## Facts

- Albert J. Hackl, Sr. and Christine M. Hackl formed an Indiana LLC (Treeco) to hold two tree farms and other contributed assets, including substantial cash and securities.
- The operating agreement made Albert Hackl the manager for life absent resignation, removal, or incapacity, with authority to appoint a successor and dissolve the LLC.
- The manager controlled whether and when any financial distributions would be made.
- Members could not withdraw from the LLC or sell their interests without manager approval; transfer restrictions limited the ability to monetize the interests.
- Unauthorized transferees received only economic rights to potential distributions, not membership or voting rights.
- The Hackls made annual gifts of nonvoting Treeco membership units to children and grandchildren and claimed the annual gift-tax exclusion under 26 U.S.C. § 2503(b).
- The IRS determined the gifts were “future interests,” disallowed the exclusions, and assessed a substantial gift-tax deficiency; the Tax Court sustained the deficiency.

## Issues

1. Whether gifts of nonvoting LLC membership interests subject to manager-controlled distributions and significant transfer limits are “present interests” eligible for the 26 U.S.C. § 2503(b) annual exclusion or “future interests” excluded from the exemption.
2. Whether it was proper to interpret “future interests” using Treasury regulations and longstanding judicial interpretations rather than a claimed “plain meaning” of § 2503(b).

## Decision

- The Seventh Circuit affirmed the Tax Court.
- The court held the gifted Treeco units were “future interests” and therefore did not qualify for the § 2503(b) annual exclusion.
- The court held the Tax Court properly relied on Treasury Regulation § 25.2503-3 and established case law interpreting “future interests.”
- The court rejected the argument that an immediate, complete transfer of legal title alone establishes a “present interest.”

## Legal Principles

- The § 2503(b) annual exclusion does not apply to gifts of “future interests,” defined by regulation to include interests limited to commence in use, possession, or enjoyment at a future time.
- The controlling inquiry is whether the donee receives a substantial present economic benefit—i.e., a current ability to use, possess, or enjoy the property—not merely whether legal title is transferred.
- An ownership interest may be a future interest when governing documents deny meaningful present enjoyment through (i) donor/manager discretion over distributions, (ii) inability to compel liquidation or distributions, and (iii) restrictions that make the interest effectively illiquid or nontransferable.
- Courts may apply longstanding Treasury regulations and judicial interpretations to determine whether an interest is “future” for gift-tax purposes.

## Conclusion

The court treated the Hackls’ transfers of nonvoting LLC units as future interests because the donees lacked enforceable, current access to economic benefits and could not realistically monetize or control the interests, making the § 2503(b) annual exclusion unavailable.


Hackl v. Commissioner, 335 F.3d 664 (7th Cir. 2003)