Rev. Rul. 79-384

ISSUE

What are the federal gift tax consequences of the payment of $10,000 as a result of a judgment against the payor, who promised to make the payment if the payee graduated from college?

FACTS

In 1972, A promised in writing to pay B, A's child, $10,000 if B graduated from college. At that time B was 16 years old. B graduated from college on June 1, 1977. B promptly demanded payment of the $10,000 in accordance with A's promise. A refused to pay the money and B brought suit in the local courts. On September 25, 1978, a judgment was issued by the local court against A on the contract with B in the amount of $10,000. A paid the money to B on the same day.

LAW AND ANALYSIS

Section 2501 of the Internal Revenue Code imposes a tax on the transfer of property by gift by any individual.

The gift tax is aimed at every kind and type of transfer by way of gift, whether the gift is indirect or direct, and whether the property is real or personal, tangible or intangible. Section 25.2511-1(a) of the regulations.

Under section 2512(b) of the Code, if property is transferred for less than "an adequate and full consideration in money or money's worth," the excess of the value of the transferred property over the value of any such consideration received is a gift for federal gift tax purposes. Under section 25.2512-8 of the regulations, a consideration not reducible to a value in money or money's worth, such as love and affection, is to be wholly disregarded for federal gift tax purposes.

In Estate of Copley v. Commissioner, 15 T.C. 17 (1950), affirmed, 194 F.2d 364 (7th Cir. 1952), acq., 1965-2 C.B. 4, the petitioner entered into an antenuptial agreement in which the petitioner promised to give the future spouse a sum of money in consideration of the marriage and in lieu of all of the spouse's marital rights in the petitioner's property. The agreement became legally enforceable under state law on the date of the marriage in 1931. The petitioner transferred part of the sum in 1936 and the remainder in 1944. The court concluded that a gift tax would have been due in 1931 if there had been a gift tax law in effect at that time.

In Harris v. Commissioner, 178 F.2d 861 (2d Cir. 1949), reversed on other grounds, 340 U.S. 106 (1950), 1950-2 C.B. 77, the Court of Appeals held that a promise to make a gift becomes taxable in the year in which the obligation becomes binding and not when the discharging payments are made. See, also, Rosenthal v. Commissioner, 205 F.2d 505 (2d Cir. 1953); Rev. Rul. 69-346, 1969-1 C.B. 227.

Therefore, where one promises to transfer property in the future, the gift tax consequences of the promise are judged as of the first date on which it is possible to determine that the transfer must be made and that the transfer will be of a determinable amount. See also Rev. Rul. 69-347, 1969-1 C.B. 227.

In the present case, the fact that B graduated from college is not consideration, in money or money's worth, received by A. Even if A had received some benefit from B's graduation from college, it is not possible to place a monetary value on that benefit. Therefore, under section 25.2512-8 of the regulations, discussed above, A received no consideration, for federal gift tax purposes, in exchange for A's promise to pay $10,000 even though B's graduating from college may have been "consideration" under state law. See Hamer v. Sidway, 27 N.E. 256, (Ct. App. 1891); Restatement of Contracts sec. 76 (1932); 1 A.L. Corbin, Corbin on Contracts 132 (1963).

In the present case, as in the Copley case, discussed above, A's promise to pay became binding on A before the subject of the promise was transferred. As in Rev. Rul. 69-346, discussed above, it was not possible to determine, as of the date when the donor's promise was made, whether a gift would actually result.

Such a determination could be made only when B graduated from college. Since B properly fulfilled the condition of A's obligation, A became bound to make the payment on B's graduation. It is thus on that date that A's gift was made, for federal gift tax purposes.

The fact that B found it necessary to obtain the assistance of the local courts in order to compel A to comply with the terms of the agreement and that A did not actually transfer the $10,000 until more than a year after B reached age 21 does not alter the conclusion in the present case. In Copley, discussed above, the donor's promise became binding in 1931, although payment was not made until 1936 and 1944. It was held that the gift was made in 1931 when the promise became enforceable.

HOLDING

The donor, A, made a gift of $10,000 on the day B graduated from college, the date when A's promise became enforceable and determinable in value, notwithstanding the fact that A did not actually make the payment of $10,000 until a later date when judgment was rendered against A.