While I've got my nose to the tax grindstone, I note that the Seventh Circuit has affirmed a Tax Court ruling that gifts of interests in a family limited liability company (LLC) did not qualify for the gift tax annual exclusion. Estate planners will doubtlessly spin the decision, Hackl v. Commissioner, as being limited to its extreme facts -- these commentators always have a ready reason why adverse court decisions don't apply to their clients. But I'm not so sure Hackl will be so limited.

One of the arguments the taxpayers made was that the Tax Court's decision threatens to disallow the gift tax exclusion (the ability to make gifts of $11,000 per donee per year without gift tax consequences) for virtually any gift of a small interest in a family entity, such as a corporation, partnership, or LLC. The unanimous Seventh Circuit panel did not seem to have a problem with that prospect. It declared:

The Hackls protest that Treeco is set up like any other limited liability corporation and that its restrictions on the alienability of its shares are common in closely held companies. While that may be true, the fact that other companies operate this way does not mean that shares in such companies should automatically be considered present interests for purposes of the gift tax exclusion. As we have previously said, Internal Revenue Code provisions dealing with exclusions are matters of legislative grace that must be narrowly construed. See Stinson Estate, 214 F.3d at 848. The onus is on the taxpayers to show that their transfers qualify for the gift tax exclusion, a burden the Hackls have not met.