Dickman v. Commissioner of Internal Revenue

• Decision Date: 22 February 1984
• Docket Number: No. 82-1041,82-1041
• Citation: 465 U.S. 330,104 S.Ct. 1086,79 L.Ed.2d 343
• Parties: Esther C. DICKMAN, et al., Petitioners v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

465 U.S. 330

104 S.Ct. 1086

79 L.Ed.2d 343

Esther C. DICKMAN, et al., Petitioners

v COMMISSIONER OF INTERNAL REVENUE.

No. 82-1041.

Argued Nov. 1, 1983.

Decided Feb. 22, 1984.

Rehearing Denied April 16, 1984.

See 466 U.S. 945, 104 S.Ct. 1932.

Syllabus

Held: The loans in question resulted in taxable gifts of the reasonable value of the use of the money lent. Pp. 333-344.

(a) The language of §§ 2501(a)(1) and 2511(a) is clear and admits of only one reasonable interpretation: transfers of property by gift, by whatever means effected, are subject to the federal gift tax. The gift tax was designed to encompass all transfers of property and property rights having significant value. Pp. 333-335.

(b) The interest-free loan of funds is a "transfer of property by gift" within the contemplation of the Code. The transfer of cash, interest-free and repayable on demand, is a grant of the use of valuable property. And the right to use the money without charge is a valuable interest in the money lent, although the value of such interest may be reduced by virtue of its demand status. Pp. 335-338.

(c) Failure to impose the gift tax on interest-free loans would seriously undermine Congress' goal in enacting the gift tax as a protection against income tax avoidance by the transferor and as a supplement to the estate tax. Pp. 338-339.

(d) Subjecting interest-free loans to the gift tax does not impose upon the transferor a duty to invest profitably, but rather merely recognizes that certain tax consequences flow from a decision to make "a transfer of property by gift." Pp. 339-340.

(e) There is no merit to petitioners' contention that imposing a gift tax on interest-free loans could result in imposing the tax on routine neighborly or familial gifts, thus intruding into cherished zones of privacy. Any such administrative problems are rendered illusory by the generous exclusions, exceptions, and credits provided by the Code for gifts to both family members and others. Pp. 340-342.

(f) Assuming, arguendo, that the Commissioner's present position represents a departure from prior administrative practice, he may, nevertheless, change an earlier interpretation of the law, even if such a change is made retroactive in effect, and even though a taxpayer may have relied to his detriment upon the Commissioner's prior position. Pp. 342-343.

690 F.2d 812 (CA11 1982), affirmed.

Justice Powell filed dissenting opinion in which Justice Rehnquist joined.

Frank P. Riggs, Sun City Center, Fla., for petitioners.

Lawrence G. Wallace, Washington, D.C., for respondent.

Chief Justice BURGER delivered the opinion of the Court.

We granted certiorari to resolve a conflict among the Circuits as to whether intrafamily, interest-free demand loans result in taxable gifts of the value of the use of the money lent.

I

A.

Paul and Esther Dickman were husband and wife; Lyle Dickman was their son. Paul, Esther, Lyle, and Lyle's wife and children were the owners of Artesian Farm, Inc. (Artesian), a closely held Florida corporation. Between 1971 and 1976, Paul and Esther loaned substantial sums to Lyle and Artesian. Over this 5-year interval, the outstanding balances for the loans from Paul to Lyle varied from $144,715 to $342,915; with regard to Paul's loans to Artesian, the outstanding balances ranged from $207,875 to $669,733. During the same period, Esther loaned $226,130 to Lyle and $68,651 to Artesian. With two exceptions, all the loans were evidenced by demand notes bearing no interest.¹

Paul Dickman died in 1976, leaving a gross estate for federal estate tax purposes of $3,464,011. The Commissioner of Internal Revenue audited Paul Dickman's estate and determined that the loans to Lyle and Artesian resulted in taxable gifts to the extent of the value of the use of the loaned funds.² The Commissioner then issued statutory notices of gift tax deficiency both to Paul Dickman's estate and to Esther Dickman.³ Esther Dickman and the estate, petitioners here, sought redetermination of the deficiencies in the Tax Court. Reaffirming its earlier decision in Crown v. Commissioner, 67 T.C. 1060 (1977), aff'd, 585 F.2d 234 (CA7 1978), the Tax Court concluded that intrafamily, interest-free demand loans do not result in taxable gifts. 41 TCM 620, 623 (1980), ¶ 80,575 P-H Memo TC, at 2428. Because the Tax Court determined that all the loans to Lyle and Artesian were made payable on demand, it held that the loans were not subject to the federal gift tax. Id., at 624, ¶ 80,575 P-H Memo TC, at 2428.

B

The United States Court of Appeals for the Eleventh Circuit reversed, holding that gratuitous interest-free demand loans give rise to gift tax liability. 690 F.2d 812, 819 (1982). Reviewing the language and history of the gift tax provisions of the Internal Revenue Code of 1954 (Code), 26 U.S.C. § 2501 et seq., the Court of Appeals concluded that Congress intended the gift tax to have the broadest and most comprehensive coverage possible. The court reasoned that the making of an interest-free demand loan constitutes a "transfer of property by gift" within the meaning of 26 U.S.C. § 2501(a)(1), and accordingly is subject to the gift tax provisions of the Code. In so holding, the Court of Appeals squarely rejected the contrary position adopted by the United States Court of Appeals for the Seventh Circuit in Crown v. Commissioner, 585 F.2d 234 (1978). We granted certiorari to resolve this conflict, 459 U.S. 1199, 103 S.Ct. 1181, 75 L.Ed.2d 429 (1983); we affirm.

II

A.

The statutory language of the federal gift tax provisions purports to reach any gratuitous transfer of any interest in property. Section 2501(a)(1) of the Code imposes a tax upon "the transfer of property by gift." Section 2511(a) highlights the broad sweep of the tax imposed by § 2501, providing in pertinent part:

The language of these statutes is clear and admits of but one reasonable interpretation: transfers of property by gift, by whatever means effected, are subject to the federal gift tax.

The Committee Reports accompanying the Revenue Act of 1932, ch. 209, 47 Stat. 169, which established the present scheme of federal gift taxation, make plain that Congress intended the gift tax statute to reach all gratuitous transfers of any valuable interest in property. Among other things, these Reports state:

"The terms 'property,' 'transfer,' 'gift,' and 'indirectly' are used in the broadest and most comprehensive sense; the term 'property' reaching every species of right or interest protected by law and having an exchangeable value.

"The words 'transfer . . . by gift' and 'whether . . . direct or indirect' are designed to cover and comprehend all transactions . . . whereby, and to the extent . . . that, property or a property right is donatively passed to or conferred upon another, regardless of the means or the device employed in its accomplishment." H.R.Rep. No. 708, 72d Cong., 1st Sess., 27-28 (1932); S.Rep. No. 665, 72d Cong., 1st Sess., 39 (1932).

The plain language of the statute reflects this legislative history; the gift tax was designed to encompass all transfers of property and property rights having significant value.⁴ On several prior occasions, this Court has acknowledged the expansive sweep of the gift tax provisions. In Commissioner v. Wemyss, 324 U.S. 303, 306, 65 S.Ct. 652, 654, 89 L.Ed. 958 (1945), the Court explained that

The Court has also noted that the language of the gift tax statute "is broad enough to include property, however conceptual or contingent," Smith v. Shaughnessy, 318 U.S. 176, 180, 63 S.Ct. 545, 547, 87 L.Ed. 690 (1943), so as "to reach every kind and type of transfer by gift," Robinette v. Helvering, 318 U.S. 184, 187, 63 S.Ct. 540, 542, 87 L.Ed. 700 (1943). Thus, the decisions of this Court reinforce the view that the gift tax should be applied broadly to effectuate the clear intent of Congress.

B

In asserting that interest-free demand loans give rise to taxable gifts, the Commissioner does not seek to impose the gift tax upon the principal amount of the loan, but only upon the reasonable value of the use of the money lent. The taxable gift that assertedly results from an interest-free demand loan is the value of receiving and using the money without incurring a corresponding obligation to pay interest along with the loan's repayment.⁵ Is such a gratuitous transfer of the right to use money a "transfer of property" within the intendment of § 2501(a)(1)?

We have little difficulty accepting the theory that the use of valuable property—in this case money—is itself a legally protectible property interest. Of the aggregate rights associated with any property interest, the right of use of property is perhaps of the highest order. One court put it succinctly:

" 'Property' is more than just the physical thing—the land, the bricks, the mortar—it is also the sum of all the rights and powers incident to ownership of the physical thing. It is the tangible and the intangible. Property is composed of constituent elements and of these elements the right to use the physical thing to the exclusion of others is the most essential and beneficial. Without this right all other elements would be of little value. . . ." Passailaigue v. United States, 224 F.Supp. 682, 686 (MD Ga.1963) (emphasis in original).⁶

What was transferred here was the use of a substantial amount of cash for an indefinite period of time. An analogous interest in real property, the use under a tenancy at will, has long been recognized as a property right. E.g., Restatement (Second) of Property § 1.6 (1977); 3 G. Thompson, Commentaries on the Modern Law of Real Property § 1020 (J. Grimes ed. 1980). For example, a parent who grants to a child the rent-free, indefinite use of commercial property having a reasonable rental value of $8,000 a month has clearly transferred a valuable property right. The transfer of $100,000 in cash, interest-free and repayable on demand, is similarly a grant of the use of...