Hunt family "gifts."

Individual

HUNT FAMILY "GIFTS"

The Tax Court, in C. L. Hunt v. Commissioner (T.C. Memo. 1989-335), sorted through complex silver and gold futures transactions of Texas's billionaire Hunt family to determine the nature of large transfers of money from Nelson Bunker Hunt and his wife, Caroline L. Hunt, to each of their children. These were made to cover the children's margin calls at various brokerage houses.

The parents classified all the transfers as loans and thereafter claimed nonbusiness bad debt deductions for a large portion of the unpaid balances of the "loans." The children, who were insolvent even after the debt forgiveness, did not recognize any cancellation of indebtedness income. The Internal Revenue Service, claiming that all the transfers constituted gifts, disallowed the Hunts' nonbusiness bad debt deductions and assessed both gift tax and income tax deficiencies.

The court, in its discussion of the law regarding intrafamily loans, held in part for the taxpayer and in part for the government. The court drew a distinction between transfers made when the children were solvent and those made when the children were insolvent. With respect to the transfers made while the children were solvent, the court found the taxpayer acted consistently with an intention to create bona fide debt (and avoid the gift tax).

The transfers made after the Hunts knew or, in the court's opinion, should have known the children were "hopelessly insolvent" were considered gifts. The court found the Hunts could not have had a reasonable expectation or belief they would be repaid for these transfers.

The court also found the fact that the loans were made on Mr. Hunt's reliance that the silver market would rebound did not constitute a contingency to the children's repayment of the debt (which generally would cause the transfers to be considered gifts) but merely represented a risk factor relating to the children's ultimate ability to repay the loans. The silver market did not rebound.

Observation: While Hunt does not expand existing case law in the area of intrafamily loans versus gifts, it does provide a useful discussion of the significant factors in the distinction the court will make between them. Although the case does not suggest there can never be an intrafamily loan when the debtor is insolvent at the time of the loan, the case does suggest care be taken in assessing the degree of insolvency and, in an objective manner, the real expectation of being rapaid.