Appeal from the United States District Court for the Western District of Washington Thomas S. Zilly, Senior District Judge, Presiding D.C. No.2:08-cv-00227-TSZ
Argued and Submitted August 4, 2010-Seattle, Washington
Before: John T. Noonan, David R. Thompson and Marsha S. Berzon, Circuit Judges.
Taxpayers William A. Linton and Stacy A. Linton appeal the district court's grant of summary judgment in favor of the United States on their claim for a refund of 2003 federal gift taxes. The Lintons contend that they gifted interests in a limited liability company ("LLC"); the government contends that they gifted cash, securities, and real property. We have jurisdiction under 28 U.S.C. § 1291, and we reverse and remand for further proceedings.
The parties have assumed that in determining the character of the Lintons' gifts, the sequencing of two transactions is "critical," Senda v. Comm'r, 433 F.3d 1044, 1046 (8th Cir. 2006), and we do so too, without deciding whether that is always so in cases of this ilk. The transactions at issue are: (1) the contribution of cash, securities, and real property to the limited liability company, and (2) the transfer of LLC interests to the Lintons' children's trusts. If done in that order (and with some lapse of time between the transactions), as the Lintons contend occurred here, the gifts would ordinarily be characterized as gifts of LLC interests, and the value of those LLC interests might be discountable for tax purposes. If, however, the contributions to the LLC occurred after the transfer of LLC interests to the children's trusts, the gifts would ordinarily be characterized as indirect gifts of the particular contributed assets and would not be discountable. See id.
William A. Linton formed WLFB Investments, LLC ("WLFB"), a Washington limited liability company, in November 2002. On January 22, 2003, William and Stacy A. Linton met with attorney Richard Hack to sign a series of documents. At the meeting, William gifted half of the percentage interests in WLFB to Stacy. Also, William and/or Stacy signed and dated the following documents:
* Quit Claim Deed: signed by William and conveying a parcel of his separate property real estate to WLFB. The parties agree the quit claim deed was effective on January 22.
* Assignment of Assets: signed by William as assignor and by both William and Stacy as assignees on behalf of the LLC.
* Letters: signed by William and authorizing the transfer of securities and cash to WLFB. The parties disagree as to when the transfers of securities and cash were effected.*fn1
At the same meeting with attorney Hack, William, Stacy, and William's brother James Linton, signed, but left undated, several other documents:
* Trust Agreements (four total-one for each child): signed by William and Stacy as grantors and by James as trustee; forming and apparently funding irrevocable trusts for the children.
* Gift Documents (eight total-one each from William or Stacy to each trust): signed by William or Stacy as assignor and by James as trustee, gifting 11.25 percentage interests in WLFB to each respective trust.
Two or three months later, attorney Hack assembled these key documents. For all undated documents, he filled in the missing date as January 22, 2003. In his deposition, Hack stated this insertion was erroneous, and that these documents should have been dated January 31, 2003. William agrees that January 31 was the correct date. This testimony is consistent with that of Caryl Thorp, an accountant with Moss Adams LLP, who advised the Lintons on the ordering of the transactions.
Some of the subsequent reporting and documentation of the transactions also supports the Lintons' alleged sequence of events. First, WLFB's federal partnership income tax return for 2003, prepared by Moss Adams, shows the contributions as initially being credited equally to William's and Stacy's individual capital accounts in the limited liability company. The return then shows capital transferred from their individual accounts along with a commensurate increase in the capital accounts for the children's trusts. Second, William's and Stacy's individual federal gift tax returns for 2003, prepared by attorney Hack, describe the gifts as gifts of percentage interests in "WLBF [sic]" and show the date of the gifts as January 31, 2003. Third, WLFB's "Membership Interest Ledger," prepared by attorney Hack's office, shows, in the first row, that William owned 100% of WLFB upon contribution of the real estate and portfolio assets. The first row also shows William's transfer of 50% of his interest in the LLC to Stacy. Subsequent rows show their transfers of percentage interests in the LLC to the children's trusts. However, all dates for all Ledger rows are blank. Fourth, a share valuation report, prepared by Moss Adams, states that percentage interests in the LLC were transferred from the Lintons to the children's trusts on January 31.
In their gift tax returns for 2003, the Lintons characterized their gifts to the children's trusts solely as gifts of WLFB percentage interests. The Lintons determined the gifts were worth only 47% of the value of the underlying capital, due to the LLC's restrictions on ownership and control of the LLC interests. The Internal Revenue Service ("IRS") rejected the application of the 47% discount, arguing that: (1) the Lintons made indirect gifts of cash, securities, and real property to the children's trusts, or (2) the Lintons' gifts should be treated as gifts of cash, securities, and real property under the step transaction doctrine.*fn2 Prior to formal assessment by the IRS, William and Stacy each made an advance payment of the claimed tax deficiency and filed suit in the district court seeking a refund of gift taxes paid.
Upon cross-motions, the district court granted the govern-ment's motion for summary judgment and denied the Lintons' motion for partial summary judgment on the indirect gift issue. Linton v. United States, 638 F. Supp. 2d 1277 (W.D. Wash. 2009). The district court relied on express language in the Trust Agreements and Gift Documents to determine the children's trusts were created and the gifts of the LLC interests were made to those trusts on January 22, 2003. Id. at 1286-87. The court also determined the contributions of cash, securities and real property were made to the LLC either simultaneously with or after the gifts of the LLC interests to the children's trusts. Id. at 1287. Thus, the district court concluded, "the Lintons' transfers of real estate, cash, and securities enhanced the LLC interests held by the children's Trusts, thereby constituting indirect gifts to the Trusts of pro rata shares of the assets conveyed to the LLC." Id.
The district court also determined, in the alternative, that even if the Lintons established that the cash, securities and real property were contributed to the LLC before the gifts of the LLC interests to the children's trusts, the Lintons "nevertheless made indirect gifts to their children's Trusts under the step transaction doctrine." Id. In arriving at this conclusion, the court considered "three alternative tests: (i) the binding commitment test; (ii) the end result test; and (iii) the interdependence test," and determined that regardless of which test was used, the step transaction doctrine applied. Id. at 1288 (quotation marks omitted). The district court noted that the Lintons made no affirmative decision to delay the gifts, and no evidence ...