Friday, September 3, 2010
FAMILY LLC TRANSER RESTRICTIONS INVALID UNDER SECTION 2703
On September 1, 2010 in Fisher v. United States, No. 1:08-cv-00908, the United States District Court for the Southern District of Indiana held that family LLC transfer restrictions must be ignored under IRC Section 2703 in the valuation of gifts of family LLC units by the taxpayers to their children. The basis for the ruling was that the LLC was not a bona fide business because the lake front lot that was it's principal asset was not a business. The District Court relied on the decision in Holman v. Commissioner, 601 F.3d 763 (8th Cir. 2010) which held that a family LLC passively holding publicly traded stock served no bona fide business purpose for purposes of respecting transfer restrictions under IRC Section 2703. The determination did not eliminate the application of valuation discounts for lack of control or marketability, but it did require that any gift valuation discounts not take the LLC's operating agreement transfer restrictions into account. This case reflects the Service's ongoing challenge to family LLC estate and gift transfer valuations, particularly in cases where the family LLC holds nothing but passive investment assets without any specific investment criteria or focus.