Rev. Rul. 73-61

Advice has been requested with respect to the gift tax consequences of a transaction between a parent and his son under the circumstances described below.

The parent negotiated a $200,000 loan with a bank with which he had had previous transactions. Later in the same month the parent advanced $250,000 to a corporation wholly owned by his son. In return therefor, he received two promissory notes from the corporation. One note, in the face amount of $50,000, was payable in ten years. The other, for $200,000, was payable upon demand. Each note provided for the repayment of the principal sum without interest.

Section 2501 of the Internal Revenue Code of 1954 imposes a tax on the transfer of property by gift. Section 2511 of the Code provides that the gift tax applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible. Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. The application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than the subjective motives of the donor. Section 25.2511-1(g) of the Gift Tax Regulations. When property is transferred for less than adequate and full consideration in money or money's worth, section 2512(b) of the Code directs that the difference between the value of the property transferred and the consideration received shall be deemed a gift.

Section 25.2511-1(h)(1) of the regulations provides that, with certain exceptions not relevant here, a transfer by gift to a corporation represents a gift to the shareholders.

The right to use property, in this case money, is itself an interest in property, the transfer of which is a gift within the purview of section 2501 of the Code unless full and adequate consideration in money or money's worth is received. The tax in the instant case would be imposed on the value of the right to use the money. Such value is usually stated in terms of interest or some other equivalent in money or money's worth. The rate of interest that would represent full and adequate consideration may vary, depending upon the actual circumstances pertaining to the transaction. See Gertrude H. Blackburn v. Commissioner, 20 T.C. 204, (1953), which held that a taxable gift was made when a taxpayer sold a building to her children and received a note with interest payable at less than the usual local rate of interest on such transactions.

For Federal gift tax purposes, a gift is complete when the donor has so parted with dominion or control of property as to leave in him no power to change its disposition, provided the transferred interest in property is susceptible of valuation at that time. Rev. Rul. 69-347, 1969-1 C.B. 227. Where it is not determinable whether a gift has been made, and, if so, of what value, there is no completed transfer by gift until such time as the amount of the gift becomes susceptible of valuation. Rev. Rul. 69-346, 1969-1 C.B. 227.

Accordingly, it is held that when the parent transferred $50,000 to the corporation in return for a note payable in ten years and bearing no interest, the parent gave his son the right to the use of the money for the term of the note. Under these circumstances, the value of the right to the use of the money loaned is ascertainable by accepted actuarial methods, as of the date the money and the note were exchanged, and is, therefore, subject to the gift tax at that time. See section 25.2512-5 of the regulations.

With respect to the transfer of $200,000 in return for the noninterest-bearing demand note, the value of the right to the use of the money loaned was not ascertainable at the date of the exchange. The corporation has the right to use the money only so long as the parent does not demand payment. The value of this interest is the value of the use of the money for such portion of the year as the parent in fact allows the son the use of the money. The value of the use of the money during the calendar quarter is calculable as of the last day of each calendar quarter during which the corporation has been granted such use. Accordingly, it is held that the parent made a gift to his son of the use of the money subject to the demand note during so much of each quarter as such use was permitted.

Of course, as a practical matter this Revenue Ruling will have no tax effect in cases involving small interest-free loans because of the $3,000 per person annual exclusion and the $30,000 lifetime exemption provided by sections 2503 and 2521 of the Code, respectively.

The Internal Revenue Service will not follow the decision in Elizabeth McGhee Johnson v. United States, 254 F. Supp. 73 (1966), that interest-free loans made by the taxpayers to their children, repayable upon demand, did not constitute gifts of the value of the use of the money.