Taxpayers Wait Too Long For Assignment

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If a taxpayer owns appreciated property and transferors it to another, and that successor owner sells the property, the gain from the sale is reportable by the successor owner, not the donor. However, if the gift occurs too close to the sale date, the assignment of income doctrine will attribute the gain back the transferor. A recent cases demonstrates what “too close” means.

In the case, the transferred assets were member interests in LLCs that owned stock in a closely held corporation. In early 2000, the stockholders of the company retained an investment banking firm to sell the business. On November 16, 2000, Agilent Technologies made a bid to purchase all of the stock. On November 21, 2000, the board of directors of the corporation agreed to the offer, subject to certain conditions. On November 24, 2000, the board gave its final approval. A formal Agreement and Plan of Merger was entered into on that day. Trading in the stock was restricted by those agreements, pending closing. Also on November 24, 2000, the owners of the LLC sold their shares to 3 Cayman Island corporations in exchange for annuities. Presumably, based on rules in effect in 2000, it was intended that the gains from sale would be taxed on a deferred basis (but this is not certain). The sale of shares to Agilent was publicly announced on November 27, and the Agilent sale closed on January 8, 2001.

The transfers of the LLC interests occurred too late to avoid the assignment of income doctrine, ruled the District Court of the Virgin Islands. Thus, the gains from the sale of the stock of the closely held company to Agilent were taxable to the original LLC owners.

The court relied heavily on Ferguson v. Comm'r, 174 F.3d 997, 1003 [83 AFTR 2d 99-1775] (9th Cir. 1999). In that case, a transfer occurred too late to shift the incidence of taxation when the subsequent sale was “practically certain to proceed” and not a remote hypothetical possibility, and it was “quite unlikely” that the anticipated sale would not occur. In this case, all sale approvals had been obtained, and the owners were contractually bound to sell. Thus there was “no real risk” that the sale transaction would not occur.

Gail Vento LLC v. U.S., 111 AFTR 2d 2013-XXXX, (DC VI), 03/28/2013

Topics:  Assignment of Income Doctrine, Assignments, Inter Vivos Gifts

Published In: Business Organization Updates, General Business Updates, Tax Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Charles (Chuck) Rubin, Gutter Chaves Josepher Rubin Forman Fleisher P.A. | Attorney Advertising

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Charles (Chuck) Rubin
Gutter Chaves Josepher Rubin Forman Fleisher P.A.

A tax and business attorney who assists clients in preserving & enhancing individual, family &... View Profile »


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