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THE GIFT OF AN LLC INTEREST GENERally does not result in the recognition of gain or loss by the donor or the donee. A gift is, however, subject to gift tax unless it qualifies for the annual gift tax exclusion or reduces the donor's applicable credit amount.
Practitioners should note that if the management of the LLC has unfettered discretion to make or withhold distributions, any gift of an interest in the LLC may be treated as a gift of a future interest not qualifying for the annual gift tax exclusion (TAM 9751003). In Hackl, 335 F.3d 664 (7th Cir. 2003), the court found that where the donee has no distribution right and no right of withdrawal, the gift of an LLC interest is a gift of a future interest not qualifying for the annual gift tax exclusion.
This outcome can be avoided by giving the manager/managing member the authority to accumulate the funds as he or she may deem appropriate based on his or her reasonable business judgment. This problem may also be avoided by requiring cash distributions to pay the taxes created by operations or by providing a right of first refusal on sale of the interest.
If gift tax is imposed, it is calculated on the fair market value (FMV) of the gifted property less the amount of debt of which the donor is relieved (no debt relief occurs if the interest gifted is in an LLC taxed as a corporation). In the context of a gift of an LLC interest, the FMV...