02/18/2022
New Retention Policy for Estate Tax Returns
The IRS recently announced that effective February 11, 2022, it will no longer keep estate tax returns for 75 years…
In Smaldino v. Commissioner, the Tax Court ruled that a husband’s transfer of a 41% membership interest in a limited liability company to his wife (which would not have been a taxable gift) was instead a taxable gift by the husband to an irrevocable trust.
Louis Smaldino owned rental properties in southern California which he transferred to Smaldino Investments, LLC. Louis created an irrevocable “dynasty trust” in 2012 and he transferred 8% of the LLC to the dynasty trust. About the same time, Louis transferred 41% of the LLC to his wife Augustina who transferred that 41% interest to the dynasty trust the next day.
Louis filed a gift tax return reporting a taxable gift of 8% of the LLC to the trust. The IRS determined that Louis had, instead, made a taxable gift of 49% of the LLC to the dynasty trust and asserted a gift tax deficiency of $1,154,000.
The Tax Court observed that “the substance of a transaction, rather than the form in which it is cast, determines the tax consequences ….” Applying this “substance over form” doctrine and based on the evidence presented, the Tax Court held that Louis did not effectively transfer any interest in the LLC to his wife and, as such, the dynasty trust received its entire 49% interest in Smaldino Investments, LLC from Louis as a gift.