Dickman v. C. I. R., 81-5297

• Decision Date: 01 November 1982
• Docket Number: No. 81-5297,81-5297
• Citation: 690 F.2d 812
• Parties: 82-2 USTC P 13,501 Esther C. DICKMAN, Estate of Paul B. Dickman, Deceased, G. Wendell Smith, Personal Representative, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 812

690 F.2d 812

82-2 USTC P 13,501

Esther C. DICKMAN, Estate of Paul B. Dickman, Deceased, G.

Wendell Smith, Personal Representative, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 81-5297.

United States Court of Appeals, Eleventh Circuit.

Nov. 1, 1982.

Certiorari Granted Feb. 22, 1983.

See 103 S.Ct. 1181.

John F. Murray, Acting Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, John H. Menzel, Director, Tax Litigation Div., Farley Katz, Atty., Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellant.

Frank P. Riggs, Sun City Center, Fla., Guy S. Emerich, Punta Gorda, Fla., for petitioners-appellees.

Appeal from the Tax Court of the United States.

Before GODBOLD, Chief Judge, HILL and FAY, Circuit Judges.

JAMES C. HILL, Circuit Judge:

At issue in this case is whether taxable gifts resulted when lenders made interest-free loans to a relative and to a closely held corporation. The Tax Court ruled that all loans here were on a demand basis and, following its decision in Crown v. Commissioner, 67 T.C. 1060 (1977), aff'd, 585 F.2d 234 (7th Cir. 1978), it held that the loans involved no gift tax consequences. We reverse, holding that such interest-free loans are subject to the gift tax whether the loans are made for a fixed term or are on a demand basis; we remand for further proceedings relevant to the taxpayers' challenge to the gift tax deficiencies assessed by the Commissioner.

I. THE FACTS

Paul B. Dickman (now deceased) and Esther C. Dickman were husband and wife, and Lyle C. Dickman (also deceased) was their son. Artesian Farm, Inc. is a Florida corporation which was owned by Paul, Esther, Lyle, and Lyle's wife and sons. ¹

Paul ("decedent") and Esther made substantial loans to Lyle and Artesian during the calendar quarters involved here. ² With two exceptions, all the loans were evidenced by non-interest bearing demand notes. One exception was a loan made to Lyle on "open-account" and payable on demand. The other was one made to Artesian; the parties dispute its characterization as a term or a demand loan. ³ After an audit, the Commissioner determined that the loans made by the decedent and Esther resulted in taxable gifts to the extent of the value of the use of the money lent. ⁴

Statutory notices of gift tax deficiency were issued for each of the calendar quarters ending March 31, 1971, through December 31, 1976; the total amounts were $41,109.78 for Esther and $42,212.91 for the decedent. Esther and the decedent's estate ("taxpayers") sought redetermination of the deficiencies by filing petitions with the Tax Court on November 28, 1978. By amended answers, the Commissioner asserted a greater deficiency for one of the quarters. ⁵

The Tax Court found that all loans were demand loans indistinguishable from those in Crown v. Commissioner, 67 T.C. 1060 (1977), aff'd, 585 F.2d 234 (7th Cir. 1978). Relying on the opinions in Crown, the court held that the loans did not involve taxable gifts so that the taxpayers were not liable for the asserted deficiencies.

II. THE APPLICATION OF THE GIFT TAX PROVISIONS

A. The Reach of the Gift Tax

Section 2501(a)(1) of the Internal Revenue Code of 1954 imposes a gift tax on any "transfer of property by gift" made by an individual during the taxable year. Section 2511(a) provides that the tax should apply "whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible." Section 2512(b) helps define the phrase "transfer of property by gift:"

Where the property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar quarter.

The present gift tax provisions were enacted by the Revenue Act of 1932. The Congressional Committee reports reflect Congress' intent to reach any gratuitous transfer of any interest in property:

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 (subject to certain express conditions and limitations) 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), reprinted in 1939-1 Cum.Bull. (Pt. 2) 457, 476; S.Rep. 665, 72d Cong., 1st Sess. 39 (1932), reprinted in 1939-1 Cum.Bull. (Pt. 2) 496, 524.

The Treasury Regulations embody the same expansive notion:

Thus, all transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax.

Treas.Reg. § 25.2511-1(c), 26 C.F.R. (1981).

On several occasions, the Supreme Court has indicated that the gift tax provisions should be applied broadly to effectuate the clear, sweeping intent of Congress. For example, in Commissioner v. Wemyss, 324 U.S. 303, 65 S.Ct. 652, 89 L.Ed. 958 (1945), the Court held that when an individual made a transfer to his prospective wife to compensate her for trust income she would lose upon their marriage, the transfer was a taxable gift even though it was not motivated by donative intent. The Court stated that "Congress intended to use the term 'gifts' in its broadest and most comprehensive sense" and acknowledged "the evident desire of Congress to hit all the protean arrangements which the wit of man can devise that are not business transactions within the meaning of ordinary speech." Id. 324 U.S. at 306, 65 S.Ct. at 654. See also Smith v. Shaughnessy, 318 U.S. 176, 180, 63 S.Ct. 545, 547, 87 L.Ed. 690 (1943) ("The language of the gift tax statute 'property ... real or personal, tangible or intangible,' is broad enough to include property, however conceptual or contingent."); Robinette v. Helvering, 318 U.S. 184, 187, 63 S.Ct. 540, 542, 87 L.Ed. 700 (1943) (The purpose of the gift tax was to "reach every kind or type of transfer by gift.").

B. The No-Interest Loan as Property

Several court decisions have held that the right to use property for a predetermined, definite period of time constitutes "property" for tax purposes. E.g., Threlfall v. United States, 302 F.Supp. 1114, 1118-19 (W.D.Wis.1969) (involving term leasehold and charitable contribution deduction under income tax); Allen v. Commissioner, 57 T.C. 12 (1971) (same). Other cases have held that the right to use property for an indefinite period is "property." E.g., Abbott v. United States, 74-2 U.S.T.C. P 13,040 (S.D.Miss. Nov. 14, 1974) (involving gift tax valuation and the right to use property for the life of another person); Thriftimart, Inc. v. Commissioner, 59 T.C. 598, 615-16 (1973), remanded on other issues (9th Cir. 1975) (involving charitable deduction and lease terminable by owner upon sale of building); Passailaigue v. United States, 224 F.Supp. 682, 686 (M.D.Ga.1963) (involving charitable contribution deduction under income tax and the right to use real estate for such time as the owner permitted) ("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."); Sullivan v. Commissioner, 16 T.C. 228, 231 (1951) (involving charitable deduction and right to use property for duration of war).

Based on the reasoning of the previous cases, the Commissioner contends that the gift tax statute must be read to encompass the right to use hundreds of thousands of dollars interest-free for extended periods of time-the right transferred without consideration by the taxpayers to Lyle and Artesian. The Commissioner recognizes that the taxpayers reserved the right to demand repayment of the sums lent, and thus retained dominion and control over the money. However, he points out that since Lyle and Artesian received the right to use the money in the taxable periods involved here, they received the beneficial enjoyment of the transferred property, which, under the Regulations, constitutes a taxable gift to the extent of the value of that right. See § 25.2511-2(f), Treas.Reg. (1981), providing that in the case of a transfer of property which is an incomplete gift because the donor retains dominion and control, the "receipt of income of other enjoyment of the transferred property by the transferee" during the period before the gift is complete "constitutes a gift of such income or of such other enjoyment taxable as of the calendar quarter ... of its receipt."

The taxpayers admit the extremely broad import of the language found in the gift tax provisions and the relevant legislative history. They argue, though, that non-gift tax concepts of property are inapplicable and that the gift tax statute "has never been extended to the point of taxing the use of property without more than continued, withdrawable permission." Appellees' Brief at 5. With special reference to the Crown decisions, the taxpayers argue that their position is reflected in other courts' application of the gift tax statute to non-interest-bearing loans. We turn then to those cases and other related ones.

III. OTHER COURTS, OTHER CASES

A. Bargain Exchanges Involving Term Loans

In Blackburn v. Commissioner, 20 T.C. 204 (1953), the taxpayer transferred property worth $245,000 to her children for a 30-year secured promissory note in the amount of $172,517.65, bearing interest at 2.25%. At that time, the usual rate of interest for a similarly secured note was 4%. The...