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of an instrument adopting the terms
While one might conclude that a transfer to and provisions of the operating agree-
ment. The court found that nothing in
a spouse will not be respected if there is a the record denoted that Mrs. Smaldino
subsequent transfer by the donee spouse executed any instrument, nor would she
have acquired more than an assignee’s
of that property by gift, one should further interest in the LLC under the terms of
consider reasons why the transfers were not the operating agreement.
The Tax Court also noted that the
respected in this case. evidence did not indicate that Mr. Smal-
dino, as manager of the LLC and trustee
of the revocable trust, ever gave express
$5.2 million). Mrs. Smaldino, in turn, the one currently before the Tax Court. or implied consent for Mrs. Smaldino
transferred these interests to the trust He further argued that the transfer to to be a member of the LLC pursuant to
the next day. In return for this accom- his wife should be respected under Sec. the operating agreement’s restrictions.
modation, Mr. Smaldino promised 2523(a), which exempts interspousal The record, in fact, reflected that one
Mrs. Smaldino that she would be given transfers from gift tax. day after purportedly transferring his
a larger share of assets from his revo- The Tax Court, however, found that LLC class B membership interests to his
cable trust. Sec. 2523(a) applies only in the situation wife, Mr. Smaldino executed an amend-
The Smaldinos each reported these where the donor transfers an interest in ment to the LLC’s operating agreement
gifts on their respective 2013 gift tax property to his or her spouse. The court of which the LLC’s “sole member” was
returns. The IRS determined that Mr. concluded that Mr. Smaldino’s actions noted as the revocable trust. The court
Smaldino had made a taxable gift to were ineffective to transfer membership further found that a provision of the op-
the trust of 49% of the LLC class B interests in the LLC to Mrs. Smaldino. erating agreement that defined class A
membership interests, which included The court observed that Mr. Smaldino’s voting units and class B nonvoting units
the 41% interest he had given to Mrs. execution of a certificate of assign- was never amended to show that Mrs.
Smaldino, and issued Mr. Smaldino a ment of the LLC class B membership Smaldino held any of the LLC’s class B
notice of deficiency. interests to Mrs. Smaldino, although a nonvoting units or any other member
At trial, the IRS argued that, under relevant factor to be considered in these interest. The operating agreement,
the doctrine of substance over form, Mr. circumstances, was not a controlling however, was amended to show that as
Smaldino’s alleged transfer of the LLC factor, particularly when the economic of April 15, 2013, the trust held a 49%
class B member interests to Mrs. Smal- substance behind the execution of the member interest in the LLC, which was
dino and her alleged retransfer of these certificate runs contrary to the content made up of two blocks of LLC class B
same interests to the trust one day later of the documents. nonvoting units and to show Mr. Smal-
were part of a prearranged plan among The Tax Court went on to analyze dino as having a 51% member interest
all parties involved to effectuate the the LLC’s operating agreement, which in the LLC. Mr. Smaldino’s interest in
transfer of the ownership of the LLC it found distinguished between the as- the LLC was made up of two blocks
from Mr. Smaldino to the trust. Thus, signment of economic rights in the LLC consisting of class B nonvoting units and
the two purported transfers were an and the transfer of membership interests. class A voting units.
indirect gift from Mr. Smaldino to the In addition, the court found that Mr. The Tax Court also found it trou-
trust. The IRS cited case law in which Smaldino’s purported transfer of inter- bling that the amendment to the LLC’s
the courts used substance-over-form ests to Mrs. Smaldino was not among operating agreement was undated, as
principles to recharacterize property the types of transfers allowed under the opposed to the rest of the operating
transfers for related parties as indirect LLC’s operating agreement. Under the agreement amendments in the record.
gifts.11 agreement, the assignee of a member- The certificates of assignment from Mr.
Mr. Smaldino argued that those cases ship interest could become a “substituted Smaldino to Mrs. Smaldino were also
were not controlling, since none of them member” only if specific conditions were undated, even though they purported
involved an interspousal transfer like met, including the assignee’s execution to be effective April 14, 2013. The

11. Heyen, 945 F.2d 359 (10th Cir. 1991); Estate of Bies, T.C. Memo. 2000-338; Estate of Cidulka, T.C. Memo. 1996-149.

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