Pierre v. Comm'r

¶1Respondent determined deficiencies of $1,130,216.11 and $24,969.19 in petitioner’s Federal gift tax and generation-skipping transfer tax for 2000 and 2001, respectively. The issue to be decided is whether certain transfers of interests in a single-member limited liability company (llc) that is treated as a disregarded entity pursuant to sections 301.7701-1 through 301.7701-3, Proced. & Admin. Regs.,2 known colloquially and hereinafter referred to as the check-the-box regulations, are valued as transfers of proportionate shares of the underlying assets owned by the LLC or are instead valued as transfers of interests in the LLC, and, therefore, subject to valuation discounts for lack of marketability and control.3

¶2FINDINGS OF FACT

¶3Some of the facts and certain exhibits have been stipulated by the parties. The facts stipulated by the parties are incorporated in this Opinion and are so found. Petitioner resided in New York at the time she filed the petition.

¶4Petitioner received a $10 million cash gift from a wealthy friend in 2000. Petitioner wanted to provide for her son Jacques Despretz (Mr. Despretz) and her granddaughter Kati Despretz (Ms. Despretz) but was concerned about keeping her family’s wealth intact. Richard Mesirow (Mr. Mesirow) helped petitioner develop a plan to achieve her goals.

¶5On July 13, 2000, petitioner organized the single-member Pierre Family, LLC (Pierre LLC). Petitioner respected the formalities of formation in the State of New York, and Pierre LLC was validly formed under New York law. Petitioner did not elect to treat Pierre LLC as a corporation for Federal tax purposes by filing a Form 8832, Entity Classification Election, and therefore filed no corporate return for Pierre LLC.

¶6On July 24, 2000, petitioner created the Jacques Despretz 2000 Trust and the Kati Despretz 2000 Trust (sometimes collectively referred to as the trusts).

¶7On September 15, 2000, petitioner transferred $4.25 million in cash and marketable securities to Pierre LLC.

¶8On September 27, 2000, 12 days after funding Pierre LLC, petitioner transferred her entire interest in Pierre LLC to the trusts. She first gave a 9.5-percent membership interest in Pierre LLC to each of the trusts to use a portion of her then-available credit amount and her GST exemption. She then sold each of the trusts a 40.5-percent membership interest in exchange for a secured promissory note. The notes each had a face amount of $1,092,133. Petitioner set this amount using the appraisal by James F. Shuey of James F. Shuey & Associates that valued a 1-percent nonmanaging interest in Pierre LLC at $26,965. Mr. Shuey determined the value of a 1-percent interest by applying a 30-percent discount to the value of Pierre LLC’s underlying assets. However, petitioner admits that because of an error in valuing the underlying assets, a discount of 36.55 percent was used in valuing the LLC interest for gift tax purposes.

¶9Petitioner filed a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for 2000 and reported the gift to each trust of a 9.5-percent Pierre LLC interest. She reported the value of the taxable gift to each trust as $256,168 (determined by multiplying a 9.5-percent interest times the $26,965 appraised value of a 1-percent nonmanaging interest in Pierre LLC).

¶10Respondent examined petitioner’s gift tax return and issued a deficiency notice for 2000 and 2001. Respondent determined that petitioner’s gift transfers of the 9.5-percent Pierre LLC interests to the trusts are properly treated as gifts of proportionate shares of Pierre LLC assets valued at $403,750 each, not as transfers of interests in Pierre LLC. Respondent further determined that petitioner made gifts to the trusts of the 40.5-percent interests in Pierre LLC to the extent that the value of 40.5 percent of the underlying assets of Pierre LLC exceeded the value of the promissory notes from the trusts. Respondent valued each of these transfers at $629,117 after taking into account the value of the promissory notes.

¶11OPINION

¶12I. The Parties’ Contentions

¶13The parties do not dispute that Pierre LLC was a validly formed LLC pursuant to New York State law, which recognized Pierre LLC as an entity separate from petitioner under New York State law.4 They also agree that, at the time of the transfers, Pierre LLC is to be disregarded as an entity separate from its owner “for federal tax purposes” under the check-the-box regulations. The parties disagree, however, about whether the check-the-box regulations require that Pierre LLC be disregarded for Federal gift tax valuation purposes.

¶14Respondent argues that, because Pierre LLC is a single-member LLC that is treated as a disregarded entity under the check-the-box regulations, petitioner’s transfers of interests in Pierre LLC should be “treated” as transfers of cash and marketable securities, i.e., proportionate shares of Pierre LLC’s assets, rather than as transfers of interests in Pierre LLC, for purposes of valuing the transfers to determine Federal gift tax liability. Accordingly, respondent contends that petitioner made gifts equal to the total value of the assets of Pierre LLC less the value of the promissory notes she received from the trusts.5

¶15Petitioner argues that, for Federal gift tax valuation purposes, State law, not Federal tax law, determines the nature of a taxpayer’s interest in property transferred and the legal rights inherent in that property interest. Accordingly, petitioner contends that we must look to State law to determine what property interest was transferred and then value the property interest actually transferred to apply the Federal gift tax provisions to that value to ascertain gift tax liability. Petitioner argues that, under New York State law, a membership interest in an LLC is personal property, and a member has no interest in specific property of the LLC. N.Y. Ltd. Liab. Co. Law sec. 601 (McKinney 2007). Accordingly, petitioner argues that she properly valued the transferred interests in Pierre LLC for purposes of valuing her transfers to the trusts and that she properly applied lack of control and lack of marketability discounts in valuing6 the transferred LLC interests.

¶16Petitioner also contends that respondent bears the burden of proof on all fact issues because she has met the requirements of section 7491.7 As the only issue decided in this Opinion is decided as a matter of law, we need not decide in this Opinion which party bears the burden of proof.8

¶17II. The Historical Gift Tax Valuation Regime

¶18We begin with a brief summary of the longstanding statutes, regulations, and caselaw that constitute the Federal gift tax valuation regime. Section 2501(a) imposes a tax on the transfer of property by gift. The amount of a gift of property is the value of the property at the date of the gift. Sec. 2512(a). It is the value of the property passing from the donor that determines the amount of the gift. Sec. 25.2511-2(a), Gift Tax Regs. “The value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of the relevant facts.” Sec. 25.2512-1, Gift Tax Regs. Where property is transferred for less than adequate and full consideration in money or money’s worth, the amount of the gift is the amount by which the value of the property transferred exceeds the value of the consideration received. Sec. 2512(b).

¶19In addition to the statutes and regulations, there is significant Supreme Court precedent interpreting them and guiding the implementation of the Federal gift and estate tax.9 The Supreme Court, in Bromley v. McCaughn, 280 U.S. 124 (1929), held that the imposition of a gift tax is within the constitutional authority of Congress. The holding in Bromley turned on a finding that the gift tax is an excise tax rather than a direct tax. As the Supreme Court stated in Bromley v. McCaughn, supra at 135—136:

The general power to “lay and collect taxes, duties, imposts, and excises” conferred by Article I, § 8 of the Constitution, and required by that section to be uniform throughout the United States, is limited by § 2 of the same article, which requires “direct” taxes to be apportioned, and section 9, which provides that “no capitation or other direct tax shall be laid unless in proportion to the census” directed by the Constitution to be taken. …

… a tax imposed upon a particular use of property or the exercise of a single power over property incidental to ownership, is an excise which need not be apportioned …

… [The gift tax] is a tax laid only upon the exercise of a single one of those powers incident to ownership, the power to give the property owned to another. …

¶20The Supreme Court has also provided guidance as to the appropriate roles of Federal and State law in the valuation of transfers. A fundamental premise of transfer taxation is that State law creates property rights and interests, and Federal tax law then defines the tax treatment of those property rights. See Morgan v. Commissioner, 309 U.S. 78 (1940). It is well established that the Internal Revenue Code creates ‘“no property rights but merely attaches consequences, federally defined, to rights created under state law.’” United States v. Natl. Bank of Commerce, 472 U.S. 713, 722 (1985) (quoting United States v. Bess, 357 U.S. 51, 55 (1958)). In Morgan v. Commissioner, supra at 80-81, the Supreme Court stated:

State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed. Our duty is to ascertain the meaning of the words used to specify the thing taxed. 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.

¶21In Morgan, the Court disregarded the State law classification of a power of appointment as “special” where the rights associated with that power of appointment under State law (i.e., the power to appoint to anyone, including the holder’s estate and creditors) were properly classified under Federal law as a general power of appointment. As is standard in Federal estate and gift tax cases, the interest was created by State law, respected by the Court, and taxed pursuant to the Federal estate and gift tax provisions. In short, the Court ignored the label, not the interest created, and determined whether the interest fell within the Federal statute. This Court, in Knight v. Commissioner, 115 T.C. 506 (2000), followed the Supreme Court precedent discussed above. As we said in Knight v. Commissioner, supra at 513 (citing United States v. Natl. Bank of Commerce, supra at 722, United States v. Rodgers, 461 U.S. 677, 683 (1983), and Aquilino v. United States, 363 U.S. 509, 513 (1960)): “State law determines the nature of property rights, and Federal law determines the appropriate tax treatment of those rights.”

¶22Pursuant to New York law petitioner did not have a property interest in the underlying assets of Pierre LLC, which is recognized under New York law as an entity separate and apart from its members. N.Y. Ltd. Liab. Co. Law sec. 601. Accordingly, there was no State law “legal interest or right” in those assets for Federal law to designate as taxable, and Federal law could not create a property right in those assets. Consequently, pursuant to the historical Federal gift tax valuation regime, petitioner’s gift tax liability is determined by the value of the transferred interests in Pierre LLC, not by a hypothetical transfer of the underlying assets of Pierre LLC.

¶23III. The Check-the-Box Regulations and Single-Member LLCs

¶24We next turn to the question of whether the check-the-box regulations alter the historical Federal gift tax valuation regime discussed above. Pursuant to the Internal Revenue Code, the income of a C corporation is subject to double taxation (once at the corporate level and once at the shareholder level) while the income of partnerships and sole proprietor-ships is taxed only once (at the individual taxpayer level). See Littriello v. United States, 484 F.3d 372, 375 (6th Cir. 2007). An LLC is a relatively new business structure, created by State law, that has some features of a corporation (i.e., limited personal liability) and some features of a partnership (i.e., management flexibility and pass-through taxation). McNamee v. Dept. of the Treasury, 488 F.3d 100, 107 (2d Cir. 2007). Section 7701, underpinning the check-the-box regulations, defines entities for purposes of the Internal Revenue Code “where not otherwise distinctly expressed or manifestly incompatible with the intent thereof”. Section 7701 does not make it clear whether an LLC falls within the definition of a partnership, a corporation, or a disregarded entity taxed as a sole proprietorship.

¶25Before the promulgation of the check-the-box regulations, the proliferation of revenue rulings, revenue procedures, and letter rulings relating to the classification of LLCs and partnerships for Federal tax purposes made the existing regulations “unnecessarily cumbersome to administer”. Dover Corp. & Subs. v. Commissioner, 122 T.C. 324, 330 (2004). Those existing regulations, known as the “Kintner Regulations”, had been in place since I960.10 In McNamee v. Dept. of the Treasury, supra at 108-109, the Court of Appeals for the Second Circuit, the court that would be the venue for any appeal of the instant case absent stipulation to the contrary, stated:

The Kintner regulations had been adequate during the first several decades after their adoption. But, as explained in the 1996 proposal for their amendment, the Kintner regulations were complicated to apply, especially in light of the fact that

many states ha[d] revised their statutes to provide that partnerships and other unincorporated organizations may possess characteristics that traditionally have been associated with corporations, thereby narrowing considerably the traditional distinctions between corporations and partnerships under local law.

Simplification of Entity Classification Rules, 61 Fed. Reg. 21989, 21989-90 (proposed May 13, 1996). …

¶26To simplify the classification of hybrid entities, such as LLCs, the check-the-box regulations were promulgated. Section 301.7701-l(a)(l), Proced. & Admin. Regs., provides:

Classification of organizations for federal tax purposes. — (a) … — (1) … The Internal Revenue Code prescribes the classification of various organizations for federal tax purposes. Whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law. [Emphasis added.]

¶27Section 301.7701-3(a) and (b), Proced. & Admin. Regs., provides:

Classification of certain business entities. — (a) … A business entity … can elect its classification for federal tax purposes as provided in this section. An eligible entity … with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner. Paragraph (b) of this section provides a default classification for an eligible entity that does not make an election. …

(b) Classification of eligible entities that do not file an election. — (1) … Except as provided in paragraph (b)(3) of this section, unless the entity elects otherwise, a domestic eligible entity is—

:p. % … ❖

(ii) Disregarded as an entity separate from its owner if it has a single owner.

[Emphasis added.]

¶28Accordingly, the default classification for an entity with a single owner is that the entity is disregarded as an entity separate from its owner. Sec. 301.7701 — 3(bj(l)(ii), Proced. & Admin. Regs. There is no question that the phrase “for federal tax purposes” was intended to cover the classification of an entity for Federal tax purposes, as the check-the-box regulations were designed to avoid many difficult problems largely associated with the classification of an entity as either a partnership or a corporation; i.e., whether it should be taxed as a pass-through entity or as a separately taxed entity. Simplification of Entity Classification Rules, 61 Fed. Reg. 21989-21990 (May 13, 1996). The question before us now is whether the check-the-box regulations require us to disregard a single-member LLC, validly formed under State law, in deciding how to value and tax a donor’s transfer of an ownership interest in the LLC under the Federal gift tax regime described above.

¶29IV. Whether the Check-the-Box Regulations Alter the Historical Federal Gift Tax Valuation Regime

¶30Respondent points to a number of cases as support for the proposition that, pursuant to the check-the-box regulations, valid State law restrictions must be ignored for the purpose of determining the interest being transferred under the Federal estate and gift tax regime. Respondent cites McNamee v. Dept. of the Treasury, 488 F.3d 100 (2d Cir. 2007), a case decided by the Court of Appeals for the Second Circuit. However, respondent’s reliance on McNamee is misplaced. In McNamee, the Court of Appeals held that State law cannot abrogate the Federal tax obligations of the owner of a disregarded entity under the check-the-box regulations. Id. at 111 (citing Littriello v. United States, 484 F.3d at 379). In issue in McNamee was the requirement to pay withholding taxes for a single-member llc’s employees. The Court of Appeals held that the owner of the single-member LLC there in issue was liable for the disregarded entity’s taxes; it did not hold that an entity is to be disregarded in deciding what property interests are transferred under State law for Federal gift tax valuation purposes when an owner of an entity disregarded under the check-the-box regulations transfers an interest in that entity.11

¶31Similarly, respondent’s reliance on Shepherd v. Commissioner, 115 T.C. 376 (2000), affd. 283 F.3d 1258 (11th Cir. 2002), and Senda v. Commissioner, 433 F.3d 1044 (8th Cir. 2006), affg. T.C. Memo. 2004-160, is not convincing, as the facts of those cases differ significantly from the facts of the instant case. In Shepherd v. Commissioner, supra at 384, we looked to applicable State law to decide what property rights were conveyed. In Shepherd, the property the taxpayer possessed and transferred was his interests in leased land and bank stock. Id. at 385. Because the creation of the taxpayer’s sons’ partnership interests preceded the completion of the gift to the partnership, we found that the taxpayer made indirect gifts to his sons of his interests in the land and bank stock. Id. at 389. The Court of Appeals for the Eleventh Circuit, in its opinion affirming Shepherd, highlighted the distinction between the facts of Shepherd and a hypothetical set of facts (more similar to the facts under consideration in the instant case) when it noted that

Thus, instead of completing a gift of land to a preexisting partnership in which the sons were not partners and then establishing the partnership interests of his sons (which would result in a gift of a partnership interest), Shepherd created a partnership in which his sons held established shares and then gave the partnership a taxable gift of land (making it an indirect gift of land to his sons). [Shepherd v. Commissioner, 283 F.3d at 1261; fn. ref. omitted.]

¶32In the instant case, petitioner completed a gift of cash and securities to Pierre LLC at a time when the trusts were not members of Pierre LLC and then later transferred interests in Pierre LLC to the trusts, which established the interests of the trusts in Pierre LLC.12 Accordingly, Shepherd is consistent with the requirement that State law determines the interest being transferred. In the instant case, as discussed above, pursuant to New York law, petitioner transferred interests in Pierre LLC.

¶33Senda v. Commissioner, supra, is also distinguishable. In Senda, the taxpayers were unable to establish whether they had transferred partnership interests to their children before or after they contributed stock to the partnership. Citing Shepherd v. Commissioner, supra, the Court of Appeals for the Eighth Circuit noted that the sequence was critical “because a contribution of stock after the transfer of partnership interests is an indirect gift”. Senda v. Commissioner, supra at 1046.

¶34Both Shepherd and Senda stand for the proposition that a transfer of property to a partnership for less than full and adequate consideration may represent an indirect gift to the other partners. In the instant case, petitioner contributed the cash and securities to Pierre LLC before transfers to the trusts were made and the trusts became members of Pierre LLC. Consequently, Shepherd and Senda are not controlling.

¶35Petitioner relies heavily on Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74. We do not find Estate of Mirowski to be controlling because the Commissioner did not rely on the check-the-box regulations with respect to the transfer of the LLC interests there in issue. However, we do note that in Estate of Mirowski we refused to adopt an interpretation that “reads out of section 2036(a) in the case of any single-member LLC the exception for a bona fide sale … that Congress expressly prescribed when it enacted that statute.” If respondent’s interpretation were to prevail in the instant case, such an interpretation could create a similar result.13

¶36The multistep process of determining the nature and amount of a gift and the resulting gift tax under the Federal gift tax provisions described above, i.e., (1) the determination under State law of the property interest that the donor transferred, (2) the determination of the fair market value of the transferred property interest and the amount of the transfer to be taxed, and (3) the calculation of the Federal gift tax due on the transfer, is longstanding and well established. Neither the check-the-box regulations nor the cases cited by respondent support or compel a conclusion that the existence of an entity validly formed under applicable State law must be ignored in determining how the transfer of a property interest in that entity is taxed under Federal gift tax provisions.

¶37While we accept that the check-the-box regulations govern how a single-member LLC will be taxed for Federal tax purposes, i.e., as an association taxed as a corporation or as a disregarded entity, we do not agree that the check-the-box regulations apply to disregard the LLC in determining how a donor must be taxed under the Federal gift tax provisions on a transfer of an ownership interest in the LLC. If the check-the-box regulations are interpreted and applied as respondent contends, they go far beyond classifying the LLC for tax purposes. The regulations would require that Federal law, not State law, apply to define the property rights and interests transferred by a donor for valuation purposes under the Federal gift tax regime. We do not accept that the check-the-box regulations apply to define the property interest that is transferred for such purposes. The question before us (i.e., how a transfer of an ownership interest in a validly formed LLC should be valued under the Federal gift tax provisions) is not the question addressed by the check-the-box regulations (i.e., whether an LLC should be taxed as a separate entity or disregarded so that the tax on its operations is borne by its owner). To conclude that because an entity elected the classification rules set forth in the check-the-box regulations, the long-established Federal gift tax valuation regime is overturned as to single-member LLCs would be “manifestly incompatible” with the Federal estate and gift tax statutes as interpreted by the Supreme Court. See sec. 7701.

¶38We note that Congress has enacted provisions of the Internal Revenue Code, see secs. 2701, 2703, that disregard valid State law restrictions in valuing transfers. Where Congress has determined that the “willing buyer, willing seller” and other valuation rules are inadequate, it expressly has provided exceptions to address valuation abuses. See chapter 14 of the Internal Revenue Code, sections 2701 through 2704, which specifically are designed to override the standard “willing buyer, willing seller” assumptions in certain transactions involving family members.

¶39By contrast, Congress has not acted to eliminate entity-related discounts in the case of LLCs or other entities generally or in the case of a single-member llc specifically. In the absence of such explicit congressional action and in the light of the prohibition in section 7701, the Commissioner cannot by regulation overrule the historical Federal gift tax valuation regime contained in the Internal Revenue Code and substantial and well-established precedent in the Supreme Court, the Courts of Appeals, and this Court, and we reject respondent’s position in the instant case advocating an interpretation that would do so. Accordingly, we hold that petitioner’s transfers to the trusts should be valued for Federal gift tax purposes as transfers of interests in Pierre LLC and not as transfers of a proportionate share of the underlying assets of Pierre LLC.

¶40To reflect the foregoing,

¶41An appropriate order will be issued.

¶42Reviewed by the Court.

¶56concurring: As the author of the Opinion for the Court in Med. Practice Solutions, LLC v. Commissioner, 132 T.C. 125 (2009), I write to explain why my agreement with the majority opinion here is consistent with the conclusion in that case, which followed McNamee v. Dept. of the Treasury, 488 F.3d 100 (2d Cir. 2007). Briefly, I agree with the majority that McNamee and Med. Practice Solutions, LLC are classification cases that appropriately applied the check-the-box regulations of section 301.7701 — 3(b)(l)(ii), Proced. & Admin. Regs., in deciding whether the single owner/member of an LLC or the LLC was liable for employment taxes on the wages of the employees of the business in question. In contrast, this case involves the issue of the valuation for transfer tax purposes of certain interests in a single-owner LLC that that owner transferred. See majority op. p. 32. (McNamee and Med. Practice Solutions, LLC, along with Littriello v. United States, 484 F.3d 372 (6th Cir. 2007), and others cited in Med. Practice Solutions, LLC, will be referred to as the employment tax cases).

¶57The check-the-box regulations might be applied to determine for gift tax purposes whether the owner of a single-member LLC or the LLC is the transferor of the assets used in the business or the activities for which the LLC was formed. In that event, the determination would parallel the determination in the employment tax cases as to who is liable for the Federal tax in dispute and would consider whether the LLC should be “disregarded” under those regulations. The only transfer at issue here, however, is the transfer by the owner of the LLC of certain interests that she held in that llc.

¶58Transfer tax disputes, including this one, more frequently involve differences over the fair market value of property, and fair market value is determined by applying the “willing buyer, willing seller” standard to the property transferred. See majority op. pp. 28-30. Where the property transferred is an interest in a single-member LLC that is validly created and recognized under State law, the willing buyer cannot be expected to disregard that LLC. See, e.g., Knight v. Commissioner, 115 T.C. 506, 514 (2000) (“We do not disregard … [a] partnership because we have no reason to conclude from this record that a hypothetical buyer or seller would disregard it.”).

¶59Of course, Congress has the ability to, and on occasion has opted to, modify the willing buyer, willing seller standard. See, e.g., secs. 2032A, 2701, 2702, 2703, 2704; Holman v. Commissioner, 130 T.C. 170, 191 (2008) (applying section 2703 to disregard restrictions in a partnership agreement). In Kerr v. Commissioner, 113 T.C. 449, 470-474 (1999), affd. 292 F.3d 490 (5th Cir. 2002), we explained that the special valuation rules were a targeted substitute for the complexity, breadth, and vagueness of prior section 2036(c). We reaffirmed the willing buyer, willing seller standard, Kerr v. Commissioner, supra at 469, and concluded that the special provision in section 2704(b) did not apply to disregard the partnership restrictions in issue, id. at 473; see also Estate of Strangi v. Commissioner, 115 T.C. 478, 487-489 (2000), affd. on this issue, revd. and remanded on other grounds 293 F.3d 279 (5th Cir. 2002).

¶60The majority opinion, majority op. pp. 31-32, discusses the adoption of the check-the-box regulations as a targeted substitute for the complexity of the Kintner regulations in classifying hybrid entities and thereby determining the tax consequences to those entities and their owners of the business or the activities for which those entities were formed. A targeted solution to a particular problem should not be distorted to achieve a comprehensive overhaul of a well-established body of law.

¶61If the regulations expressly provided that single-owner LLCs would be disregarded in determining the identity of the property transferred and the value of that transferred property, we could debate the validity of the regulations and the degree of deference to be given to various expressions of an agency’s position. Here we are dealing only with respondent’s litigating position. The majority does not question the validity of the check-the-box regulations. The majority holds only that those regulations do not control the valuation issue in this case. See majority op. p. 35.

¶62The argument that the majority opinion disregards the plain meaning of the phrase “for federal tax purposes” in section 301.7701-3(a), Proced. & Admin. Regs., is unpersuasive. The plain meaning of the text of a regulation is the starting point for determining the meaning of that regulation. See Walker Stone Co. v. Secy. of Labor, 156 F.3d 1076, 1080 (10th Cir. 1998) (“When the meaning of a regulatory provision is clear on its face, the regulation must be enforced in accordance with its plain meaning.”). We see here, however, (1) ambiguity in the specific phrase “federal tax purposes” and (2) ambiguity in the term “disregarded”, both of which make plain meaning elusive.

¶63First, the regulation does not provide that an entity will be disregarded “for all Federal tax purposes”. Instead, the regulation implements a statute that, by its terms, applies except where “manifestly incompatible with the intent” of the Internal Revenue Code. Sec. 7701(a). The language of the regulation requires a determination of which “federal tax purposes” are implicated and whether a given purpose might be manifestly incompatible with the Internal Revenue Code.

¶64Second, the regulation states that an entity will be “disregarded as an entity separate from its owner”. Sec. 301.7701-3(a) and (b)(l)(ii), Proced. & Admin. Regs, (emphasis added). That sentence might mean that a disregarded entity is exempt from tax, that its transactions are disregarded and therefore not reported for tax purposes, or that transfers of interests in the entity are disregarded for Federal gift tax purposes and not taxed. While none of those meanings is likely, the ambiguity is inherent. Of course, the regulation must be interpreted in the light of the other principles of the Internal Revenue Code. Those other principles include the valuation principles discussed in the majority opinion. Respondent’s proposed application of the regulation is manifestly incompatible with those principles.

¶65The majority’s approach is consistent with the principle that a regulation will be interpreted to avoid conflict with a statute. See LaVallee Northside Civic Association v. V.I. Coastal Zone Mgmt. Commn., 866 F.2d 616, 623 (3d Cir. 1989); see also Smith v. Brown, 35 F.3d 1516, 1526 (Fed. Cir. 1994); Phillips Petroleum Co. v. Commissioner, 97 T.C. 30, 35 (1991), affd. without published opinion 70 F.3d 1282 (10th Cir. 1995). It is also consistent with the express limitation of section 7701(a) on the scope of regulations that define terms. See majority op. p. 36. The majority’s interpretation of the scope of the check-the-box regulations harmonizes the classification purpose of those regulations with the statutory rules and case precedents that firmly establish the meaning of fair market value in transfer tax cases and the willing buyer, willing seller standard as the hallmark of that meaning.

¶66Some final words about deference. As the majority opinion indicates, majority op. p. 30, section 7701(a) precludes the application of the definitions of the terms in that section where they are “manifestly incompatible with the intent” of the Internal Revenue Code. This case does not involve the question in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), of deference to the Commissioner’s interpretation of a statute that the Commissioner is charged with administering. Nothing in the check-the-box regulations or in the cases cited by respondent persuades us that those regulations require us to disregard a single-owner LLC where, as is the case here, to do so would be “manifestly incompatible” with the intent of other provisions of the Internal Revenue Code.

¶67Judge Halpern in his dissenting opinion does not address the majority’s conclusion that respondent’s interpretation of the regulation is manifestly incompatible with other provisions of the Code. He asserts that “respondent’s position [in this case] … is consistent with the Commissioner’s administrative position for at least 10 years”. Dissenting op. p. 44. He cites Rev. Rul. 99-5, 1999-1 C.B. 434, which describes the Federal income tax consequences of a transfer under sections 721-723, 1001(a), and 1223. The ruling and the sections cited do not deal with transfer taxes generally or gift tax specifically. Moreover, the Internal Revenue Service has reversed itself with respect to application of the check-the-box regulations in employment tax situations and has adopted new rules as of January 1, 2009. See McNamee v. Dept. of the Treasury, 488 F.3d at 109; Littriello v. United States, 484 F.3d 372 (6th Cir. 2007); Med. Practice Solutions, LLC v. Commissioner, 132 T.C. at 129.

¶68We have never accorded deference to the Commissioner’s litigating position, as contrasted to (1) contemporaneous expressions of intent when the regulations were adopted and (2) consistent administrative interpretations before the litigation. See Gen. Dynamics Corp. & Subs. v. Commissioner, 108 T.C. 107, 120-121 (1997). Respondent does not argue here that respondent’s interpretation of the regulation is entitled to deference. Neither the cases—Oteze Fowlkes v. Adamec, 432 F.3d 90, 97 (2d Cir. 2005), United States v. Miller, 303 F.2d 703, 707 (9th Cir. 1962), and Lantz v. Commissioner, 132 T.C. 131, 144 n.10 (2009) — nor the so-called hornbook law on which Judge Halpern relies in his dissenting opinion requires us to give deference to respondent’s litigating position that the check-the-box regulations apply in this case. We have no reason to believe that respondent’s litigating position here is an interpretation of those regulations that reflects “the … fair and considered judgment [of the Secretary of the Treasury] on the matter in question.” Auer v. Robbins, 519 U.S. 452, 462 (1997) (where the Supreme Court of the United States ordered the Secretary of Labor to file an ami-cus brief in a case between private litigants involving the interpretation of a regulation that the Secretary had promulgated, the Supreme Court accepted the Secretary’s interpretation since in the circumstances of the case “There is simply no reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question.”). Moreover, Judge Halpern’s reliance on a footnote in Lantz v. Commissioner, supra, is misplaced. We there concluded that a taxpayer’s pursuit of a particular type of relief would be fruitless in the face of the Commissioner’s position, the validity of which had not been challenged. Neither case cited in that footnote adopts the litigating position of the party as distinct from preexistent and consistent administrative interpretations. See Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945); Phillips Petroleum Co. v. Commissioner, 101 T.C. 78, 97 (1993), affd. without published opinion 70 F.3d 1282 (10th Cir. 1995).