In Fisher v. U.S., the United States District Court for the Southern District of Indiana held that gifts a couple made to their children of limited liability company (LLC) interests in an LLC did not qualify for the gift tax exclusion under section 2503(b)(1) because the interests were not present interests in property due to certain restrictions on the children’s rights relating to the property.
The court concluded that conditions such as a right of first refusal provision granting the LLC the right to purchase a prospective transferor’s interest at price equal to the amount of the prospective transferee’s offer restricted the children’s ability to presently realize a substantial economic benefit.
The taxpayers argued that the children possessed the unrestricted right to receive distributions from the LLC’s proceeds. However, the court determined that because any potential distribution was subject to a number of contingencies, all within the discretion of the LLC’s General Manager, such distributions lacked a substantial present economic benefit.
Further, the taxpayers argued that the children possessed the unrestricted right to enjoy the principal asset in the LLC which was a beach front property. The court held that the LLC Operating Agreement did not indicate that the right was transferred to the children when they became members. Also, the court stated that the right to possess, use and enjoy property, without more, is not a right to a substantial present economic benefit.
Therefore, the court held that the transfers of the LLC interests to the children were future interests in property and not subject to the gift tax exclusion.