Gifts of an ownership interest in a business not eligible for the annual exclusion.

• Author: Bakale, Anthony

In Hackl, 118 TC No. 14 (2002), the Tax Court ruled that direct gifts of immediate vested ownership interests in a limited liability company (LLC) were not gifts of present interests entitled to an annual gift tax exclusion, because the donees did not receive rights to a substantial present economic benefit. Hackl could compel taxpayers to restructure gifts of family businesses to qualify for the annual exclusion.

Sec. 2501 imposes a tax on gifts of property. Sec. 2511 specifies that the tax applies whether the gift is direct or indirect. Sec. 2503(b)(1) allows each donor to exclude the first $10,000 per year to each donee for gifts of present interests. Regs. Sec. 25.2503-3(b) defines a present interest as an unrestricted right to the immediate use, possession or enjoyment of property or the income therefrom. Kegs. Sec. 25.2503-3(a) states that future interests, which may be vested or contingent, are limited to use, possession or enjoyment at some future time. Sec. 2503(b)(2) indexes the annual exclusion for inflation in $1,000 increments; the 2002 exclusion is $11,000.

Most case law has involved indirect gifts, such as gifts in trust or gifts to an entity with preexisting owners. In both situations, the gifts are indirect gifts of the underlying property to trust beneficiaries or an entity's owners. Citing Fondren, 324 US 18 (1945), the Tax Court pointed out that the case law has established that to qualify as a present interest, an indirect gift must give the donee "a substantial present economic benefit by reason of use, possession, or enjoyment of either the property itself or income from the property." The court examines all facts and circumstances to determine if a gift is of a present interest.

Case law has also established that if the use, possession or enjoyment is postponed due to a future uncertain event (such as the discretion of a trustee or joint action of entity owners), the gift is of a future interest. For income interests to be considered present interests, indirect gifts involving trusts require the donor to show that the trust will receive income and that some ascertainable portion will flow steadily to the beneficiary. In addition, if the beneficiary has the right to demand immediate possession and enjoyment of corpus or income, the beneficiary has a present interest whether or not the right is exercised and whether or not the beneficiary has a vested interest in the trust corpus or income (Estate of Cristofani, 97TC...