Disregarded entity not disregarded.

• Author: Josephs, Stuart R.
• Position: IRS NEWS - Brief article

An individual organized a single-member LLC and contributed cash and marketable securities to it. Under the check-the-box regulations (Regs. Sec. 301.7701-3), the LLC was treated as a disregarded entity "for federal tax purposes."

The individual then created trusts for her son and granddaughter and gave a 9.5 percent interest in the LLC to each trust. She also sold a 40.5 percent interest in the LLC to each trust in exchange for a secured promissory note.

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A discounted value was used for gift tax purposes. The notes were discounted for lack of control and lack of marketability.

The IRS asserted that, since the LLC was a disregarded entity, it also should be disregarded for federal gift tax valuation purposes. Therefore, the LLC interests contributed to the trusts should, instead, be treated as gifts of the trusts' proportionate shares of the cash and marketable securities.

The IRS also argued that the individual made an...