897 / What are the gift tax implications, if any, when an individual transfers property (or an interest in property) and takes back noninterest-bearing term notes covering the value of the property transferred, and the transferor intends to forgive the notes as they come due?
The IRS takes the position that such a transfer is a gift of the entire value of the property or interest given at the time of the transfer and is not a sale. If the transfer is of a remainder interest in property, it is a future interest gift that does not qualify for the gift tax annual exclusion (see Q 905). The Service distinguishes between an intent to forgive the notes and donative intent (see Q 893) with respect to transfer of the property: “A finding of an intent to forgive the note relates to whether valuable consideration was received, and thus, to whether the transaction was in reality a bona fide sale or a disguised gift.”2 The Tax Court, however, makes a distinction based on the nature of the notes given, holding that if the notes are secured by valid vendor’s liens, the transaction is to be treated as a sale; a gift occurs on each date a note is due and forgiven, the value of the gift being the amount due on the note.3
1. IRC §§ 7872(b)(1), 7872(d)(2).
2. Rev. Rul. 77-299, 1977-2 CB 343; Deal, 29 TC 730 (1958).
3. Haygood v. Comm., 42 TC 936 (1964), nonacq. 1977-2 CB 2; Est. of Kelley v. Comm., 63 TC 321 (1974), nonacq. 1977-2 CB 2.