FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
WILLIAM A. LINTON; STACY A.
LINTON, No. 09-35681
Plaintiffs-Appellants,
v. D.C. No.
2:08-cv-00227-TSZ
UNITED STATES OF AMERICA, OPINION
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of Washington
Thomas S. Zilly, Senior District Judge, Presiding
Argued and Submitted
August 4, 2010—Seattle, Washington
Filed January 21, 2011
Before: John T. Noonan, David R. Thompson and
Marsha S. Berzon, Circuit Judges.
Per Curiam Opinion
1217
LINTON v. UNITED STATES 1221
COUNSEL
Cory L. Johnson, Seattle, Washington, for the appellants.
Jonathan S. Cohen, Department of Justice, Washington, D.C.,
for the appellee.
1222 LINTON v. UNITED STATES
OPINION
PER CURIAM:
Taxpayers William A. Linton and Stacy A. Linton appeal
the district court’s grant of summary judgment in favor of the
United States on their claim for a refund of 2003 federal gift
taxes. The Lintons contend that they gifted interests in a lim-
ited liability company (“LLC”); the government contends that
they gifted cash, securities, and real property. We have juris-
diction under 28 U.S.C. § 1291, and we reverse and remand
for further proceedings.
The parties have assumed that in determining the character
of the Lintons’ gifts, the sequencing of two transactions is
“critical,” Senda v. Comm’r, 433 F.3d 1044, 1046 (8th Cir.
2006), and we do so too, without deciding whether that is
always so in cases of this ilk. The transactions at issue are: (1)
the contribution of cash, securities, and real property to the
limited liability company, and (2) the transfer of LLC inter-
ests to the Lintons’ children’s trusts. If done in that order (and
with some lapse of time between the transactions), as the Lin-
tons contend occurred here, the gifts would ordinarily be char-
acterized as gifts of LLC interests, and the value of those LLC
interests might be discountable for tax purposes. If, however,
the contributions to the LLC occurred after the transfer of
LLC interests to the children’s trusts, the gifts would ordinar-
ily be characterized as indirect gifts of the particular contrib-
uted assets and would not be discountable. See id.
BACKGROUND
William A. Linton formed WLFB Investments, LLC
(“WLFB”), a Washington limited liability company, in
November 2002. On January 22, 2003, William and Stacy A.
Linton met with attorney Richard Hack to sign a series of
documents. At the meeting, William gifted half of the per-
LINTON v. UNITED STATES 1223
centage interests in WLFB to Stacy. Also, William and/or
Stacy signed and dated the following documents:
• Quit Claim Deed: signed by William and con-
veying a parcel of his separate property real
estate to WLFB. The parties agree the quit claim
deed was effective on January 22.
• Assignment of Assets: signed by William as
assignor and by both William and Stacy as
assignees on behalf of the LLC.
• Letters: signed by William and authorizing the
transfer of securities and cash to WLFB. The par-
ties disagree as to when the transfers of securities
and cash were effected.1
At the same meeting with attorney Hack, William, Stacy,
and William’s brother James Linton, signed, but left undated,
several other documents:
• Trust Agreements (four total—one for each
child): signed by William and Stacy as grantors
and by James as trustee; forming and apparently
funding irrevocable trusts for the children.
• Gift Documents (eight total—one each from
William or Stacy to each trust): signed by Wil-
liam or Stacy as assignor and by James as trustee,
1
U.S. Bancorp Piper Jaffray, Inc., apparently received William’s letter
on January 24 and made the transfers between January 24 and 31. RBC
Dain Rauscher, Inc., appears to have made the transfers between January
24 and 29. The parties dispute whether the transfers were legally com-
pleted on those dates or on January 22, when the general “Assignment of
Assets” was signed. We need not resolve this dispute. As we conclude that
neither party has established when the LLC interests were gifted, neither
party is entitled to summary judgment on the present record. Whether the
precise date of the funding matters will depend on the gifting date.
1224 LINTON v. UNITED STATES
gifting 11.25 percentage interests in WLFB to
each respective trust.
Two or three months later, attorney Hack assembled these
key documents. For all undated documents, he filled in the
missing date as January 22, 2003. In his deposition, Hack
stated this insertion was erroneous, and that these documents
should have been dated January 31, 2003. William agrees that
January 31 was the correct date. This testimony is consistent
with that of Caryl Thorp, an accountant with Moss Adams
LLP, who advised the Lintons on the ordering of the transac-
tions.
Some of the subsequent reporting and documentation of the
transactions also supports the Lintons’ alleged sequence of
events. First, WLFB’s federal partnership income tax return
for 2003, prepared by Moss Adams, shows the contributions
as initially being credited equally to William’s and Stacy’s
individual capital accounts in the limited liability company.
The return then shows capital transferred from their individual
accounts along with a commensurate increase in the capital
accounts for the children’s trusts. Second, William’s and
Stacy’s individual federal gift tax returns for 2003, prepared
by attorney Hack, describe the gifts as gifts of percentage
interests in “WLBF [sic]” and show the date of the gifts as
January 31, 2003. Third, WLFB’s “Membership Interest Led-
ger,” prepared by attorney Hack’s office, shows, in the first
row, that William owned 100% of WLFB upon contribution
of the real estate and portfolio assets. The first row also shows
William’s transfer of 50% of his interest in the LLC to Stacy.
Subsequent rows show their transfers of percentage interests
in the LLC to the children’s trusts. However, all dates for all
Ledger rows are blank. Fourth, a share valuation report, pre-
pared by Moss Adams, states that percentage interests in the
LLC were transferred from the Lintons to the children’s trusts
on January 31.
LINTON v. UNITED STATES 1225
In their gift tax returns for 2003, the Lintons characterized
their gifts to the children’s trusts solely as gifts of WLFB per-
centage interests. The Lintons determined the gifts were
worth only 47% of the value of the underlying capital, due to
the LLC’s restrictions on ownership and control of the LLC
interests. The Internal Revenue Service (“IRS”) rejected the
application of the 47% discount, arguing that: (1) the Lintons
made indirect gifts of cash, securities, and real property to the
children’s trusts, or (2) the Lintons’ gifts should be treated as
gifts of cash, securities, and real property under the step trans-
action doctrine.2 Prior to formal assessment by the IRS, Wil-
liam and Stacy each made an advance payment of the claimed
tax deficiency and filed suit in the district court seeking a
refund of gift taxes paid.
Upon cross-motions, the district court granted the govern-
ment’s motion for summary judgment and denied the Lintons’
motion for partial summary judgment on the indirect gift
issue. Linton v. United States, 638 F. Supp. 2d 1277 (W.D.
Wash. 2009). The district court relied on express language in
the Trust Agreements and Gift Documents to determine the
children’s trusts were created and the gifts of the LLC inter-
ests were made to those trusts on January 22, 2003. Id. at
1286-87. The court also determined the contributions of cash,
securities and real property were made to the LLC either
simultaneously with or after the gifts of the LLC interests to
the children’s trusts. Id. at 1287. Thus, the district court con-
cluded, “the Lintons’ transfers of real estate, cash, and securi-
ties enhanced the LLC interests held by the children’s Trusts,
2
The government also challenged the Lintons’ valuation of the gifts. In
discounting the value of the gifts by 47%, the Lintons relied on a valuation
report prepared by Moss Adams. In that report, Moss Adams determined
the LLC interests were less valuable than the corresponding capital
accounts because the LLC agreement restricted the transfer of the interests
outside the family and reserved all “authority or power to act” to the
“Managers”—William and Stacy Linton. The valuation challenge is not at
issue on this appeal.
1226 LINTON v. UNITED STATES
thereby constituting indirect gifts to the Trusts of pro rata
shares of the assets conveyed to the LLC.” Id.
The district court also determined, in the alternative, that
even if the Lintons established that the cash, securities and
real property were contributed to the LLC before the gifts of
the LLC interests to the children’s trusts, the Lintons “never-
theless made indirect gifts to their children’s Trusts under the
step transaction doctrine.” Id. In arriving at this conclusion,
the court considered “three alternative tests: (i) the binding
commitment test; (ii) the end result test; and (iii) the interde-
pendence test,” and determined that regardless of which test
was used, the step transaction doctrine applied. Id. at 1288
(quotation marks omitted). The district court noted that the
Lintons made no affirmative decision to delay the gifts, and
no evidence suggested the trust res was exposed to real eco-
nomic risk during the alleged interim between the contribu-
tions to the LLC and the gifts of the LLC interests to the
children’s trusts. Id. at 1290.
STANDARD OF REVIEW
We review a grant of summary judgment de novo. Univer-
sal Health Servs., Inc. v. Thompson, 363 F.3d 1013, 1019 (9th
Cir. 2004). We view the evidence in the light most favorable
to the nonmoving party, determining “whether there are any
genuine issues of material fact and whether the district court
correctly applied the relevant substantive law.” Id.
DISCUSSION
I
[1] A gift tax is imposed on a donor for a “transfer of prop-
erty by gift.” 26 U.S.C. § 2501(a)(1). The tax applies
“whether the gift is direct or indirect.” 26 U.S.C. § 2511(a).
The parties call on us to determine when the Lintons
donated the LLC interests to their children’s trusts: Did they
LINTON v. UNITED STATES 1227
do so before they funded the LLC (so the Lintons would
potentially be liable for the full value of the assets conferred,
as an indirect gift, to their children), or was it after they
funded the LLC (so the Lintons would be entitled to market-
ability and minority discounts on the assets transferred)? The
assets were transferred to the LLC at some date or dates
between January 22 and January 31.
[2] A gift is complete for federal tax purposes when “the
donor has so parted with dominion and control as to leave in
him no power to change its disposition . . . .” 26 C.F.R.
§ 25.2511-2(b); see also Smith v. Shaughnessy, 318 U.S. 176,
181 (1943) (“The essence of a [taxable] gift by trust is the
abandonment of control over the property put in trust.”). The
state law of gifts informs our analysis of whether and when
the donor has parted with dominion and control in a manner
adequate to give rise to federal tax liability. See Jones v.
Comm’r, 129 T.C. 146, 150 (2007) (“In order to make a valid
gift for Federal tax purposes, a transfer must at least effect a
valid gift under the applicable State law.”); cf. United States
v. Nat’l Bank of Commerce, 472 U.S. 719, 722 (1985) (“[I]n
the application of a federal revenue act, state law controls in
determining the nature of the legal interest which the taxpayer
had in the property.” (quotation omitted)); Aquilino v. United
States, 363 U.S. 509, 514 n.3 (1960); Shepherd v. Comm’r,
115 T.C. 376, 384 (2000), aff’d 283 F.3d 1258 (11th Cir.
2002) (“look[ing] to applicable State law . . . to determine
what property rights are conveyed”). This conclusion follows
from the general principle that federal tax law “creates no
property rights but merely attaches consequences, federally
defined, to rights created under state law.” Nat’l Bank of
Commerce, 472 U.S. at 722 (quotation omitted); Morgan v.
Comm’r, 309 U.S. 78, 80 (1940) (“State law creates legal
interests and rights. The federal revenue acts designate what
interests or rights, so created, shall be taxed.”); cf. United
States v. Mitchell, 403 U.S. 190, 197 (1971) (explaining that
1228 LINTON v. UNITED STATES
“federal income tax liability follows ownership. . . . In the
determination of ownership, state law controls.”).3
[3] Under Washington law, “the elements of a completed
gift are (1) an intention of the donor to give; (2) a subject mat-
ter capable of delivery; (3) a delivery; and (4) acceptance by
the donee.” In re Marriage of Zier, 147 P.3d 624, 628 (Wash.
Ct. App. 2006). The transfer of the LLC interests occurred
when all four elements of a completed gift first existed simul-
taneously. We must determine when that was. We discuss
each element individually, but we defer discussion of the first
element, intention to give, until the end, as here it is both the
decisive element and the most difficult to determine.
3
The state law of gifts is not determinative of whether a transaction is
taxable as a gift for purposes of the federal gift tax or of when a transac-
tion becomes sufficiently complete to be so taxable, though it necessarily
informs federal tax law’s determination of those questions: State law pro-
vides the shape to the transaction which, depending on the transaction’s
contours, federal law then may characterize as giving rise to gift tax liabil-
ity. See Pahl v. Comm’r, 150 F.3d 1124, 1128 (9th Cir. 1998) (holding
that “we look to federal law to determine what interest creates tax liability.
We look, however, to state law to determine whether the taxpayer has the
requisite interest.”); cf. Morgan, 309 U.S. at 81 (“If it is found in a given
case that an interest or right created by local law was the object intended
to be taxed, the federal law must prevail no matter what name is given to
the interest or right by state law.”). Thus, for instance, while donative
intent may be relevant to the state law question of whether a transfer
occurred by gift, by contract, or not at all, cf. Buckerfield’s Ltd. v. B.C.
Goose & Duck Farm Ltd., 511 P.2d 1360, 1363 (Wash. Ct. App. 1973),
if a transfer did occur, donative intent is irrelevant to whether the federal
gift tax applies. See 26 C.F.R. § 25.2511-1(g)(1) (whether the gift tax
applies depends “on the objective facts of the transfer and the circum-
stances under which [the gift] is made, rather than on the subjective
motives of the donor.”); Dickman v. Comm’r, 465 U.S. 330, 333 (1984)
(“The statutory language of the federal gift tax provisions purports to
reach any gratuitous transfer of any interest in property.” (emphasis
added)); cf. Nat’l Bank of Commerce, 472 U.S. at 722 (“Once it has been
determined that state law creates sufficient interests in the taxpayer to sat-
isfy the requirements of the statute, state law is inoperative, and the tax
consequences thenceforth are dictated by federal law.” (quotation omit-
ted)).
LINTON v. UNITED STATES 1229
a) Subject matter capable of delivery
[4] Subject matter capable of delivery (here, interests in
the LLC) existed since the creation of the LLC in November
2002. This element, therefore, existed at all times relevant to
the Lintons’ January 2003 transactions.
b) Delivery
“[O]nly such delivery is required as the nature of the thing
given and the circumstances under which it is given will per-
mit, and so it is generally held the delivery may be manual,
constructive or symbolic. . . . Whether what was done was
sufficient to constitute a delivery depends on the nature of the
property and the attendant circumstances.” Marriage of Zier,
147 P.3d at 628.
[5] Unlike a precious gem or the keys to a vault, LLC
interests do not lend themselves to manual delivery. Instead,
they are delivered through the execution of papers. As a
result, while one might distinguish the manual delivery of a
gem from a prior or subsequent transfer of title to the gem, it
is somewhat artificial to separate the “delivery” of an LLC
interest from the intention to donate it. Cf. id. at 629 (delivery
of corporation’s stock effected, even where stock certificates
were not manually delivered to donee); Henderson v. Tagg,
412 P.2d 112, 116 (Wash. 1966) (same). We suspect, there-
fore, that the Washington law of gifts would collapse its anal-
ysis of the delivery element of an alleged gift of LLC interests
into its analysis of the intent to donate.
[6] In the alternative, the element of delivery was at least
present no later than the intent to donate. On January 22,
2003, the taxpayers signed two kinds of documents: one, the
gift documents stating that each taxpayer “hereby gifts to the
[relevant] Trust . . . a total of 11.25 percentage interests in
WLFB Investments, LLC,” and another, the trust agreements,
stating “at the time of signing this Agreement, the Grantors
1230 LINTON v. UNITED STATES
have transferred percentage interests in the WLFB Invest-
ments, LLC . . . to the Trustee for the Trust.” These docu-
ments were signed in the presence of the trustee, James
Linton, the legal representative of the trust, to whom delivery
to the trust would need to be made. On this alternative
account, the element of delivery was present on January 22,
2003.
It is true that the gift documents and trust agreements were
left undated on January 22, 2003. Washington law might con-
sider the blank space left for the date as creating ambiguity as
to whether a delivery occurred on January 22, 2003, espe-
cially if it determined the delivery of an LLC interest by look-
ing for an objective manifestation of an intent to deliver. If
that were so, then, the inquiries into the delivery and the
intent to donate elements of a gift would, as intimated at the
outset, be one and the same here. Donation and delivery of an
abstract equity interest are hard to distinguish, and, as we later
explain, Washington law would also look to an objective
manifestation of the intent to donate to determine that element
of a gift. In any case, on either interpretation of what Wash-
ington law requires for delivery, that element of a gift was
present no later than the element of intent to donate.
c) Acceptance
[7] There is little Washington case law on what constitutes
“acceptance” of a gift. This dearth of cases is, perhaps, unsur-
prising, given that the plaintiffs in most disputes over gifts are
the alleged donees, so acceptance is not contested. In any
case, “acceptance is presumed, subject to the donee’s right to
refuse or disclaim,” RESTATEMENT (THIRD) OF PROP. (WILLS &
DON. TRANSFERS) § 6.1(b) (2003), and neither party has
directed the court to any evidence that the trustee disclaimed
the LLC interests on January 22, 2003, or at any later date.
Thus, whether a gift of LLC interests occurred on January 22,
2003 depends entirely on the presence or absence of the
remaining element of a gift: the intent to donate.
LINTON v. UNITED STATES 1231
d) Intent to Donate
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.,
115 P.3d 262, 267 (Wash. 2005) (“[W]hen interpreting con-
tracts, the subjective intent of the parties is generally irrele-
vant 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 mani-
festation” method of interpretation in the exegesis of wills,
donative documents that are close cousins of gift documents.
See In re Estate of Curry, 988 P.2d 505, 508 (Wash. Ct. App.
1999) (explaining that “[e]xtrinsic evidence of surrounding
facts and circumstances may be admitted to explain the lan-
guage 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, 480 P.2d 511,
4
We acknowledge that the Restatement does make subjective intent the
relevant standard for the interpretation of gift documents. See RESTATEMENT
OF PROP. (THIRD): WILLS AND OTHER DONATIVE TRANSFERS § 10.1 (2003)
(“The controlling consideration in determining the meaning of a donative
document is the donor’s intention. The donor’s intention is given effect to
the maximum extent allowed by law.”); id. at § 10.2 (“In seeking to deter-
mine the donor’s intention, all relevant evidence, whether direct or cir-
cumstantial, may be considered, including the text of the donative
document and relevant extrinsic evidence.”). But Washington courts have
not adopted this rule. They disregard it in interpreting wills, see Curry,
988 P.2d at 507-08, even though the Restatement applies the rule to all
donative documents, including wills. We see no reason to think Washing-
ton courts would follow the Restatement on this point with respect to some
donative documents, but not others.
1232 LINTON v. UNITED STATES
513 (Wash. Ct. App. 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 inter-
ests 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.
[8] But the story is more complex. First, the gift docu-
ments were not dated on January 22, 2003, which creates con-
siderable 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 objec-
tive 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.
[9] 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
5
The Restatement provides:
The delivery of the document by the donor to the donee is an
act manifesting that the donor intends the document to be pres-
ently operative, unless there is evidence that the delivery was
made for some other purpose. If, for example, the purpose of the
delivery was to allow the donee or the donee’s representative to
inspect the document to see if any portion of it should be
rephrased, the delivery would lack its normal significance.
LINTON v. UNITED STATES 1233
Washington. So the execution of the gift documents on Janu-
ary 22, 2003 was alone not enough to make the gifts effective
on that date. To know when the Lintons objectively mani-
fested the intent to donate the LLC interests, we must know
when they put the gift documents “beyond retrieval” or other-
wise 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 Compa-
ny.”6 Moreover, Hack testified that he later came to believe
Delivery of an inter vivos donative document occurs when the
donor puts the document beyond retrieval. . . .
A delivery of the document by the donor to someone other
than the donee is a manifestation that the document is presently
operative, unless the circumstances indicate otherwise. . . .
A manifestation that the document is to be presently operative
may be made without delivery of the document to anyone, if the
outward and visible acts of the donor evidence an intent to make
a present transfer.
Id.
6
We note, but do not resolve, a possible ambiguity in the gift docu-
ments’ appointment of Hack as agent. The gift documents may appoint
Hack as an agent to effect the gifts at some later date, or the gift docu-
ments may effect the gifts themselves (after all, they do “hereby gift” the
LLC interests) and appoint Hack only to do whatever subsequent paper-
work is needed to reflect that the gifts were made. While the latter appears
the more natural reading to us, we leave this issue open for the district
court to resolve if it finds the need to do so.
1234 LINTON v. UNITED STATES
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 testi-
fied “When [William Linton] was at my office [on January
22], he didn’t know [when he wanted to make the gifts effec-
tive], 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 accoun-
tant’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 pur-
poses 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 pur-
poses, the donee), left the meeting on January 22, 2003, with
copies of the (undated) gift documents, and his doing so was
LINTON v. UNITED STATES 1235
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 Wash-
ington law, in March or April, around the time Hack put
together the minute book.
[10] In sum, the determinative question as to when the gift
of the LLC interests occurred is the first date at which objec-
tive circumstances existed that would suggest the gift docu-
ments were meant to be operative (and all three other
elements of a gift existed under Washington law). The rele-
vant 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 doc-
ument 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 ques-
tion.7
7
Of course, though necessarily informed by state law, federal law is not
beholden to the technicalities of state law in assessing federal tax liability.
See, e.g., Frank Lyon Co. v. United States, 435 U.S. 561, 572-73 (1978);
Morgan, 309 U.S. at 80-81. But we have not discussed the substance-over-
form doctrine in our analysis of when the LLC interests were transferred
because form is significantly aligned with substance when it comes to the
timing of the transactions. Courts have explained, and we elaborate below,
that the relative timing of the two transactions required for a gift via a lim-
1236 LINTON v. UNITED STATES
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 accre-
tion of events, including the signing of the undated gift docu-
ments, 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 deter-
mine that the accumulation of objective circumstances was or
was not sufficiently complete before the LLC was funded.
II
The Lintons contend that they are entitled to summary
judgment because even if the government is right about tim-
ing, no gift would have occurred and so they would therefore
have no gift tax liability. Their argument is that if the transac-
tions 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
ited liability entity is of importance because of the risk of a change in val-
uation to which the funded entity interests are exposed before they are
transferred to the children. See Holman v. Comm’r, 130 T.C. 170, 189
(2008), aff’d 601 F.3d 763 (8th Cir. 2010); Gross v. Comm’r, 96 T.C.M.
(CCH) 187, 192 n.5 (2008). The degree of risk, if any, to which the funded
entity interests is exposed is almost wholly dependent on the state law
question of when the gifts occurred.
We also observe that the parties and the district court considered the
possibility of reforming the gift documents. Reformation, even if possible,
would be irrelevant. The question in a tax case such as this is when the
LLC interests actually were donated, not when they should have been.
When the LLC interests were transferred is an historical fact, which a
court may ascertain but which it cannot travel through time to alter retro-
actively.
LINTON v. UNITED STATES 1237
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 com-
pany after they had gifted the percentage interests in the com-
pany to their children, the gifted assets would, by virtue of
this provision, be credited to their own (i.e., the parents’) cap-
ital 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 con-
trast, 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 govern-
ment is right about the timing of the transactions, these docu-
ments 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 the-
ory, 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.
1238 LINTON v. UNITED STATES
[11] But tax law is concerned “with the realities of a situa-
tion and not with the formalities of title.” Estate of Fortunato,
99 T.C.M. (CCH) 1427, 1433 (2010) (quotation omitted); cf.
Frank Lyon Co., 435 U.S. at 572 (“[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 informa-
tional return together reflect the substantive reality of the situ-
ation: All parties involved regarded the trusts’ capital
accounts as having been enhanced. In other words, all con-
cerned 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).
[12] 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 techni-
calities 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.
[13] 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
LINTON v. UNITED STATES 1239
(9th Cir. 2003) (holding that where parties to a transaction
have a familial relationship, “heightened scrutiny” of its sub-
stance 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 litiga-
tion. Given that all parties involved in the transactions were
members of the same family and their interests in the transac-
tions 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’ sub-
stantive realities.8 We therefore hold that the Lintons are not
entitled to summary judgment on their failed gift theory.
III
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 liabil-
ity on the basis of a ‘realistic view of the entire transaction.’ ”
8
Moreover, over time, the formal niceties of state law (i.e., whether a
state court would determine that the capital accounts were enhanced)
could come to match the substantive reality (i.e., that all concerned
regarded the children’s capital accounts as enhanced) through the running
of state law statutes of limitations, estoppel and other state law doctrines
of property.
1240 LINTON v. UNITED STATES
Brown, 329 F.3d at 671 (quoting Comm’r v. Clark, 489 U.S.
726, 738 (1989)).9
9
We note at the outset our hesitation about the need to apply any of the
traditional three tests that make up the step transaction doctrine once the
issue of the timing of the transactions is resolved. As the government
acknowledged at oral argument, the step transaction doctrine “really [is]
what drives this kind of case,” including the primary question of the order
in which the transactions occurred.
The step transaction doctrine is one of the many “substance-over-form”
doctrines in tax law. See Brown, 329 F.3d at 671; see generally Joseph
Bankman, The Economic Substance Doctrine, 74 S. CAL. L. REV. 5 (2000)
(discussing origins and difficulties of substance-over-form doctrines,
including step transaction doctrine). It “combines a series of individually
meaningless steps into a single transaction” for purposes of federal tax
treatment. Esmark, Inc. & Affiliated Cos. v. Comm’r, 90 T.C. 171, 195
(1988).
Courts have insisted that family limited partnerships be funded before
the partnership interests are distributed for the same reason that they apply
the step transaction doctrine: to ensure that the two transactions are ade-
quately distinct that the second transaction merits independent, and more
favorable, tax treatment. See, e.g., Holman, 130 T.C. at 189 (“[T]he pas-
sage of time may be indicative of a change in circumstances that gives
independent significance to a partner’s transfer of property to a partnership
and the subsequent gift of an interest in that partnership to another.”);
Gross, 96 T.C.M. (CCH) at 192 n.5 (noting the importance of the “real
economic risk” of a change in valuation of assets donated to a partnership
during an eleven-day “hiatus” before which partnership interests were
gifted).
To obtain favorable tax treatment, the Lintons needed to transfer assets
to the LLC and then wait at least some amount of time before they gifted
the LLC interests to their children. The waiting period would subject the
gifted assets to some risk of changed valuation before they were trans-
ferred, through the LLC, to the children’s trusts. That risk would make the
two transactions distinct for tax purposes. (The government has not chal-
lenged that the nine days between January 22 and January 31 is a suffi-
ciently long period to make the transactions distinct, notwithstanding that
some of the value transferred to the LLC was cash. Cf. Gross, 96 T.C.M.
at 192 n.5 (noting that the Tax Court “might view the impact of an 11-day
hiatus differently in the case of another type of investment[,]” subject to
less risk than “heavily traded, relatively volatile common stocks.”)). Oth-
ers have noted, in different contexts, the similarity between the step trans-
action doctrine and the requirement that two transactions be timed in a
LINTON v. UNITED STATES 1241
Whether a court’s application of the step transaction doc-
trine to undisputed facts “is an issue of fact or law is a ques-
tion 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.
[14] The step transaction doctrine treats multiple transac-
tions 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 con-
siders the substance over the form of the transactions, “ ‘any-
one 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)).
certain manner. See Weikel v. Comm’r, 51 T.C.M. (CCH) 432, 438 (1986)
(“Courts will often, in addition to the [familiar three step transaction doc-
trine] tests . . . examine the timing of the transaction at issue.”); Yoram
Keinan, Rethinking the Role of the Judicial Step Transaction Principle
and a Proposal for Codification, 22 AKRON TAX J. 45, 74-77 (2007) (dis-
cussing relevance of the timing of two transactions to the step transaction
doctrine).
In sum, we suspect that the timing requirements discussed above are, in
essence, a working out of the step transaction doctrine in a particular set
of circumstances, and, therefore, that, if the Lintons or the government
prevails as to the issue of timing, there would be no need to apply the three
traditional step transaction doctrine tests. But because neither party con-
tests that the three step transaction doctrine tests apply, and because our
application of them does not change the result we reach, we apply them.
1242 LINTON v. UNITED STATES
[15] 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, exam-
ining the step transaction doctrine in light of the three applica-
ble tests, we conclude that its application does not entitle the
government to summary judgment.
[16] 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 taxpay-
er’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 treat-
ment that they seek: The Lintons wanted to convey to their
children LLC interests, without giving them management con-
trol 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 transac-
tions could somehow be merged, the Lintons would still pre-
vail, because the end result would be that their gifts of LLC
interests would be taxed as they contend.
[17] The interdependence test asks “whether on a reason-
able interpretation of objective facts the steps were so interde-
pendent 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 other-
wise bona fide business settings.” True, 190 F.3d at 1176.
[18] The placing of assets into a limited liability entity
such as the LLC is an ordinary and objectively reasonable
LINTON v. UNITED STATES 1243
business activity that makes sense with or without any subse-
quent 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.
[19] 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. Gor-
don, 391 U.S. 83, 96 (1968). The test only applies to transac-
tions spanning several years. True, 190 F.3d at 1175 n.8;
Associated Wholesale Grocers, 927 F.2d at 1522 n.6; McDon-
ald’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 inap-
plicable.
[20] The government is therefore not entitled to summary
judgment based on an application of the step transaction doc-
trine.
CONCLUSION
We reverse the district court’s grant of summary judgment
in favor of the government, determining that the Lintons’ gifts
to the children’s trusts would be valued as though the gifts
were indirect gifts of particular assets and not gifts of the LLC
interests. Genuine issues of material fact exist as to the
sequence of transactions by which the gifts were made. We
1244 LINTON v. UNITED STATES
remand this question for the district court to determine, fol-
lowing further proceedings, when the four elements of a gift
under Washington state law were simultaneously present, and,
in particular, to determine when the Lintons first objectively
manifested their intent to make the gifts effective. We also
reverse the district court’s grant of summary judgment in
favor of the government as to the application of the step trans-
action doctrine. Finally, we affirm the district court’s order
denying summary judgment to the Lintons, holding that they
are not entitled to summary judgment on their failed-gift the-
ory.
The government shall bear the costs of this appeal.
AFFIRMED IN PART; REVERSED in PART and
REMANDED.