Opinion ID: 183262
Heading Depth: 1
Heading Rank: 7

Heading: Intent to Donate

Text: The Lintons aver that they did not intend to donate the interests on January 22, 2003. But Washington law does not apply a subjective-intent standard in the interpretation of legal instruments. See Hearst Commc'ns, Inc. v. Seattle Times Co., 154 Wash.2d 493, 115 P.3d 262, 267 (2005) ([W]hen interpreting contracts, the subjective intent of the parties is generally irrelevant if the intent can be determined from the actual words used.). In other words, Washington courts do not interpret what was intended to be written but what was written. Id. Washington probate law similarly follows an objective manifestation method of interpretation in the exegesis of wills, donative documents that are close cousins of gift documents. See In re Estate of Curry, 98 Wash.App. 107, 988 P.2d 505, 508 (1999) (explaining that [e]xtrinsic evidence of surrounding facts and circumstances may be admitted to explain the language of a will when uncertainty arises as to the testator's true intention. But extrinsic evidence may not be considered for the purpose of proving intention as an independent fact, or of importing into the will an intention not expressed therein. (quotations omitted)). In the absence of contrary authority, therefore, we presume that the Washington law of gifts applies an objective standard to the determination of donative intent generally, especially where a writing exists. [4] Cf. Proctor v. Forsythe, 4 Wash. App. 238, 480 P.2d 511, 513 (1971) (finding an intent to give based on the  expressed intent of the donor) (emphasis added). The gift documents, signed on January 22, 2003, provide that the Lintons hereby gift the LLC interests. The objective manifestation of the Lintons' intent to donate the LLC interests on January 22, 2003 might therefore seem plain. If that were so, then, under Washington law, all four elements of a gift would be present on January 22, 2003, and the gift of LLC interests would be complete on that date. But the story is more complex. First, the gift documents were not dated on January 22, 2003, which creates considerable objective ambiguity as to the Lintons' intent to make the donation effective on that date. More importantly, execution of a gift document, alone, is not a sufficient objective manifestation of an intent to donate. As the Restatement indicates, [t]he mere preparation of a donative document does not effect a present transfer necessary to perfect a gift. Such a writing becomes effective when the donor manifests the intention that the document is to be operative to make a present transfer. Id. at § 6.2 cmt. u. In other words, a writing, on its own, is not a sufficient objective manifestation of intent to donate at the time of the writing, or at all. Circumstances surrounding the writing must show that the writing was meant to be effective. Most often, the writing will be effective when the donor puts the document beyond retrieval by delivering the document to the donee. Id. [5] We assume this rule applies in Washington. So the execution of the gift documents on January 22, 2003 was alone not enough to make the gifts effective on that date. To know when the Lintons objectively manifested the intent to donate the LLC interests, we must know when they put the gift documents beyond retrieval or otherwise objectively manifested an intent to make them effective. As we explain, we do not see evidence of when they did so in the record before us, so we reverse and remand for such proceedings as the district court finds necessary to make that determination. After the signing on January 22, 2009, the gift documents remained with the Lintons' attorney, Richard Hack. That Hack retained the documents might indicate there was no intent to donate on January 22, because Hack, the donors' agent, was to await instructions from his clients as to when to make the donation effective. And, indeed, the gift documents provide that the Lintons appoint Richard Hack, as attorney to transfer the percentage interests on the books of the Company. [6] Moreover, Hack testified that he later came to believe that his client would have wanted the documents to be dated January 31, suggesting that the Lintons did not intend for the transfer to be effective until January 31 and that Hack, acting as the Lintons' agent, made them effective on that date. But that conclusion is at odds with the facts before us. At their January 22 meeting, the Lintons did not give Hack instructions as to when to make the gifts effective. Hack testified When [William Linton] was at my office [on January 22], he didn't know [when he wanted to make the gifts effective], and he wanted to work that out with [his accountant]. William Linton appears, in fact, never to have given Hack any instructions as to when to make the gifts effective. Instead, Hack reconstructed Linton's intent later, apparently in late March or early April, based on documents provided him by the Lintons' accountant. Hack testified: I didn't circle back with Bill and grab him by the shoulders and say, `Hey, Bill, is this the date and is this really what you want to do?' We left that open. No, I didn't do that at all. I used the accountant's data to prepare the gift tax return. Thus, because the Lintons never instructed Hack to make the gifts effective on January 31, they cannot plausibly claim that they left the documents with Hack with instructions to make the gifts effective on January 31. More importantly, even if the Lintons had given Hack such instructions, Hack appears to have taken no action on January 31 that might have made the gifts effective. January 31 cannot, therefore, be the date on which the gifts became effective, at least not for purposes of summary judgment on the record currently before the Court. If the Restatement represents Washington law in this regard, and we presume it does, the current record suggests two possibilities as to the date the gifts became effective: Either James Linton, the trustee (and, therefore, for legal purposes, the donee), left the meeting on January 22, 2003, with copies of the (undated) gift documents, and his doing so was a sufficient objective manifestation that the gift documents were intended to be effective immediately. Or Bill and Stacy Linton appointed Hack to be their agent with the power to make the gift documents effective at some later date, that later date occurring whenever Hack finalized the gift documents (by dating them, albeit incorrectly) and made some objective manifestation that the gift was effective (such as by sending a copy of the documents to James Linton). On this second account, the gifts were likely effective, as a matter of Washington law, in March or April, around the time Hack put together the minute book. In sum, the determinative question as to when the gift of the LLC interests occurred is the first date at which objective circumstances existed that would suggest the gift documents were meant to be operative (and all three other elements of a gift existed under Washington law). The relevant objective circumstance could be, but is not necessarily, when the trustee James Linton was given a copy of the signed gift document, because on that date the donor put[] the document beyond retrieval, RESTATEMENT, § 6.2 cmt. u, thereby objectively manifesting an intent to make the gift documents operative. Because the record is subject to contrary inferences as to when that, or some other event objectively manifesting the Lintons' intent to make the gift documents operative, first occurred, the government is not entitled to summary judgment on this pivotal point. We therefore remand to the district court for such proceedings as it deems necessary to resolve this question. [7] We recognize the possibility that the district court might determine that there was no one event which independently constituted an objective manifestation of the Lintons' intent to make the gift documents operative, and instead decide that that intent was objectively manifested by the gradual accretion of events, including the signing of the undated gift documents, and various actions the Lintons took on the assumption that the LLC interests already had been transferred. But such a lack of one independently sufficient event should not matter, for present purposes, so as long as the district court can determine that the accumulation of objective circumstances was or was not sufficiently complete before the LLC was funded.
The Lintons contend that they are entitled to summary judgment because even if the government is right about timing, no gift would have occurred and so they would therefore have no gift tax liability. Their argument is that if the transactions occurred in the order the government contends (i.e., first, the LLC interests were transferred to the trusts, and then the assets were transferred to the LLC), then no gift to the trusts occurred at all. The Lintons rely on a provision of the LLC agreement, providing that A Member's Capital Account shall be increased by the Member's capital contributions to the Company. . . . If the Lintons gifted assets to the company after they had gifted the percentage interests in the company to their children, the gifted assets would, by virtue of this provision, be credited to their own (i.e., the parents') capital accounts. If only the donors' capital accounts were enhanced by the transfer of assets to the LLC and there was no subsequent transfer from the donors' capital accounts to the children's capital accounts, then there was no gift for tax purposes. See Shepherd v. Comm'r, 115 T.C. at 389 (Obviously, not every capital contribution to a partnership results in a gift to the other partners, particularly where the contributing partner's capital account is increased by the amount of his contribution, thus entitling him to recoup the same amount upon liquidation of the partnership.). By contrast, if the transactions had occurred in the order the Lintons intended, then by virtue of the IRC § 704 capital account rules incorporated in the LLC agreement, the transfer of the LLC interests would have effected a pro rata transfer of the donors' capital accounts to the donees' capital accounts. See 26 C.F.R. § 1.704-1(b)(2)(iv)( l ). The Lintons' failed-gift theory is clever; unfortunately for them, it is too clever. The membership ledger of the LLC shows that the capital accounts of the children's trusts were, in fact, increased, as does the LLC's informational return that its accountants prepared and filed with the IRS in March 2004. The Lintons contend that if we conclude the government is right about the timing of the transactions, these documents were prepared on a mistaken assumption (i.e., that the LLC interests were transferred after the assets, and, therefore, by virtue of the IRC § 704 capital account rules, included a pro rata transfer of the assets from the donors' capital accounts to the donees') and should be ignored. On their theory, the informational return and the ledger would only reflect what everyone believed to be the state of the capital accounts, not the actual state of the capital accounts. But tax law is concerned with the realities of a situation and not with the formalities of title. Estate of Fortunato v. Comm'r, 99 T.C.M. (CCH) 1427, 1433 (2010) (quotation omitted); cf. Frank Lyon Co., 435 U.S. at 572, 98 S.Ct. 1291 ([T]axation is not so much concerned with the refinements of title as it is with . . . the actual benefit for which the tax is paid.); Pahl, 150 F.3d at 1127-1129. The membership ledger and the LLC's informational return together reflect the substantive reality of the situation: All parties involved regarded the trusts' capital accounts as having been enhanced. In other words, all concerned parties acted as if William and Stacy Linton had so parted with dominion and control [over the assets] as to leave in [them] no power to change [their] disposition. 26 C.F.R. § 25.2511-2(b). The Lintons' failed-gift argument, by contrast, relies on the formal technicalities of state law. (Even though it incorporates the IRC § 704 capital account rules, the LLC agreement is a contract, which, like the background interests in property that it regulates, is governed by state law.) The failed-gift argument is formal because it relies on the technicalities of title (i.e., whether a state court presented with the issue would hold that the capital accounts were legally enhanced by the gifting of the LLC interests), but ignores the substantive reality that all concerned treated the accounts as enhanced and so, for all effective purposes, they were so. In other words, the Lintons may be right that, if the government is correct about the timing of the transactions, the ledger and informational return may have technically been in error, because the transfer of the assets to the LLC would not have automatically enhanced the trusts' capital accounts, and there was no subsequent transfer from the parents' capital accounts to those of the trusts. But this nicety of state law is too fine to have federal tax consequences, especially given federal tax law's heightened suspicion of state law's formal technicalities when all the parties involved have a familial relationship. See Brown v. United States, 329 F.3d 664, 673 (9th Cir.2003) (holding that where parties to a transaction have a familial relationship, heightened scrutiny of its substance is appropriate); Kornfeld v. Comm'r, 137 F.3d 1231, 1235 (10th Cir. 1998) (holding that where parties to the transactions in question are related, the level of skepticism as to the form of the transaction is heightened). Absent interest from the Internal Revenue Service, the only conceivable way that the substantive realities (i.e., that all concerned treated the capital accounts as enhanced) would be realigned with the short-term formal technicalities of state law (i.e., the absence of adequate paperwork making the transfer to the children's capital accounts) would be if one of the parties concerned became aware of the discrepancy and decided to pursue litigation. Given that all parties involved in the transactions were members of the same family and their interests in the transactions were aligned, cf. Brown, 329 F.3d at 673 (disregarding legal form in part because the donee was unlikely to flout the taxpayer's intention), that possibility is so remote as not to affect federal tax law's assessment of the transactions' substantive realities. [8] We therefore hold that the Lintons are not entitled to summary judgment on their failed gift theory.
The district court determined that, even if the sequence of events was as the Lintons contend, the gifts would still be characterized as gifts of cash, securities, and real property to the children's trusts under the step transaction doctrine. The step transaction doctrine collapses `formally distinct steps in an integrated transaction' in order to assess federal tax liability on the basis of a `realistic view of the entire transaction.' Brown, 329 F.3d at 671 (quoting Comm'r v. Clark, 489 U.S. 726, 738, 109 S.Ct. 1455, 103 L.Ed.2d 753 (1989)). [9] Whether a court's application of the step transaction doctrine to undisputed facts is an issue of fact or law is a question over which we have struggled. Brown, 329 F.3d at 670. As stated previously, we ordinarily review grants of summary judgment de novo. The government contends, however, that the application of the step transaction doctrine to undisputed facts is a question of fact to be reviewed under the clearly erroneous standard. We need not resolve this dispute, as we would reverse the district court under either standard of review. The step transaction doctrine treats multiple transactions as a single integrated transaction for tax purposes if all of the elements of at least one of three tests are satisfied: (1) the end result test, (2) the interdependence test, or (3) the binding commitment test. True v. United States, 190 F.3d 1165, 1174-75 (10th Cir. 1999). Although the doctrine considers the substance over the form of the transactions, `anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose the pattern which will best pay the Treasury.' Brown, 329 F.3d at 671 (quoting Grove v. Comm'r, 490 F.2d 241, 242 (2d Cir.1973)). The step transaction doctrine has been described as combin[ing] a series of individually meaningless steps into a single transaction. Esmark, Inc. & Affiliated Cos. v. Comm'r, 90 T.C. 171, 195 (1988). We note as a threshold matter that the government has pointed to no meaningless or unnecessary step that should be ignored. Nonetheless, examining the step transaction doctrine in light of the three applicable tests, we conclude that its application does not entitle the government to summary judgment. The end result test asks whether a series of steps was undertaken to reach a particular result, and, if so, treats the steps as one. True, 190 F.3d at 1175. Under this test, a taxpayer's subjective intent is especially relevant, and we ask whether the taxpayer intended to reach a particular result by structuring a series of transactions in a certain way. Id. The result sought by the Lintons is consistent with the tax treatment that they seek: The Lintons wanted to convey to their children LLC interests, without giving them management control over the LLC or ownership of the underlying assets. Ample evidence supports this intention. The end result sought and achieved was the gifting of LLC interests. If the transactions could somehow be merged, the Lintons would still prevail, because the end result would be that their gifts of LLC interests would be taxed as they contend. The interdependence test asks whether on a reasonable interpretation of objective facts the steps were so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517, 1523 (10th Cir.1991) (quotation marks omitted). Under this test, it may be useful to compare the transactions in question with those we might usually expect to occur in otherwise bona fide business settings. True, 190 F.3d at 1176. The placing of assets into a limited liability entity such as the LLC is an ordinary and objectively reasonable business activity that makes sense with or without any subsequent gift. In Holman v. Commissioner, the Tax Court stated that the creation of a limited partnership was not necessarily fruitless even if done in anticipation of gifting partnership interests to the taxpayers' children. 130 T.C. 170, 188, 191 (2008) (holding the creation of the limited partnership and the subsequent transfer of partnership interests should not be treated as a single transaction). The Lintons' creation and funding of the LLC enabled them to specify the terms of the LLC and contribute the desired amount and type of capital to itreasonable and ordinary business activities. These facts do not meet the requirements of the interdependence test. The binding commitment test asks whether, at the time the first step of a transaction was entered, there was a binding commitment to take the later steps. Comm'r v. Gordon, 391 U.S. 83, 96, 88 S.Ct. 1517, 20 L.Ed.2d 448 (1968). The test only applies to transactions spanning several years. True, 190 F.3d at 1175 n. 8; Associated Wholesale Grocers, 927 F.2d at 1522 n. 6; McDonald's Rests. of Illinois, Inc. v. Comm'r, 688 F.2d 520, 525 (7th Cir.1982) (rejecting application of the test for transactions spanning six months). Here, the Lintons' transactions took place over the course of no more than a few months, and arguably a few weeks. The binding commitment test is inapplicable. The government is therefore not entitled to summary judgment based on an application of the step transaction doctrine.