Valuing a 100% Interest in a Disregarded Entity

One would think that the value of a 100% interest in a disregarded entity would be the same as the net value of the assets of the disregarded entity. Such value of the 100% interest may be relevant for estate or gift tax purposes, or for charitable contribution deduction purposes for income or transfer taxes.

In Reri Holdings I v. CIR, the issue was whether an appraisal of the asset of a disregarded entity LLC was sufficient for income tax charitable deduction purposes when the charitable contribution was actually a transfer of the 100% member interest in the disregarded entity. Based on the Pierre case and other precedent, the IRS argued that the appraisal should have been of the LLC interest, and not the underlying asset. The taxpayer responded that such values should be the same, and thus there was substantial compliance in reporting and the charitable deduction should be allowed.

Reliance on Pierre and other similar cases is inappropriate, since those cases involved the transfer of partial interests in the LLC, not 100% of the LLC. In such cases, a hypothetical willing buyer would take into consideration the restrictions on the LLC interest that would apply after receipt of the partial LLC interest since he/she would be only a partial owner bound by those restrictions. Such restrictions are irrelevant when the hypothetical willing buyer owns 100% of the LLC interest since there are no internal LLC restrictions on his/her ownership that cannot be overcome by reason of that 100% ownership.

The Tax Court agreed with this distinction and found that generally the valuation of the asset of the LLC (after taking into consideration liabilities of the LLC) equates with the value of the 100% LLC interest. It did note, however, that in this case there may have been an external transfer restriction that applies to a successor owner of the LLC interest, which transfer restriction does not apply directly to the asset of the LLC. In that case, there might be a difference in value between a 100% member interest and the net value of the assets of the LLC. Thus, a separate valuation of the 100% member interest may be needed.

Conservative planners should assure that the valuations that they obtain for tax compliance purposes properly describe the interest actually being transferred, and that there are no reasons why the 100% member interest should be different than the net value of the LLC assets if that valuation of the member interest is based entirely on the net value of the LLC assets.

RERI Holdings I, LLC v. CIR, 143 TC No. 3, August 11, 2014