business-purpose LLC will be taxed at its physical real estate location, which is Oregon.  So Washington does not include the vacation home in the Washington numerator of the fraction.
Oregon, on the other hand, in its regulations, honors LLCs regardless of business purpose, or lack thereof.  LLCs are intangible, Oregon says.  And Oregon does not tax intangibles of nonresidents.
So Ralph pays no Oregon or Washington estate tax on the vacation house.  Zero.  Zip.  Nada.
Or am I missing something here?
That's the good news.  Now let's reverse the situation.  George lives in Oregon and puts his Wenatchee vacation house in an LLC and then dies.  Washington will disregard the LLC and tax the Washington real estate.  Oregon will honor the LLC as an intangible and tax it to its resident decedent.
So it gets taxed in both states.  Which makes George unhappy.  Even though he is dead.
Or am I missing something here?
The mind reels.
Thanks,
Phil Jones

Philip N. Jones |Duffy Kekel LLP
111 SW 5th Ave, Suite 1500, Portland OR 97204
(503) 226-1371 (main)| (503) 226-3574 (fax)
pjones at duffykekel.com<mailto:pjones at duffykekel.com>

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