Yesterday, the Tax Court issued its decision in the case of Pierre v. Commissioner, 133 T.C. No. 2 (2009) which was a resounding defeat for the IRS. In a Federal Gift Tax matter, the IRS tried, and failed to argue that because of the check the box regulations, when a taxpayer makes a transfer of an interest in a single member limited liability company, the entity should be disregarded and the transfer should be treated as a transfer of the underlying assets.
The Tax Court ruled that although the classification of an entity for federal tax purposes is governed by the check the box rules, state law applies in determining what is actually gifted. This ruling is important because it provides a road map of another way for estate planning practitioners to generate valuation discounts for their wealthier clients.