internal_revenue_service number release date index number ----------------------- ------------------------------------------------ -------------------- --------------------------- in re -------------------------- ------------------------ -------------------------- legend taxpayer department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-115577-04 date date ----------------------------------------------------------------------------------------------- ------------------------- ------------ ---------------------- ------------------ ------- ------- -------------------- -------------------------- -------------------------- -------------------- ---------------------------- ---------------------- year year husband wife child child child child property --------------------------- state child date agreement ------------------------------------------------------------------------ date date addendum ------------------------------------------------------------------------------------------ property ---------------------------- dear ----------------- correspondence submitted on behalf of taxpayer requesting a ruling regarding the applicability of sec_2702 of the internal_revenue_code in year and year dates prior to date husband wife and five of their six children taxpayer child child child and child purchased property located in state for fair_market_value from an unrelated party wife acquired a life this is in response to your letter dated date and subsequent ------------------- ------------- the information submitted and representations made are summarized as follows plr-115577-04 interest husband acquired a life interest that would become effective upon the death of wife child acquired a one-third common undivided_interest in the remainder and taxpayer child child and child each acquired a one-sixth common undivided_interest in the remainder it is represented that husband wife and their five children each paid the actuarial value of their respective interest from their own resources and that none of the five children used any funds acquired from their parents to acquire their interests child did not participate in the initial acquisition of property because he was a minor on date husband wife taxpayer and children through executed an agreement in connection with the property acquisition the agreement provides generally for the parties’ respective rights duties and obligations in the acquisition ownership and disposition of property article of the agreement provides that wife the primary life_tenant and husband the secondary life_tenant shall pay toward the purchase of property including associated closing costs an amount equal to the actuarial value of their respective rights to the use of and the income from property wife shall have a legal_life_estate for her natural life and upon her death unless husband predeceases her husband shall have a legal_life_estate for his natural life remaindermen shall contribute to the purchase of property including associated closing costs the actuarially determined value of their respective remainder interests in such property article of the agreement provides that the parties to the agreement intend that no gift be made and agree that they shall take whatever actions are necessary to insure that no gift is in fact made it is the express intent of the parties that they shall pay fair_market_value for their respective interests in property if it is at any time determined by a court of law that the actuarial interest or value used herein represents less than fair and adequate_consideration with respect to each such interest then a re-computation shall be made and the parties which have not paid fair value shall re-contribute to the other parties the difference with interest thereon at the rate of percent per annum of prior to the expiration of the respective life tenancies the proceeds into which the property is converted shall be impressed with a_trust and the life tenants or the survivor shall be the trustees after the payment of income taxes the remaining proceeds shall be held by the trustees invested and reinvested and the trustees shall pay to the life tenants at least annually all income but not principal earned by the trust assets upon the death of both life tenants the trust shall terminate and the trust assets shall be immediately paid to the remaindermen in accordance with their respective interests article of the agreement provides in part that if property should be disposed article of the agreement provides that taxpayer and children through the the addendum modifies the agreement by adding a new article which article of the agreement provides that the parties agree that child may article of the agreement provides in part that the sale of property shall plr-115577-04 require the consent of the life tenants and the remaindermen transfer to child upon his attainment of age a one-sixth interest in the remainder estate being one-half of child 1’s interest without the consent of any party to this agreement provided that such transferee agrees to be bound by the terms of the agreement on date child attained the age of majority and received his one-sixth interest by conveyance from child on date husband wife taxpayer and children through executed an addendum to the agreement husband wife taxpayer and children through are collectively referred to as the family members provides that in the event the parties agree to collectively acquire any subsequent real_property as life tenants and remaindermen the newly acquired property shall be subject_to the same terms and conditions as between the life tenants and remaindermen as set forth in the agreement substantial improvements are made to any of the properties that are the subject of the agreement the life tenants and the remaindermen shall contribute toward the cost thereof the actuarial interest that they shall have therein notwithstanding the foregoing by agreement of the parties any such improvements may be made by wife or by husband upon the death of wife in which event such improvements shall belong to the party who paid for such improvements and may be thereafter severed and removed from the real_property upon such transfer by his sister child and that child agrees to be bound by all of the terms and conditions of the agreement as amended agreement additional property located in state in the same manner of holding title as they employed for property all of the properties so acquired other than property are referred to as property and remaindermen after date and that the current agreement has not been modified or amended after date the addendum also provides that child is added as a one-sixth remainderman subsequent to the initial acquisition of property the family members acquired the parties represent that they have not acquired any property as life tenants the addendum also adds a new article which provides that in the event the agreement and addendum are collectively referred to as the current taxpayer has requested the following rulings the proceeds of a sale or other conveyance of property and the principal the proceeds of a sale or other conveyance of all or a portion of property subject_to the receipt of a favorable ruling from the service the family members plr-115577-04 propose to sell property for fair_market_value to an unrelated party the family members intend to continue to own property however a decision to sell property could be made in the future upon any disposition of property the proceeds would be placed in trust pursuant to the provisions of the current agreement proceeds of any investments or reinvestments thereof that are held in trust pursuant to the provisions of the current agreement will continue to be treated as a transfer occurring prior to date for purposes of applying the provisions of chapter_14 of the code and therefore chapter_14 will not apply thereto and the principal proceeds of any investments or reinvestments thereof that are held in trust pursuant to the provisions of the current agreement will continue to be treated as a transfer occurring prior to date for purposes of applying the provisions of chapter_14 of the code and therefore chapter_14 will not apply thereto and acquired pursuant to a transfer occurring prior to date reconciliation act of and are effective for transfers occurring after date whether a transfer of an interest in trust to or for the benefit of a member of the transferor’s family is a gift and the value of such transfer the value of any interest in such trust retained by the transferor or any applicable_family_member shall be determined as provided in sec_2702 qualified_interest shall be treated as being zero the value of any retained interests which is a qualified_interest shall be determined under sec_7520 date the agreement and addendum relating to the acquisition of property and property were also executed prior to date neither the sale_or_other_disposition of property or property nor the deposit of the proceeds of such sale or disposition in trust pursuant to the current agreement will involve any transfer of value among the family members in addition the family members will have substantially identical interests both before and after the proposed transaction after the sale of property property will continue to be treated as property sec_2702 provides that the value of any retained_interest which is not a sec_2702 provides generally that solely for purposes of determining the provisions of chapter_14 of the code were added by the revenue in this case property and property were both acquired prior to the rulings contained in this letter are based upon information and based on the facts submitted and representations made we conclude that the plr-115577-04 proceeds of a sale or other conveyance of property and or all or a portion of property and the principal proceeds of any investments or reinvestments that are held in trust pursuant to the provisions of the current agreement will be treated as a transfer or transfers occurring prior to date for purposes of applying the provisions of chapter_14 of the code and therefore chapter_14 will not apply thereto further after the sale of property property will continue to be treated as property acquired pursuant to a transfer occurring prior to date representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party if there is a change in material fact or law local or federal before the transactions considered in this ruling take effect the ruling will have no force or effect while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied with respect to the income estate or gift_tax consequences of any aspect of any transaction discussed in this letter the code provides that it may not be used or cited as precedent being sent to taxpayer this ruling is directed only to the taxpayer requesting it sec_6110 of pursuant to the power_of_attorney on file with this office a copy of this letter is except as expressly provided herein no opinion is expressed or implied sincerely stephanie n bland acting senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes


t c no united_states tax_court suzanne j pierre petitioner v commissioner of internal revenue respondent docket no filed date p transferred cash and publicly_traded_securities to llc a new york limited_liability_company in exchange for a 100-percent interest in llc p subsequently made four transfers of her interest in llc to trusts established for the benefit of her son and granddaughter p transferred as a gift a 5-percent interest in llc to each trust and then sold a percent interest in llc to each trust in exchange for a promissory note in valuing the transfers for federal gift_tax purposes p applied substantial discounts for lack of marketability and control and therefore paid no gift_tax on the transfers r argues inter alia that the transfers should be treated as transfers of the underlying assets of llc because a single-member limited_liability_company is a disregarded_entity under the check-the-box_regulations of sec_301_7701-1 through proced admin regs held for purpose of application of the federal gift_tax the transfers are to be valued as transfers of interests in llc and llc is not disregarded under the check-the-box_regulations to treat the transfers as transfers of a proportionate share of assets owned by llc kathryn keneally and meryl g finkelstein for petitioner lydia a branche for respondent wells judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’s federal gift_tax and generation-skipping_transfer_tax for and respectively the issue to be decided is whether certain transfers of interests in a single-member limited_liability_company llc that is treated as a disregarded_entity pursuant to sec_301_7701-1 through proced admin regs known colloquially and hereinafter referred to as the check-the-box_regulations are valued as transfers of proportionate shares of the underlying assets owned by the llc or are instead valued as transfers of 1the chief_judge reassigned this case for opinion and decision to judge thomas b wells from judge diane l kroupa who presided over the trial judge kroupa does not disagree with our fact findings as they relate to the legal issue addressed in this opinion 2the check-the-box_regulations refer to an entity with a single owner the new york statute that created the llc in issue refers to owners of llcs as members see n y ltd liab co law art vi mckinney for purposes of this opinion no difference in meaning is intended by the use of the terms owner and member interests in the llc and therefore subject_to valuation discounts for lack of marketability and control findings_of_fact some of the facts and certain exhibits have been stipulated by the parties the facts stipulated by the parties are incorporated in this opinion and are so found petitioner resided in new york at the time she filed the petition petitioner received a dollar_figure million cash gift from a wealthy friend in petitioner wanted to provide for her son jacques despretz mr despretz and her granddaughter kati despretz ms despretz but was concerned about keeping her family’s wealth intact richard mesirow mr mesirow helped petitioner develop a plan to achieve her goals on date petitioner organized the single-member pierre family llc pierre llc petitioner respected the formalities of formation in the state of new york and pierre llc was validly formed under new york law petitioner did not elect to treat pierre llc as a corporation for federal tax purposes by filing a form_8832 entity classification election and therefore filed no corporate return for pierre llc 3in this opinion we decide only the legal issue set forth above the following issues were argued by the parties but will be addressed in a separate opinion whether the step_transaction_doctrine applies to collapse the separate transfers to the trusts and the appropriate valuation discount if any on date petitioner created the jacques despretz trust and the kati despretz trust sometimes collectively referred to as the trusts on date petitioner transferred dollar_figure million in cash and marketable_securities to pierre llc on date days after funding pierre llc petitioner transferred her entire_interest in pierre llc to the trusts she first gave a 5-percent membership interest in pierre llc to each of the trusts to use a portion of her then- available credit_amount and her gst_exemption she then sold each of the trusts a 5-percent membership interest in exchange for a secured promissory note the notes each had a face_amount of dollar_figure petitioner set this amount using the appraisal by james f shuey of james f shuey associates that valued a percent nonmanaging interest in pierre llc at dollar_figure mr shuey determined the value of a 1-percent interest by applying a percent discount to the value of pierre llc’s underlying assets however petitioner admits that because of an error in valuing the underlying assets a discount of dollar_figure percent was used in valuing the llc interest for gift_tax purposes petitioner filed a form_709 united_states gift and generation-skipping_transfer_tax return for and reported the gift to each trust of a 5-percent pierre llc interest she reported the value of the taxable gift to each trust as dollar_figure determined by multiplying a 5-percent interest times the dollar_figure appraised value of a 1-percent nonmanaging interest in pierre llc respondent examined petitioner’s gift_tax_return and issued a deficiency_notice for and respondent determined that petitioner’s gift transfers of the 5-percent pierre llc interests to the trusts are properly treated as gifts of proportionate shares of pierre llc assets valued at dollar_figure each not as transfers of interests in pierre llc respondent further determined that petitioner made gifts to the trusts of the 5-percent interests in pierre llc to the extent that the value of percent of the underlying assets of pierre llc exceeded the value of the promissory notes from the trusts respondent valued each of these transfers at dollar_figure after taking into account the value of the promissory notes i the parties’ contentions opinion the parties do not dispute that pierre llc was a validly formed llc pursuant to new york state law which recognized pierre llc as an entity separate from petitioner under new york state law they also agree that at the time of the transfers 4although respondent argues that the step_transaction_doctrine should apply to the gift and sale transfers in issue respondent explicitly limits the proposed application of the step_transaction_doctrine to the events of date and thus continued pierre llc is to be disregarded as an entity separate from its owner for federal tax purposes under the check-the-box_regulations the parties disagree however about whether the check-the-box_regulations require that pierre llc be disregarded for federal gift_tax valuation purposes respondent argues that because pierre llc is a single- member llc that is treated as a disregarded_entity under the check-the-box_regulations petitioner’s transfers of interests in pierre llc should be treated as transfers of cash and marketable_securities ie proportionate shares of pierre llc’s assets rather than as transfers of interests in pierre llc for purposes of valuing the transfers to determine federal gift_tax liability accordingly respondent contends that petitioner made gifts equal to the total value of the assets of pierre llc less the value of the promissory notes she received from the trusts petitioner argues that for federal gift_tax valuation purposes state law not federal tax law determines the nature of a taxpayer’s interest in property transferred and the legal rights inherent in that property interest accordingly continued does not advocate applying the step_transaction_doctrine to disregard pierre llc as noted above the step transaction issues will be addressed in a separate opinion 5respondent argues that the four transfers in issue should be collapsed into one transfer pursuant to the step_transaction_doctrine as noted above this issue will be addressed in a separate opinion petitioner contends that we must look to state law to determine what property interest was transferred and then value the property interest actually transferred to apply the federal gift_tax provisions to that value to ascertain gift_tax liability petitioner argues that under new york state law a membership interest in an llc is personal_property and a member has no interest in specific property of the llc n y ltd liab co law sec_601 mckinney accordingly petitioner argues that she properly valued the transferred interests in pierre llc for purposes of valuing her transfers to the trusts and that she properly applied lack of control and lack of marketability discounts in valuing6 the transferred llc interests petitioner also contends that respondent bears the burden_of_proof on all fact issues because she has met the requirements of sec_7491 as the only issue decided in this opinion is decided as a matter of law we need not decide in this opinion which party bears the burden_of_proof 6as noted above issues of valuation will be addressed in a separate opinion 7unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue 8the issues regarding which party bears the burden_of_proof will be addressed if necessary in a separate opinion ii the historical gift_tax valuation regime we begin with a brief summary of the longstanding statutes regulations and caselaw that constitute the federal gift_tax valuation regime sec_2501 imposes a tax on the transfer of property by gift the amount of a gift of property is the value of the property at the date of the gift sec_2512 it is the value of the property passing from the donor that determines the amount_of_the_gift sec_25_2511-2 gift_tax regs the value of the property is the price at which such property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts sec_25_2512-1 gift_tax regs where property is transferred for less than adequate_and_full_consideration in money or money’s worth the amount_of_the_gift is the amount by which the value of the property transferred exceeds the value of the consideration received sec_2512 in addition to the statutes and regulations there is significant supreme court precedent interpreting them and guiding the implementation of the federal gift and estate_tax the supreme court in 280_us_124 held 9the federal estate_tax is interpreted in_pari_materia with the federal gift_tax see 308_us_39 citing 288_us_280 that the imposition of a gift_tax is within the constitutional authority of congress the holding in bromley turned on a finding that the gift_tax is an excise_tax rather than a direct_tax as the supreme court stated in bromley v mccaughn supra pincite the general power to lay and collect taxes duties imposts and excises conferred by article i of the constitution and required by that section to be uniform throughout the united_states is limited by sec_2 of the same article which requires direct taxes to be apportioned and section which provides that no capitation or other direct_tax shall be laid unless in proportion to the census directed by the constitution to be taken a tax imposed upon a particular use of property or the exercise of a single power over property incidental to ownership is an excise which need not be apportioned the gift_tax is a tax laid only upon the exercise of a single one of those powers incident to ownership the power to give the property owned to another the supreme court has also provided guidance as to the appropriate roles of federal and state law in the valuation of transfers a fundamental premise of transfer taxation is that state law creates property rights and interests and federal tax law then defines the tax treatment of those property rights see 309_us_78 it is well established that the internal_revenue_code creates ‘no property rights but merely attaches consequences federally defined to rights created under state law ’ 472_us_713 quoting 357_us_51 in morgan v commissioner supra pincite the supreme court stated state law creates legal interests and rights the federal revenue acts designate what interests or rights so created shall be taxed our duty is to ascertain the meaning of the words used to specify the thing taxed if it is found in a given case that an interest or right created by local law was the object intended to be taxed the federal_law must prevail no matter what name is given to the interest or right by state law in morgan the court disregarded the state law classification of a power_of_appointment as special where the rights associated with that power_of_appointment under state law ie the power to appoint to anyone including the holder’s estate and creditors were properly classified under federal_law as a general_power_of_appointment as is standard in federal estate and gift_tax cases the interest was created by state law respected by the court and taxed pursuant to the federal estate and gift_tax provisions in short the court ignored the label not the interest created and determined whether the interest fell within the federal statute this court in 115_tc_506 followed the supreme court precedent discussed above as we said in knight v commissioner supra pincite citing united_states v nat bank of commerce supra pincite 461_us_677 and 363_us_509 state law determines the nature of property rights and federal_law determines the appropriate tax treatment of those rights pursuant to new york law petitioner did not have a property interest in the underlying assets of pierre llc which is recognized under new york law as an entity separate and apart from its members n y ltd liab co law sec_601 accordingly there was no state law legal_interest or right in those assets for federal_law to designate as taxable and federal_law could not create a property right in those assets consequently pursuant to the historical federal gift_tax valuation regime petitioner’s gift_tax liability is determined by the value of the transferred interests in pierre llc not by a hypothetical transfer of the underlying assets of pierre llc iii the check-the-box_regulations and single-member llcs we next turn to the question of whether the check-the-box_regulations alter the historical federal gift_tax valuation regime discussed above pursuant to the internal_revenue_code the income of a c_corporation is subject_to double_taxation once at the corporate level and once at the shareholder level while the income of partnerships and sole proprietorships is taxed only once at the individual taxpayer level see 484_f3d_372 6th cir an llc is a relatively new business structure created by state law that has some features of a corporation ie limited personal liability and some features of a partnership ie management flexibility and pass-through taxation 488_f3d_100 2d cir sec_7701 underpinning the check-the-box_regulations defines entities for purposes of the internal_revenue_code where not otherwise distinctly expressed or manifestly incompatible with the intent thereof sec_7701 does not make it clear whether an llc falls within the definition of a partnership a corporation or a disregarded_entity taxed as a sole_proprietorship before the promulgation of the check-the-box_regulations the proliferation of revenue rulings revenue procedures and letter rulings relating to the classification of llcs and partnerships for federal tax purposes made the existing regulations unnecessarily cumbersome to administer 122_tc_324 those existing regulations known as the kintner_regulations had been in place since dollar_figure in mcnamee v dept of the treasury 10in richlands med association v commissioner tcmemo_1990_660 affd without published opinion 953_f2d_639 4th cir we summarized the kintner_regulations as follows the kintner_regulations set forth six characteristics ordinarily found in a corporation which distinguish it from other organizations those characteristics are associates an objective to carry on business and divide the gains therefrom continuity_of_life centralization of management limited_liability and free_transferability_of_interests the regulations go on to note that in some continued supra pincite the court_of_appeals for the second circuit the court that would be the venue for any appeal of the instant case absent stipulation to the contrary stated the kintner_regulations had been adequate during the first several decades after their adoption but as explained in the proposal for their amendment the kintner_regulations were complicated to apply especially in light of the fact that many states ha d revised their statutes to provide that partnerships and other unincorporated organizations may possess characteristics that traditionally have been associated with corporations thereby narrowing considerably the traditional distinctions between corporations and partnerships under local law simplification of entity classification rules fed reg proposed date to simplify the classification of hybrid entities such as llcs the check-the-box_regulations were promulgated sec_301_7701-1 proced admin regs provides continued cases other factors may be found which may be significant in classifying an organization although the regulations cite the supreme court decision in 296_us_344 for the proposition that corporate status will exist if an organization more nearly resembles a corporation than a partnership or trust the regulations adopt a mechanical test for determination of corporate status under that test each of the four characteristics apparently bears equal weight in the final balancing larson v commissioner t c pincite and an entity will not be taxed as a corporation unless it possesses more corporate than noncorporate characteristics sec_301 a proced and admin regs larson v commissioner supra pincite classification of organizations for federal tax purposes -- a -- the internal_revenue_code prescribes the classification of various organizations for federal tax purposes whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law emphasis added sec_301_7701-3 and b proced admin regs provides classification of certain business entities -- a a business_entity can elect its classification for federal tax purposes as provided in this section an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner paragraph b of this section provides a default classification for an eligible_entity that does not make an election b classification of eligible entities that do not file an election -- except as provided in paragraph b of this section unless the entity elects otherwise a domestic eligible_entity is-- ii disregarded as an entity separate from its owner if it has a single owner emphasis added accordingly the default classification for an entity with a single owner is that the entity is disregarded as an entity separate from its owner sec_301_7701-3 proced admin regs there is no question that the phrase for federal tax purposes was intended to cover the classification of an entity for federal tax purposes as the check-the-box_regulations were designed to avoid many difficult problems largely associated with the classification of an entity as either a partnership or a corporation ie whether it should be taxed as a pass-through entity or as a separately taxed entity simplification of entity classification rules fed reg date the question before us now is whether the check-the-box_regulations require us to disregard a single-member llc validly formed under state law in deciding how to value and tax a donor’s transfer of an ownership_interest in the llc under the federal gift_tax regime described above iv whether the check-the-box_regulations alter the historical federal gift_tax valuation regime respondent points to a number of cases as support for the proposition that pursuant to the check-the-box_regulations valid state law restrictions must be ignored for the purpose of determining the interest being transferred under the federal estate and gift_tax regime respondent cites 488_f3d_100 2d cir a case decided by the court_of_appeals for the second circuit however respondent’s reliance on mcnamee is misplaced in mcnamee the court_of_appeals held that state law cannot abrogate the federal tax obligations of the owner of a disregarded_entity under the check- the-box regulations id pincite citing littriello v united_states f 3d pincite in issue in mcnamee was the requirement to pay withholding taxes for a single-member llc’s employees the court_of_appeals held that the owner of the single-member llc there in issue was liable for the disregarded entity’s taxes it did not hold that an entity is to be disregarded in deciding what property interests are transferred under state law for federal gift_tax valuation purposes when an owner of an entity disregarded under the check-the-box_regulations transfers an interest in that entitydollar_figure similarly respondent’s reliance on 115_tc_376 affd 283_f3d_1258 11th cir and 433_f3d_1044 8th cir affg tcmemo_2004_160 is not convincing as the facts of those cases differ significantly from the facts of the instant case in shepherd v commissioner supra pincite we looked to applicable state law to decide what property rights were conveyed in shepherd the property the taxpayer possessed and transferred was his interests in leased land and bank stock id pincite because the creation of the taxpayer’s sons’ partnership interests preceded the completion of the gift to the partnership we found that the taxpayer made indirect gifts to his sons of hi sec_11for the same reasons 484_f3d_372 6th cir and med practice solutions llc v commissioner t c __ date an opinion of this court following 488_f3d_100 2d cir are not controlling for the purpose of determining what interest is being transferred under the federal gift_tax valuation regime both of these cases like mcnamee involve the classification of a single-member llc ie whether it is a pass-through entity or a separately taxed entity for purposes of liability for employment_taxes neither case addresses the valuation of transferred interests in a single- member llc for purposes of federal gift_tax valuation interests in the land and bank stock id pincite the court_of_appeals for the eleventh circuit in its opinion affirming shepherd highlighted the distinction between the facts of shepherd and a hypothetical set of facts more similar to the facts under consideration in the the instant case when it noted that thus instead of completing a gift of land to a preexisting partnership in which the sons were not partners and then establishing the partnership interests of his sons which would result in a gift of a partnership_interest shepherd created a partnership in which his sons held established shares and then gave the partnership a taxable gift of land making it an indirect gift of land to his sons shepherd v commissioner f 3d pincite fn ref omitted in the instant case petitioner completed a gift of cash and securities to pierre llc at a time when the trusts were not members of pierre llc and then later transferred interests in pierre llc to the trusts which established the interests of the trusts in pierre llcdollar_figure accordingly shepherd is consistent with the requirement that state law determines the interest being 12petitioner contributed the stock and securities to pierre llc approximately days before she transferred the pierre llc interests to the trusts in 130_tc_170 we found that the indirect gift analysis of 115_tc_376 affd 283_f3d_1258 11th cir and senda v commissioner tcmemo_2004_160 affd by 433_f3d_1044 8th cir did not apply where assets were transferred to a partnership days before the gifts of the partnership interests transferred in the instant case as discussed above pursuant to new york law petitioner transferred interests in pierre llc senda v commissioner supra is also distinguishable in senda the taxpayers were unable to establish whether they had transferred partnership interests to their children before or after they contributed stock to the partnership citing shepherd v commissioner supra the court_of_appeals for the eighth circuit noted that the sequence was critical because a contribution of stock after the transfer of partnership interests is an indirect gift senda v commissioner supra pincite both shepherd and senda stand for the proposition that a transfer of property to a partnership for less than full and adequate_consideration may represent an indirect gift to the other partners in the instant case petitioner contributed the cash and securities to pierre llc before transfers to the trusts were made and the trusts became members of pierre llc consequently shepherd and senda are not controlling petitioner relies heavily on estate of mirowski v commissioner tcmemo_2008_74 we do not find estate of mirowski to be controlling because the commissioner did not rely on the check-the-box_regulations with respect to the transfer of the llc interests there in issue however we do note that in estate of mirowski we refused to adopt an interpretation that reads out of sec_2036 in the case of any single-member llc the exception for a bona_fide sale that congress expressly prescribed when it enacted that statute if respondent’s interpretation were to prevail in the instant case such an interpretation could create a similar resultdollar_figure the multistep process of determining the nature and amount of a gift and the resulting gift_tax under the federal gift_tax provisions described above ie the determination under state law of the property interest that the donor transferred the determination of the fair_market_value of the transferred property interest and the amount of the transfer to be taxed and the calculation of the federal gift_tax due on the transfer is longstanding and well established neither the check-the-box_regulations nor the cases cited by respondent support or compel a conclusion that the existence of an entity validly formed under applicable state law must be ignored in determining how the transfer of a property interest in that entity is taxed under federal gift_tax provisions while we accept that the check-the-box_regulations govern how a single-member llc will be taxed for federal tax purposes ie as an association taxed as a corporation or as a disregarded_entity we do not agree that the check-the-box 13as noted above see supra note the federal estate_tax must be interpreted in_pari_materia with the federal gift_tax regulations apply to disregard the llc in determining how a donor must be taxed under the federal gift_tax provisions on a transfer of an ownership_interest in the llc if the check-the-box_regulations are interpreted and applied as respondent contends they go far beyond classifying the llc for tax purposes the regulations would require that federal_law not state law apply to define the property rights and interests transferred by a donor for valuation purposes under the federal gift_tax regime we do not accept that the check-the-box_regulations apply to define the property interest that is transferred for such purposes the question before us ie how a transfer of an ownership_interest in a validly formed llc should be valued under the federal gift_tax provisions is not the question addressed by the check-the-box_regulations ie whether an llc should be taxed as a separate_entity or disregarded so that the tax on its operations is borne by its owner to conclude that because an entity elected the classification rules set forth in the check- the-box regulations the long-established federal gift_tax valuation regime is overturned as to single-member llcs would be manifestly incompatible with the federal estate and gift_tax statutes as interpreted by the supreme court see sec_7701 we note that congress has enacted provisions of the internal_revenue_code see sec_2701 sec_2703 that disregard valid state law restrictions in valuing transfers where congress has determined that the willing buyer willing seller and other valuation rules are inadequate it expressly has provided exceptions to address valuation abuses see chapter_14 of the internal_revenue_code sec_2701 through which specifically are designed to override the standard willing buyer willing seller assumptions in certain transactions involving family members by contrast congress has not acted to eliminate entity- related discounts in the case of llcs or other entities generally or in the case of a single-member llc specifically in the absence of such explicit congressional action and in the light of the prohibition in sec_7701 the commissioner cannot by regulation overrule the historical federal gift_tax valuation regime contained in the internal_revenue_code and substantial and well-established precedent in the supreme court the courts of appeals and this court and we reject respondent’s position in the instant case advocating an interpretation that would do so accordingly we hold that petitioner’s transfers to the trusts should be valued for federal gift_tax purposes as transfers of interests in pierre llc and not as transfers of a proportionate share of the underlying assets of pierre llc to reflect the foregoing an appropriate order will be issued reviewed by the court cohen foley vasquez thornton marvel goeke wherry gustafson and morrison jj agree with this majority opinion cohen judge concurring as the author of the opinion for the court in med practice solutions llc v commissioner t c __ i write to explain why my agreement with the majority opinion here is consistent with the conclusion in that case which followed 488_f3d_100 2d cir briefly i agree with the majority that mcnamee and med practice solutions llc are classification cases that appropriately applied the check-the-box_regulations of sec_301_7701-3 proced admin regs in deciding whether the single owner member of an llc or the llc was liable for employment_taxes on the wages of the employees of the business in question in contrast this case involves the issue of the valuation for transfer_tax purposes of certain interests in a single-owner llc that that owner transferred see majority op p mcnamee and med practice solutions llc along with 484_f3d_372 6th cir and others cited in med practice solutions llc will be referred to as the employment_tax cases the check-the-box_regulations might be applied to determine for gift_tax purposes whether the owner of a single-member llc or the llc is the transferor of the assets used in the business or the activities for which the llc was formed in that event the determination would parallel the determination in the employment_tax cases as to who is liable for the federal tax in dispute and would consider whether the llc should be disregarded under those regulations the only transfer at issue here however is the transfer by the owner of the llc of certain interests that she held in that llc transfer_tax disputes including this one more frequently involve differences over the fair_market_value of property and fair_market_value is determined by applying the willing buyer willing seller standard to the property transferred see majority op pp where the property transferred is an interest in a single-member llc that is validly created and recognized under state law the willing buyer cannot be expected to disregard that llc see eg 115_tc_506 we do not disregard a partnership because we have no reason to conclude from this record that a hypothetical buyer or seller would disregard it of course congress has the ability to and on occasion has opted to modify the willing buyer willing seller standard see eg sec_2032a sec_2701 sec_2702 sec_2703 sec_2704 130_tc_170 applying sec_2703 to disregard restrictions in a partnership_agreement in 113_tc_449 affd 292_f3d_490 5th cir we explained that the special valuation rules were a targeted substitute for the complexity breadth and vagueness of prior sec_2036 we reaffirmed the willing buyer willing seller standard kerr v commissioner supra pincite and concluded that the special provision in sec_2704 did not apply to disregard the partnership restrictions in issue id pincite see also 115_tc_478 affd on this issue revd and remanded on other grounds 293_f3d_279 5th cir the majority opinion majority op pp discusses the adoption of the check-the-box_regulations as a targeted substitute for the complexity of the kintner_regulations in classifying hybrid entities and thereby determining the tax consequences to those entities and their owners of the business or the activities for which those entities were formed a targeted solution to a particular problem should not be distorted to achieve a comprehensive overhaul of a well-established body of law if the regulations expressly provided that single-owner llcs would be disregarded in determining the identity of the property transferred and the value of that transferred property we could debate the validity of the regulations and the degree of deference to be given to various expressions of an agency’s position here we are dealing only with respondent’s litigating position the majority does not question the validity of the check-the-box_regulations the majority holds only that those regulations do not control the valuation issue in this case see majority op pp the argument that the majority opinion disregards the plain meaning of the phrase for federal tax purposes in sec_301_7701-3 proced admin regs is unpersuasive the plain meaning of the text of a regulation is the starting point for determining the meaning of that regulation see 156_f3d_1076 10th cir when the meaning of a regulatory provision is clear on its face the regulation must be enforced in accordance with its plain meaning we see here however ambiguity in the specific phrase federal tax purposes and ambiguity in the term disregarded both of which make plain meaning elusive first the regulation does not provide that an entity will be disregarded for all federal tax purposes instead the regulation implements a statute that by its terms applies except where manifestly incompatible with the intent of the internal_revenue_code sec_7701 the language of the regulation requires a determination of which federal tax purposes are implicated and whether a given purpose might be manifestly incompatible with the internal_revenue_code second the regulation states that an entity will be disregarded as an entity separate from its owner sec_301_7701-3 and b ii proced admin regs emphasis added that sentence might mean that a disregarded_entity is exempt from tax that its transactions are disregarded and therefore not reported for tax purposes or that transfers of interests in the entity are disregarded for federal gift_tax purposes and not taxed while none of those meanings is likely the ambiguity is inherent of course the regulation must be interpreted in the light of the other principles of the internal_revenue_code those other principles include the valuation principles discussed in the majority opinion respondent’s proposed application of the regulation is manifestly incompatible with those principles the majority’s approach is consistent with the principle that a regulation will be interpreted to avoid conflict with a statute see 866_f2d_616 3d cir see also 35_f3d_1516 fed cir 97_tc_30 affd without published opinion 70_f3d_1282 10th cir it is also consistent with the express limitation of sec_7701 on the scope of regulations that define terms see majority op p the majority’s interpretation of the scope of the check-the-box_regulations harmonizes the classification purpose of those regulations with the statutory rules and case precedents that firmly establish the meaning of fair_market_value in transfer_tax cases and the willing buyer willing seller standard as the hallmark of that meaning some final words about deference as the majority opinion indicates majority op p sec_7701 precludes the application of the definitions of the terms in that section where they are manifestly incompatible with the intent of the internal_revenue_code this case does not involve the question in 467_us_837 of deference to the commissioner’s interpretation of a statute that the commissioner is charged with administering nothing in the check-the-box_regulations or in the cases cited by respondent persuades us that those regulations require us to disregard a single-owner llc where as is the case here to do so would be manifestly incompatible with the intent of other provisions of the internal_revenue_code judge halpern in his dissenting opinion does not address the majority’s conclusion that respondent’s interpretation of the regulation is manifestly incompatible with other provisions of the code he asserts that respondent’s position in this case is consistent with the commissioner’s administrative position for at least years dissenting op p he cites revrul_99_ 1999_1_cb_434 which describes the federal_income_tax consequences of a transfer under sections a and the ruling and the sections cited do not deal with transfer_taxes generally or gift_tax specifically moreover the internal_revenue_service has reversed itself with respect to application of the check-the-box_regulations in employment_tax situations and has adopted new rules as of date see mcnamee v dept of the treasury f 3d pincite 484_f3d_372 6th cir med practice solutions llc v commissioner t c at __ slip op pincite we have never accorded deference to the commissioner’s litigating position as contrasted to contemporaneous expressions of intent when the regulations were adopted and consistent administrative interpretations before the litigation see 108_tc_107 respondent does not argue here that respondent’s interpretation of the regulation is entitled to deference neither the cases--432_f3d_90 2d cir 303_f2d_703 9th cir and lantz v commissioner t c ___ ___ ndollar_figure slip op pincite --nor the so-called hornbook law on which judge halpern relies in his dissenting opinion requires us to give deference to respondent’s litigating position that the check-the- box regulations apply in this case we have no reason to believe that respondent’s litigating position here is an interpretation of those regulations that reflects the fair and considered judgment of the secretary_of_the_treasury on the matter in question 519_us_452 where the supreme court of the united_states ordered the secretary of labor to file an amicus brief in a case between private litigants involving the interpretation of a regulation that the secretary had promulgated the supreme court accepted the secretary’s interpretation since in the circumstances of the case there is simply no reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question moreover judge halpern’s reliance on a footnote in lantz v commissioner supra is misplaced we there concluded that a taxpayer’s pursuit of a particular type of relief would be fruitless in the face of the commissioner’s position the validity of which had not been challenged neither case cited in that footnote adopts the litigating position of the party as distinct from preexistent and consistent administrative interpretations see 325_us_410 101_tc_78 affd without published opinion 70_f3d_1282 10th cir wells foley vasquez thornton marvel goeke wherry and gustafson jj agree with this concurring opinion halpern j dissenting i introduction we here face a task common in courts reviewing the actions of an administrative agency ie we must construe an agency’s statute and regulations and consider the agency’s interpretation of those authorities i agree with neither the approach the majority takes nor the conclusion it reaches i agree with much of what judge kroupa writes but wish to emphasize how my approach differs from that of the majority ii the language of the regulation that regulations like statutes are interpreted pursuant to canons of construction is a basic principle of regulatory interpretation e g 986_f2d_60 4th cir affg tcmemo_1991_557 in every case involving questions of statutory or regulatory interpretation the starting point is the language itself e g bd of educ v harris 622_f2d_599 2d cir quoting 437_us_322 the regulations we here construe are sec_301_7701-1 through -3 proced admin regs the so-called check-the-box_regulations we are particularly concerned with the language in sec_301_7701-2 proced admin regs describing what happens when a business_entity with only one owner is disregarded as an entity separate from that owner viz its activities are treated in the same manner as a sole_proprietorship branch or division of the owner given that pierre llc’s owner petitioner is an individual pierre llc’s activities are treated in the same manner as those of a sole_proprietorship see id missing from the instruction sometimes the activities instruction however is its scope ostensibly sec_301_7701-1 proced admin regs provides that scope stating that the activities instruction applies for federal tax purposes sec_2501 imposes a tax on the transfer of property by gift the tax is an excise_tax imposed on the value of the property transferred see id 465_us_330 the gift_tax is an excise_tax on transfers of property sec_2512 provides that the amount of a gift of property is the value of the property on the date of the gift respondent argues that because petitioner elected to treat pierre llc as a disregarded_entity petitioner is properly treated as transferring cash and marketable_securities as opposed to pierre llc interests for federal gift_tax purposes petitioner responds t he issue is the gift_tax treatment of transfers of interests in an llc not the imposition of a tax due as a result of the activities of a single-member llc in effect petitioner argues that the activities instruction is irrelevant to any inquiry concerning her transfers of interests in the llc since that inquiry concerns her own activities and not her llc’s activities petitioner’s position bespeaks a distinction between a sole_proprietor and her business that the activities instruction will not bear a sole_proprietorship is generally understood to have no legal identity apart from the proprietor c j s_corporations sec_4 a sole_proprietorship has no separate legal existence or identity apart from the sole_proprietor judge richard a posner applied that rule_of unity nicely in 315_f3d_721 7th cir two plaintiffs are listed but one is a sole_proprietorship and the other the proprietor so they are one not two in the eyes of the law and the one is the proprietor not the proprietorship i would read the activities instruction as plainly saying that pierre llc and petitioner constitute only one actor ie petitioner for federal tax purposes which of course encompass the federal gift_tax so that any gift by petitioner of an interest in pierre llc is as respondent argues a gift of an interest in that llc’s cash and marketable_securities others may find the activitie sec_1 treating the transfer of an interest in a single-member disregarded_entity as a transfer of an interest in the entity’s assets is in no way inconsistent with applying the willing buyer willing seller standard for valuation purposes see sec_25_2512-1 gift_tax regs as judge cohen suggests in her concurring opinion p the willing buyer and willing seller continued instruction to be ambiguous so i will proceed as if the instruction is not clear from the plain language of the regulation i reject and the majority does not contend that the regulation plainly precludes considering the llc’s property or at least interests therein as the property petitioner transferred when she transferred interests in the llc iii the intent of the secretary if we accept that the activities instruction is ambiguous then we must construe that provision with respect to that task it is axiomatic that any regulation should be construed to effectuate the intent of the enacting body 303_f2d_703 9th cir indeed hornbook law holds in construing an administrative rule_or_regulation the court must necessarily look to the administrative construction thereof where the meaning of the words used is in doubt and the courts will ordinarily show deference to such construction and give it controlling weight continued are purely hypothetical figures see 94_tc_193 that the hypothetical willing buyer is deemed to purchase an interest in the entity’s assets to value a hypothetical gift of that interest is not inconsistent with the fact that a real buyer and by extension a donee would receive an interest in what has become a two- member unincorporated entity ie for federal tax purposes a partnership see sec_301_7701-3 proced admin regs thus respondent’s position does not require the real buyer to disregard the llc for it is an interest in an llc with which he winds up c j s public administrative law and procedure sec_212 emphasis added accord 432_f3d_90 2d cir an agency’s interpretation of its own statute and regulation must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation citations and internal quotation marks omitted lantz v commissioner t c __ __ ndollar_figure slip op pincite n the same there is ample evidence that the secretary in the person of the commissioner construes the activities instruction to require that the wrapper be disregarded in determining the property the owner of a single-member disregarded_entity transfers when she transfers an interest in the entity that is of course respondent’s position which because it is consistent with the commissioner’s administrative position for at least years cannot be dismissed as a mere litigating position implementation of the check-the-box_regulations has required the commissioner to issue numerous interpretations ten years ago in revrul_99_5 1999_1_cb_434 the commissioner addressed the federal_income_tax consequences of the sale by a the owner of a in lantz v commissioner t c __ __ slip op pincite halpern j dissenting i dismissed the commissioner’s interpretation of sec_301_9100-1 proced admin regs as no more than a litigating position without merit since it was ‘plainly erroneous’ and ‘inconsistent with the regulation’ that is not so here single-member disregarded_entity an llc of a 50-percent ownership_interest in the entity to b with the result that the disregarded_entity was converted into a partnership the commissioner held that b’s purchase of percent of a’s ownership_interest in the llc is treated as the purchase of a 50-percent interest in each of the llc’s assets which are treated as held directly by a for federal tax purposes id therefore the commissioner continued under sec_1001 a recognizes gain_or_loss from the deemed sale of the interest in each asset of the llc to b id in the intervening years the commissioner has issued numerous letter rulings consistent with and relying on his interpretation in revrul_99_5 supra that a transfer by the owner of all or a part of his interest in a single-member disregarded_entity is to be treated as the transfer by the owner of a proportional interest in the entity’s assets revrul_99_ e g priv ltr rul date limited partnership’s distribution of membership interests in llc a single-member disregarded_entity will be treated as a distribution of llc’s assets and liabilities to the partners priv ltr rul date trust’s distribution to beneficiaries a and b of interests in x a single-member disregarded_entity should have been treated as a non-taxable pro_rata distribution of d of x’s assets to a and e of x’s assets to b as if such assets had been distributed outright from trust to a and b priv ltr rul date although taxpayer transferred its interest in a disregarded_entity the sale of such interest is treated as a sale of the assets of the disregarded_entity for federal_income_tax purposes priv ltr rul date for purposes of sec_1031 like-kind_exchange provisions t ransfer of all the interest in disregarded_entity will be treated continued supra and the letter rulings are cited not as precedent see sec_6110 but to show the commissioner’s consistency over a decade in disregarding the wrapper and treating the transfer of an interest in a single-member disregarded_entity as a transfer of an interest in the disregarded entity’s assets see eg 369_us_672 private letter rulings do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws granted the interpretations address sales_and_other_dispositions for purposes of the income_tax and the commissioner apparently has made no interpretation particular to sec_2501 and the gift_tax yet as the court_of_appeals for the district of columbia circuit recently observed in 493_f3d_170 d c cir admittedly an income_tax case but the court was speaking generally about gifts a gift is the functional equivalent of a below-market sale see also sec_25_2512-8 gift_tax regs transfers reached by the gift_tax embrace sales exchanges and other dispositions of property for an inadequate consideration simply put the difference between a sale and a gift is a difference in degree not in_kind continued as a transfer of the assets of disregarded_entity given the assumed ambiguity of the activities instruction in sec_301_7701-2 proced admin regs and the deference we show to the secretary’s construction of his regulations i accept respondent’s reading of the activities instruction as a plausible construction that is because petitioner elected to treat pierre llc as a disregarded_entity petitioner is properly treated as transferring cash and marketable_securities as opposed to pierre llc interests for federal gift_tax purposes i next consider the validity of the regulation iv chevron_deference i review the validity of the regulation because although the majority denies that it seeks to invalidate the regulation i believe that it does not simply reject the meaning respondent ascribes to the activities instruction but rather accepts that meaning and rejects the activities instruction itself as an invalid construction of the statute the majority at least conditionally accepts respondent’s reading of the check-the-box_regulations if the check-the-box_regulations are interpreted and applied as respondent contends they go far beyond classifying the llc for tax purposes majority op p indeed the majority speculates that the result of respondent’s reading would be to overturn the long- established federal gift_tax valuation regime as to single- member llcs majority op p that the majority concludes would be ‘manifestly incompatible’ with the federal estate and gift_tax statutes as interpreted by the supreme court see sec_7701 majority op p the majority thus seems to accept respondent’s reading of the check-the-box_regulations but to conclude that that reading and thus the activities instruction itself is invalid because manifestly incompatible with the continued the validity of the check-the-box_regulations at least as they applied to imposing employment_tax obligations directly on the owner of a single-member disregarded_entity has been upheld by this court med practice solutions llc v commissioner t c __ and two u s courts of appeals 488_f3d_100 2d cir and 484_f3d_372 6th cir barring stipulation to the contrary appeal of this case will lie to the court_of_appeals for the second circuit see sec_7482 in mcnamee the taxpayer had elected to treat his single- member llc as a disregarded_entity the commissioner sought to recover employment_taxes from the taxpayer that the llc had failed to pay on the ground that the llc was disregarded for federal tax purposes the taxpayer objected that no regulation could deprive him of the protection from liability that local law afforded him as a member of an llc and argued that the check-the-box_regulations ‘directly contradict the relevant statutory provisions of the internal revenue code’ mcnamee v dept of continued internal_revenue_code in this section of this separate opinion i show that the regulation in issue including the activities instruction is a valid interpretation of the statute in sec iii supra of this separate opinion i have set forth the reasons respondent’s reading of that regulation must be accepted for employment_taxes related to wages paid on or after date a disregarded_entity is treated as a corporation for purposes of employment_tax reporting and liability sec_301_7701-2 proced admin regs the treasury supra pincite the relevant statutory provisions were the first three paragraphs of sec_7701 defining the terms person partnership and corporation id pincite in upholding the check-the-box_regulations against challenge in mcnamee v dept of the treasury supra pincite the court_of_appeals applied the following standard in reviewing a challenge to an agency regulation interpreting a federal statute that the agency is charged with administering the first duty_of the courts is to determine whether the statute’s plain terms ‘directly addres s the precise question at issue ’ 545_us_967 quoting 467_us_837 if the statute is ambiguous on the point we defer in pertinent part sec_7701 provides as follows sec_7701 definitions a when used in this title where not otherwise distinctly expressed or manifestly incompatible with the intent thereof-- person --the term person shall be construed to mean and include an individual a_trust estate partnership_association company or corporation partnership --the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not within the meaning of this title a_trust or estate or a corporation corporation --the term corporation includes associations to the agency’s interpretation so long as the construction is ‘a reasonable policy choice for the agency to make ’ national cable u s pincite quoting chevron u s pincite the court_of_appeals found the definitions ambiguous with respect to the classification of single-member llcs id pincite- emphasizing the taxpayer’s choice in having his llc disregarded or treated as a corporation the court concluded that the check-the-box_regulations provided a flexible response to a novel business form and are not arbitrary capricious or unreasonable id pincite in other words notwithstanding the protection from the liabilities of his llc that mr mcnamee enjoyed under local law see id pincite nothing in the relevant sec_7701 definitions deprived the secretary of the authority to write a regulation permitting mr mcnamee to waive that protection at least as it pertained to the employment_tax liabilities of the entity in exchange for escaping the double_taxation that would result if he failed to make that waiver see id pincite the court_of_appeals thus rejected mr mcnamee’s contention that the limited_liability rights he enjoyed under local law protected him from the commissioner’s action to collect his llc’s unpaid payroll_taxes id pincite contrary to the majority’s suggestion that state law not federal_law defines for valuation purposes under the federal gift_tax the property rights and interests a donor transfers see majority op p mcnamee v dept of the treasury supra stands for the proposition that federal_law in the form of the check-the-box_regulations does define the property rights and interests so transferred in other words the court_of_appeals in mcnamee construed the check-the-box_regulations to modify the bundle of rights that mr mcnamee enjoyed under local law and that constituted ownership of the llc we are not at this point discussing the meaning of the activities instruction having settled that in section iii supra of this separate opinion we are considering only the validity of the regulation sec_301_7701-2 proced admin regs setting forth that instruction in the light of mcnamee v dept of the treasury supra i find that the first three paragraphs of sec_7701 which as in that case appear to be the relevant statutory provisions do not plainly speak to the question of whether for gift_tax purposes the secretary may write a regulation requiring that the wrapper be disregarded in determining what property the owner of a single- member disregarded_entity transfers when she transfers an interest in the entity as to the question of what constitutes the bundle of rights enjoyed by the owner of a single-member disregarded in considering the persuasive value of another court’s opinion we must consider not only the result but the rationale for that result see 517_us_44 when an opinion issues for the court it is not only the result but also those portions of the opinion necessary to that result by which we are bound entity the court_of_appeals clearly stated that at least for payroll tax purposes under the preamendment version of the regulation the limited_liability that local law accorded the owner is ignored mcnamee v dept of the treasury f 3d pincite indeed sec_301_7701-1 proced admin regs provides whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law if the definitions in sec_7701 through are consistent with disregarding one right in the bundle of rights enjoyed by the owner of a single-member disregarded_entity why are they not consistent with disregarding more than one right in that bundle indeed why are they not consistent with disregarding the entirety of the bundle ie the wrapper that separates the owner from the underlying assets mcnamee thus convinces me that in the context of this case the check-the-box_regulations are not arbitrary capricious or unreasonable and therefore are valid as i point out in section iii supra of this separate opinion the commissioner has plainly taken the position that pursuant to the check-the-box_regulations for purposes of the income_tax the wrapper is disregarded and the owner of a single- member disregarded_entity transferring an interest in the entity is deemed to transfer an interest in the underlying assets of the entity neither petitioner nor the majority suggests that transfers of interests in single-member disregarded entities cannot be treated as described while the income_tax provisions of the internal_revenue_code are not to be construed as though they were in_pari_materia with the gift_tax provisions 160_f2d_812 2d cir revg 6_tc_652 there is nothing in the definitions in sec_7701 through of person partnership and corporation that indicates that those terms should have different meanings for purposes of the income and gift_tax provisions of the internal_revenue_code while the majority does not acknowledge that it is addressing the validity of the check-the-box_regulations i believe that it is rejecting the activities instruction as an invalid construction of the statute see supra note and accompanying text its reason for doing so is that the commissioner cannot by regulation overrule the historical federal gift_tax valuation regime contained in the internal_revenue_code and substantial and well- established precedent in the supreme court the courts of appeals and this court majority op p while certainly the secretary cannot by regulation overrule the internal_revenue_code judicial construction of a statute must except in one instance give way to later administrative construction a court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to chevron_deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion 545_us_967 moreover while application of the check-the-box_regulations to sec_2501 may well result in a radical departure from settled rules as the majority suggests see majority op p the majority fails to acknowledge that at the time of their adoption the check-the-box_regulations represented a radical departure for income_tax purposes from prior caselaw and regulatory precedent beginning with the seminal supreme court case of 296_us_344 the supreme court in morrissey used various factors to classify business trusts as either true trusts or associations taxable as corporations associations subsequent regulations extended the factors approach to the classification of other business entities the check-the-box_regulations in effect overrule morrissey by providing that with certain exceptions an unincorporated organization comprising two or more associates may elect its classification as a partnership or corporation for federal tax purposes regardless of the number of corporate characteristics it possesses under state or foreign law moreover the right of an unincorporated single-member organization with a preponderance of corporate characteristics which constitutes an entity separate from its owner under state or foreign law to elect to be disregarded for federal_income_tax purposes was unprecedented under the then-existing law the check-the-box_regulations thus constituted a radical departure from existing jurisprudence that prompted many commentators to question their validity see 122_tc_324 n that concern has been put to rest by 488_f3d_100 2d cir 484_f3d_372 6th cir and med practice solutions llc v commissioner t c __ all of which concerned single- member disregarded entities if the check-the-box_regulations trump supreme court precedent regarding the role of state law in determining entity classification for federal income or employment_tax purposes then surely they must also supersede judicial precedent respecting state law concepts of property rights for see eg 74_tc_1266 state law trust with a single beneficiary classified as an association because it possessed a preponderance of corporate characteristics including associates and a joint profit_motive barnette v commissioner tcmemo_1992_371 german gmbh wholly owned by u s_corporation classified as an association because it possessed a preponderance of the remaining four corporate characteristics after disregarding the two corporate characteristics absent from both one-man corporations and sole proprietorships viz associates and an objective to carry on a business for joint profit affd without published opinion 41_f3d_667 11th cir see also wirtz harris tax classification of the one-member limited_liability_company tax notes date federal gift and estate_tax purposes yet that is precisely the conclusion the majority denies respondent’s interpretation of sec_301_7701-2 proced admin regs is a valid construction of sec_7701 through v conclusion as stated above sec_2501 imposes a tax on the transfer of property by gift and sec_2512 provides that the amount of a gift of property is the value of the property on the date of the gift we are here required to identify for purposes of those provisions the property petitioner transferred when she conveyed two 5-percent interests in pierre llc to two trusts respondent argues that because petitioner elected to treat pierre llc as a disregarded_entity she is properly treated as transferring two 5-percent undivided interests in the llc’s assets rather than two 5-percent interests in the llc itself respondent relies on the check-the-box_regulations as authority to so identify the property petitioner transferred after applying traditional tools of statutory and regulatory construction to the pertinent language of the regulations i agree with respondent as to the identity of the property transferred in conclusion i note that when identifying the property transferred for purposes of the gift_tax applying the check-the- box regulations in the manner respondent construes them will not always be adverse to taxpayers if the donor transfers a controlling_interest in her single-member disregarded_entity holding say real_property the discount attaching to the undivided_interest in the real_property deemed transferred may exceed the discount if any attaching to the controlling_interest nominally transferred the check-the-box_regulations put the choice of entity classification in the hands of the taxpayer that the taxpayer bears any burden along with the benefits seems only fair kroupa and holmes jj agree with this dissenting opinion here it appears that petitioner has not claimed a discount on account of any undivided_interest in property transferred kroupa j dissenting the majority opinion allows an octogenarian taxpayer to give away dollar_figure million in cash and marketable_securities at a substantial discount in gift_taxes because she put them in a limited_liability_company llc despite a regulation telling us that for federal tax purposes that llc should be disregarded the majority is either ignoring the plain language of the regulation or silently invalidating it i must respectfully dissent the majority fails to apply the plain language of sec_301_7701-1 through proced admin regs collectively the check-the-box_regulations which require that a single-member llc be disregarded for federal tax purposes as the trier of fact i find no fault with the facts upon which the majority addresses the legal issue i take exception however to how the majority frames the legal issue neither party argued that the regulations are invalid yet the majority has in effect invalidated the check-the-box_regulations for federal gift_tax purposes without providing the necessary legal analysis to do so i the plain language of the check-the-box_regulations the check-the-box_regulations provide that an entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301 a proced admin regs the regulations further provide that w hether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law sec_301_7701-1 proced admin regs emphasis added the crux of my dispute with the majority is how the majority interprets these provisions the majority ignores the plain language of the check-the-box_regulations and holds instead that pierre llc must be respected as an entity separate from petitioner for federal gift_tax purposes the majority fails to discuss however what it means for an entity not to be separate from its owner the regulations provide that the owner of a disregarded_entity is treated as the owner of its property see sec_301_7701-3 and iv proced admin regs likewise the court_of_appeals for the second circuit the court to which this case is appealable has said ‘if the entity is disregarded its activities are treated in the same manner as a sole_proprietorship of the owner ’ 488_f3d_100 2d cir 1the commissioner has set forth specific limited exceptions in the regulations to this general_rule that took effect after the year at issue see sec_301_7701-2 iv and v proced admin regs he has also issued chief_counsel_advice date concluding that a single-member llc could not be disregarded for collection purposes under sec_6321 and sec_6331 2petitioner resided in new york when she filed the petition see sec_7482 quoting sec_301_7701-2 proced admin regs yet the majority ignores these authorities and minimizes the check-the-box_regulations as simply rules of classification for federal_income_tax purposes see majority op pp in doing so the majority limits the phrase federal tax purposes to federal_income_tax purposes see majority op pp the majority’s interpretation is wrong for several reasons first the check-the-box_regulations do not read for federal_income_tax purposes instead the regulations are drafted broadly the check-the-box_regulations apply to the entire code see sec_7701 had the drafters of the check-the-box_regulations intended that they apply only for income_tax purposes the drafters would have used the phrase federal_income_tax purposes this phrase is used extensively throughout the regulations see eg sec_1_6050k-1 income_tax regs sec_53_4947-1 foundation excise_tax regs sec_301_6362-5 proced admin regs the drafters expressed their intent when they chose not to limit the regulations’ scope to federal_income_tax in addition the drafters could have specifically excluded gift_tax from the regulations’ scope had the drafters intended that result they did not do so when the regulations were originally drafted see t d 1997_1_cb_215 they also did not do so when the regulations were subsequently amended specifically to exclude employment and certain excise_taxes from the regulations’ scope concerning disregarded_entity status see sec_301_7701-2 and v proced admin regs t d 2007_2_cb_675 effective date tellingly the preamble to the amended regulations states that single-owner entities generally would continue to be treated as disregarded entities for other federal tax purposes after amendment see notice of proposed rulemaking fed reg date i fail to see how for other federal tax purposes means for other federal tax purposes except gift_tax purposes the check-the-box_regulations expressly tell us to treat the owner of a single-member llc as the owner of its assets sec_301_7701-3 and iv proced admin regs in addition the owner of a disregarded_entity that elects to have the entity treated as a corporation is deemed to have contributed all of the assets and liabilities of the entity to a corporation in exchange for stock sec_301_7701-3 proced admin regs similarly a single-member corporation that elects to be disregarded is treated as distributing all of its assets and liabilities to its single owner sec_301_7701-3 proced admin regs the check-the-box_regulations consistently treat single owners who choose noncorporate status for their llcs as holding the property of these disregarded entities the majority also fails to address other guidance from the commissioner that treats the owner of a single-member llc as the owner of its underlying property revrul_99_5 1999_1_cb_434 describes the federal tax consequences when a disregarded single-member llc becomes an entity with more than one owner and is classified as a partnership for federal tax purposes the ruling requires that the single owner be treated as selling an interest in each of the assets if an interest in the llc is sold id the ruling also states that if the interest is obtained through a capital_contribution the single owner is treated as having contributed all of the assets of the llc to the new partnership for an interest id in both instances the single owner is treated as the owner of the assets of the llc as required under the check-the-box_regulations the majority further ignores the commissioner’s consistent treatment of single-member llc owners as the owners of the llc’s underlying assets the commissioner has issued numerous private 3there is nothing radical about this it is essentially a limited form of piercing the corporate veil for federal tax purposes the state-law concept of piercing the corporate veil means and the regulations echo that a court will disregard the corporate entity and treat as identical the corporation and the individual or individuals owning all its stock and assets n y jur 2d business relationships sec_34 letter rulings on this issue for example the owner of a single-member llc is treated as owning the llc’s underlying assets for purposes of determining like-kind_exchange treatment on the exchange of property under sec_1031 though the owner has no state law property interest in the llc’s assets see priv ltr rul date priv ltr rul date priv ltr rul date priv ltr rul date priv ltr rul date priv ltr rul date priv ltr rul date despite the commissioner’s consistent treatment of single owners as the owners of the llcs’ underlying property the majority insists that the check-the-box_regulations do not apply to determine what property the single owner owns for federal gift_tax purposes see majority op p i know of no provision in the code that requires us to treat the term property used in sec_1031 differently for 4private letter rulings may be cited to show the practice of the commissioner see 452_us_247 ndollar_figure 369_us_672 122_tc_324 ndollar_figure 5this treatment has not been limited to like-kind_exchange situations see priv ltr rul date single member of a disregarded_entity is treated as the owner of property it receives for purposes of the exemptions under sec_514 and c priv ltr rul date a single-member llc is a qualified subchapter_s shareholder because the llc is disregarded under the regulations purposes of sec_2501 which imposes a tax on the transfer of property by gift the supreme court has already told us that the meaning of the word property in the code is a federal question and federal courts are in no way bound by state courts’ answers to similar questions involving state law 535_us_274 the majority’s reliance on what it calls the longstanding gift_tax regime to create such a difference addresses neither the plain language nor the intent of the check-the-box_regulations ii the majority invalidates the regulations for federal gift_tax purposes the majority concludes that the check-the-box_regulations do not apply for federal gift_tax purposes see majority op p i disagree i do not minimize a plain language interpretation of the regulations as merely respondent’s litigating position to do so promotes a distinction without a difference instead i interpret federal tax purposes to mean federal tax purposes including federal gift_taxes the majority in effect invalidates the check-the-box_regulations to the extent that the term federal tax purposes encompasses federal gift_tax the majority does not however provide the necessary analysis to do so how could they given that this court and the courts of appeals for the second and sixth circuits have recently blessed the regulations as eminently reasonable mcnamee v dept of the treasury f 3d pincite 484_f3d_372 6th cir see med practice solutions llc v commissioner t c __ instead the majority concludes that the commissioner cannot by regulation overrule the federal gift_tax regime as interpreted by this court and others see majority op p the majority must provide further analysis an agency may promulgate regulations that overcome the judiciary’s prior construction of a statute even an entire regime’s worth of construction unless that prior construction followed from the statute’s unambiguous terms see 545_us_967 467_us_837 an agency may change its prior interpretation of a statute to meet changing circumstances 465_us_330 it is well established that the commissioner may change an earlier interpretation of the law even if such a change is made retroactive in effect thus the majority’s reliance on the longstanding gift_tax regime before the issuance of the check-the-box_regulations is not enough to invalidate the regulations if the related statute is ambiguous the court_of_appeals for the second circuit has already held that sec_7701 is ambiguous as to the federal tax treatment of single-member llcs mcnamee v dept of the treasury supra pincite further the court concluded that the check-the-box_regulations reasonably interpret and fill gaps in an ambiguous statute and are entitled to deference under chevron u s a inc v natural res def council inc supra mcnamee v dept of the treasury supra pincite see littriello v united_states supra pincite the majority ignores this relevant second circuit precedent and concludes without discussion of any degree of deference that an entity’s classification for income_tax purposes is irrelevant to how a donor must be taxed under the federal gift_tax provisions on a transfer of an ownership_interest in the llc see majority op pp the majority misstates the issue the majority writes that while we accept that the check-the-box_regulations govern how a single-member llc will be taxed for federal tax purposes ie as an association taxed as a corporation or as a disregarded_entity we do not agree that the check-the-box_regulations apply to disregard the llc in determining how a donor must be taxed under the federal gift_tax provisions on a transfer of an ownership_interest in the llc majority op pp the check-the-box_regulations determine whether a single-member entity exists at all for federal tax purposes rather than how that entity will be taxed the majority distinguishes between the classification and the valuation of an entity but that distinction is false the gift_tax regulations provide guidance on how to value interests in a corporation a partnership and a proprietorship see sec_25_2512-2 and sec_25_2512-3 gift_tax regs they do not provide guidance on how to value an interest in a single-member llc accordingly we must first classify the entity and only then can we value its interests i submit that the ambiguity of sec_7701 extends to gift_tax valuation the majority cannot trivialize the check-the-box_regulations by dismissing them as irrelevant iii the majority’s reliance on the gift_tax regime the majority concludes that it would be manifestly incompatible with the gift_tax regime if we did not respect pierre llc for gift_tax purposes because new york law provides that a member has no interest in specific property of the llc while a membership interest in an llc is personal_property n y ltd liab co law sec_601 mckinney i disagree the check- the-box regulations provide the federal tax consequences of what is in effect an agreement between the taxpayer and the commissioner to treat an entity in a certain way for federal tax purposes despite the entity’s state law classification there is simply no llc interest left to value for federal gift_tax purposes when a single-member llc elects to be disregarded it therefore does not matter whether state law recognizes an llc as a valid entity or provides that a member has no interest in any of the specific property of the llc see sec_301_7701-1 proced admin regs the check-the-box_regulations specifically say that federal_law determines whether a single-member entity is recognized as separate from its owner id the majority dismisses relevant precedent from two federal courts of appeals addressing this conflict between state law rights of single-member llc owners and the consequences of disregarded_entity status under the check-the-box_regulations see 488_f3d_100 2d cir 484_f3d_372 6th cir the court_of_appeals for the second circuit rejected a taxpayer’s argument that he was not liable for his single-member llc’s unpaid payroll_taxes because connecticut law provided that the owner is not personally liable for the llc’s debts see mcnamee v dept of the treasury supra the court noted that while state laws of incorporation control various aspects of business relations they may affect but do not necessarily control the application of federal tax provisions id pincite quoting littriello v united_states supra pincite accordingly a single-member llc is entitled to whatever advantages state law may extend but state law cannot abrogate its owner’s federal tax_liability id the majority minimizes this relevant analysis in mcnamee and littriello the majority summarily concludes that it is not relevant because the courts did not specifically address gift_tax see majority op p the courts had no reason to address gift_tax issues that does not mean however that the courts’ analyses should be ignored both the mcnamee and littriello courts recognized that the check-the-box_regulations applied equally to the nonincome-tax issue of employment_tax liability determining an owner’s liability for employment_taxes is as far removed from determining the owner’s income_tax_liability as is determining the owner’s gift_tax liability the code imposes both federal employment_tax liability and federal gift_tax liability separate and apart from determining a taxpayer’s income_tax_liability the majority fails to recognize that the single owner’s liability for employment_taxes turns upon disregarding the llc for federal tax purposes rather than upon the identity of the taxpayer see med practice solutions llc v commissioner t c at __ slip op pincite a single-member llc and its sole member are a single_taxpayer or person to whom notice is given see also mcnamee v dept of the treasury supra pincite an entity disregarded as separate from its owner cannot be regarded as the employer littriello v united_states supra pincite recognizing a single owner as the individual who owns all the assets is liable for all debts and operates in an individual capacity despite the majority’s wish pierre llc does not exist apart from petitioner for gift_tax purposes and petitioner should be treated as holding its assets further the second and sixth circuit courts of appeals stressed that the taxpayer could have escaped personal liability for the llc’s tax debt if the taxpayer had simply elected corporate status for the single-member llc mcnamee v dept of the treasury supra pincite littriello v united_states supra pincite the same principle applies here petitioner could have elected to treat pierre llc as a corporation she did not the supreme court has repeatedly recognized that while a taxpayer is free to organize his affairs as he chooses nevertheless once having done so he must accept the tax consequences of his choice whether contemplated or not 417_us_134 i would hold petitioner to her choice finally the majority overlooks the broad scope of the gift_tax statutes in concluding that the check-the-box_regulations are manifestly incompatible with the gift_tax regime congress intended to use the term gifts in its most comprehensive sense 324_us_303 the gift_tax applies whether the gift is direct or indirect sec_2511 accordingly transfers of property by gift by whatever means effected are subject_to federal gift_tax dickman v commissioner u s pincite moreover we have used substance over form principles to get to the true nature of the gift where the substance of a gift transfer does not fit its form see 113_tc_449 affd on another issue 292_f3d_490 5th cir astleford v commissioner tcmemo_2008_128 estate of murphy v commissioner tcmemo_1990_472 we have also used the step_transaction_doctrine which has been called ‘well-established’ and ‘expressly sanctioned’ in the area of gift_tax where intra-family transactions often occur see 433_f3d_1044 8th cir quoting 489_us_726 affg tcmemo_2004_160 the majority would instead have us apply the opposite approach accepting petitioner’s own label rather than the substance of her choice despite this broad expanse of gift_taxes the majority would require congressional action before any state law property right could be disregarded for federal gift_tax purposes see majority op pp the majority cites four special valuation statutes sections to imply that congress will take action when necessary to overcome the willing buyer willing seller gift_tax valuation rule see majority op p i know of no authority however that prevents the promulgation of regulations affecting the so-called gift_tax regime iv conclusion the plain language of the regulations requires pierre llc to be disregarded as an entity separate from its owner unlike the majority i give meaning to these words i do not minimize this language by labeling it a classification a plain language interpretation of the check-the-box_regulations must prevail it is an interpretation of relevant regulations it is not manifestly incompatible with the gift_tax statutes for the foregoing reasons i respectfully dissent colvin halpern gale holmes and paris jj agree with this dissenting opinion