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Are gift demand loans of tangible property subject to the gift tax?

Suppose a parent "loans" (1) her vacation home "Dellview" in Aspen to her adult child for a non-specified period of time without rent or other charge for the use of the property. The home has a rental value of $1,000 per day. There is no formal lease agreement. Therefore, the parent, as owner, can occupy the premises or evict the child at will. The daughter in fact occupies the property for sixty-five days in the summer of 2009. Has Mother made a gift to daughter for gift tax purposes? Would any variation in this fact pattern alter the answer?

If relying only on the function of the federal gift tax to hack up the estate tax and, perhaps, the income tax, the answer would be that there is no gift. On the other hand, if the gift tax is viewed as a stand-alone excise tax on gifts of all types, a technical case can be made that there are gifts totaling $65,000, but there may be good reasons for not taxing the gift. The gift tax statute does not specifically deal with what might be generically called "gift demand loans of property," and the general language of the gift tax statute arguably would not reach them on the ground that the grant of permission to use property is not itself a "property interest." (2) The 1984 case of Dickman v. Commissioner, (3) however, held that an interest-free demand loan of cash did entail a gift of a property interest. Moreover, dictum in the Dickman majority opinion suggests that the gratuitous rent-free-use of another's tangible property could be a gift. (4) Section 7872, enacted in 1984 in the wake of Dickman, applies to below-market loans of money, but not property.

Part I explains how the deep structure of the gift tax precludes a gift in this scenario. Part II critiques the Dickman case. Part III holds that statutory enactments subsequent to Dickman do not resolve the issue. Part IV distinguishes loans of personal-use property from loans of money. Part V deals with the question of whether the gratuitous use of another's property is the equivalent of a taxable distribution from a revocable trust. Part VI provides a summary and offers suggestions for legislation and/or administrative pronouncement.
TABLE OF CONTENTS

I.    THE CASE AGAINST TREATING RENT-FREE DEMAND LOANS OF         184
      TANGIBLE PROPERTY AS GIFTS

II.   THE FLY IN THE OINTMENT: DICKMAN V. COMMISSIONER            188

      A. The Prelude to Dickman                                   188

      B. The Dickman case                                         190

      C. Dickman Case                                             195

         1. Generalities Decide Nothing                           195

         2. Did Dickman Correctly Identify What was               198
            Transferred?

            a. Imputed Cross-Payment Approach                     198

            b. Revocable Transfer of Cash Theory                  203

            c. Gift of Right to Use Money                         203

         3. Treating the Gift as Occurring When the Money is      208
            Lent

            a. Does the Open-Gift Approach Support the Result in  209
               Dickman?

            b. Treating a Gift Demand Loan as a                   213
               Retained-Interest Transfer

            c. Valuing the Consideration at its Fair Market       214
               Value

III.  THE STATUTORY AFTERMATH                                     218

      A. Section 7872                                             218

         1. Alternative Models for a Legislative Solution         218

            a. The Revocable Trust Model                          219

            b. The Retained Term Interest Model                   220

         2. Section 7872 Compared to the Term Interest Model      223

         3. Does Section 7872 Carry Implications for Loans of     226
            Property?

      B. Section 2503(g)                                          227

IV.   DOES DICKMAN "FIT" GIFT DEMAND LOANS OF PROPERTY?           230

      A. Dickman Does Not Apply to Gift Property Loans            230

         1. No Transfer of a Property Interest                    231

         2. Demand Loans of Property are Non-Transfers or         235
            Revocable Transfers

         3. The Pre-1969 Income Tax Charitable Deduction Cases    236

      B. Is the Use of Property the Equivalent of a Distribution  240
         from a Revocable Trust?

         1. The Text of the Regulation Section and its Possible   240
            Relevance to Loans of Property

         2. Did Dickman Adopt a Use-Value Concept of              240
            "Enjoyment?"

         3. History of the Regulation                             242

         4. Discerning Meaning from the Historical Context        244

         5. The Meaning of "Enjoyment" Under the Estate Tax       247

         6. Is There a "Gift-in-Substance" Doctrine?              253

         7. Revocable Transfers vs. Non-Transfers                 254

         8. The Regulation Cannot Enlarge the Statute             255

V.    CODA: CONSUMPTION SPENDING FOR SELF AND OTHERS              257

      A. Lending and Sharing Are Incidents of Ownership           257

      B. Gifts of Consumption                                     259


I. THE CASE AGAINST TREATING RENT-FREE DEMAND LOANS OF TANGIBLE PROPERTY AS GIFTS

Suppose a case based on the hypothetical described above comes before the Supreme Court, but assume that all cases and rulings concerning below-market loans of cash, including Dickman, did not exist. The opinion for the Court might look like the one that follows.

SMITH v. COMMISSIONER OF INTERNAL REVENUE

-U.S.-

PER CURIAM:

The Commissioner of the Internal Revenue Service (Service) asserted a gift tax deficiency against taxpayer Alice Smith for allowing her adult daughter, Jane Stark, to use her vacation home in Aspen, Colorado, known as Dellview, rent free for sixty-five days in 2009. The Tax Court and the Ninth Circuit held that no deficiency was owed, and we granted certiorari to resolve an important question under the gift tax.

The Commissioner alleges a gift of $65,000 on the theory that Smith transferred value to Jane at the rate of $1,000 per day, the fair rental value of the property, for a period of sixty-five days. We reject the Commissioner's position for the reasons set forth below.

Section 2501(a)(1) of the Internal Revenue Code (Code) imposes a tax "on the transfer of property by gift ... by any individual." The term "property" includes any "interest" in property. (5) Thus, if X owns Blackacre, and gratuitously transfers a term of ten years to Y, then X has made a gift of a ten-year term interest to Y. If X instead gratuitously "leased" the premises to Y for ten years without rent, granting Y the same rights and privileges as a rent-paying lessee, the transaction would be the same, in substance, as a gift of a ten-year term interest, because a leasehold is classified as a property interest.

The use of property by an owner thereof or by the holder of a possessory interest in property, such as a legal life estate, is an incident of ownership. On the other hand, the mere use of that property with the permission of the owner is not itself a property right or an interest in property of the user. Thus, if my neighbor allows me to swim in her swimming pool, I have not acquired property or an interest therein, nor has the pool owner parted with property or any interest therein. When a person acquires personal use property, the contemplated personal use is not simply that of the purchaser individually, but also such person's spouse, family, friends, household employees, and other permitted users. The grant of permission includes the power to revoke that permission. In effect, the property never ceases being held for the owner's personal use.

In addition, it is axiomatic under the federal gift tax that a transfer of property under which the transferor retains control of the property is not a completed gift. (6) In the present case. Smith could have revoked her daughter's possession of the property at any time. Thus, there was no completed gift of the property or an interest therein.

The Commissioner argues that the use of the property by Smith's daughter is the equivalent of a distribution of money from a revocable trust, and that such use is a gift, because it is beyond the power of Smith to revoke her daughter's use once it has occurred in the course of time. (7) This argument is unavailing. Unlike the case with a distribution of money or property from a revocable trust, there is no material wealth both foregone by Smith and obtained by her daughter that is cast beyond the power of Smith to recall. Smith's daughter has nothing to show for the use of the property other than whatever psychic benefits might have been derived from such use. And psychic benefits are not gifts of property interests under the gift tax, any more than they are income under the income tax. (8)

The gift tax is to be construed in relation to the estate tax, which is a tax on a tax base comprised, among other things, of property owned by the decedent at death. One clear way of avoiding the estate tax is to make gifts of property or interests therein before death, because then the subject of the gift is no longer in the gross estate of the donor. Section 2503(b) of the gift tax states that, "When property is transferred for less than an adequate 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. ... "Thus, we have held that a transfer of property not in the ordinary course of business (9) is a gift for gift tax purposes, even though made without donative intent, solely because the donor did not receive consideration in money or money's worth. (10) Consideration in money or money's worth reduces or eliminates the amount of the gift precisely because the consideration received increases the donor's potential gross estate. Consideration that does not augment the donor's potential gross estate is not consideration "in money or money's worth." (11) In Wemyss, a promise of marriage was held not to he consideration in money or money's worth, even though it was valid consideration under the law of contracts.

In short, the federal gift tax is wholly objective in defining a gift transaction as a transfer of material wealth. The mere fact that a gratuitous arrangement has value to the recipient is not sufficient to charge the transferor with a gift for gift tax purposes. Enjoyment and utility are not themselves wealth. For example, the performance of services by X for the benefit of a family member is not a gift for gift tax purposes. (12)

In the present case, Smith has not diminished her gross estate by allowing her daughter to use the property rent-free. When Smith receives the property back from her daughter, the property would have the same value as if Smith had lived in the property for the 65 day period. Crucially, if Smith were to die while the daughter is occupying the premises, the daughter's rent-free occupancy, not being an outstanding property interest, would not reduce Smith's gross estate. The personal representative of Smith's estate would have the power to evict the daughter, as would any purchaser of the property.

It is true that Smith could have leased Dellview at market rent and thereby have increased her gross estate. A person is not charged with a gift by failing to put money or property to income-producing use, however. Indeed, a person is not charged with a gift by letting property lie fallow, consuming the property, or committing economic waste. In general, taxation operates upon what the parties have actually done, not on what they might have done. If Smith had charged rent to her daughter under a term lease and then had forgiven the rent payments after they became due, we might have a different case, because reciprocal assets and liabilities would be extinguished. (13) But that is not the case here.

The Commissioner does contend, however, that here the donor is transferring wealth to the daughter, because the donor is not only foregoing rent but implicitly allowing the daughter to rent the property for cash. The Commissioner cites the proposition that the gift tax is a back-up to the income tax because the gift tax imposes a toll charge on the transfer of income-producing property to a donee who is presumably in a lower income tax bracket. In the present case, there was no such possibility of shifting income to Smith's daughter, even if the latter were allowed to rent the premises to a third party--a fact not disclosed in the record. First, Smith's daughter has no legal right to rent Dellwood to a third party, but only the right to use the property on a non-exclusive basis. If Smith's daughter were to rent the property to a third party, the rent would legally belong to Smith, the owner of all rights in the property. If Smith allowed her daughter to keep the rent, then Smith would be effecting cash gifts to her daughter. The same analysis would apply if the daughter's rights were the equivalent of a tenancy at will because in that case the transaction would be characterized as a revocable transfer, and the income procured by the daughter would be included in Smith's income for income tax purposes, even if the daughter had the right, pursuant to an agreement with Smith, to keep the income. (14)

It seems likely that transactions such as the one presented here are quite common. The Commissioner has not, until very recently, taken the position that transactions of this sort are gifts. The Commissioner assures us that most such transactions would not generate gift tax liability because of the gift tax exclusion. However, the annual exclusion would not in fact apply in this case, because, even if the transaction were characterized as a tenancy at will followed by a reversion, the present interest of the donee cannot be valued by actuarial methods at the inception of the transaction. (15) The Commissioner argues in the alternative that the gift is not made at the inception, but instead occurs with the passage of time; therefore, each annual gift would qualify for the exclusion. Since we hold that there is no gift at any time, it is not necessary for us to decide this timing question. In any event, the gift tax annual exclusion is limited to $13,000 per donee per year. The per-donee limit, if applicable, would place a burden on donors to keep track of all "loans" of tangible property, and calculate the value of the rent foregone. In addition, the amount subject to gift tax is the net gift, which would be the gross gift reduced by obligations undertaken by the donee. (16) But the Commissioner has offered no blueprint for calculating the net gift in this kind of case, and we decline to delve into such ancillary questions on our own. If the gift tax is to be expanded into the realm of intra-family uses of tangible property, such a move is better left to Congress, which is equipped to fill out the details that would be required to implement such a basic change in the tax law.

Affirmed.

Of course the Supreme Court has never decided the hypothetical Smith v. Commissioner case above. But the Court did decide Dickman v. Commissioner in 1984. (17) As already noted, in Dickman, the Supreme Court held that an interest-free demand loan of cash from a parent to a child resulted in passage-of-time gifts equal to the foregone interest. Dickman would appear to cast doubt on the conclusion reached in Smith.

II. THE FLY IN THE OINTMENT: DICKMAN V. COMMISSIONER

This part considers the evolution of non-statutory gift tax doctrine in relation to interest-free loans of cash, as opposed to property. Basically, it expounds and critiques Dickman.

A. The Prelude to Dickman

The problem of interest-free loans of cash under the gift tax first received judicial cognizance in a 1953 Tax Court case, Blackburn v. Commissioner, holding that an interest-tree term loan resulted in a present gift equal to the excess of the amount lent over the value of the repayment obligation. (18) Under standard present-value analysis, an obligation to repay a fixed dollar amount, say $100,000, without interest in ten years is worth significantly less than $100,000. In contrast, in an arms-length loan, or in a loan that pays a market rate of interest, the borrower's obligation to pay principal and interest presumptively has a value equal to the amount lent.

As an aside, this kind of analysis does not really work with a "loan" of in-kind property for a fixed term, because in the case of property there is no fixed dollar amount that can be discounted back to the present. The estate and gift taxes, however, have long indulged the fiction that such discounting is appropriate as a means of valuing successive interests in property. Assume that X, owning Blackacre presently worth $1 million, conveys a ten-year term interest to Y, but retains the reversion. Under traditional gift tax doctrine, only the value of the term interest is a gift. (19) It is assumed that the values of the term interest and the reversion must add up to $1 million, the current value of the property. This assumption is erroneous because partial interests may possess an aggregate fair market value that is more or less than the value of a fee simple interest in the property due to such factors as control or lack thereof, lack of marketability, illiquidity, and the balance of upside versus downside risks, that attach to the partial interests. Next, it is assumed that the value of the reversion can be figured by discounting the value of the property ten years in the future, assumed to be an amount equal to the current value of the fee simple interest, $1 million, to its present value. The assumption that the property will be worth $1 million in ten years is highly unrealistic. Based on these dubious assumptions, it is concluded that the value of the gift of the term interest is an amount equal to the excess of $1 million over the present value of the reversion. In the case of temporal interests in property, this kind of faulty "subtraction method" analysis is felt to be necessary, because the gift tax value has to be determined at the time of transfer.

In any event, the Service, in a Revenue Ruling published in 1973, extended the holding of the Blackburn to gift demand loans. (20) In the case of a demand loan, the value of the interest-free repayment obligation cannot be ascertained at the time the loan is made, because the repayment date is not known in advance, nor is it pegged to predictable external events. Here, the Service relied on the "open gift" doctrine that it had advanced in an earlier Revenue Ruling, holding that where a right has been transferred but the value thereof cannot be presently determined due to future contingencies, there is no completed transfer by gift until such time as the amount of the gift becomes susceptible to valuation. (21)

In the 1978 decision of Crown v. Commissioner, the Seventh Circuit rejected the Commissioner's position with regard to gift demand loans. (22) The Seventh Circuit noted a possible analogy of the interest-free demand loan of money to a revocable transfer of property, but then distinguished the two situations. In the property scenario, distributions or payments to third parties are treated as gifts by the donor, whereas in the loan scenario the borrower is only given the opportunity to invest, and any actual investment yield is attributable to the borrower, rather than being treated as having been acquired from the lender as a gift. (23)

On facts similar to those in Crown, the Eleventh Circuit in Dickman upheld the Commissioner's approach on the grounds that the borrower had a valuable property right whose value was harvested with the passage of time. The Supreme Court granted certiorari to resolve the conflict among the circuits.

B. The Dickman Case

The Supreme Court held, by a 7 to 2 vote, that an interest-free demand loan resulted in a series of gifts with the passage of time measured by the interest foregone by the lender. (24) Chief Justice Burger, writing for the majority, began with some generalities equating the broad reach of "gift" under the gift tax with the broad reach of "income" under the income tax. (25) The majority opinion dealt with the issue of whether the right to use money lent on demand was a valuable property interest as follows:
  We have little difficulty accepting the theory that the use of
  valuable properly--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. ... 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. 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 valuable property. (26)


On the issues of the timing and valuation of the gift, the majority opinion stated: "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. " (27) The majority opinion cited with approval the Revenue Ruling holding that a gift that cannot be valued at the time the transfer becomes enforceable is deemed to be complete at such later time when the value of the gift becomes ascertainable. (28)

The majority opinion observed that the gift tax operates both to reinforce not only the estate tax, but also the income tax. Thus, no-charge loans of money and property would allow a high-bracket transferor to shift income and wealth to lower-bracket family members. Although there is no tax obligation to put money or property to profitable use, a loan of money or commercial property is essentially a choice to allow another person to put the money or property to work for his or her own benefit.

The majority opinion declined to distinguish the case of the rent-free use of personal-use tangible property, and instead attempted to downgrade the significance of this issue:
  Petitioners next attack the breadth of the Commissioner's view that
  interest-free demand loans give rise to taxable gifts. Carried to its
  logical extreme, petitioners argue, the Commissioner's rationale
  would elevate to the status of taxable gifts such commonplace
  transactions as a loan of the proverbial cup of sugar to a neighbor
  or a loan of lunch money to a colleague. Petitioners urge that such
  a result is an untenable intrusion by the Government into cherished
  zones of privacy, particularly where intrafamily transactions are
  involved. [The majority opinion then noted that the provision of
  support is not a gift.] ... [I]t is not uncommon for parents to
  provide their adult children with such things as the use of cars or
  vacation cottages, simply on the basis of the family relationship.
  We assume that the focus of the Internal Revenue Service is not on
  such traditional familial matters. When the Government levies a gift
  tax on routine neighborly or familial gifts, there will be time
  enough to deal with such a case. Moreover, the tax law provides
  liberally for gifts to both family members and others; within the
  limits of the prescribed statutory exemptions, even substantial gifts
  may be entirely tax free. [The majority opinion then noted the
  various exclusions, deductions, and so on, that prevent gifts from
  being taxed.] These generous exclusions, exceptions, and credits
  clearly absorb the sorts of de minimis gifts petitioners envision
  and render illusory the administrative problems that petitioners
  perceive in their "parade of horribles." (29)


A dissent by Justice Powell, joined by Justice Rehnquist, noted that the Service's position was relatively new and would be better dealt with by the Congress than the courts. (30) The dissent then turned to the issue of the rent-free use of personal-use property, stating:
  The most troublesome issue generated by the Court's opinion is the
  scope of its new reading of the statute. The Court does not limit its
  holding to interest-free loans of money. The Court states: "We have
  little difficulty accepting the theory that the use of valuable
  property ... is itself a legally protectible property interest." Ante,
  at 336. Under this theory, potential tax liability may arise in a
  wide range of situations involving the unrecompensed use of property.
  Examples could include the rent-free use of a home by a child over
  the age of minority who lives with his parents, or by a parent over
  the age of self-support who lives with her child. Taken to its
  logical extreme, this theory would make the loan of a car for
  a brief period a potentially taxable event. (31)


This passage continued by noting that in-kind gifts of this sort would be hard to value. (32) The dissent also noted that the various exclusions, etc., did not relieve a transferor from having to value the various gifts or to file gift tax returns. (33)

Based on the foregoing, the holding of Dickman would appear to encompass the scenario where a parent makes a rent-free at-will (i.e., revocable) lease of rental property to a relative. It cannot be doubted that a rent-free term lease of commercial property to a related party would be a gift of a term interest in property. Because of the fact that in oral argument the taxpayer's counsel would not even concede this obvious point, (34) the majority opinion in Dickman undoubtedly wanted to make it clear that not only gratuitous term leases would result in gifts, but that this result could not be avoided by instead entering into gratuitous at-will leases of at least rental property. (35)

As to rent-free on-demand uses of tangible property held for personal use that do not rise to the level of a leasehold interest, it is not clear whether or not these are gifts under Dickman, despite the majority opinion's unwillingness to distinguish cases of this type. The government's arguments were focused on the point that an interest-free demand loan of cash gave the borrower property rights, just as a lease of property confers a property right on the lessee, (36) and were somewhat vague on the issue of "gift demand loans" of personal-use property. (37) The majority opinion concluded its discussion of this scenario with the remark: "When the Government levies a gift tax on routine neighborly or familial gifts [of such items as cars and vacation homes], there will be time enough to deal with such a case." (38) Pretending, however, that these cases might be distinguishable on the ground that they involve "traditional family matters" just won't work. (39) The gift tax, apart from the exemption for the provision of support to dependents, (40) is precisely about traditional family matters!

To my knowledge, the Service has never announced that it will or will not apply Dickman to the rent-free use of a tangible personal-use asset. It appears that the Service has not moved down this path.

C. Dickman Analyzed

The majority opinion in Dickman is doctrinally confusing by reason of overgeneralization and of treating several distinct theories as one, while ignoring a theory that fit but did not give the desired result and another theory that might have reached a result more favorable to the government than the one reached.

1. Generalities Decide Nothing

The majority opinion created the environment for mis-mingling separate theories by opening with sweeping generalizations that suggest an unlimited scope for the gift tax comparable to that of the income tax. (41) Neither tax has unlimited scope and each tax has a different subject. The income tax is a tax on (non-excluded) receipts, whereas the gift tax is a tax on transfers. Additionally, whereas the income tax might sometimes reach economic benefits other than cash or property, the gift tax is limited to transfers of property, including cash, and interests therein. Finally, the term "gift" has a different, if largely overlapping, meaning under the two taxes. (42)

Nor is the invocation of a purpose of the gift tax to back up the income tax (43) sufficient to reach the Dickman result. The primary purpose of the gift tax is to back up the estate tax, which could otherwise be easily avoided by inter vivos gifts. The purpose to back up the income tax is secondary, at best. With the exception of one recent statutory provision that might not take effect, (44) the gift tax rules have never been coordinated with the income tax rules. (45) There has never been a rule that devices that successfully shift income are per se subject to gift tax. In fact, the Supreme Court held in 1939 that a transfer will not be treated as complete under the gift tax just because it is treated as complete under the income tax. (46) That same case held that a gift would be treated as being incomplete under the gift tax precisely on account of being includible in the gross estate for estate tax purposes. (47) The issue of whether a bona fide outright no-strings-attached gift to an adult should be subject to an excise tax solely because it is effective to shift future income from property would seem to be a matter for legislative judgment, not judicial logic--especially given the fact that the income tax itself can and does provide rules for treating gifts, or gifts to minors, as being ineffective for income tax purposes. (48) Although an income tax problem was inherent in the facts of Dickman, the case was strictly a gift tax case and was not a suitable vehicle for solving income tax problems.

Value, as well as future income, can be transferred without a transfer of a property interest. Thus, it is clear that the gratuitous performance of services by one person for another does not fall within the gift tax, because there is no transfer of wealth. (49) To be sure, a borderline problem exists as to the distinction between property and services. Suppose that X owns an airplane that Y, a family member, desires to use. There are at least three possible forms in which such use may occur. First, if Y leases the aircraft from X for a term of years, then X has transferred a property interest to Y. Second, if Y buys a ticket for a trip on X's airplane, the ticket can, unless restricted by law or contract, be the subject of a gift from Y to Z. (50) Third, X can allow Y to fly on a space-available basis, but in that case there is no transfer of property or an interest therein, but merely the performing of a gratuitous service.

Along lines similar to the performance of services, the gift tax is not a tax on foregone economic opportunities--the failure to create wealth--because no existing wealth is transferred from one person to another. Nor does the gift tax even reach the situation where one channels an economic opportunity to another, as by giving an investment tip, because the transferor does not have legally-protected rights against the world, and the transferee's efforts are what actually create the wealth. (51)

2 Did Dickman Correctly Identify What was Transferred?

The principal doctrinal problem faced by the Court majority was to identify the property interest, in the gift tax sense, that the lender parted with. The Court did not succeed because it confused the various available theories.

a. Imputed Cross-Payment Approach

The Court's approach of treating the foregone interest as a gift produces the awkward result of treating the borrower as having economic gain from both not having to pay interest and (as the parties agreed) (52) from the investment yield on the borrowed funds. (53) The parties in Dickman correctly assumed that any actual income obtained by the borrower by using the borrowed funds would be taxable income to the borrower, not the lender. This awkwardness does not go away simply because one type of economic gain happens to be excluded under the income tax. (54)

The only two ways of avoiding this awkwardness and justifying the existence of a wealth transfer where no wealth transfer is evident would be to view the situation as entailing equal cross-payments of cash gifts from the lender and cash interest from the borrower. The Court did cite, even if incorrectly, the cross-payment approach as being the government's theory, (55) but, although the Court adopted a gift tax result consistent with this theory, the Court did not appear to follow this approach in its analysis, as it did in an income tax case decided a few years later. (56) The theory the Court appeared to follow in Dickman--the open-gift theory (57)--is not conflatable with the cross-payment theory.

The government did not advance the cross-payment theory in argument, perhaps because the Service felt that adoption of such a theory would have undermined its position that gift loan cases were to be treated differently from cases where the lender charges interest but intends, at the time of the loan, to forgive principal and interest payments as they come due. Here the Service has taken the dubious position that the borrower's obligation is not consideration in money's worth, resulting in a gift of the whole property. (58)

In any event, any such putative transfer by the borrower to the lender that offsets the series of gifts from the lender to the borrower would have the character of interest. The analysis would proceed as follows: the related-party borrower is actually charged interest, but the lender gives the borrower cash to make the interest payments, but since the amounts are equal, no cross-transfers actually take place. Here the lender has gross income equal to the interest putatively received but is charged with equal gifts, and the borrower has deductions for interest putatively paid against actual investment income, along with excludible gifts received.

Unfortunately, a theory involving putative interest payments from the borrower to the lender poses income tax issues that were not before the Court, partly because the borrower was not a party to the litigation. (59) Additionally, the Supreme Court, as well as lower courts, have avoided dealing with below-market loans in an income tax context, deferring entirely to Congress, which ultimately, in section 7872, (60) adopted precisely the cross-payment approach. (61) The fact that these problems were shortly thereafter fixed by Congress is no reason to overlook the Supreme Court's over-reaching in Dickman.

Although the cross-payment approach may be claimed to be an application of the general substance-over-form approach, it actually goes beyond that to restructure the transaction into something that it was not. The Service has no general statutory authority for restructuring gratuitous-transfer situations for either gift tax or income tax purposes. (62) It is common wisdom that even the substance-over-form doctrine is rarely applied in the estate and gift tax area, (63) except perhaps to undress sham transactions. (64)

On the merits, a scenario in which cross-payments really do exist in substance is one where the lender charges interest and subsequently forgives the interest payments as they become due, which is indistinguishable from giving the borrower the cash with which to make the interest payments. Here the borrower gains by not having to pay something that is actually owed. Negative wealth is erased. The situation where no interest is charged in the first place is distinguishable because there the borrower's wealth position is not affected. This distinction between avoiding an incurred cost and avoiding a non-incurred cost has long been recognized in the gift tax. (65) In the gift demand loan scenario, the borrower does not avoid an incurred cost or a cost that would certainly have been incurred. (66) No market good or service enjoyed by the borrower is paid for, and no liability of the borrower is reduced or eliminated by avoiding the interest cost. The "avoided cost" can be imagined only because of the loan itself, which is initiated by the lender. (67) If the borrower gains anything, it is the investment gain, if any, that would not have occurred without the loan. Certainly there cannot be gifts of both the investment gain of the donee and the avoided interest cost.

The most that can be said is that an imputed-cross-payment approach gives the same results as would occur under a demand loan transaction where the interest is actually charged and then forgiven as and when payment of it becomes due. But there is no doctrine that requires taxpayers to reach a given economic result by taking the least favorable alternative route tax-wise. (68) The government has had only mixed success applying a substance-over-form approach to below-market loans in an income tax context, (69) where its authority and ability to employ such an approach have much firmer foundations. (70)

Of course, reasons that would inhibit courts from adopting a cross-payment approach to below-market loans would not constrain a legislature.

b. Revocable Transfer of Cash Theory

A second possible approach to identifying the gifts would have been to hold that the transfer of the loan amount was incomplete by being revocable, because it was recallable at will. (71) Where a transfer is deemed incomplete, the property is deemed to belong to the transferor, and any cash or property that ends up in the hands of a recipient is deemed to have been received by the transferor and then re-transferred to the recipient by gift. (72) Although the Dickman majority opinion cited the revocability of the loan, (73) it failed to follow through on this approach. If it had, the gifts would have been of the income and gains actually obtained by the borrower, plus any portion of the principal repayment obligation forgiven by the lender, rather than the avoided interest cost of the borrower. (74) The actual-gain approach would have entailed the practical disadvantage of requiring the government to trace the cash loan through to the borrower's use of the cash. Moreover, if the borrower obtained no investment profit, there would be no gifts under the gift tax.

The revocable-transfer approach would not really apply to gift demand loans of cash in any event, because the lender retains no dominion or control over the loaned amount or the fruits thereof. (75) The right to demand the outstanding principal amount is merely a money claim--a chose in action. The borrower has absolute command of the funds and the fruits thereof, and the income attributable to the use of the borrowed funds is accordingly attributed to the borrower for income tax purposes.

c. Gift of Right to Use Money

The theory the Dickman majority expressly adopted was that there was a transfer by the lender to the borrower of one of the rights in the bundle of rights constituting the fee ownership of property, namely, the right to use cash, and that this right had an ascertainable value equal to the market interest foregone with the passage of time while the loan was outstanding. This theory happened to be identical to the Service's position as stated in Revenue Ruling 73-61, (76) and is compatible with the "bundle" approach taken in the Court's takings-of-property jurisprudence. (77)

Merely stating a transfer-of-use theory doesn't lead to the result of treating the gifts resulting from a demand loan as occurring with the passage of time. The gift tax is imposed at the time of transfer, and the right to use the money is transferred when the loan is made. In an attempt to resolve this difficulty, the Dickman majority came up with the theory, stated in a footnote, that the lender retained the dominion and control over the use of the funds, if not of the funds themselves, by being able to recall the loan. (78) This dominion and control was relinquished with the passage of time by not demanding repayment, and therefore the gifts occurred with the passage of time. (79) This theory also fails to locate a transfer of wealth, however. A power to control wealth, although valuable, is not itself wealth. Additionally, if a power exists at all, it is over the money lent, not of its use apart from the money itself. The loan funds and their use are inseparable. Whoever has dominion over the funds has dominion over their use. Outright transfers of cash do not implicate any bundle of rights. There are no concurrent or future interests in cash transferred outright. The right to use cash is not equivalent to a lease, which is indeed a partial interest in property. Cash is unitary and is owned exclusively by the possessor. A loan conveys not the right to use cash, but the right to have cash, subject to an obligation to pay cash in the future.

In any event, the release-of-use theory led to the result that the gift was measured, over time, by the use value of the money, not the actual yield of the borrower. The use value is the interest that would be payable on comparable loans and appears to be descriptive of an avoided cost of the borrower. As previously noted, an avoided-cost approach can result in a gift only with respect to costs actually incurred by the donee or costs that the donee would certainly have incurred. (80) In most gift loan cases, however, it cannot be assumed that the borrower would have borrowed at a market rate of interest.

Another way valuing the gift as being the use value of the money would be to view the use value as describing an opportunity cost associated with money--what any holder of the money could earn by making a safe investment of it. Hence, whatever use of the money the borrower actually undertook must have been subjectively worth at least that of a safe return. The position of the lender can be similarly described. Opportunity cost is only a way of setting a minimum price tag on subjective value, however. Even that is doubtful, because the opportunity-cost concept assumes the parties are acting solely according to rational economic self-interest. In any event, the gift tax operates on gratuitous transfers of actual wealth that can be valued objectively at market prices. Subjective value is not good enough for a wealth transfer tax.

Up to this point, the transfer-of-use rationale appears to be unable to locate any loss in the lender's potential gross estate or any gain in the borrower's wealth. To state the problem once again, a failure to secure investment gain is not a de-accession of wealth, and an avoided non-incurred cost is not an accession to wealth. The Court paid lip service to the former principle, but then said that making an interest-free loan to a relative distinguished the scenario of allowing cash to lie idle. (81) This is surely begging the question, as the only reason given for distinguishing the two cases is that two parties are involved rather than one, and it still has to be shown that the borrower has acquired wealth. Moreover, from the lender's point of view, making an interest-free loan is just another way of allowing cash to lie idle.

Nevertheless, it could be argued, in defense of the result reached by the Court, that entering into a transaction with another is distinguishable from allowing funds to lie fallow, because now two sides of the transaction can be compared. In the case of market-interest term loans, interest is charged to equalize the bargain as of the time the loan is made. The amount lent equals the present value of the borrower's obligations to pay interest and repay principal. Over time, however, the lender gains, and the borrower loses, on account of the interest payments. In the case of interest-free term loans, the bargain is unequal in present value terms, because the present value of the future repayment obligation is necessarily less than the amount lent. Over time, however, there is no financial gain or loss to either party. In tabular form:
LOANS

                            Market-Interest  Interest-Free

TIME FRAME  Present Values  Equality         Lender Losses

            Over Time       Lender Gains     Equality


Thus, in the case of term loans the appropriate tax treatment depends on the selection of the time frame. There is no doctrinal inevitability in either choice. In the income tax, apart from a handful of statutory provisions, the common law principles governing loans are: (1) borrowing and lending are not taxable events on the theory that the obligation to repay principal alone is deemed to fully offset the borrowed amount, and (2) any gain or loss can occur only at the back end, where it is measured by the difference between the amount received at one time and the amount paid at another time.(82) These outcomes adhere to the "over time" approach. Accordingly, apart from special statutory provisions providing otherwise, a no-interest term loan is not treated as an immediate loss to the lender, even though the present value of the repayment obligation is less than the amount lent. This approach was developed by the Supreme Court itself, (83) and has been followed by it in cases decided both before and after Dickman. (84) Although none of the Supreme Court cases, apart from Dickman, involved related-party transactions, the majority opinion in Dickman showed blissful unawareness of the Court's own contrary doctrine involving borrowing and lending.

The question, then, is whether a court, as opposed to Congress, should employ a present-value approach in the case of below-market gift term loans under the gift tax. The answer might at first appear to be "yes," because the gift and estate taxes have long used this approach in the case of transfers involving future interests. Thus, if A deeds Blackacre to B for twelve years, reversion to A--a transaction that is the "property" equivalent of an interest-free term loan--A is treated as having made a gift of B's term interest regardless of whether B puts Blackacre to productive or personal use. (85) That interest is valued by using actuarial tables. (86) The actuarial tables in turn are constructed according to present value principles, although certain built-in assumptions are made. (87)

The present value approach is indeed appropriate for gift term loans under the current gift tax because of the potential for avoidance of the current estate tax. Treating the example discussed in the preceding paragraph as a gift term loan, and assuming that A dies before the twelve-year term has expired, the remaining value of B's term interest--again calculated by using actuarial tables--will effectively be excluded from A's gross estate. (88) If the term interest were not subject to gift tax, then less than 100% of the property would be subject to transfer tax. But note that the gift tax has to use actuarial tables solely because the estate tax uses them. Actuarial tables would not be necessary under a universal hard-to-complete rule under which retained-interest transfers are wholly included in the gross estate, or its opposite, a universal easy-to-complete rule under which such transfers were treated as gifts of the entire property. Salient examples of such rules exist under the current system. (89) In short, whether or not to construct a system that requires use of actuarial tables is a matter of legislative choice, and the better choice may be a system that forgoes the use of actuarial tables, which can be gamed by tax planning. (90)

Even if a present value approach were appropriate for gift term loans, it does not necessarily follow that the same approach can or should be used for gift demand loans. Since the date of repayment is not known, discounting to present value is not an option. Nothing is excluded from the gross estate on account of the futurity of the repayment obligation, because the personal representative can and must call the loan immediately. Any diminution of the gross estate is the excess of the stated principal over the value of the repayment obligation discounted with reference to factors other than futurity, which is the same as the measure of the gift amount lent less the value of consideration, determined under conventional gift tax principles. It is true that the passage-of-time approach of Dickman produces the same gift tax result that would occur for a gift term loan, in present value terms, if the same rate is used to impute interest on the gift demand loan as is used to discount the repayment obligation in the gift term loan scenario. (91) However, equity of gift tax result is not a sufficient basis for a judicial decision if the result flies in the face of gift tax doctrine, which demands that gifts be valued at the time made, and does not serve the cause of preventing estate tax avoidance. In fact, actuarial tables are used under the gift tax precisely because gifts must be valued at the time they are made.

3. Treating the Gift as Occurring When the Money is Lent

The theories mentioned so far all presuppose that there as no gift at the time the gift demand loan was entered into, because it is axiomatic that the yield from a completed gift cannot itself be treated as an additional gift. Since the gift tax is imposed when a completed transfer occurs, (92) and since a gift demand loan is not incomplete by reason of being a revocable transfer, it would appear that the only transfer of wealth in the gift tax sense occurs when the money is lent. The borrower's repayment obligation is consideration for the transfer, and is subtracted from the amount transferred to arrive at the net gift. (93) The gift tax treatment of a term loan follows this pattern, and the same must be true of a gift demand loan. If the consideration were full and adequate, the gift demand loan would never produce a gift, (94) but such a position was rejected by Dickman, which held that there was a gift but that the gift could only be valued with the passage of time. (95) This subsection considers the timing issue.

a. Does the Open-Gift Approach Support the Result in Dickman?

In the case of a gift term loan, the consideration for the transfer (the repayment obligation) can be reduced to present value because the repayment date is known. In the case of a gift demand loan, discounting is not possible because the repayment date is not known. To counter this difficulty, the Service has adapted the open-transaction doctrine of the income tax (96) to the gift tax, as evidenced by published rulings and litigation positions. This approach will be referred to herein as the "open gift" approach, in order to distinguish it from its income tax counterpart. The open-gift approach applies to situations where a gift transfer is made but valuation of the gift is impossible due to future contingencies. A gift demand loan involves such a contingency, namely, the uncertainty of the repayment date. The application of the open gift approach results in after-the-fact valuation. In order to achieve the same result, in present value terms, as would occur if the repayment date could have been accurately predicted, the gift would be valued by applying the discount rate used in present value tables to the outstanding principal to produce periodic putative transfers, which is precisely the same as the Dickman result.

The problem is that, disregarding Dickman, it appears that the open-gift approach is a doctrinal mess. The doctrine has no claim for authority on the basis of statute, regulations, or pre-Dickman case law, but was developed entirely by the Service. (97) There appears to be no case that has actually held that a gift was should be classified as open solely on account of difficulties of valuation. The one case that appears to support the doctrine can be characterized as holding that a binding agreement to make a future conditional gift results in a gift only when the condition is satisfied. (98) The open gift doctrine was rejected outright by the Tax Court in a case that the Service decided not to appeal, (99) although the Service acquiesced in that decision only with respect to the holding that a transfer was beyond the reach of the gift tax if it occurred at or after the donor's death. (100) (The transfer in that case also escaped the estate tax.) (101) Finally, the doctrine has not been applied in the same kind of case as its income tax counterpart, namely, to a gift of an asset the value of which hinges on "internal" contingencies.

On the doctrinal merits, the only authoritative ground for treating a gift as being incomplete is that of the donor's retained dominion or control of the property transferred. Difficulty of valuation has nothing to do with whether a gift has been put beyond the donor's dominion and control. In contrast, difficulty of valuation under the income tax implicates the fundamental principle of "realization" of income or gains, and can result in deferral of income or gains to a later year. The acquisition of a right that is contingent on future events does not result in realized income or gains until the contingency is resolved. That is, the contingency is the "cause" of both non-realization and impossibility of valuation. Unlike the gift tax, the income tax continues, after a taxpayer's death, to reach income and gains from open transactions that occur before a taxpayer's death. (102) In short, whereas the income tax can adapt to deferred realization, the federal transfer taxes cannot. (103)

It may be claimed that Dickman itself validates the open-gift doctrine. As a argumentative matter, one cannot invoke Dickman as authority for a doctrine that supports the rationale of Dickman. In any event, it is doubtful that Dickman actually endorsed the open-gift approach as formulated by the Service, because the Dickman majority stated that the lender had dominion and control over the right to use the loaned funds. (104) Thus, the Dickman majority appears to have thought that the gift was incomplete under the established retained-dominion theory, rather than the open-gift theory standing alone. The Tax Court case that rejected the open-gift doctrine, decided after Dickman, apparently also thought that Dickman was a retained-dominion case, as it did not bother to distinguish or defy Dickman. (105)

Dickman did cite a Revenue Ruling with apparent approval, if without discussion or analysis, that purported to apply the open-gift approach. (106) Unfortunately, the ruling itself appears to be based on the premise established by a companion ruling, namely, that a gift occurs upon the entering into a binding contract to effect a future transfer. (107) This rule, accepted previously by the Tax Court at the urging of the Service, is misconceived, because a gift occurs only on the release of dominion and control of existing wealth of the donor. If the false premise of the ruling were removed the gifts would have occurred on the date of actual transfer and there would have been no valuation problem to contend with.

A gift demand loan is not a gift that is both delayed and contingent on a condition precedent. All of the open-gift rulings involved conditions precedent to a future wealth transfer, and are therefore inapplicable. Instead, a gift demand loan is a present transfer in return for a right to obtain the principal upon demand. Since any owner of this obligation could make the demand, its value to such owner would not depend on the futurity of such demand. In short, the claim of impossibility of valuation due to not knowing the time of demand is illusory. The only "contingencies" are those pertaining to collection from the borrower, and contingencies of this type routinely enter into the valuation of repayment obligations. (108) Therefore, the open-gift approach--even assuming its viability--would not be applicable to gift demand loans.

b. Treating a Gift Demand Loan as a Retained-Interest Transfer

A way that the Supreme Court could have reached a maximum pro-government result would have been to apply the doctrine of Robinette v. Helvering, (109) which holds that any retained interest of a donor is valued at its minimum amount if actuarial principles cannot be applied. (110) Consideration received for a transfer is the functional equivalent of a retained interest. (111) Both assume a completed transfer subject to an offset based on what, in one case, the donor receives back or, in the other, does not give away. (112) Both consideration offsets and retained-interest offsets are integral to the gift transaction itself, and both are valued at the time of transfer. The offset should be valued at its minimum value, rather than its maximum value, because otherwise the amount of the gift runs the risk of being understated.

The gift demand loan is an appropriate scenario to apply this analysis, because the whole point of the arrangement in a related-party context is to effect a significant transfer of value by not calling the loan, whereas a willing buyer in the market would operate under the exact opposite incentive. (113) Since the ability of the donor to delay the demand for repayment effectively terminates only at the lender's death, (114) the measure of the consideration would be that of a remainder interest keyed to the lender's life expectancy. Hence, the amount of the net gift would equal an income interest in the loan amount for a period equal to the lender's life expectancy.

The Dickman majority did not venture down this path, however, presumably because the government did not point to it. On the merits, the argument against this approach is basically the same as the argument against the Dickman result, which is that the gift tax is not a stand-alone tax but is an adjunct to the estate tax and should only apply to transactions that shift actual wealth from the donor to the donee. As the following material demonstrates, valuing consideration under the willing buyer, willing seller test achieves the appropriate result.

c. Valuing the Consideration at its Fair Market Value

The federal gift and estate taxes are imposed on the act of transfer, not the act of receipt. For this reason, they are called "transfer taxes" and not "accessions taxes" or "inheritance taxes." Under a transfer tax, the transfer, and its value, is determined by looking forward. The ex ante orientation of the federal transfer taxes is, for better or worse, what necessitates the use of present value techniques with respect to assets and interests that have a finite duration. (115) For both term and demand gift loans, the correct doctrinal analysis in the absence of a contrary statute is that the gift occurs at the time of the transfer--the time the loan is made--and the amount of the gift is the excess of the amount lent over the value of the repayment obligation.

In the case of gift term loans, it happens that the consideration is valued in a way that is somewhat different from an equivalent term interest in property. (116) The gift of a term interest in property is valued according to the principles set forth in section 7520, that is, under mandatory actuarial tables that assume a rate of return on an unchanging principal equal to 120 percent of the federal midterm rate. (117) In the gift term loan scenario, the consideration--taking the form of the repayment obligation--is not, as far as the statutory scheme is concerned, keyed to actuarial tables but instead is the objective fair market value of the note as determined under the willing buyer, willing seller test. (118) That test would entail an initial present value calculation based on a risk-free interest rate, followed by an adjustment for factors bearing on risk. (119) Contrary to its own regulations, however, the Service has allowed term notes given as consideration for transfers of cash or property to be valued solely by reducing the obligation to present value. (120) By valuing term notes at their present value rather than fair market value, the Service would be making--presumably in the interests of administrative convenience--a concession to taxpayers, because the taking into account of additional valuation factors would produce an additional discount in the value of the consideration, resulting in an increase in the amount of the gift. It may be, however, that the Service only allows the present value approach in a business or investment context, and adheres to the market-value approach in a family context. (121)

A gift demand loan (122) is not a revocable transfer of cash, but instead a transfer of cash for consideration in the form of an interest-free note payable on demand. The gift tax generally requires that the amount of the gift be determined at the time of transfer, which in this case would be the lending of the cash. (123) The taxpayers in the gift demand loan litigation culminating in the Supreme Court decision in Dickman argued that the amount of the gift was zero on the ground that the present-value of an interest-free demand loan is equal to its face amount. The government argued that present-value analysis could not work on account of ignorance of the actual repayment date. (124) As intimated earlier, both of these positions are incorrect, factually and legally. Legally, the measure of in-kind consideration is its fair market value under the objective willing-buyer, willing-seller test. The fact that the Service might allow a present-value approach in the case of term loans becomes irrelevant, because demand loan repayment obligations cannot be reduced to present value.

In applying the willing-buyer, willing-seller test, the uncertainty of when the demand for repayment will occur under the gift demand loan arrangement itself is irrelevant. What is relevant in an objective market is that the owner of the repayment obligation has the power to demand repayment immediately, fn the valuation context, a power that can be exercised for a person's own benefit is deemed to be worth what can be obtained by the maximum exercise of the power--even if the power is not, or might not, be exercised. (125) Thus, in the free-market construct posited by the willing-buyer, willing-seller test, interested buyers and sellers would arrive at a value by starting with the principal amount, which can be demanded immediately, and then proceeding to apply discounts with reference to such potential obstacles to immediate repayment as the financial condition and liquidity of the borrower, the presence or absence of security, the inevitability of at least some delay, possible legal defenses, transaction costs, and so on.

In short, because the value of the consideration is determinable, and because such value will be somewhat less than the loan amount, there really is a measurable gift when the loan is made. That the valuation of the consideration would have to be determined on a case-by-case basis and with considerable effort is no excuse for pretending there is no gift at all in such cases. (126) The Service should not justify a strong anti-taxpayer rule that is contrary to its own regulations on the Service's own institutional laziness. The valuation exercise may also be not worth the effort, because under current law any such gift that might result from accurate valuation is not taxable under the gift tax until such gift, when added to other gifts from the lender to the borrower during the year, exceeds $13,000. (127) In any event, if the transfer is or is not made for full and adequate consideration in money or money's worth, there can be no further gifts with the passage of time because that would result in a second gift tax on the same gift or non-gift. (128)

This result satisfies the purposes of the gift tax, because the same valuation principles that apply in the gift tax context would apply in the estate tax context. (129) Thus, the amount included in the gross estate would be overstated in the same way that the gift amount would be understated by the use of a market valuation test. For example, if there is a gift demand loan of $100,000, and the repayment obligation is worth $97,000 under the market-value test, the gift is $3,000 but the amount included in the gross estate would be $97,000, assuming no change in risk.

Although this approach is satisfactory from the angle of the gift tax being a back-up to the estate tax, it is perhaps not ideal, because, first, it results in inequitably favorable treatment of gift demand loans relative to gift term loans under the gift tax alone. Second, it does not deal with the assignment-of-income issue. The only way to achieve a "unified" solution to both the gift and income tax issues is to adopt the imputed-cross-payment approach discussed earlier, (130) but that was beyond the reach of the courts. Accordingly, the Supreme Court should not have granted certiorari in Dickman, despite a conflict among Circuits. It happened that section 7872, which, as will be shown shortly, solved the gift, income, and estate tax issues, was in the legislative pipeline as Dickman was being decided.(131) This was a classic instance of a problem better suited to solution by a legislature than a court.

III. THE STATUTORY AFTERMATH

Although the Dickman decision is doctrinally confused and reached the wrong doctrinal result, it is still authority in a positive law sense. Before exploring the implications of the Dickman decision for gratuitous, rent-free "demand loans" of tangible property, it is first necessary to look at post-Dickman changes to the Code that might also bear on that very issue.

A. Section 7872

Later in the same year Dickman was decided--1984--Congress enacted section 7872 of the Code, which provides gift and income tax rules for below-market-interest-rate loans of cash. (132) The prime motivation for the enactment of section 7872 was to deal with the income tax consequences of those below-market loans that were considered to be tax-motivated. (133) Nevertheless, section 7872 also prescribes the gift tax consequences of such loans in a way that is mostly consistent with the income tax rules. Section 7872 does not purport to apply to "loans" of tangible property.

1. Alternative Models for a Legislative Solution

In order to understand what section 7872 accomplished, it is necessary to compare the interest-free demand gift loan to its siblings, the revocable trust and the interest-free-term loan of cash.

a. The Revocable Trust Model

A transfer of money or property to a revocable trust is incomplete for gift and income tax purposes. That statement means that there is no gift for gift tax purposes, (134) and the income from the transferred property is taxed to the grantor for income tax purposes. (135) Any distribution during the grantor's lifetime from the trust to a party other than the grantor is treated as a completed gift. (136) The value of the trust at the grantor's death is included in the grantor's gross estate. (137) Accordingly, there is no income or transfer tax avoidance: income is taxed to the grantor but not to the trust or its beneficiaries, and income that is not distributed to the grantor is subject to gift tax or estate tax. In effect, the revocable transfer is simply treated, for tax purposes, as not having been made.

The courts could not adopt a revocable-transfer approach to gift demand loans due to the fact, for reasons already stated, that a demand loan really is not a revocable transfer. Any economic return obtained by the borrower is clearly that of the borrower for income tax purposes, (138) because it derives from an investment that is owned by the borrower. (139) If the income from the borrower's investment is taxable to the borrower, it cannot also be attributed to the lender.

Adoption of the revocable trust model by Congress for gift demand loans would entail (1) no gift tax on making the loan, (2) attribution of the borrower's investment income on the borrowed money to the lender, and (3) inclusion of the outstanding principal amount in the gross estate.

b. The Retained Term Interest Model

An alternative model is that of the retained-interest trust transfer, specifically, a transfer into trust, with income payable to a family member for a term of years and reversion to the grantor. Here the gift is the value of the term interest, which is calculated by subtracting the present value of the grantor's reversion from the value of the property transferred. The gift amount in the similar gift term loan scenario is calculated in pretty much the same manner.

A court cannot properly extend this approach to gift demand loans, because the repayment date is not known in advance. A legislature can adapt this approach to gift demand loans, however. One can use hindsight to determine the term of the loan. The present value of the consideration can then be calculated. (140) Suppose L loans $100,000 to adult child B on a zero-interest basis, and that A in fact calls the loan after thirty-six months. Using hindsight, and using a five percent discount rate compounded annually, B's repayment obligation had a present value of $86,384 when the loan was made, which would have resulted in a time-of-loan gift of $13,616. But suppose, in the alternative, a gift of $5,000 is imputed to L each year. If the three $5,000 gifts were reduced to present value, the gifts would likewise have an aggregate present value of $13,616. Thus, imputing gifts at a constant rate equal to the discount rate obviates any need to charge interest to compensate for a deferred tax and, in addition, avoids any possible problem of the statute of limitations.

Consequently, the Dickman holding that the measure of the gift is the actual foregone interest over time was likely motivated by the fact that it yielded a result that is the mathematical equivalent of the gift tax result for term loans, except that the discounting of the term loan is at a constant interest rate, which is presumably matched to the time of the loan, whereas the foregone interest on the demand loan could vary from period to period. (141) This analysis, along with the prior exposition of the doctrinal shortcomings of Dickman, combine to make Dickman appear to be an unprincipled result-oriented decision. But what was a stretch for the Court is easily within the competency of a legislature.

Present value analysis also reveals the substance of a gift term loan in a way that reveals the appropriate income tax consequences thereof. Again assume an interest-free loan of $100,000 repayable in full after thirty-six months, and a discount rate of five percent, resulting in the present value of the repayment obligation being $86,384 and a present gift of $13,616. For income tax purposes, the $13,616 is an instant decrease in wealth of the lender, hence an "expense," which is not deductible. (142) Thus, the "real" investment, or loan principal, is $86,384, which for income tax purposes is a nondeductible capital expenditure, which in turn becomes the income tax basis in the repayment obligation. If, as is likely, the investor is using the cash method of accounting, the receipt after thirty-six months of $100,000, net of the basis offset of $86,384, produces taxable gain of $13,616. (143) The economic analysis of the borrower's side is the mirror image of that of the lender. When the loan is made, the borrower receives a gift of $13,616, which is excluded from gross income under section 102(a), and a loan amount of $86,384, which is excluded by reason of being a borrowing. (144) At the end of thirty-six months, B pays out $100,000, of which $86,384 satisfies the principal repayment obligation, (145) and $13,616 represents a loss on the borrowing transaction. To both parties, the $13,616 is really a payment of the accrued interest. (146) The interest is includible income to the lender; its deductibility to the borrower under present law would mostly depend on the use of the borrowed money. (147) If the borrowed money is invested, the interest would be deductible subject to a possible limitation. (148) The effect of inclusion by the lender and deduction by the borrower is one of re-attribution of income from the borrower back to the lender. The re-attribution would be of the accrued interest on the loan ($13,316), however, rather than the actual income, if any, of the borrower attributed to the borrowed funds, and the re-attribution would occur entirely in the year the loan is repaid as opposed to being spread out over the term of the loan. (149) In short, this structural analysis yields a decent, if not ideal, solution to the income tax problem.

These structural income tax implications of interest-free gift term loans were never advanced by the government in the form of regulations or published rulings, (150) perhaps because its authority to do so was unclear. (151) The government attempted in litigation to identify the "transfer" component of such transactions, with mixed success, but never went so far as to find an imputed interest component to them for income tax purposes. (152) The Dickman litigation did not alter this state of affairs.

2. Section 7872 Compared to the Term Interest Model

The discussion herein again uses the example of a $100,000 no-interest loan from L to B for thirty-six months and a discount rate of five percent compounded annually. (153)

Section 7872 mostly follows the term-loan model, but there is one concession to the revocable-trust model, which will be explained shortly. Basically, section 7872 is limited in its scope to below-market loans of cash that have the potential to hide transfers in the nature of gifts, compensation, and dividends. (154) In the case of loans not subject to section 7872, there will presumably be no imputation of transfers or of interest, unless some other statutory rule applies. (155)

As to non-gift term loans subject to section 7872, the term-loan model described above is followed for income tax purposes, (156) producing an immediate-transfer and imputed-interest amount of $13,616, except that the aggregate imputed interest is reckoned for income tax purposes on the accrual method, even if the taxpayers are on the cash method, over the thirty-six month period as if such interest were original issue discount. (157)

For gift term loans, the gift amount for gift tax purposes is again $13,616 in the year the loan is made. (158) The income tax side accounting, however, is simplified: the foregone interest, without compounding, is computed by multiplying the stated principal, $100,000, by the then applicable federal rate (AFR). (159) Thus, in the example, which assumes the AFR is always five percent, the total imputed interest for income tax purposes would be $15,000 in three annual installments of $5000, rather than $13,616 over the same period. (160)

As to gift demand loans, (161) section 7872 basically follows the cross-transfer approach described earlier. That is, as in Dickman, an amount equal to the "foregone interest" on the stated principal amount of the loan is treated as having been paid by the borrower to the lender as interest and then as having been retransferred to the borrower as a gift in each period. (162) Thus, if the gift demand loan is called after thirty-six months, gifts occurring at a rate of $5000 per twelve-month period will produce aggregate gifts for gift tax purposes of $15,000 and annual interest payments back to the lender in the same amount.

It should be noted again that three annual transfers of $5000 at a five percent discount rate compounded annually have a present value of $13,616, proving that three annual gifts of $5000 are the equivalent of one up-front gift of $13,616. Nevertheless, the spreading-out of the gift amounts is favorable to donors because of the gift tax annual exclusion. (163)

There are special rules for both term and demand gift loans--the chief one being that the foregone interest for income tax purposes is not to exceed the donee's net investment income, unless the loan is $100,000 or more or unless a principal purpose of the arrangement is to avoid federal tax. (164) Where this rule applies, there is no re-attribution of income from the borrower to the lender if the borrower is not an investor. In such a case, the interest-free gift loan would not have been an income-shifting device. This rule gives the same result as would occur under the revocable-trust approach on the downside, but without any requirement of tracing the loan proceeds to investments by the borrower. (165) On the upside, the income re-attribution cannot exceed the imputed interest calculated at the applicable federal rate, which is a conservative benchmark. (166) Thus, if the borrower's return on the borrowed funds exceeds the applicable federal rate, such excess is not reattributed from the borrower to the lender.

Curiously, as a result of the foregoing, imputed gifts will occur under section 7872 even in gift loan cases where there is no income shifting and no estate tax avoidance.

3. Does Section 7872 Carry Implications for Loans of Property?

Section 7872 deals only with loans of money, and says nothing about similar transactions involving property that are not legally referred to as "loans." (167) Therefore, although section 7872 pre-empts the field in the case of below market gift loans of money, (168) it cannot be claimed that section 7872 pre-empts the issue of "loans" of property. Thus, if Dickman carries gift tax implications for such transactions, section 7872 would not preclude judicial doctrinal elaboration in that area. (169)

On the other hand, section 7872 may be viewed as the beginning of a dialogue with the courts in this area, because it is hard not to view section 7872 as being a response, at least in part, to Dickman. The response confirmed Dickman to a certain extent, but in a limited domain. One might read the limited response as a veiled threat that Congress will intervene again if the courts extend the imputed-transfer approach to transactions not involving loans of cash. Of course, the form of any such possible intervention is unpredictable, as it would be influenced by the politics of the moment. It does seem reasonably clear to this observer that there can be no political constituency for imputing gift transfers in situations involving gratuitous loans of property to family members except for transactions that have a clear capability of avoiding estate or income tax.

B. Section 2503(g)

In an obscure and unpublicized provision of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Congress added section 2503(g), (170) which holds that a rent-free "loan" of artwork to a museum, other than a private foundation, (171) is to be ignored for gift and estate tax purposes. The House and Senate reports state: "A loan of a work of art to a public charity or a private operating foundation is [in the absence of [section] 2503(g)] treated as a transfer subject to federal gift tax," (172) but cites no authority for this statement. Considered out of context, this provision and the supporting statements might appear to evince Congress's belief, for whatever it is worth, (173) that Dickman applies to "demand loans" of tangible property.

In the absence of section 2503(g), loans of artworks do indeed result in gifts in virtually all cases, but independently of Dickman. The general gift tax framework for a "loan" of property, leaving Dickman aside, is that the transfer would either be incomplete, due to a power in the transferor to revoke the transfer or control the transferred property, (174) or would be complete only to the extent of a "partial interest," in this case, a term interest, which is followed by a reversion in the transferor, and the value of the term interest would be determined under actuarial tables. (175) This framework is well-known and accounts for the absence of any cited authority. Loans of art to museums would overwhelmingly, perhaps exclusively, fall into the gift-of-term-interest category, either because the loans would be for specific exhibitions or because loans impose obligations on museums for, at a minimum, caretaking and insurance. (176) Thus, section 2503(g) was directed at transactions that involved gifts of term interests without any regard for Dickman.

The purpose of section 2503(g) can be understood in relation to the prior tax history of gifts of partial interests in property to charity. Prior to 1969, courts were quite liberal in allowing income tax charitable deductions in such cases, given that section 170(c) defines a charitable contribution as a gift "to or for the use" of a qualified charity. (177) For gift and estate tax purposes a deduction could be obtained if the charitable interest was capable of actuarial valuation. (178) Thus, a person could obtain an income tax deduction, without gift or estate tax cost, for a term loan of an artwork to a museum.

In 1969, Congress drastically altered this landscape by enacting provisions which, leaving details and exceptions aside, disallowed any income, gift, and estate tax deductions for gifts of partial interests in property, including rent-free lease situations. (179) The museum community would have viewed this situation as an undue tax obstacle to art loans. From the government's point of view, however, a gift of a term interest in art to a museum has the potential to reduce the donor's gross estate on account of the gift itself, rather than any charitable deduction, in cases where the donor dies before the reversion takes in possession. (180) Gifts that can reduce the gross estate should be subject to gift tax.

The effect of section 2503(g) is to treat the loan as not having been made for both estate and gift, as well as for income tax, purposes. Thus, Congress provided that there would be no gift for gift tax purposes, but that at the same time the value, if any, of the charity's outstanding term interest would not be subtracted from the amount included in the gross estate.

Section 2503(g) cannot shed any light on the applicability of Dickman to rent-free "loans" of tangible property in general. Revocable loans of property are not transfers for purposes of any of the income, gift, and estate tax. Consequently, section 2503(g) has no relevance to such loans. The historical and doctrinal issues relate to term loans, which are not really "loans" in the property law sense, but are gifts of term interests with retained reversions. It is significant that section 2503(g) was made to apply retroactively to art loans made after July 31, 1969, which was the effective date of the changes in the tax law that rendered partial-interest gifts, including "use of property" gifts, nondeductible for income, gift, and estate tax purposes. (181) The combination of the 1969 changes and the retroactive-to-1969 section 2503(g) has produced a situation where term loans of art to museums produce neither a tax advantage nor a tax disadvantage.

Only museums and their lenders benefit from section 2503(g). Gifts of term interests to family members (182) are actually tax-disadvantaged thanks to the later enactment of section 2702, which deems the gift tax value of the term interest to be that of the entire property, as opposed to the value of the term interest itself. (183) Gifts of term interests to persons who are neither art museums nor family members are subject to gift tax, when made, on the actuarial value of the term interest. In cases not governed by section 2503(g), any remaining value of a term interest at the time of the donor's death is excluded from the donor's gross estate.

IV. DOES DICKMAN "FIT" GIFT DEMAND LOANS OF PROPERTY?

Although gift tax law prior to Dickman would have treated below-market gift loans of property as either revocable transfers or as gifts of term interests, each with well-defined tax consequences, the crucial question is whether Dickman adds a new or different layer of analysis with respect to demand loans of property. This issue needs to be faced because the Dickman majority opinion declined to distinguish gift demand loans of property from gift demand loans of money. Dickman can be ignored in the property-loan situation only if (1) demand property loans are distinguishable from demand cash loans and (2) there is no other sound theory for treating demand property loans as yielding "use" gifts with the passage of time.

A. Dickman Does Not Apply to Gift Property Loans

The legal theory of the Dickman decision is the literalistic one that a no-interest demand loan of cash results in a gift transfer of a property interest, namely, the use of money, that occurs with the passage of time. One can argue that Dickman should not be "extended" to property situations on the grounds, elucidated in Part II, that the majority decision was confused, reached a doctrinally unsound result, or was inapposite to the facts, or that section 7872 renders its holding obsolete. Nevertheless, as a matter of positive law, Dickman is on the books and has doctrinal life where not superseded by section 7872. (184)

Another argument would be that Dickman should not be extended to a scenario that is fundamentally distinguishable. The grounds of distinction are that: (1) most gift loans of property do not entail any transfer of a property interest, and (2) where a property interest is transferred, any power to revoke the transfer renders the transfer incomplete for tax purposes.

1. No Transfer of a Property Interest

In an interest-free loan of cash, there is a transfer of not merely a property interest but rather of the property itself, and such transfer is outright and unconditional. The borrower has an unfettered right to the cash, and can put the cash to whatever use the borrower sees fit, including that of income-producing investment. The lender has a repayment right, (185) but that is a chose in action, not a retained interest in or power over the transferred cash itself.

In the property-loan situation, the borrower would not normally have a property interest in the sense relevant for taxation--namely, the right to control the property and/or retain any income derived therefrom. The Supreme Court in Dickman analogized an interest-free loan of cash to a tenancy at-will of property, (186) which is a recognized type of non-freehold property interest that sits on the boundary between a lease and a mere license to use. Most gift loans of property do not even create tenancies at will, however.

Property law generally does not recognize such a thing as a non-trust gift of real property that is revocable at the will of a donor. (187) The same is true of a revocable transfer of personal property. (188) Retention by the purported donor of a right to control the property, or an uncontested exercise by the purported donor of dominion and control, would negate the gift. (189) Legally, the only ways in which a person can acquire possession at the will of the owner are by way of (a) an at-will lease of real property, (b) a license of (i.e., the grant of permission to use) real or personal property, (190) or (c) a bailment of personal property. (191) In a license or bailment, the purported donee acquires nothing that can be called a "property interest." Basically, all that is acquired, other than a possible right to compensation for services, is immunity from an action for trespass or conversion. (192) Gratuitous licenses and bailments are revocable at will, and inherently allow use and control by the owner at-will without having to evict the licensee or bailee. (193) Unless expressly granted by contract, (194) a licensee or bailee generally is not allowed to use the property to produce income. (195) Accordingly, any permitted use under a license or bailment would have no value under the willing-buyer, willing-seller test, as it could not produce economic yield. (196)

In the case of personal property, not only is there no such thing as an "at-will lease,"--a lease that is revocable on the demand of the owner--but there is also no such thing as a gratuitous lease. (197) The only other possibilities are those of bailment and license. Since bailment arrangements are basically for the purpose of storage and safe keeping, or incident to the performance of services by the bailee, any personal use by the grantee would negate a bailment and instead suggest only a permission to use. Thus, virtually all non-commercial grants of permission to use tangible personal property would entail mere licenses and not a transfer of a property interest under the gift tax.

In the case of real estate, at least there is such a thing as a gratuitous at-will tenancy. In contrast to licenses and bailments, leases in general are treated as property interests that give the lessee the right of exclusive possession, and the tenant, unless prohibited by the terms of the lease or by law, would be allowed to use the property in the tenant's business. (198) Tenancies in real estate are classified, in terms of duration, as (1) fixed-term tenancies, (2) periodic tenancies, which are of indefinite duration but terminable by either party with advance notice, or (3) tenancies by will--revocable by either party at any time without advance notice and automatically revoked upon the death of either party. (199) Since both periodic and at-will tenancies give the landlord the right of termination, they may be hard to distinguish. The main difference is that periodic tenancies require advance notice. An at-will tenancy in real estate is also hard to distinguish from a license on account of the grantor's power of revocation without notice. In fact, here the distinction may lie without a meaningful difference, because a tenant at will, like a licensee, has no inherent right to assign or sublet her interest, (200) and is not eligible for eminent domain compensation. (201) Thus, one of the only differences is that a tenant at will can use the property in the tenant's business whereas a licensee cannot--but the right of business use would be discernable only if an agreement exists to such effect or if the premises were so used without objection by the owner. Because of the similarities between licenses and at-will leases of real estate, the very fact that the arrangement is gratuitous and/or involves a non-business use by the grantee may lead a court to treat it as a license. (202) In short, most non-commercial grants of permission to use real property would entail mere licenses and not a transfer of a property interest under the gift tax.

The only remaining issue is whether a true gratuitous tenancy at will of real estate should be treated as the grant of a property interest for gift tax purposes. The gift tax can surely look behind labels to the underlying quality of the rights conferred. The rights of an at-will tenant are so attenuated that at least one property law treatise has said that an at-will lease is "analogous to a license." (203) If one looks at attributes that are relevant to transfer taxation, one would be inclined to view them as indistinguishable. A gift of any revocable possessory interest would be ineffective to shift the income from the property, because the donor remains as the real owner of the property. (204) Likewise a gift of a non-trust non-leasehold term interest in property with a retained reversion is disregarded for income tax purposes. (205) Bare possession of property at the permission of the owner does not remove anything from the owner's gross estate. (206) Even if possession were viewed as an interest, the full value of the property would be included in the gross estate because it would terminate on the grantor's death and revert to the grantor's estate. Additionally, even if such a right were to survive the grantor, such that it would be excludible from the gross estate, it would have a zero value under the willing-buyer, willing-seller test, since a hypothetical purchaser could obtain no economic return from it.

In short, the analogy drawn by the majority opinion in Dickman between at-will tenancies of property and demand loans of cash misfires. Most gift demand loans of property do not rise to the level of tenancies at will and are not transfers of property interests at all, and therefore are not gifts for gift tax purposes under even the expansive Dickman view of property interest. (207) Even tenancies at-will are borderline by reason of being virtually indistinguishable from licenses and bailments. They would not have any value under the willing-buyer, willing-seller test, and, unlike demand loans of cash, have no potential for income or estate tax avoidance.

2. Demand Loans of Property are Non-Transfers or Revocable Transfers

The second ground of distinction between gift demand loans of cash and of property relates to their appropriate tax treatment. Whereas gift demand loans of cash involve irrevocable transfers for partial consideration in money or money's worth, gift demand loans of property are non-transfers, transfers of nothing, or incomplete revocable transfers, which are all treated the same: they are non-gifts for gift tax purposes, fully included in the grantor's gross estate for estate tax purposes, and ineffective to shift income for income tax purposes. (208) Since the whole range of gift demand loan situations involving property produce the same tax results, it is not necessary to attempt to make fine distinctions among tenancies at will, bailments, and licenses for tax purposes. (209) In cases where the owner may acquiesce in the possessor's obtaining income from the property, such income can easily be treated as belonging to the owner for income tax purposes and as gifts for gift and income tax purposes.

It might be argued that the estate tax can be avoided by gift demand loans of property, because the property might depreciate in value during the period of permitted use. In the case of a consumer durable, the property may even become worthless. The decline in value would presumably have occurred in the absence of the loan, however. Accordingly, the amount subject to estate tax will be the same as if the lender had used the property herself, rather than allowing another to use it.

3. The Pre-1969 Income Tax Charitable Deduction Cases

The government, in opposition to the foregoing, might cite cases holding that terminable rent-free leases of building space to charity generated income tax charitable deductions measured by the value of the charity's use during the taxable year. The relevant statutory provision was what is now section 170(c), defining a deductible donation as a "contribution or gift to or for the use" of the charity. In 1948, the Service ruled that allowing a charity to use one's premises was not a transfer of a property interest but rather a grant of permission. (210) Two Tax Court cases decided in the 1950s held that a gift of a term lease in realty qualified as deductible contribution of a property interest in the year the term leases were granted. (211)

In a 1963 District Court decision, Passailaigue v. United States, (212) the contribution was of the right to use real estate that could be cancelled by the owner on fifteen days notice. The Commissioner argued that the prior cases were distinguishable because the leases in them were irrevocable, but the District Court held that the revocability of the lease only affected the timing of the deduction. The result was that the donor was allowed an income tax deduction equal to the fair rental value of the property on an annual basis. (213) Another District Court case decided in June of 1969 held that a donor's grant of the use of building space for a very short term gave rise to a charitable deduction. (214)

Congress responded to these cases near the end of 1969 by enacting section 170(f), which provided that, with certain exceptions, a contribution of a partial interest in property, including a contribution of the "right to use property," would no longer qualify for the charitable deduction.

In 1970, the Service clarified its position with respect to prior law by curtly stating that the determining factor was whether the grant of use was a "legally enforceable conveyance of a present interest in property under local law." (215)

In a 1973 case, the Service conceded the fact of a pre-1969 deductible donation of a leasehold interest, but successfully resisted the donor's contention that the lease was for a term. (216) Calling the lease revocable, the Tax Court held that the taxpayer could claim an annualized deduction based on actual use, rather than an up-front deduction for the present value of future charitable use.

Finally, a 1979 Tax Court case held that a rent-free oral tenancy at will qualified for the deduction by reason of being an enforceable interest under local law. (217)

These cases--none of which were appealed--can be interpreted as holding that a "lease," even if revocable or for a very short term, qualified as a charitable donation for income tax purposes if made before the effective date of section 170(f). The Service's position might appear to have been based on the distinction between a lease and a license, but the distinction was not couched in these terms nor elaborated upon except by requiring that the lease be a legally enforceable property interest under local law, and no examples were given of a transaction that failed to qualify. None of the cases discussed the distinction between lease and license or attempted to apply it to the facts. The Service's position appears to have been that all of these arrangements were basically the same as the gratuitous performance of services. Nevertheless, in one of the cases a deduction was denied with respect to space that was not needed by the charity and which was used occasionally by the donor. (218) In any event, once it was established by the cases that leases were deductible in principle, it was usually advantageous to the Service that the deductions be allowed ex post on the basis of actual use rather ex ante on the basis of maximum possible use.

It would be awkward for the Service to cite these cases for the proposition that gratuitous licenses and bailments involve gifts, in light of the Service's longstanding, if imprecise, position to the contrary, embodied in rulings the Service has never revoked. (219) Moreover, none of the cases flatly contradict the principle that a prior-law charitable gill required a donation of a recognized property interest. Finally, Congress has overturned the result of cases allowing charitable deductions even for term interests embodied in leases. (220)

The cases themselves posed lease rather than license scenarios on their facts, because in all of them in which the deduction was allowed the property was commercial real estate, and the lease agreements gave the charity the right of exclusive use in carrying on its exempt function while imposing duties on the charity. That is, the transactions mimicked arms-length transactions except for the waiver of rent. In contrast, most gratuitous loans of tangible property to individuals lack any contractual aspects and give the permitted user no rights against the owner. (221)

The cases can also be distinguished on the law, because they arose under the express "for the use of" language of section 170(c)--previously noted--which has no gift tax counterpart. This language literally describes a gratuitous lease of property, and maybe even encompassed licenses, despite the Service's continued objection to such a construction. Nevertheless, the distinction between lease and license, although perhaps not critical in terms of the policies underlying the prior-law income tax charitable deduction, possess clear relevance for the policies underlying the gift tax--namely, to prevent estate tax avoidance and to impose a toll charge on assignments of future income. The opinions in these cases felt that a broad construction of this language was appropriate in light of Congress's supposed desire to encourage charitable donations of all types. (222) Congress has since revealed that this purpose is so not unlimited or open-ended. The cases, as well as section 170(f), are also inconsistent with the approach of section 7872, which treats interest-free loans as involving offsetting gross-income and gift constructive payments. Additionally, the cases are also inconsistent with general income tax doctrine, which treats transfers subject to revocation or retained control as non-transfers, and, especially, treats transfers of carved-out interests, with retained reversions, as not being dispositions of property interests. (223)

Finally, and most importantly, the timing aspect of these cases that allow the deductions to be measured by actual use is actually more appropriate to the income tax, which is an annual tax, than would be accruing the deduction in full in the year the gratuitous lease is entered into. Treating the deduction as occurring with the passage of time is consistent not only with the annual accounting orientation of the income tax, but also accords with the realization principle, which defers reckoning of income and deductions until they become fixed and final. Even an accrual method taxpayer cannot deduct in advance the future rents to be paid under a lease, or even rents paid in advance. (224) A taxpayer providing property to another can only take deductions for the costs of doing so as they are incurred. (225) In cases where using property at no charge is gross income, the income is realized with the passage of time, not when the use right is acquired. The realization principle is a basic structural principle of the income tax. In contrast, it is alien to the gift tax, which is imposed at the time a property interest is disposed of, even where the value of such interest is contingent on future events. (226) In the end, income tax doctrine cannot dislodge gift tax doctrine. Gratuitous loans of tangible property are either non-transfers or revocable transfers.

B. Is the Use of Property the Equivalent of a Distribution from a Revocable Trust?

The fact that a gift demand loan of property, unlike a demand loan of cash, fits within the tax law pertaining to revocable trusts cuts two ways. It effectively distinguishes Dickman, because a gift demand loan of cash cannot be analyzed as a revocable transfer for reasons stated earlier. (227) On the other hand, it invokes a possible theory for reaching the same result as under Dickman, which is based on the rule that a distribution from a revocable transfer to a person other than the donor is treated as a gift. (228) The question, then, is whether or not the use of "loaned" property is the equivalent of a distribution-gift from a revocable transfer.

1. The Text of the Regulation Section and its Possible Relevance to Loans of Property

The following sentence appears in Treasury Regulation section 25.2511-2(f) (1999), referring to incomplete transfers of property:
  The receipt of income or of other enjoyment of the transferred
  property [subject to a retained power of revocation] by the
  transferee or by the beneficiary (other than the donor himself)
   ... operates to free such income or other enjoyment from the power,
  and constitutes a gift of such income or other enjoyment. ... (229)


The reference in this regulation to "other enjoyment" appears to be broad enough to cover revocable transfers that do not yield income. If enjoyment of an interest-free demand loan is the use-value of money, then enjoyment of the rent-free use of loaned property might be its fair rental value. The regulation will be examined from various angles in an attempt to determine whether "other enjoyment" should be construed to mean "use-value" apart from the receipt of cash or property.

2. Did Dickman Adopt a Use-Value Concept of "Enjoyment?"

If the Dickman case endorsed, expressly or by implication, the use-value interpretation of "enjoyment" in the gift tax regulation under discussion, further discussion of the question might be deemed to be irrelevant. The government did cite this regulation in its Dickman brief and oral argument, (230) but the Supreme Court majority failed to pick up on it. Nevertheless, in a footnote, the Court referred to the incomplete-transfer concept that underlies the regulation, as follows:
  In order to make a taxable gift, the transferor must relinquish
  dominion and control over the transferred property. At the moment
  an interest-free loan is made, the transferor has not given up all
  dominion and control; he could terminate the transferee's use of the
  funds by calling the loan. As time passes without a demand for
  repayment, however, the transferor allows the use of the principal
  to pass to the transferee, and the gift becomes complete. ... [T]he
  fact that the transferor's dominion and control over the use of the
  principal are relinquished over time will become especially relevant
  in connection with the valuation of gifts that result from such
  loans; it does not, however, alter the fact that the lender has made
  a gratuitous transfer of property subject to the federal gift
  tax. (231)


The contention might be that the Supreme Court in this passage implicitly adopted a use-value interpretation of "enjoyment" because it cited the incomplete-transfer notion while holding that the gift was held to be measurable by the borrower's "use-value" of the money over time. First, one would doubt that the true rationale of a Supreme Court case can be found only in a footnote. Second, the Supreme Court majority not only failed to cite the regulation but also failed to invoke the term "enjoyment." Third, the Dickman majority opinion was ambivalent about whether the gifts actually occurred with the passage of time or whether the gift was made when the no-interest demand loan was entered into, with only its valuation depending upon the passage of time. Fourth, a theory of transferred use value over time does not hinge on the revocability of the transfer. It can also apply to a term interest. Finally, a theory of transferred use value over time does not distinguish a transfer of wealth from the provision of a service.

The footnote also does not make sense on the merits. If any transfer is revocable it is that of the cash principal itself, as the use value is derivative of the cash. A gift of the principal would occur only if the lender forgave all or part of the repayment obligation or if collection on such obligation became impossible. There would be no gift if the borrower simply spent the funds on consumption while remaining subject to the repayment obligation. The move made in the footnote to separate the use of the principal from the principal itself is not explained, and is, in effect, conclusory.

In short, the Dickman case cannot be said to have applied or upheld the regulation in question to gift demand loans of cash.

3. History of the Regulation

The quoted sentence was added to the regulation in 1936. (232) The historical record contains no direct evidence of what the reference to "enjoyment" meant or what it was intended to encompass or accomplish, and the circumstantial evidence is inconclusive.

The gift tax first appeared on the scene to back up the 1916 estate tax as a result of the 1924 Revenue Act. The 1924 gift tax statute said nothing at all about revocable transfers, but it added a provision to the estate tax, which held that revocable and other similar transfers were to be included in the gross estate. A regulation issued in 1924 stated, in relevant part, that revocable trusts were not completed gifts, but that the payment of "income" from a revocable trust to a person other than the grantor was a gift. (233) The 1924 gift tax was repealed in 1926, but then it was re-enacted in 1932 with a statutory provision that echoed the 1924 regulation in stating that the creation of a revocable trust was not a gift, but that gifts occurred with distributions of "income" to beneficiaries other than the settlor or upon the relinquishment of the revocation power. (234)

In February of 1933 the Supreme Court, in Burnet v. Guggenheim, decided that the 1924-1926 gift tax act applied on the occasion of a release by the donor of a power to revoke a revocable trust created before the effective date of the gift tax, notwithstanding the absence of statutory language dealing with revocable transfers. (235) The majority opinion noted, but did not expressly rely on, the 1924 regulation. (236) It also noted that these results were consistent with the 1924 statutory provision including revocable transfers in the settlor's gross estate. (237)

In October of 1933, regulations were issued that confirmed the various gift tax consequences of revocable trusts described above, but did not really add anything new. (238) In 1934, Congress, as a technical correction, repealed the provision of the 1932 gift tax statute dealing with revocable trusts on the ground that it was now superfluous in light of Guggenheim. (239) In 1936, the revocable-trust regulation was revised and expanded, with the addition of the sentence referring to "the receipt of income or other enjoyment" that is now, with immaterial changes, imbedded in current Treasury Regulation section 25.2511-2(f). (240)

4. Discerning Meaning from the Historical Context

There was no notice or comment and no Treasury Decision to illuminate the meaning of "enjoyment." (241) I have been unable to find any discussion of the original understanding of the regulation's "enjoyment" language in the gift tax literature, (242) and there appears to be no litigated case or ruling in which the regulation has been applied to the use-value of revocable transfers of tangible property. (243) Certainly the regulation long pre-dates any interest by the Treasury in below-market loans of money (244) and was promulgated long before the 1983 decision in Dickman. Thus, one can only speculate on what "enjoyment" was intended to reach on the basis of the 1936 wealth transfer tax environment and any relevant differences between the 1936 regulation and its predecessors.

In the estate and gift tax world, virtually all revocable transfers involve trusts. Apart from tenancies at will in real property, non-trust revocable transfers of cash, personal property, and real property are not recognized at common law. (245) A tenancy at will does not truly constitute a revocable transfer, but rather entails a power in the landlord to accelerate the reversion that the landlord already holds. Nevertheless, non-trust revocable transfers can occur through non-trust contractual arrangements such as joint bank accounts, annuities, pension plans, and life insurance. Since the early gift tax statutes and regulations referred only to revocable trusts, their coverage was not comprehensive. Accordingly, the language of the 1936 regulation was drafted so as to encompass both trust and non-trust transfers. (246) If that were the sole reason for the changes in the 1936 regulation, "enjoyment" would not refer to the use-value of tangible property, but rather to the exercise of third-party-beneficiary withdrawal rights under contractual arrangements, which are the functional equivalent of trust distributions. (247)

A second relevant difference is that the phrase in the 1936 regulations referring to "income or other enjoyment" replaced the word "income" standing alone. The 1924 and 1933 versions of the regulation were woefully deficient in only referring to "income" payments, (248) because, in principle, any distribution from a revocable trust to a person other than the grantor is a gift from the donor, whether the distribution is of income or corpus, on account of the fact that the distribution constitutes wealth passing to the distributee that is freed from the donor's power to revoke. Similarly, the expansion in the coverage of the regulation to include contractual arrangements meant that third-party distributions and withdrawals from accounts and contractual arrangements would be completed gifts without having to be "income." Even if the authors of the 1936 regulation thought there could be revocable transfers of property not involving a trustee or other third party, it would still have been necessary to avoid limiting the scope of the rule to distributions of only "income." (249) One thinks of pay-outs from annuities, royalties from copyrights and mineral interests, and rents, crops, and extracted minerals from real estate--all of which might be viewed as "principal" in whole or in part. (250)

These changes in the 1936 regulations suggest "other enjoyment" was meant to refer to (a) non-income distributions from revocable trusts and (b) "distribution equivalents" from non-trust revocable transfers. All of these distribution equivalents are accessions to wealth in the form of cash or property, without reference to the use value of tangible property. Additionally, the structure of the phrase "income or of other enjoyment" suggests that "enjoyment" must share a common characteristic with "income," namely, the distribution or withdrawal of material wealth. The regulation cannot be construed to extend the scope of the gift tax beyond its statutory anchor: there must be a gift transfer of property or an interest therein.

Recall that the full phrase is "the receipt of income or of other enjoyment." (251) The notion of "receipt ... of enjoyment" is awkward, unless enjoyment is understood to refer to cash or wealth. If enjoyment just refers to use or a notion of subjective benefit, then it would have been appropriate to use the verbs "use" or "enjoy."

In sum, "enjoyment" in the gift tax regulation makes perfect sense as a reference to transfers of wealth, without extending its meaning to "use value" or "bare possession."

5. The Meaning of "Enjoyment" Under the Estate Tax

Another possible approach to deciphering "other enjoyment" in the gift tax regulation is to inquire if the term "enjoyment" has acquired a settled meaning in wealth transfer taxation more broadly. It turns out that it has had a long-standing history in estate and inheritance taxation, but virtually none in gift taxation other than the sentence in the regulation being discussed. (252) Gift taxes, as opposed to inheritance or estate taxes, were unknown at the state or federal level prior to the 1924 federal gift tax. Previously, the usual method of combating inheritance or estate tax avoidance was through statutory provisions that augmented the natural inheritance or estate tax base by the date-of-death value of (a) transfers made in contemplation of death and (b) transfers that would "take effect in possession or enjoyment at or after [the transferor's] death." The latter type of provision made its first appearance in the Pennsylvania Inheritance Tax Statute of 1826, but its meaning was not then explained, (253) and I have been unable to uncover any subsequent attempt at a comprehensive definition. In Vanderbilt v. Eidman, (254) construing a similar provision in the Federal Inheritance Tax of 1898, (255) the concept of "possession or enjoyment" was posited as laying in opposition to "passage of title" and "vesting." Thus, if X creates an irrevocable inter vivos trust with an independent trustee, income to Y for life, remainder to Z, both the income interest for life and the remainder interest come into being and vest when the trust is created, but Y "enjoys" the income during her life, and Z's vested remainder "comes into possession" at Y's death. If the same trust were revocable by X, then Y's enjoyment and Z's possession would become secure at X's death, when X's power expires, and arguably this scenario would fall within the "take effect" language of the early statutes and be subject to tax at X's death.

The first modern estate tax, the Federal Estate Tax of 1916 had a similar "take effect" provision, and an early case indeed held that a revocable trust was indeed included in the settlor's gross estate for the reason just stated. (256) Some early constructional uncertainties (257) resulted in the splitting apart of this provision into three separate provisions, however, which are now designated as sections 2036, 2037, and 2038 of the estate tax. All of these provisions are triggered by interests and powers retained by a transferor and all of them use the phrase "possession or enjoyment," but in different ways. (258) The overarching concept, if not the precise doctrine, has continued to be that an inter vivos transfer is pulled into the transferor's gross estate if possession or enjoyment by donees and/or trust beneficiaries is contingent, in the relevant fashion, on the transferor's death.

The vestigial remains of the original "take effect" provision are interred in current section 2037, which requires, inter alia, that "possession or enjoyment of the [transferred] property can, through ownership of such [transferred] interest, be obtained only by surviving the decedent." (259) The first provision to be split off from the "take effect" provision was the predecessor of current section 2038, which was enacted simultaneously with the first gift tax in 1924, and which provides for inclusion in the transferor's gross estate of property, or an interest therein, whose "enjoyment" is subject to a power in the transferor to revoke, alter, amend, or terminate. (260) Under both sections 2037 and 2038, the statutory reference is to the possession or enjoyment of the transferees mainly in their capacity as trust beneficiaries, not the transferor, and such possession or enjoyment by the transferees is always derivative of property or an interest therein that has been transferred by the decedent. (261) It is hard to see how the notions of use value could play any independent role under sections 2037 and 2038. (262)

In the case of section 2036(a)(1)--which causes inclusion in the gross estate of property where the transferor has "retained" the "right to income" or the "possession or enjoyment" of the transferred property (263)--it appears that the possession or enjoyment of the transferor can exist independently of a property interest held by the transferor. For example, if X deeds Blackacre to Y, and X continues to be the exclusive occupier of the property until X's death, Blackacre might, depending on the facts, be included in X's gross estate under section 2036(a)(1) even though X has not reserved a legal life estate as such. (264) The relevant facts bearing on the ultimate result in such a case are: (1) whether the possession or enjoyment of the donor is pursuant to an agreement or understanding with the donee, and (2) whether the use by the donor is exclusive. (265) Thus, the retained enjoyment of the donor must be pursuant to an arrangement that approaches a property interest in substance, if not in the technical sense, because the agreement or understanding need not be enforceable. It may be that current doctrine imposes too high a threshold on the application of section 2036(a)(1) by requiring an agreement or understanding plus exclusive use--at least in the case of trusts. (266) In any event, the agreement or understanding notion properly bears on the "retention" requirement, (267) not the enjoyment (etc.) concept. The purpose of that requirement is to weed out situations where X transfers property to Y, and Y freely allows X to use the property from time to time. (268) That is, "retention" is to be distinguished from "gift back." The notion of agreement or understanding should be viewed as going to the issue of whether the donor's use was a condition on which the gift was made and not the result of a subsequent and independent act of generosity by the donee. Exclusive use by the donor is circumstantial evidence of the former, but sporadic use tends to indicate the latter.

In sum, the possession or enjoyment that can trigger section 2036(a)(1) in the case of non-trust gifts does not have to be an incident of a retained property interest, but the doctrinal requirements of "agreement or understanding" and "exclusive use" have the effect of requiring a retained property interest in substance, if not in form. The Supreme Court has held that the right to vote transferred stock does not rise to the threshold of possession or enjoyment, stating that the donor's retained enjoyment right must be substantial, and not contingent or speculative, for section 2036(a)(1) to apply. (269) Thus, it appears that section 2036(a)(1) would not apply where the donee, having obtained a fee simple absolute from the donor, gives the donor permission, from time to time, to use the transferred property.

To summarize, the word "enjoyment" as it has been used in the estate tax is either derivative of a transferred property interest or, under section 2036(a), is indicative of a retained interest-in-substance. The policies that favor inclusion of transferred property, or interests therein, in the gross estate on account of retained interests (270) would not necessarily apply to ascertaining transferred interests under the gift tax. In fact, as a matter of logic, there is no reason to find gifts with respect to property that does not avoid inclusion in the gross estate, to any extent, by reason of the decedent's ownership.

Finally, in the estate tax, as well as state inheritance taxes, "possession" and "enjoyment" are always, with the exception of section 2038, conjoined as a single term, whereas in the gift tax regulation in question only the word "enjoyment" is found, paired instead with the word "income." Since section 2038 deals with the same type of transfer as the regulation in question, it is not surprising that the gift tax regulation also refers to enjoyment. Nevertheless, it would have been an odd decision to use "enjoyment"--standing alone--in the gift tax regulation to mean "possession," given that the latter word not only has a long history of being conjoined with "enjoyment" in transfer taxation, but also because "possession" precisely describes the revocable transfer of the use of tangible property. Therefore, "enjoyment" must exclude "possession" in the gift tax regulation.

6. Is There a "Gift-in-Substance" Doctrine?

If the term "enjoyment" under the estate tax means something like "interest in substance," can the phrase "other enjoyment" in the gift tax regulations have a similar meaning? Specifically, can "enjoyment" of tangible property under a gift demand loan arrangement be considered to be a gift of a property interest in substance? As a preliminary matter, in most cases the donor would gain nothing tax-wise by disguising a gift as a non-gift, because the property would remain in her gross estate and the income therefrom would be taxable to her.

The desirability of a gift-in-substance doctrine can be tested by considering the case of a gift demand loan of personal-use property that yields no income and has a short life, such as a consumer durable. Through such a transaction, one might make a gift in substance without appearing to make one. Although the lender would continue to be treated as the owner for income and estate tax purposes, these results would be harmless to the lender because the property produces no actual income and its estate tax value would be low--perhaps zero. But these observations also count in a general sort of way against finding a gift, because the same income and estate tax results would have occurred without the loan. Thus, "tax avoidance" would exist here only if the gift tax is viewed as a stand-alone tax that has independent force apart from its acknowledged role as a back-up to the estate and income taxes.

Even viewing the gift tax as a stand-alone tax, there appears to be no authority for a "gift in substance" doctrine. No such doctrine is set forth in the gift tax regulations, and I have found no case or ruling that would support such a doctrine. (271) As an aside, the "indirect gift doctrine" is distinguishable by reason of being concerned with the use of third parties in effecting gifts or with the disguising of gifts as commercial transactions. (272) The fact that the gift tax is a tax on what a donor gives up, rather than what a donee receives, suggests that a gift-in-substance concept would miss the point. (273)

If there were such a doctrine as "gift in substance," it would be trumped by the principle of "incomplete transfer," (274) which holds that there is no gift unless the "donor has so parted with dominion and control as to leave him no power to change its disposition, whether for his own benefit or the benefit of another." (275) The incomplete-transfer principle was developed (276) and expanded (277) with an eye to the fact that these transfers would be included in the gross estate. The incomplete-transfer principle demonstrates that the gift tax is indeed subordinate to the estate tax in this respect.

7. Revocable Transfers vs. Non-Transfers

If an "incomplete" transfer is not a gift, then a fortiori a "non-transfer" is not a gift. A revocable "outright" transfer of personal property--not in trust or not involving third parties--is not a gift at all. The distinction between a non-gift, resulting from a revocable outright transfer, and a revocable gift was made by Justice Cardozo in the 1933 Supreme Court decision of Burnet v. Guggenheim. (278) It was only because the transfer in that case was in trust, thereby divesting the donor of title, that the incomplete-transfer principle was called into play at all. If there had been a non-trust transfer of stock subject to recall by the donor, no gift issue would have even arisen. A later Supreme Court case from the 1970s held that under section 2036(a) one cannot retain an interest or power in something that has never been transferred in the first place. (279)

The gift tax regulation referring to "other enjoyment" by its own terms presupposes a prior transfer that is incomplete on account of a retained power to revoke, alter, or amend. (280) The regulation is simply not applicable to non-transfers.

When it comes to gift loans of property, the only scenario involving a true revocable transfer is the tenancy at will of real estate. Most legally-trained persons have heard of tenancies at will. Not all situations that look like tenancies at will really are tenancies at will, however. Revocability is also characteristic of licenses to use property and, for that matter, periodic tenancies. The legal distinction between at-will tenancies and licenses is that a leasehold as a non-freehold estate gives the grantee the right of exclusive possession, whereas a license is only a permission for a certain use. (281) A license is not a "property interest," and therefore it cannot be conveyed or transferred as such. Virtually all gift demand loans of tangible property entail licenses, not at-will leases.

The Service has itself long maintained the relevance of the distinction between property interests and licenses in the charitable contribution area. (282) The fact that the Service took the dubious and unsuccessful position that leases were not property interests was simply an example of an unsound application of a sound principle.

8. The Regulation Cannot Enlarge the Statute

It was previously demonstrated that the phrase "other enjoyment" in the gift tax regulation can easily be construed to refer only to material distributions and withdrawals of cash or property, and not to the use value of the property. The basic reason why this construction is proper is that a regulation cannot enlarge the underlying statute, and the underlying statute requires a gift of property or an interest therein. In the case of distributions or withdrawals from a revocable transfer, the requirements of the statute are satisfied. The donor of revocable transfer of income-producing property, in trust or otherwise, is conceptually treated as the real owner of the property. It follows that any distribution or withdrawal by a person other than the donor is treated as having been made initially to such owner, who then is deemed to make a gift of the distributed cash or property to the distributee. (283) This view of the transaction explains why the distribution is taxed to the donor, instead of to the donee, for income tax purposes, (284) and why the distributed amount is treated as a gift from the donor to the distributee for gift and income tax purposes. If the same analysis were applied to a revocable transfer of personal-use property, then the use by a person other than the lender would be attributed to the lender. Such use is not income to the lender, however, as it is not an accession to wealth. The use value of one's own property is called "imputed income," which has never been recognized for federal tax purposes. (285) If the lender receives no cash or wealth, then none can be deemed to be re-transferred to the user as a gift.

From the donee's point of view, the distribution or withdrawal frees the cash or property from the donor's power of revocation, and such cash or property can be disposed of freely by the donee. The notion of "freeing from the power" is relevant for material wealth but not for personal use, which cannot be detached from the property itself. A suitable metaphor is that of a flow of electric current to an appliance, such as a television: if the power supplier turns off the current, the viewer has nothing at all that can be described as wealth. Of course, if the donee of a revocable property gift has the right to "bottle and sell" the enjoyment right, then the donee has the right to convert the license to use a personal-use asset into wealth, and if that right is in fact exercised, the proceeds retained by the donee should be treated as a gift from the donor. If the power is not exercised, however, there is no wealth transfer.

The argument to the contrary is that a gratuitous term lease would be a gift of a property interest, and therefore the gift of an at-will lease must also entail a gift of a property interest measured by the passage of time. This argument is a non-sequitur as a matter of doctrine, because there are different rules for completed gifts of property interests and incomplete gifts of property. As a policy matter, whereas gift demand loans have tax-avoidance potential, gifts of at-will leases and gratuitous licenses to use property do not.

VI. CODA: CONSUMPTION SPENDING FOR SELF AND OTHERS

The conclusion that gift demand loans of property do not result in gifts for gift tax purposes is based on the following considerations. First, the Dickman case, holding that a gift demand loan of cash entails seriatim gifts, does not present any coherent theory within established gift tax doctrine that would apply to gift demand loans of property. Additionally, Dickman is distinguishable because a gift demand loan of property is either a non-transfer or a revocable transfer. This distinction in turn rests on the property-law distinction between leases and licenses, but in either case there is no potential for estate or income tax avoidance and no transfer by gift of property or an interest therein.

This result may appear to be narrowly doctrinal, but it is supported by some broader considerations pertaining to the scope and role of the gift tax.

A. Lending and Sharing Are Incidents of Ownership

From a more detached perspective, the gratuitous grant of the use of property to another by way of a license to use the property can be viewed as a species of use by the owner herself rather than as a transfer of wealth to another. Allowing friends and relatives to use property--sharing--is a normal social phenomenon, and is generally not a substitute for a commercial transaction. Nor is it a technique of tax avoidance. People acquire property in part to express their personality and to share themselves and their good fortune with family and friends. Satisfaction of one's own needs and wants is not a transfer subject to tax. The very idea of a "transfer" presupposes the participation of at least two separate autonomous units. The notion of autonomy makes sense in a commercial context, but not necessarily in a family or social context. The notion that not every transaction involving relatives and friends is a wealth transfer is recognized in the income tax, where support, sharing, and entertaining are not viewed as income transfers, but are simply treated as consumption spending of the provider. (286)

In the gift tax, support is viewed as a non-gift. (287) The conventional explanations for the non-statutory exclusion for support under the gift tax are either that the transfers are involuntary, in that they are mandated by law, or that they are made for full and adequate consideration. The "transfer mandated by law" theory (288) extends beyond support to taxes, fines, and damage awards. This approach is unsatisfactory, however, because it would require reference to the family law of each and every sub-unit of the United States. The "consideration" theory is question-begging, because the provision of ongoing support clearly does deplete the provider's gross estate in favor of those who are the natural objects of the provider's bounty. (289) A better theory for explaining the support exclusion is that the provider is spending money to pursue his or her own ends in a way that also happens to benefit loved ones, but without transferring wealth or material endowment. Consistent with this theory, it is the practice of the Service to forego imposition of the gift tax in cases involving consumption spending on minors, the sharing of tangible property, and demand loans of tangible property. (290) In a non-family context, courts have held that spending to pursue one's personal, including political, goals is not a gift even though it directly benefits another. (291) In contrast, in Dickman and the pre-1969 cases involving rent-free leases of real estate to charity, (292) the transactions closely mimicked the commercial forms of loan and lease. Both cash and rental property are expected to produce income, and gift loans of both are more reasonably viewed in terms of assignment of income than are gift loans of personal-use tangible property.

B. Gifts of Consumption

As a general matter, transactions that provide only consumption benefits for another might not be viewed as true wealth transfers subject to gift tax because they do not remove material endowment of the transferor to be added to that of the transferee. Suggestions have indeed been made that would exclude all spending for another's consumption from the gift tax. (293) The enactment of any such principle should be accompanied by safeguards against transactions that would disguise wealth transfers as consumption purchases. Even without a statutory rule, a rent-free "loan" of a consumer item for a period longer than its depreciation life can easily be viewed as an outright gift in substance. (294) The Service could also issue regulations treating the lending of tangible property for a significant period as being gifts of term interests. The discussion of the parameters of such an exclusion can await another day, however. (295) Since a loan of money does not entail the purchase of consumption benefits for another, Dickman and section 7872 would not be affected by debates over the scope of the consumption/support exclusion. In contrast, any gift tax consumption/support exclusion would likely encompass routine gift demand loans of property, and in that event such loans would avoid gift tax on an independent theoretical basis other than the technical arguments advanced herein.

(1) The term "loan" is set in quotation marks because the law does not really refer to a transfer of possession of tangible property as a loan, but rather as any of a lease, transfer of a term interest followed by a reversion, revocable transfer, license, bailment, or permissive use. True loans are of money. The word loan as used herein in connection with tangible property is simply meant to encompass all arrangements by which a person transfers property to another under an arrangement that provides for the return of the property.

(2) Section 2501(a)(1) requires a transfer of "property" by gift. It is understood that property includes money, as well as an interest in property. See Treas. Reg. [section]25.2511-1(e),(f)(1997).

(3) Dickman v. Commissioner, 465 U.S. 330 (1984), aff'g, 690 F.2d 812 (11th Cir. 1982), rev'g, 41 T.C.M. (CCH) 620 (1980).

(4) This possible extension of Dickman is critiqued in Mark J. Wolff, Dickman Confined: The Taxation of Gratuitous Transfers of Use, 21 STETSON L. REV. 509, 542-56 (1992).

(5) See Treas. Reg. [section] 25.2511-1(e) (1999).

(6) See Treas. Reg. [section] 25.2511-2(b) (1999).

(7) See Treas. Reg. [section] 25.2511-2(f) (1999).

(8) See Helvering v. Indep. Life Ins. Co., 292 U.S. 371, 379 (1934).

(9) Transactions in the ordinary course of business do not entail gifts even if the transaction turns out to be a bad bargain. See Treas. Reg. [section] 25.2512-8 (1960).

(10) Commissioner v. Wemyss, 324 U.S. 303 (1945).

(11) The term "money's worth" includes property and reductions in the donor's debts or other legal obligations that are imposed by law or were incurred in a transaction in which the donor received value. See id.

(12) See Commissioner v. Hogle, 165 F.2d 352 (10th Cir. 1947); Estate of Childers v. Commissioner, 10 T.C. 566, 579-80 (1948); see also Rev. Rul. 66-167, 1966-1 C.B. 20 (holding that advance waiver of executor's commissions that enhanced son's legacy was not a gift).

(13) See Haygood v. Commissioner, 42 T.C. 936 (1964) (analyzing gift tax treatment of installment sale to related individual followed by forgiveness of installment notes as they became due).

(14) Cf. Helvering v. Clifford, 309 U.S. 331.

(15) If there were a gift of a term interest, Smith would, under section 2702 of the Code, appear to be treated as having made a transfer of Dellwood in fee to her daughter, without subtraction for the value of the retained reversion. Although there is an exception for certain tangible property, the exception is limited to nondepreciable property, such as artworks. See I.R.C. [section] 2702(c)(4); Treas. Reg. [section] 25.2702-2(c), (d)(1)(Ex. 6) (2005).

(16) See Diedrich v. Commissioner, 457 U.S. 191 (1982) (holding that the obligation undertaken by the donee to pay the donor's gift tax reduced the amount subject to the gift tax).

(17) See Dickman v. Commissioner, 465 U.S. 330 (1984).

(18) 20 T.C. 204 (1953).

(19) Distrust of the actuarial tables in certain situations, however, led to the enactment in 1993 of section 2702, which would treat X as having made a gift of the entire fee interest in this example.

(20) Rev. Rul. 73-61, 1973-1 C.B. 408.

(21) Rev. Rul. 69-346, 1969-1 C.B. 227 (ruling that a presently-enforceable gift could not be valued until occurrence of future event; gift is deemed to occur upon happening of the future event rendering possible the valuation of the gift). See infra text accompanying note 98 for discussion of the open gift doctrine.

(22) See Crown v. Commissioner, 585 F.2d 234 (7th Cir. 1978).

(23) Id. at 237 n.8.

(24) The Dickman majority opinion reads like a string of excerpts from the government's brief. The government's position was premised on the taxpayer's concession that the borrower's economic return, if any, on the borrowed funds was taxable income to the borrower rather than the lender. Brief for the Respondent, Dickman v. Commissioner, 465 U.S. 330 (1984) (No. 82-1041).

(25) The decision of Commissioner v. Glenshaw Glass Co. was cited. 348 U.S. 426 (1955) (holding that an accession to wealth was gross income regardless of source). This move does not solve the Dickman problem because "gift" requires a transfer of wealth from donor to donee, which was the very issue under consideration. Moreover, the mere ability to use money without paying interest had generally not been held to be income under the income tax. See infra note 63.

(26) Dickman v. Commissioner, 465 U.S. 330, 336 (1984) (emphasis added) (citation omitted).

(27) Id. at 335. Because of the procedural posture of the case, the Court did not prescribe the precise valuation rule. In the Tax Court proceeding, the government asserted a deficiency computed by applying the interest rate for tax overpayments against outstanding balances, but the Tax Court held that there was no gift, rendering the valuation issue moot. Dickman v. Commissioner, 41 T.C.M. (CCH) 620 (1980). The Eleventh Circuit, in reversing, remanded to the Tax Court on the valuation issue without offering any guidelines. Dickman v. Commissioner, 690 F.2d 812, 820 (1982). The Supreme Court, in affirming the Eleventh Circuit, including its action to remand, made it clear that the actual use by the donee was irrelevant to the valuation issue. In particular, it held that the Commissioner could determine the amount of the annual gift based on the lesser of (a) the rate of return readily obtainable by the borrower and (b) the reasonable value of the use of the funds. Dickman, 465 U.S. at 344. There is no reported decision on remand, but the Service set forth its view of the valuation issue, which was basically to apply a conservative interest rate against the outstanding loan balance, in Announcement 84-60, which was in turn shortly superseded by the enactment of section 7872. I.R.S. Announcement 84-60, 1984-23 I.R.B. 58; I.R.C. [section] 7872.

(28) Rev. Rul. 69-346, 1969-1 C.B. 227 (holding that, where an antenuptial agreement required the wife to make a gift at the husband's death, the wife's gift is deemed to be made at the husband's death when the amount of the gift could be ascertained, notwithstanding the general rule that an enforceable contract to make a future gift is a gift when the contract is entered into).

(29) Dickman, 465 U.S. at 340-42 (emphasis in original)

(30) Id. at 345.

(31) Id. at 349-50.

(32) Id. at 350.

(33) Id. at 351-52.

(34) Taxpayer's counsel engaged in the following colloquy with the Justices:
  QUESTION: But I thought your answer to the Chief Justice's question
  would have indicated that an execution of a lease by a father to a
  child of say a very valuable property, commercial property, a lease
  for 20 years free of any rent, wouldn't be a gift. Maybe I
  misunderstood.
  MR. RIGGS: No, sir.


See Transcript of Oral Argument, Dickman, 465 U.S. 330 (1984) (No. 82-1041), 1983 U.S. Trans. LEXIS 64, 10-11. Taxpayer's theory was basically that a demand loan was per se not a gift, because it is an equal exchange.

(35) Taxpayer's counsel appeared to concede that, in such a case, any rentals obtained by the lessee would be attributed to the related lessor under the assignment of income doctrine, but counsel also claimed that any income earned by the borrower of an interest-free loan would not be taxed to the related lender. See id. at 37-40.

(36) See Brief for the Respondent, Dickman, 465 U.S. 330 (1984) (No. 82-1041), 1982 U.S. Briefs 1041, 25, 27-28; Oral Arguments, Dickman, 465 U.S. 330 (1984) (No. 82-1041), 1983 U.S. Trans. LEXIS 64, 23, 30.

(37) The government's brief stated that a one-year rent-free term loan of an automobile would be a gift and made no serious attempt to distinguish demand loans of such property. See Brief for the Respondent, Dickman, 465 U.S. 330 (1984) (No. 82-1041), 1982 U.S. Briefs 1041, 49 n.47. In the government's oral argument, the following colloquy took place:
  QUESTION: And when you get into the property area, I'm troubled by
  where one draws the line. What about a parent lending an
  automobile? ... Parents or friends lend a summer home or a beach
  cottage or whatever. It's a Pandora's box, it seems to me. ...
  MR. WALLACE [after discussing in-kind support]: It has to be looked
  at in terms of the purpose of the gift tax, which was to supplement
  the estate tax. And if transfers of wealth are being used in a way
  that would defeat the applicability of the estate tax or of the
  income tax, which was also a purpose, then there is more of a problem
  under the gift tax law than if it's the ordinary kind of consumption
  of property where the donor could have consumed his estate,
  obviously, on more frivolous things, but instead he's providing
  support and tuition benefits for his children, but it's being
  consumed rather than passed along.


Dickman, 465 U.S. 330 (No. 82-1041), 1983 U.S. Trans. LEXIS 64, 18-21. Subsequently, to a question about the use by adult children of a parent's summer cottage, the government only surmised that any gift resulting therefrom would likely fall within the annual gift exclusion. Id. at 25-26.

(38) Dickman, 465 U.S. at 341.

(39) For an article critical of the open-ended potential reach of Dickman, see Paul L. Caron, Taxing Opportunity, 14 VA. TAX REV. 347 (1994).

(40) See I.R.S. Gen. Couns. Mem. 38,702 (Apr. 28, 1981).

(41) See Dickman, 465 U.S. at 334 n.4. These generalities may have been seen by the Dickman majority as a counter to taxpayer's argument that Congress, in enacting the gift tax, did not have interest-free demand loans specifically in mind. A sufficiently effective counter, however, is to cite the text of section 2511(a) that defines the scope of the gift tax to include transfers, however motivated and however effective, of any kind of property, with exceptions, wherever located. This is a straightforward textualist approach.

(42) See Farid-Es-Sultaneh v. Commissioner, 160 F.2d 812 (2d Cir. 1947).

(43) See Dickman, 465 U.S. at 338.

(44) Section 2511(c), added by The Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16, [section]511, provides that a transfer in trust made after 2009 is subject to gift tax unless it is wholly incomplete for income tax purposes. As of the writing of this article, the estate tax is scheduled to disappear for decedents dying after 2009, which would leave only the gift tax and the income tax. With no estate tax, the only purpose of the gift tax would be to back up the income tax. No one expects the estate tax to permanently disappear, however. In the absence of legislation, the pre-2001 version of the estate tax will revive for decedents dying after 2010. I.R.C. [section] 2511.

(45) The rules for completion of gifts, in trust or otherwise--pending the coming into effect of section 2511(c)--are found in Treas. Reg. [section] 25.2511-2 (1999), and are independent of the income tax rules, found in I.R.C. [section][section] 671-677. There are numerous instances where trust transfers are subject to gift tax despite being incomplete for income tax purposes.

(46) See Estate of Sanford v. Commissioner, 308 U.S. 39, 47-48 (1939).

(47) This holding applies only to situations where the issue is one of completeness and only to situations where there is no specific gift tax rule to the contrary. For example, Treas. Reg. [section] 25.2512-1(d) provides that a gift is complete where the donor retains merely the power to affect the time or manner of a trust's enjoyment, even though the same transfer may be included in the gross estate under section 2038(a)(1) on account of a power in the donor to "terminate" the trust. Similarly, inclusion in the gross estate of a transferred interest does not preclude gift taxation of the same interest. See Smith v. Shaughnessy, 318 U.S. 176 (1943).

(48) Unearned (i.e., investment) income of minors, presumably derived from gifts and bequests from adults, is taxed at the parent's marginal rate. See I.R.C. [section] 1(g). Sections 671-677 treat a trust grantor as the owner of the income from trusts in which the grantor, or the grantor's spouse, retains various interests, powers, and expectancies. Case law provides parallel rules for non-trust transfers. I.R.C. [section][section] 671-77; see infra note 135.

(49) See Commissioner v. Hogle, 165 F.2d 352 (10th Cir. 1947).

(50) See Rev. Rul. 84-1, 1984-1 C.B. 39 (donating purchased right to hotel rooms for various periods was contribution of property as opposed to donation of donor's own services).

(51) See Estate of Blass v. Commissioner, 11 T.C.M. (CCH) 622 (1952) (involving diversion of economic opportunity).

(52) The investment income would be attributed to the donee even if the investment could be traced to the borrowed money. See supra note 24.

(53) The dissent might have been getting at this point by observing that the donee would be taxed on investment income even though receiving a gift that purports to be excluded from income under section 102(a). Dickman v. Commissioner, 465 U.S. at 352. The dissent was confused in this analysis. The borrowing, which is the locus of the gift, is a separate transaction from the donee's investments. The problem is that the result of Dickman posits a double economic gain to the donee, which seems counter-intuitive. It is not illogical, however, and Dickman does not produce double taxation of the same amounts. I only describe the result as "awkward" because it posits a wealth transfer where no such transfer is apparent.

(54) The interest-free use of the money is excluded from gross income three times over: (1) as imputed income, treated as non-income, see infra note 62, (2) as a gift under section 102(a), and (3) as, possibly, a forgiven debt payment that would have been deductible. See I.R.C. [section] 108(e)(2).

(55) See Dickman, 465 U.S. at 335 n.5. In fact, the government's theory was not a cross-payment theory, but instead was the one announced in Rev. Rul. 73-61, 1973-1 C.B. 408, namely, an open-gift theory, discussed at infra note 121.

(56) See Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 (1990) (holding that, for income tax purposes, a non-refunded deposit is really a refund of the deposit coupled with an equal-amount payment for utility services).

(57) The theory of the Court majority was the same as that adopted by the Service in Rev. Rul. 73-61, 1973-1 C.B. 408.

(58) See Rev. Rul. 77-299, 1977-2 C.B. 343. The courts, however, have held that the gifts in these cases occur only as and when amounts due and payable are actually forgiven. See Haygood v. Commissioner, 42 T.C. 936 (1964) (non-acq.). The courts are correct, because the outstanding principal balance would, if the stated interest is at a market rate, be an includible asset of the lender's estate, so that the making of the loan in itself, assuming a market interest rate, would not reduce the lender's potential gross estate. For income tax purposes, a purported loan may not be recognized as a true loan if the repayment obligation is a sham or objectively unreal, in which case the lender cannot obtain a bad-debt deduction as a result of non-repayment. On the borrower's side, a "sham borrowing" cannot support interest deductions or, in the case of purchase-money loans, basis in purchased property. See, e.g., Knetsch v. United States, 364 U.S. 361 (1960); Estate of Franklin v. Commissioner, 544 F.2d 1045 (9th Cir. 1976).

(59) See Commissioner v. Duberstein, 363 U.S. 278 (1960) (holding that tax result to transferee had to be determined independently of the tax treatment of the transferor, given that there is no joinder of parties to a transaction in federal tax cases).

(60) See infra Part IV.

(61) Cases finding no income tax consequences for interest-free loans include Greenspun v. Commissioner, 670 F.2d 123 (9th Cir. 1982); Dean v. Commissioner, 35 T.C. 1083 (1961). Cases finding constructive dividends include Silverman v. Commissioner, 28 T.C. 1061, aff'd, 253 F.2d 849 (8th Cir. 1958); Boyd v. Commissioner, 5 T.C.M. (CCH) 791 (1946). Congress has enacted at least three Code provisions mandating the finding of imputed interest in specified market-transaction loans where interest is disguised as principal. See I.R.C. [section][section] 483, 1274, and 7872. There are two Supreme Court cases declining to find imputed interest, or denying relevance to the time value of money, outside of the confines of these provisions: United States v. Hughes Properties, 476 U.S. 593 (1986); Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 (1990).

(62) Section 482 of the Code permits the Commissioner to allocate income among businesses or entities to clearly reflect income, but this authority does not extend to individuals operating in a nonbusiness capacity and is limited to the income tax. Section 446(b) allows the Commissioner to change a taxpayer's method of accounting to clearly reflect income, but the imputation of interest and, especially, gifts does not fall within the rubric of "accounting methods."

(63) See CHARLES L. B. LOWNDES ET AL., FEDERAL ESTATE AND GIFT TAXES [section]4.3 (3d ed. 1974). An ownership-in-substance approach was rejected in the estate tax cases of United States v. Field, 255 U.S. 257 (1921) (holding that the exercise of general testamentary power of appointment was not the equivalent of ownership), and Helvering v. Safe Deposit & Trust Co., 316 U.S. 56 (1942) (holding that aggregation of powers and interests does not equate with ownership). An extreme example of ignoring substance can be found in Estate of Strangi v. Commissioner, 115 T.C. 478 (2000), aff'd on this issue, 293 F.3d 279 (5th Cir. 2002). In contrast, courts have reached the opposite result under the income tax. See Mallinckrodt v. Nunan, 146 F.2d 1 (8th Cir. 1945), cert. denied, 324 U.S. 871 (holding that possession of a general inter vivos power of appointment resulted in income tax ownership of income-producing property). Cf. Helvering v. Clifford, 309 U.S. 331 (1940) (finding that a donor was the owner-in-substance of transferred property for income tax purposes). The estate and gift taxes do recognize an "indirect transfer" doctrine, which disregards intermediaries in three-party situations. See, e.g., United States v. Estate of Grace, 395 U.S. 316 (1969); Treas. Reg. [section] 25.2511-1(h)(3) (1997). Importantly, however, this doctrine can be said to rest on the legal concept of agency.

(64) See, e.g., Estate of Maxwell v. Commissioner, 3 F.3d 591 (2d Cir. 1993) (consideration for sale in form of mortgage held to be a sham); Estate of Mitchell v. Commissioner, 43 T.C.M. (CCH) 1034 (1982) (holding that an annuity promise was a sham).

(65) Compare Rev. Rul. 64-225, 1964-2 C.B. 15 (asserting that waiver of right of accrued commissions for services is a gift), with Rev. Rul. 66-167, 1966-1 C.B. 20 (finding that performing gratuitous services as executor does not result in gifts).

(66) An analogous situation in the income tax is raised by situations where a party, for its own reasons, provides an economic benefit that the taxpayer-recipient did not bargain for or seek. The result is that the taxpayer-recipient is not considered to have gross income (unless the benefit is disguised compensation, etc.). See United States v. Gotcher, 401 F.2d 118 (5th Cir. 1968).

(67) The same principle exists under the income tax. If a law firm pays for a job prospect's visit, the job prospect avoids the costs of transportation, meals, lodging, and entertainment, but these benefits are obtained only because of the law firm's recruiting effort, and were not bargained for by the job prospect. See id. at 120, n.3. It is true that in Diedrich v. Commissioner, 457 U.S. 191 (1982), a taxpayer argued unsuccessfully that there could be no debt-cancellation income where the debt arose in the transaction itself. That case is distinguishable from the recruiting trip and Dickman, however, because the donor's gift itself generated the gift tax liability that had to be paid. In both the recruiting-trip scenario and in Dickman there was no obligation on the part of the borrower to pay for anything.

(68) See the famous quote from Judge Learned Hand's opinion in Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), echoed in its affirmance, Gregory v. Helvering, 293 U.S. 465, 469 (1935), which stated, "[a]ny one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury. ..."

(69) See supra note 61. It should have been easy to find, at a minimum, that a no-interest loan entails a present transfer by the lender to the borrower for income tax purposes in an amount equal to the excess of the loan amount over the value of the repayment obligation. The courts, however, have always taken the position that in the absence of a contrary statute the lending of money produces no immediate income tax consequences to either the borrower or lender on the theory that the amount lent equals the face amount of the principal repayment obligation. For a critique of this approach, see Joseph M. Dodge, Exploring the Treatment of Borrowing and Liabilities, or Why the Accrual Method Should Be Eliminated, 26 VA. TAX REV. 245 (2006). This "book accounting" view of lending under the income tax derives from business accounting, which has historically avoided valuation. In contrast, valuation lies at the heart of the gift tax, because by definition a gift is the excess of the value of the property transferred over the value of the consideration received.

(70) In the income tax, the Service has express authority to restructure transactions involving two controlled business of a taxpayer. See I.R.C. [section] 482. Additionally, it has broad authority to find disguised compensation, dividend, interest, and other enumerated species of income. I.R.C. [section] 61; see, e.g., Helvering v. Midland Mutual Life Ins. Co., 300 U.S. 216, 223 (1937) (discussing interest income).

(71) Revocable transfers are deemed to be incomplete for gift tax purposes. See Treas. Reg. [section] 25.2511-2(c) (1999).

(72) See Treas. Reg. [section] 25.2511-2(f) (1999).

(73) See Dickman v. Commissioner, 465 U.S. 330, 338 n.7 (1984).

(74) See Treas. Reg. [section] 25.2511-2(f) (1999); Burnet v. Guggenheim, 288 U.S. 280 (1933).

(75) In contrast, if a person transfers cash to a revocable trust, retaining the power to revoke, and the trustee acquires investments with the cash, the grantor, by revoking the trust, obtains the trust property.

(76) Rev. Rul. 73-61,1973-1 C.B. 408.

(77) See Hodel v. Irving, 481 U.S. 704 (1987); Kaiser Aetna v. United States, 444 U.S. 164, 179 (1979).

(78) See Dickman 465 U.S. at 338 n.7.

(79) The Court could have cited the first and third sentences of Treas. Reg. [section] 25-2511-2(f) (1999) for the proposition that gifts can occur out of revocable transfers with the passage of time. See infra Part IV.B.1 for analysis of this regulation.

(80) See supra text accompanying notes 65, 66.

(81) See Dickman, 465 U.S. at 340.

(82) Thus, if the loan bears any interest at all and is paid off, the lender has gain and the borrower has a loss, which is equal to the interest expense. If the borrower fails to repay principal, the lender has a bad debt loss and the borrower has debt-discharge income.

(83) United States v. Kirby Lumber Co., 284 U.S. 1 (1931) (discussing the balance sheet approach to borrowing, looking only to principal-repayment obligation). Accrual accounting, wherein future gross income and expense items are included or deducted at their face amounts rather than present values, is based on the same approach.

(84) Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203, 210 (1990) (holding that there was no income where utility borrowed from customers at below-market interest rate); United States v. Hughes Props., Inc., 476 U.S. 593, 604 (1986) (rejecting present-value approach in deduction-accrual case).

(85) See Treas. Reg. [section] 25.2511-1 (e) & (h)(7) (1997). This analysis disregards I.R.C. [section] 2702, enacted in 1993, which treats certain transactions of this type as being gifts of the entire property.

(86) The use of actuarial tables is mandated, by I.R.C. [section] 7520 and Treas. Reg. [section] 25.2512-5 (2009).

(87) The value of B's term interest is the value of the property transferred, minus the value of A's reversion. The value of A's reversion is the present value of the right to receive an amount equal to the current value of the property after twelve years, using a discount rate prescribed by the tables. See Treas. Reg. [section] 25.2512-5T(d)(2)(ii) (2009).

(88) The repayment obligation held by A is included in A's gross estate under I.R.C. [section] 2033 at its present value as of A's death. See Treas. Reg. [section] 20.2031-4 (1960) (discussing valuation of notes). Cf. Treas. Reg. [section] 20.2031-7T(d)(2)(ii) (2000) (discussing the valuation of remainder interests in property). It is worth noting that in this example more than 100% of the loan amount will be subject to transfer tax. Assuming a discount rate of 5%, the actuarial factor for the gift of the term interest is .55, and, assuming that A dies after ten years, that for the reversion is .91, meaning that 146% of the loan amount is subject to transfer tax. The opposite would be true in the case of gifts of remainders following a retained term interest, however. These results follow from a system that taxes discrete interests at the time transferred, coupled with the fact that the present value of a remainder interest increases with the passage of time, whereas that of a term interest diminishes.

(89) An example of a hard-to-complete rule that is not dependent on actuarial tables is I.R.C. [section] 2036(a) of the estate tax--triggered by a retained income interest or its equivalent. An example of an easy-to-complete rule is I.R.C. [section] 2702, which treats certain retained-interest gifts as gifts of the whole property.

(90) See generally, Joseph M. Dodge, Redoing the Estate and Gift Taxes along Easy-to-Value Lines, 43 TAX L. REV. 241 (1988) (discussing ability of tax planners to game actuarial tables). An easy-to-complete rule is favored in Report on Reform of Federal Transfer Taxes: Task Force on Wealth Transfer Taxes, 58 TAX LAW. 93, 127 (2004).

(91) See supra note 88 for a mathematical explanation.

(92) See I.R.C. [section] 2501(a)(1); I.R.C. [section] 2511(a).

(93) See I.R.C. [section] 2512(b).

(94) The value of a note for estate and gift tax purposes is presumed to be equal to the unpaid principal, unless the party wishing to show a lower value proves otherwise. See Treas. Reg. [section] 20.2031-4 (1960); Treas. Reg. [section] 25.2512-4 (1960). The government could prove a lower value for the repayment obligation than face, but doing so on a case-by-case basis would often not be worth the cost and effort, and apparently the government has made an institutional decision to ignore valuation techniques other than discounting future payments to present value in the case of loan repayment obligations. See supra note 90.

(95) This approach can be supported by a passage in Crown v. Commissioner, 585 F.2d 234 (7th Cir. 1978), where the court held that the value depended on when repayment actually would occur, a fact that could not be known in advance. For reasons detailing why this analysis was wrong see, infra, text accompanying note 120. Cf. I.R.S. Tech. Mem. TL-N-6364 (Aug. 24, 1994) (signing of guarantee was not a gift, but subsequent payments under the guarantee would be gifts).

(96) This doctrine holds that gain or loss on a disposition is not recognized currently for income tax purposes when the consideration cannot be reasonably valued due to contingencies. Rather, the basis of the disposed-of property is allocated to the cash as the latter is received over time. See Burnet v. Logan, 283 U.S. 404 (1931); Treas. Reg. [section] 15a.453-l(d)(2)(iii) (1994). Since the income tax is an annual tax, the Service has grudgingly accepted this doctrine.

(97) The doctrine was first stated by Rev. Rul. 69-346, 1969-1 C.B. 227, which was cited by the Court in Dickman v. Commissioner. 465 U.S. 330, 338 n.7 (1984).

(98) See Estate of Bressani v. Commissioner, 45 T.C. 373 (1966), cited in Rev. Rul. 69-346, 1969-1 C.B. 227. Other rulings, including Rev, Rul, 69-346 itself, can be explained in the same conditional-gift terms. See Rev. Rul. 77-359, 1977-2 C.B. 24; Rev. Rul. 79-384, 1979-2 C.B. 344; Rev. Rul. 98-21, 1998-1 C.B. 975. A conditional transfer can be distinguished from an unconditional obligation to make payments commencing in the future, which was the subject of Rev. Rul. 69-347, 1969-1 C.B. 227.

(99) Estate of DiMarco v. Commissioner, 87 T.C. 653, 660-61 (1986) (stating that a gift cannot be incomplete solely by reason of being difficult to value).

(100) See partial acquiescence in result only, 1990-2 C.B. 1, explained in I.R.S. Tech. Mem. 1990-026 (Sept. 24, 1994).

(101) The survivorship benefit was not property owned by the decedent or property subject to an inter vivos transfer in which the decedent retained an interest or power.

(102) Such income or gains is "income in respect of a decedent" under section 691(a), which is taxable to the decedent's successor; the successor takes over the decedent's basis in such right pursuant to section 1014(c). See M. CARR FERGUSON ET AL., FEDERAL INCOME TAXATION OF ESTATES, TRUSTS, AND BENEFICIARIES 3-55 (3d ed.1998).

(103) In Burnet v. Logan, 283 U.S. 404 (1931), the contingent-payment right that was held to be subject to deferred income taxation was required to be valued for estate tax purposes.

(104) See Dickman v. Commissioner, 465 U.S. 330 (1984).

(105) See Estate of DiMarco v. Commissioner, 87 T.C. 653, 661 n.8 (1986) (rejecting the open-gift tax doctrine explicitly without citing Dickman).

(106) See Dickman, 465 U.S. at 338 n.7 (citing Rev. Rul. 69-346, 1969-1 C.B. 227).

(107) In Rev. Rul. 69-346, 1969-1 C.B. 227, one spouse entered into a contract with the other to make transfers into a trust upon a future condition that in fact occurred. The Service ruled that a gift occurs in principle when a binding contract is entered into to make a future transfer, but since the property to be transferred was then non-ascertainable, the gift would be deemed to be incomplete until the condition occurred. The premise of this ruling--that a gift occurs upon the entering into of a binding contract to make a future conditional transfer--was in turn based on prior decisions, and these decisions were followed in the companion ruling. See Rev. Rul. 69-347, 1969-1 C.B. 227. Interestingly, these decisions adopted the position urged by the government. See LOWNDES ET AL., supra note 63, at 676-78. Thus, the Service itself created the problem--a doctrine that accelerated the gift before actual transfer--that it then attempted to patch up by means of the open-gift approach. In any event, the notion that a binding contract to make a future transfer is a present gift is wrong, because the contract itself would not be enforceable until the condition occurred. In terms of gift tax doctrine, the donor does not part with dominion and control over any specific property until the condition occurred. Therefore, the property would have been includible in the donor's gross estate if the donor predeceased the condition, unless the contract, in effect, created a deductible monetary claim against the donor's estate for estate tax purposes. But that would occur only if the donor received adequate consideration in money or money's worth, which was not the case in the rulings, because of sections 2043(b) and 2053(c)(1)(A). Rev. Rul. 81-31, 1981-1 C.B. 475, condemned by Estate of DiMarco v. Commissioner, 87 T.C. 653, 661 n.8 (1986), also involved a binding contract to effect a future conditional transfer. These rulings might be said to involve time-of-transfer situations, not valuation-uncertainty situations.

(108) See Treas. Reg. [section] 20.2031-4 (1960); Treas. Reg. [section] 25.2512-4 (1960).

(109) 318 U.S. 184(1943).

(110) The doctrine is codified in Treas. Reg. [section] 25.2511-1(e) (1997). In the Robinette case, the donor attempted to subtract a retained reversionary interest that was contingent on events not susceptible to actuarial valuation from the value of the property transferred. See Robinette, supra note 109, at 188.

(111) This point is recognized under the estate and gift taxes. If a person transfers Blackacre to B in return for, say, an annuity, the annuity could be conceptualized as either a retained interest under the transfer or as consideration for the transfer, but not both. If the property transferred is included in the transferor's gross estate by reason of treating the annuity as a retained interest, the annuity cannot also count as consideration that reduces the amount included, which is the remainder interest following the annuity.

(112) This point is often overlooked in estate tax cases involving retained interest transfers. See Brant J. Hellwig, On Discounted Partnerships and Adequate Consideration, 28 VA. TAX REV. 531 (2009).

(113) See Herzog v. Commissioner, 116 F.2d 591 (2d Cir. 1941); Rev. Rul. 77-378, 1977-2 C.B. 347 (holding that a gift to an irrevocable trust is complete in full even though the trustee could pay income or corpus to the donor in its uncontrolled discretion). That is, the fact that the income or corpus might be distributed to the grantor does not constitute a retained interest.

(114) The lender's executor would have a duty to call the outstanding loan principal.

(115) Elsewhere, I have argued that the accessions tax is superior to the estate and gift tax by reason of its ex post approach to gratuitous transfers. See Joseph M. Dodge, Replacing the Accessions Tax with a Reimagined Accessions Tax, 60 HASTINGS L.J. 997 (2009).

(116) See Blackburn v. Commissioner, 20 T.C. 204 (1953) (holding that a gift term loan was a transfer for partial consideration in money's worth, valued by discounting to present value).

(117) See I.R.C. [section] 7520(a)(2). The term interest is viewed as an annuity having an annual payout equal to said rate; this annuity is reduced to present value.

(118) Presumably, consideration for a transfer is based on the same rules as apply to the valuation of transferred assets, because the purpose of the exercise is to determine the net depletion, in terms of fair market value, of the donor's estate. The fair market value, willing buyer, willing seller, principle is set out in Treas. Reg. [section] 25.2512-1 (1997). In the case of notes, Treas. Reg. [section] 25.2512-4 (1958), establishes a presumption that the value is the amount of the unpaid principal, but the presumption can be rebutted by proof of fair market value.

(119) See Treas. Reg. [section] 25.2512-4 (1958) (citing below-market interest rate, lack of security, uncollectability, legal defenses, and so on).

(120) See Rev. Rul. 73-61, 1973-1 C.B. 408, where the Service stated that the value of the consideration for a gift term loan was to be valued under the rules for valuing annuities, which employ discounting to present value, rather than the rules for valuing notes. See also Krabberhoft v. Commissioner, 939 F.2d 529 (8th Cir. 1991) (the Commissioner, in litigation, valued installment notes given by a family member as consideration for a transfer of property by discounting to present value).

(121) In Rev. Rul. 81-286, 1981-2 C.B. 177, the Service established that the fair market value of a note given by a child for a parent's $1 million loan is $270,000 for gift tax consideration-offset purposes and $305,000 for estate tax purposes, without explaining how these values were arrived at or even if interest was charged.

(122) See supra text accompanying note 76.

(123) See I.R.C. [section] 2512(b).

(124) See supra note 22.

(125) See Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968) (holding that a non-exercised withdrawal power of a trust beneficiary over the amount transferred into the trust is treated as a fee simple gift from the donor to the beneficiary, even where the power of withdrawal is not exercised), acq., Rev. Rul. 73-405, 1973-2 C.B. 321; Holbrook v. United States, 575 F.2d 1288 (9th Cir. 1978) (holding that income interest has zero value where trustee had discretionary power to pay corpus to persons other than the holder of an income interest); cf. Robinette v. Helvering, 318 U.S. 184 (1943) (holding that donor has burden of proving facts, such as retained interests and the value of consideration, that would reduce the amount of the gift).

(126) In Crown v. Commissioner, 585 F.2d 234, 238 (7th Cir. 1978), the court, in holding for the taxpayer, noted these issues but held that there was no gift when the demand loan was made because the Commissioner adduced no proof on these issues. Although Treas. Reg. [section] 25.2512-4 (1958) contains a presumption that a note is worth its principal amount, this rule operates against a donor making a gift of the note. That is, it is up to the donor to establish a lower value for the note than its face amount. Thus, when the issue is one of valuing consideration, the burden of proof should likewise be on the donor to prove a value higher than that determined by the Commissioner.

(127) See I.R.C. [section] 2503(b).

(128) See LOWNDES, ET AL., supra note 63, at [section] 28.14.

(129) See Treas. Reg. [section] 20.2031-4 (1958). I.R.C. [section] 7872(i)(2) states that the principles of section 7872 are to be applied in the estate tax context to gift term loans. Prop. Treas. Reg. [section] 20.7872-1 (Aug. 20, 1985), says that the amount includible in the case of a gift term loan is the present value, using the AFR, of the borrower's obligation unreduced by risk factors. No estate tax regulation exists for the estate tax valuation of gift demand loan repayment obligations. Presumably, the market-value rule confirmed by Rev. Rul. 81-286, 1981-2 C.B. 177, still applies.

(130) See supra text accompanying note 66.

(131) See STAFF OF JOINT COMM. ON TAXATION, 98TH CONG., PROPOSALS RELATING TO TAX SHELTERS AND OTHER TAX-MOTIVATED TRANSACTIONS 2 (Joint Comm. Print 1984) [hereinafter PROPOSALS].

(132) I.R.C. [section] 7872. Dickman was decided on Feb. 22, 1984, the same day that hearings were scheduled on an administration proposal that addressed interest-free loans. 465 U.S. 330, 330 (1984); see PROPOSALS, supra note 131, at 75.

(133) See H.R. REP. No. 98-861, at 1011-12 (1984) (Conf. Rep.).

(134) See Treas. Reg. [section] 25.2511-2(c) (1999).

(135) See I.R.C. [section] 676; Corliss v. Bowers, 281 U.S. 376 (1930) (implying that this would be the result even in the absence of statute). Similarly, a transfer to a trust for a term of years, followed by a reversion in the grantor, is usually ineffective to shift income away from the grantor. See I.R.C. [section][section] 671, 673, and 677. Although the rules for non-trust gifts are less clear, because they are not governed by statute, it is reasonably safe to conclude that non-trust revocable gifts of property are ineffective to shift income. See Commissioner v. Sunnen, 333 U.S. 591 (1948) (finding a gift of royalty right where donor could control or terminate the flow of royalty income); Leydig v. Commissioner, 43 F.2d 494 (10th Cir. 1930) (finding a husband had equivalent of power to revoke); cf. Basket v. Hassell, 107 U.S. 602 (1883) (finding a revocable, or defeasible, gift ineffective to shift title to the donee). The non-trust equivalent of a term loan of property, namely, a gift of income-producing property followed by a reversion in the grantor, has also been held to be ineffective to shift income. See Helvering v. Clifford, 309 U.S. 331 (1940); Harrison v. Schaffner, 312 U.S. 579 (1941); Helvering v. Horst, 311 U.S. 112 (1940); Galt v. Commissioner, 216 F.2d 41 (7th Cir. 1954). Interest free-term loans and demand loans escape these holdings, however, because money passes to the borrower's exclusive control. See H.R. REP. No. 98-432, pt. 2, at 1370-71, 1373-75 (1984).

(136) See Treas. Reg. [section] 25.2511-2(f) (1999). The distribution is free of the power to revoke, because the distributee has unfettered control over the distributed amount. The distribution is also a gift for income tax purposes, meaning that the distributee can exclude the distribution from income. Recall that the trust income is taxed to the grantor.

(137) See I.R.C. [section] 2038(a)(2).

(138) In Ross v. United States, 122 F.Supp. 642 (Mass. Dist. Ct. 1954), the father advanced money, interest free, to acquire an investment for his son. The profit from the investment was taxed to the son, subject to a right of the father to recover the advance. Cf. James v. United States, 366 U.S. 213 (1961) (embezzler taxed on funds notwithstanding fact that funds could be recovered by true owner).

(139) A basic income-attribution rule is that income from property is taxed to the owner of property, with the caveat that the owner of property for tax purposes may be a person not having legal title who has control over the property, other than through a security interest. See Helvering v. Clifford, 309 U.S. 331 (1940).

(140) Cf. Treas. Reg. [section] 1.483-4 (1996) (describing a method of imputing interest on contingent-payment consideration in the context of property sales). Although the Service has determined that section 483 does not apply in determining the amount of gifts, see I.R.S. Gen. Couns. Mem. 39,566 (Oct. 23, 1986), this position can be altered by Congress.

(141) Discounting to present value obtains that amount which, it invested at a readily available constant interest rate, would equal a known future payment. Suppose that it is known that X will receive a payment from Y in twelve months equal to $100, and that an available interest rate is four percent per year, compounded annually. The present value of $100 discounted to the present is $96.15. Thus, if X had actually lent Y $100 on these terms, X would be suffering an immediate economic loss of $3.85, which is the present value of the right to receive $4 in twelve months, or the foregone interest.

(142) This expense is not deductible because it does not produce future income. See I.R.C. [section] 262.

(143) Gross income includes gains from the disposition of investments. See I.R.C. [section][section] 61(a)(3), 1001(a). The gain is ordinary rather than capital gain because there is no sale or exchange of a capital asset, see I.R.C. [section] 1222, and because the gain really represents accrued interest rather than market appreciation. See United States v. Midland-Ross Corp., 381 U.S. 54 (1965).

(144) I.R.C. [section] 102(a). Borrowed money is not income, because there is no net increase in wealth, due to the repayment obligation. See supra note 89.

(145) Economically, there is no change in wealth, because the loss of $86,384 of cash is offset by removal of a liability, which constitutes negative wealth, in the same amount.

(146) The investment is like a bank certificate of deposit purchased for $78,353 that returns $100,000 after sixty months without any stated interest. The $78,353, if invested at five percent compounded annually, will grow to $100,000 after sixty months. For an explanation, see JOSEPH M. DODGE, ET AL., FEDERAL INCOME TAX: DOCTRINE, STRUCTURE, POLICY 665, 668 (3d ed. 2004). See supra note 45 for the annual growth amounts.

(147) See I.R.C. [section] 163(a), (h); Treas. Reg. [section] 1.163-8T (1997).

(148) The borrower's "investment interest" for the year would be deductible up to an amount equal to the borrower's "net investment income" for the year, with any excess being carried forward to future years. See I.R.C. [section] 163(d).

(149) The interest might have been viewed as original issue discount that would be reported on the accrual method rather than the cash method. See I.R.C. [section][section] 163(e), 1272(a)(1). It appears, however, that there would be no original issue discount as defined by section 1273(b)(2). In any event, these issues were never raised prior to the enactment of section 7872.

(150) See H. REP. NO. 98-432, pt. 2, at 1371, 1373 (1984) (noting lack of clarity concerning income tax consequences of interest-free loans and ability of such loans to avoid the income tax grantor trust rules); I.R.S. Gen. Couns. Mem. 39,566 (Oct. 23, 1986) (holding that, apart from section 7872, present value analysis would not be used to identify interest and principal in gift loan situations).

(151) One possible source of authority would have been the Commissioner's power to change a taxpayer's accounting method "to clearly reflect income." See I.R.C. [section] 446(b). This power only applies to "accounting methods," which usually relates to timing rules, and it is arguable that treating part of an outlay as an expense and part as a capital expenditure falls within the ambit of accounting methods. The argument contra is that the tax treatment of loans is subject to a "rule of law," namely, that the making of a loan is entirely a capital expenditure, because the lender expects to get all of the "principal" back. See supra text at note 84. Another angle might have been the substance-versus-form idea. Both the Commissioner's power under section 446(b) and its ability to apply the substance-versus-form approach are assumed to come into play on a case-by-case basis, however, rather than to be a basis for rulemaking.

(152) See supra note 61.

(153) The discussion assumes that present value calculations use annual compounding rather than the semi-annual compounding prescribed by section 7872.

(154) See I.R.C.[section] 7872(c). These three categories are identified by the relationship among the parties. Also within the scope of section 7872 are below-market loans (a) to continuing-care facilities, (b) that have a principal purpose to avoid tax, or (c) that, under regulations, have a significant tax-avoidance impact. Sections 483, 1272, and 1274 deal with market loans that do not accurately allocate payments between principal and interest. I.R.C. [section][section] 483, 1272, 1274,

(155) Interest is imputed under sections 483, 643(i), and 1274, which take precedence over section 7872 in case of any overlap. See I.R.C. [section] 7872(f)(8).

(156) Thus, the making of the loan entails an immediate gift for gift and income tax purposes from L to B in the amount of $13,616, and the borrower is deemed to pay the same amount to the lender as interest. See I.R.C. [section] 7872(a)(1). The $13,616 is arrived at by annual discounting. The correct method under section 7872 is to use the applicable federal rate as of the time the loan is made and discount on a semi-annual basis. See I.R.C. [section] 7872(f)(1) and (2)(A).

(157) See I.R.C. [section] 7872(b)(2). In the example, interest would be deemed to accrue on the $86,384 principal at a rate of five percent and, compounding on an annual basis, the interest accruing in each year, $4319, $4535, and $4762 after twelve, twenty, four, and thirty-six months, respectively, would be reported as income by the lender in the taxable years accrued, and the interest deduction of the borrower, if any, would be calculated in the same way.

(158) See I.R.C. [section] 7872(d)(2).

(159) See I.R.C. [section][section] 7872(a)(1)(B) and (e)(2). The AFR is defined in section 1274 as the rate for Treasury bills. I.R.C. [section] 1274(d)

(160) Foregone interest in the example would be earned at the daily rate of $100,000 x .05/365, which translates to $5000 per twelve-month period, or $25,000 over a sixty-month period.

(161) Actually, the rules described in this paragraph also apply to non-gift interest-free demand loans covered by section 7872, but this category is not important for present purposes.

(162) See I.R.C. [section] 7872(a)(1).

(163) See supra Part I. See also I.R.C. [section] 2503(b).

(164) See I.R.C. [section] 7872(d)(1). There is also a $10,000 de minimis exception for gift loans between any two individuals, which disappears to the extent the borrowed money is used to acquire income-producing assets. See I.R.C. [section] 7872(c)(2).

(165) "Downside" in this context means either that the borrower does not make investments or that the borrower's investments underperform the applicable federal rate. Instead of tracing, the benchmark is the borrower's total net investment income without regard to the funding source of such investments.

(166) The applicable federal rate is keyed to Treasury bills, which yield a low interest rate due to being highly secure.

(167) See STAFF OF JOINT COMM. ON TAXATION, 98th CONG., GENERAL EXPLANATION OF THE REVENUE PROVISIONS OF THE DEFICIT REDUCTION ACT OF 1984, at 529 (Joint Comm. Print 1984).

(168) Section 7872 covers both term and demand below-market gift loans. For income tax purposes, section 7872 covers certain interest-free loans, and sections 483 and 1274 cover others, but those not covered are assumed to be home free, as Dickman was not an income tax case. See Sarah B. Lawsky, Money for Nothing: Charitable Deductions for Microfinance Lenders, 61 SMU L. REV. 1525, 1536-40 (2008) (discussing interest-free loans to charity).

(169) The courts have been very reluctant to find that a tax statute comprehensively dealing with a certain issue spills over into or constrains the development of judicial doctrine pertaining to closely related issues. For example, section 671, which expressly states that the statutory grantor trust rules are to supersede judicial doctrine on the issue of attributing trust income to a grantor by reason of control of a trust, is considered to have no effect on the judicial income-attribution doctrine in cases of a donor's retained control of non-trust property. Similarly, the enactment in 1938 of sections 1311-14, allowing for correction of errors, in certain situations, where the correction of the error would otherwise be barred by the statute of limitations, has not foreclosed the development of judicial doctrine that solves some of the same issues by other means. See, e.g., Continental Oil Co. v. Jones, 177 F.2d 508 (10th Cir. 1949) (finding that erroneous exclusion of in-kind receipt in year barred by statute of limitations results in zero basis that increases current-year income); Hughes & Luce v. Commissioner, 70 F.3d 16 (5th Cir.1995) (holding that erroneous deduction of capital expenditure in year barred by statute of limitations results in zero basis). Thus, although section 7872 may comprehensively deal with below-market loans, that is, of money, it is silent concerning the grant of permission to use personal-use property.

(170) Technical Corrections and Miscellaneous Revenue Act, H.R. 4333, 100th Cong. [section] 1018(s)(2) (1988).

(171) The statute says that the "borrower" of the art must be a public charity or private operating foundation and the use must be related to the organization's exempt function. I.R.C. [section] 2503(g). Basically, this equates with "museum." See Treas. Reg. [section] 1.170A-4(b)(3) (1994).

(172) S. REP. NO. 100-445, at 402 (1988); H.R. REP. No. 100-795, at 391 (1988).

(173) Congress's belief as to the status of non-statutory doctrine or the judicial construction of a prior statute is not itself law. See O'Gilvie v. United States, 519 U.S. 79, 89(1996).

(174) See infra note 252.

(175) See Treas. Reg. [section] 25.2511-1(e) (gift of partial interest) (1997); Temp. Treas. Reg. 25.2512-5T (valuation of partial interests) (2009). Section 2702, which treats partial-interest gifts of property to family members as gifts of the entire property, with certain exceptions, does not apply to gifts to charity. See I.R.C. [section] 2702. Section 2702 was enacted at a later date than section 2503(g), and could not have been relevant to the latter's enactment.

(176) For a form art loan agreement, see, e.g., UCSB Business Services, http://www.busserv.ucsb.edu/forms.htm (follow "Art Exhibition & Loan Agreement" hyperlink under "Risk Management & Insurance").

(177) See, e.g., Allen v. Commissioner, 57 T.C. 12 (1971) (term lease of real estate); Passailaigue v. United States, 224 F. Supp. 682 (M.D. Ga. 1963) (at-will lease of real estate; deduction annualized).

(178) Gift and estate transfers to charity are initially included in the tax base and then deducted, if the transfer qualifies for the deduction.

(179) See I.R.C. [section][section] 170(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and 2522(c)(2) (gift tax).

(180) Assume a gift of a term interest to any person other than the donor or donor's spouse, followed by a vested reversion in the donor. The property, reduced by the value of the outstanding term interest, would be included in the gross estate under either section 2033 or, under some variations of the transaction, section 2037. See Treas. Reg. [section][section] 20.2031-7 (2009) (valuation of reversions owned by decedent), and 20.2037-1(e), Ex. (3) (1960). Actually, section 2037 does not apply where the remainder is vested, because no interest in a person other than the charity is contingent on surviving the donor. See Treas. Reg. [section] 20.2037-1(b) and (e), Ex. (1) (1960). The gross estate reduction would occur even if the holder of the term interest is not a charity. That is, the reduction stems from the fact that the term interest was a gift, not because of a charitable deduction.

(181) Interestingly, Congress, in enacting section 170(f)(3) of the Code in 1969, assumed that an income tax deduction was only obtained where the donor transferred a term interest in tangible property. See S. REP. No. 91-552, at, 83-84 (1969). Post-1969 cases, interpreting prior law, allowed income tax deductions with respect to at-will rent-free leases of real estate, however. See infra notes 216-217 and accompanying text. The result of these cases was also overturned by section 170(f)(3) for post-1969 transactions. See Rev. Rul. 76-143, 1976-1 C.B. 63; I.R.S. Gen. Couns. Mem. 35,112 (Nov. 13, 1972).

(182) The term "family member" means the donor's spouse, ancestors, descendants, siblings, or spouses of ancestors, descendants or siblings. See I.R.C. [section][section] 2702(e) and 2704(c).

(183) A lease for less than fair rental is treated as a term interest. See Treas. Reg. [section] 25.2702-4(a), (b) (1992).

(184) An analogous situation is posed by the decision in Helvering v. Clifford, 309 U.S. 331 (1940), which was wholly superseded in the case of grantor trusts by I.R.C. [section][section] 671-77. Nevertheless, Clifford stands for a "substantial ownership" principle that extends beyond the grantor trust area.

(185) The repayment right is "consideration" for the transfer under I.R.C. [section] 2512(b), which is capable of valuation. See supra text accompanying note 116.

(186) Dickman v. Commissioner, 465 U.S. 330, 336 (1984).

(187) The only exceptions to the doctrine of nonrecognition of at-will revocable gifts are for gifts causa mortis and, perhaps, gifts in anticipation of marriage. In both cases the power is limited in duration by an objective event that is expected to occur within a reasonably short period of time. A gift can be subject to a condition subsequent that has the effect of reverting ownership to the donor, called a possibility of reverter, right of re-entry, or power of termination, but that is not an at-will power of revocation because the condition is objectively determinable. See WILLIAM B. STOEBUCK & DALE A. WHITMAN, THE LAW OF PROPERTY [section][section] 2.3, 2.4, 2.5, 3.4, 3.5 (3d ed. 2000).

(188) Leases of personal property are governed by Article 2A of the Uniform Commercial Code (U.C.C.), which states that, by definition, a lease is for a "term." See U.C.C. [section] 2A-103(j) (1998).

(189) See Basket v. Hassell, 107 U.S. 602, 614 (1982).

(190) See 49 AM. JUR. 2D, Landlord and Tenant, [section] 20; 25 AM. JUR. 2D, Easements and Licenses [section] 117.

(191) See 8A AM. JUR. 2D, Bailments [section][section] 5 n.4, [section] 8.

(192) A license basically is nothing more than permission granted to a specific person to use the property such that the permitted user cannot be held to be a trespasser. See 25 AM. JUR. 2D, Easements and Licenses [section] 119. A bailee has possessory rights, but those rights are limited to the purposes of the bailment. See 8A AM. JUR. 2D, Bailments [section][section]84, 85, 123.

(193) Oral licenses are per se revocable at will. See 25 AM. JUR. 2D, Easements and Licenses [section] 118. Other licenses are generally revocable. See id. at [section] 122. A bailment is revocable if the bailment is not agreed to be for a specified term, the purpose of the bailment has been fulfilled, or if there is no clear purpose. See 8A AM. JUR. 2D, Bailments [section] 134.

(194) A bailment is contractual, and, because it involves only personal property, is generally not subject to the Statute of Frauds. See 8A AM. JUR. 2D, Bailments [section] 33. A license is also not subject to the Statute of Frauds because, although it involves real property, it does not create or limit any interest in real property. See 25 AM. JUR. 2D, Easements and Licenses [section] 117.

(195) See 8A AM. JUR. 2D, Bailments [section] 57; 25 AM. JUR. 2D, Easements and Licenses [section] 117. If the contract gives the bailee the right to sell the property for its own account, subject to an obligation to repay the bailor, the profit will be attributed to the bailee. See McBride v. Commissioner, 44 B.T.A. 273 (1941), acq., 1941-2 C.B. 9 (holding that a borrower of stock should be taxed on the profit from sale only because the contract gave the borrower the right to the profits).

(196) In Thriftimart, Inc. v. Commissioner, 59 T.C. 598 (1973), acq. 1973-2 C.B. 4, a pre-1970 income tax charitable deduction was denied for space in one particular commercial building where the donor continued to use the space on an occasional basis. The Tax Court found that a formal lease purporting to give the charity the exclusive right to use the space lacked substance, partly because the charity had no real need for that space. Id. at 615.

(197) A gratuitous lease is not a "lease" because of the absence of payment for the use of property. See U.C.C. [section] 2A-103(1)(p), cmt. (j) (1998).

(198) For example, a tenant at will would be able to use the space as an office or workshop unless the lease agreement or local law prevented such use.

(199) See STOEBUCK & WHITMAN, supra note 187, at [section][section] 6.14, 6.16, 6.18; Pollock v. Clay, 357 P.2d 1 (Mont. 1960) (interest of tenant-at-will expires on tenant's death). A "tenancy by sufferance" occurs where a tenant wrongfully holds over after a termination. See STOEBUCK & WHITMAN, supra note 187, at [section] 6.20.

(200) See RESTATEMENT (SECOND) OF PROPERTY [section][section] 1.6 & 15.1 cmt. d (1977); STOEBUCK & WHITMAN, supra note 187, at 245-46, 249-50, 266-67. This rule could be waived by the lessor.

(201) See 1 AM. LAW PROPERTY [section] 3.28 (A. J. Casner ed., 1952).

(202) See STOEBUCK & WHITMAN, supra note 187, at 245 n.2.

(203) See id. at 266 (stating that at-will tenant's possession is "tenuous" and that the interest "is quite analogous to a license").

(204) See Heyman v. Commissioner, 176 F.2d 389 (2d Cir. 1949), cert. denied, 338 U.S. 904 (holding that the includible damages were taxed to the donor, who controlled the lawsuit where a father made gift of right to proceeds from a commercial lawsuit then pending).

(205) See supra note 136.

(206) See Borland v. Commissioner, 38 B.T.A. 598 (1938) (stock included in gross estate despite being loaned to a relative, who pledged the stock as security for a loan); McIlhenny v. Commissioner, 22 B.T.A. 1093, 1101 (1931) (household furnishings included in decedent's gross estate despite being in possession of decedent's children); cf. Stewart v. Commissioner, 49 F.2d 987 (10th Cir. 1939) (stock included in gross estate despite the fact that possession was given to another party).

(207) See Rev. Rul. 70-477, 1970-2 C.B. 62 (permissive use of property not rising to the level of an enforceable property interest not a deductible gift to charity under prior law).

(208) See Estate of Mortimer v. Commissioner, 17 T.C. 579 (1951) (ineffectual conveyance of real estate). Revocable transfers are treated as non-transfers for tax purposes under section 676 (income tax), section 2038 (estate tax), and Treas. Reg. 25.2511-2 (1999) (gift tax). See I.R.C. [section][section] 676, 2038.

(209) A licensee has no property rights, but a bailee has such rights as are granted by the contract. Generally, a bailee or nominee is an agent of the bailor. Income is attributed to the principal, not the agent. See, e.g., Commissioner v. Bollinger, 485 U.S. 340, 344-45 (1988).

(210) I.T. 3918, 1948-2 C.B. 33.

(211) Sullivan v. Commissioner, 16 T.C. 228 (1951); Fair v. Commissioner, 27 T.C. 866 (1957).

(212) 224 F. Supp. 682 (M.D. Ga. 1963).

(213) Passailaigue was cited by the majority opinion in Dickman for the point that a gift could occur with the passage of time. Dickman v. Commissioner, 465 U.S. 330, 336(1984).

(214) Threlfall v. United States, 302 F. Supp. 1114 (W.D. Wis. 1969).

(215) See Rev. Rul. 70-477, 1970-2 C.B. 62.

(216) Thriftimart, Inc. v. Commissioner, 59 T.C. 598 (1973).

(217) Rutland v. Commissioner, 36 T.C.M. (CCH) 40 (1977) (holding that an oral lease of land for an indefinite period was characterized as a tenancy at will).

(218) See Thriftimart, 59 T.C. at 614.

(219) I.T. 3918, 1948-2 C.B. 33, superseded in part by Rev. Rul. 70-477, 1970-2 C.B. 62; cf. Rev. Rul. 57-462, 1957-2 C.B. 157 (holding that a newspaper may not deduct the contribution of free advertising space to charity because the contribution is a service); Rev. Rul. 67-236, 1967-2 C.B. 103 (holding that a radio station may not deduct the contribution of free broadcast time to a charity).

(220) See S. REP. NO. 91-552, at 2274 (1969).

(221) See supra note 194 and accompanying text; cf. Orr v. United States, 343 F.2d 553 (5th Cir. 1965) (involving a donor's car used for charitable purposes not under the control of the charity).

(222) The charitable deduction is unique under the income tax by essentially being based on the value received by the donee, rather than the cost to the donor.

(223) See Helvering v. Horst, 311 U.S. 112, 114 (1940) (involving the gift of interest coupons, with the bond being retained by the donor). In Hort v. Commissioner, 313 U.S. 28, 30 (1941), the Supreme Court held that there could be no basis offset against a lease termination payment received by a lessor from a lessee. Essentially, this holding is to the effect that a carve-out of a term interest does not involve the disposition of an interest in the whole for income tax purposes. Also, consideration received for a carved-out current-enjoyment interest is not considered the proceeds of a sale of an interest in property that can give rise to capital gain. See Commissioner v. P.G. Lake Inc., 356 U.S. 260 (1958). Therefore, under current section 170(e)(1), a charitable contribution of a term interest with the donor retaining a reversion would not be deductible, independently of section 170(f)(3), because the property would not give rise to capital gain if sold, and the contributed interest would have a zero basis. I.R.C. [section] 170(e)(1), (f)(3).

(224) The passage of time is a condition for the rents to become due and to satisfy the all-events test for accrual taxpayers. Even prepaid rents cannot be deducted except with the passage of time. See I.R.C. [section] 461(h)(2)(A)(ii).

(225) See I.R.C. [section] 461(h)(2)(B).

(226) See supra text accompanying note 108.

(227) See supra note 76 and accompanying text.

(228) See Treas. Reg. [section] 25-2511-2(f) (1999).

(229) Id. (emphasis added).

(230) See Brief for the Respondent at 23-24, Dickman v. Commissioner, 465 U.S. 330 (1984) (No. 82-1041), 1982 U.S. Briefs 1041; Transcript of Oral Argument at 31, 33, 64, Dickman, 465 U.S. 330 (No. 82-1041), 1983 U.S. Trans. LEXIS.

(231) See Dickman v. Commissioner, 465 U.S. 330, 337 n.7 (1984) (citations omitted) (emphasis added).

(232) See Treas. Reg. 79, Art. 3 (1936). The regulation was not issued pursuant to a treasury decision or notice and comment. See infra note 249.

(233) See Treas. Reg. 67, Art. 1 (1924), which stated:
  The creation of a trust, where the grantor retains the power to
  revest in himself title to the corpus of the trust, does not
  constitute a gift subject to tax, but the annual income of the trust
  which is paid over to the beneficiaries shall be treated as a taxable
  gift for the year in which so paid. Where the power retained by the
  grantor to revest in himself title to the corpus is not exercised a
  taxable transfer will be treated as taking place in the year in which
  such power is terminated.


(234) See Revenue Act of 1932, [section] 501(c), 47 Stat. 169, 245 (1932), which stated:
  The [gift] tax shall not apply to a transfer of property in trust
  where the power to revest in the donor title to such property is
  vested in the donor, either alone or in conjunction with any person
  not having a substantial adverse interest in the disposition of such
  property or the income therefrom, but the relinquishment or
  termination of such power (other than by the donor's death) shall
  be considered to be a transfer by the donor by gift of the property
  subject to such power, and any payment of the income therefrom to a
  beneficiary other than the donor shall be considered to be a transfer
  by the donor of such income by gift.


(235) Burnet v. Guggenheim, 288 U.S. 280, 288 (1933). Some very prominent lawyers were involved in this case, including Erwin Griswold, Elihu Root Jr., George Cleary, and Harry Covington.

(236) The trust was created in 1917, prior to the enactment of the gift tax, and the power to revoke was relinquished in 1925. The taxpayer argued that the gift was made in 1917, and therefore could not have been made again in 1925. Id. at 284.

(237) See id. at 288. The end result would be that the transferred property, and its yield, would only be taxed once.

(238) See Treas. Reg. 79, Art. 3 (1932) ("Transfers in Trust"). This regulation did add material relating to the significance of a power held jointly with a person who had an interest adverse to the exercise of a power to revoke, but the role of adverse parties under the gift tax is not relevant to the present discussion.

(239) See Revenue Act of 1934, [section] 511, 48 Stat. 680, 758 (1934); H.R. REP. NO. 73-704, at 40 (1934).

(240) See Treas. Reg. 79, Art. 3 (1936) ("Cessation of donor's dominion and control"). A more elaborate version, prompted by the 1954 re-codification, is Treas. Reg. [section] 25.2511-2 (1999) (also titled "Cessation of donor's dominion and control"). See T.D. 6334, 1958-2 C.B. 627.

(241) See INTERNAL REVENUE ACTS OF THE UNITED STATES 1909-1950: LEGISLATIVE HISTORIES, LAWS, AND ADMINISTRATIVE DOCUMENTS, page preceding 1933 version of Regulations 79 (Bernard D. Reams, Jr. ed., William S. Hein & Co., Inc. 1979).

(242) See RICHARD B. STEPHENS ET AL., FEDERAL ESTATE & GIFT TAXATION [paragraph] 10.01 (8th ed. 2002) (citing only the case of trust distributions); LOWNDES ET AL., supra note 63, at [section][section] 26.15, 28.14 (discussing gift loans of property without citing the regulation in [section] 26.16, and in the context of distributions from trusts in [section] 28.14); 5 JACOB MERTENS, THE LAW OF FEDERAL GIFT AND ESTATE TAXATION [section] 35.06 (1959).

(243) See 2 COMMERCE CLEARING HOUSE, FEDERAL ESTATE AND GIFT TAX REPORTER [paragraph] 10,582 (2006) (providing annotations of cases and rulings under Treasury Regulation section 25.2511-2).

(244) The Service first attempted, unsuccessfully, to impose gift tax on the interest-free demand loan of money in Johnson v. United States, 254 F. Supp. 73 (N.D. Tex. 1966). The Service appeared to ignore this issue until it promulgated Rev. Rul. 73-61, 1973-1 C.B. 408.

(245) See supra notes 136, 170. As already noted, demand loans of cash are not revocable transfers of the cash itself, but rather involve the transfer of cash in return for an obligation to pay a sum to the lender on demand.

(246) The second paragraph of Treas. Reg. 79, Art. 3 (1936), refers to "property" rather than trusts, and to "a transfer (in trust or otherwise)." The regulation, however, did not then extend the rule of incompleteness to transfers subject to a power to alter or amend.

(247) The regulation does not appear to be addressed directly to any case then in the courts or which had been decided earlier. The closest case I could find in the 1933-1936 period was Burnet v. Wells, decided a few months after Guggenheim. 289 U.S. 670, 677 (1933). In upholding the validity of the predecessor of section 677(a)(3), which causes a trust grantor to be taxed on the trust income that can be used to pay premiums on insurance on the grantor's life, the Court observed:
  The solidarity of the family is to make it possible for the taxpayer
  to surrender title to another and to keep dominion for himself, or
  if not technical dominion, at least the substance of
  enjoyment. ... In these and other cases there has been a progressive
  endeavor by the Congress and the courts to bring about a
  correspondence between the legal concept of ownership and the
  economic realities of enjoyment or fruition.


Id. But Wells only proves that Congress can peg tax ownership on something much less than full legal ownership.

(248) The fact that the 1936 regulation dealt with rather glaring gaps in its predecessors hardly breeds confidence in the soundness of the regulation-issuance process or its outcomes during that period. In the 1930s, the Administrative Procedure Act had not yet been enacted, notice and comment on proposed regulations was not required, and the Treasury was under no compulsion to explain its decisions. These shortcomings were revealed in a 1939 gift tax case involving a trust subject to a retained power to alter or amend. See Estate of Sanford v. Commissioner, 308 U.S. 39 (1939). The 1924, 1933, and even the 1936 versions of the regulation only referred to powers of revocation, implying that retained powers to alter or amend did not cause a transfer to be incomplete. In litigation, the Service maintained inconsistent but revenue-driven positions with respect to retained powers to alter or amend. In Sanford, the Supreme Court held that powers to alter or amend rendered a transfer incomplete, thereby ignoring the negative implication raised by the regulation. Id. at 43-44.

(249) If the power of revocation only pertains to the transferred property itself, it would not extend to the severed yield from the property, and that yield would pass into the ownership of the donee.

(250) Under traditional trust accounting rules, rents, royalties, and annuities are not "income" available to income beneficiaries to the extent they are considered to be a severance of trust corpus or principal. See REVISED UNIF, PRINCIPAL & INCOME ACT [section][section] 405, 409, 411-12 (amended 2000), 7A U.L.A. 499-500, 506-08. 515-17, 519-20 (2006).

(251) Treas. Reg. [section] 25.2511-2(f) (emphasis added).

(252) The gift tax statute does not use the term "enjoyment" anywhere. The general principle of completeness is whether "the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another." Treas. Reg. [section] 25.2511-2(b) (1999). This idea of dominion and control is explained in paragraph (c) of the same regulation to include any situation where the "donor reserves the power to revest ... the property in himself ... [or] the power to name new beneficiaries or to change the interests of the beneficiaries between themselves. ..." Treas. Reg. [section] 25.2511-2(c) (1999). The only other reference to enjoyment relevant to the incompleteness issue is in paragraph (d) of the same regulation, stating "[a] gift is not considered incomplete, however, merely because the donor reserves the power to change the manner or time of enjoyment." Treas. Reg. [section] 25.2511-2(d) (1999). An example is given of the power to delay trust distributions without changing the beneficiary. Id.; see also Treas. Reg. [section] 25.2503-3(a) (1954), which defines "future interest" as an interest or estate, vested or contingent, "limited to commence in use, possession, or enjoyment at some future date or time."

(253) See Gertrude C. K. Leighton, Note, Origin of the Phrase, "Intended to Take Effect in Possession or Enjoyment at or After ... Death" (Section 881(c), Internal Revenue Code), 56 YALE L.J. 176 (1946). Curiously, the note makes no effort to explain what the phrase was intended to mean. It appears that this language originated in floor amendments to proposed Pennsylvania legislation. The Pennsylvania provision was viewed as a precedent that was slavishly copied by other state and federal inheritance taxes, including the federal estate tax of 1916.

(254) Vanderbilt v. Eidman, 196 U.S. 480, 493 (1905); accord. Commissioner v. Estate of Church, 335 U.S. 632, 638 (1949) (discussing the corresponding provision of estate tax first enacted in 1916).

(255) See Act of June 13, 1898, [section] 29, 30 Stat. 448, 464 (1898).

(256) Reinecke v. N. Trust Co., 278 U.S. 339, 348 (1929). This result depends on construing "take effect" to include "free from the possibility of divestment."

(257) In May v. Heiner, 281 U.S. 238, 245 (1930), the Supreme Court held that a trust transfer with a reserved income interest for life was not a transfer taking effect at the transferor's death because the title passed to the remainder when the trust was created. The approach of May was a title/vesting approach that deviated from the general understanding. The Congressional reaction is described in the Revenue Act of 1932, supra note 234.

(258) See I.R.C. [section][section] 2036(a), 2037(a), 2038(a)(1).

(259) The other pre-requisite for application of section 2037 is that the transferor must have retained a reversionary interest worth at least five percent of the property transferred. I.R.C. [section] 2037(a)(2).

(260) I.R.C. [section] 2038(a)(1).

(261) Section 2037 states explicitly that the possession or enjoyment in question must be "through ownership of [the transferred] interest." I.R.C. [section] 2037. In section 2038, the reference is to "enjoyment thereof," with the word "thereof" referring to the property, or an interest therein, transferred to the person(s) whose enjoyment is potentially affected. I.R.C. [section] 2038.

(262) The prototype scenario that is snared by section 2037(a) is an irrevocable transfer in trust by A, income to B for life, reversion to A if living, but if A is not then living remainder to C. See I.R.C. [section] 2037(a). Here, C's remainder is assured of taking in possession or enjoyment only if A dies before B. Also, A has a reversion that could be worth more than 5%. Id. See Treas. Reg. [section] 20.2037-1(e), Ex. (3) (1958).

(263) A right to alter the possession, enjoyment, or income is also covered under section 2036(a)(2). The retained section 2036(a) possession, enjoyment, right, or power must be held by the transferor for life, for a period that cannot be ascertained without reference to the transferor's death, or for a period that does not in fact end before the transferor's death.

(264) See Treas. Reg. [section] 20.2036-1(c)(2), Ex. (2) (1954) (citing case of transfer of personal residence where the donor retains the right of use for a term of years, and dies within the term); Linderme v. Commissioner, 52 T.C. 305 (1969) (involving real estate): Union Planters Nat'l Bank v. United States, 361 F.2d 662 (6th Cir. 1966) (regarding retained enjoyment of household goods).

(265) See, e.g., Estate of McNichol v. Commissioner, 29 T.C. 1179 (1958), aff'd, 265 F.2d 667 (3d Cir. 1959), cert. denied, 361 U.S. 829 (holding that receipt of all the rents from transferred realty is indicative of an agreement or understanding); Estate of Gutchess v. Commissioner, 46 T.C. 554 (1966), acq., Rev. Rul. 70-155, 1970-1 C.B. 189 (ruling that there is no inclusion where the retained use, along with that of the donee, was pursuant to marital relationship); Diehl v. United States, 21 A.F.T.R.2d 1607 (W.D. Tenn. 1967) (finding no inclusion where co-occupancy with donee); Linderme v. Commissioner, 52 T.C. 305 (1969) (holding that exclusive occupancy is an important factor).

(266) Section 2036(a)(1) originated in the Joint Resolution of March 3, 1931, Pub. L. No. 131, 46 Stat. 1516, which required the retention by the decedent-transferor of "the possession or enjoyment, or the income from, the [transferred] property." The 1932 Revenue Act changed the predecessor of section 2036(a)(1) to its present form by inserting "right to" before income. The stated intent of this change was to expand the reach of the provision to cover the situation where a person had the right to income but was not actually receiving income. See H. REP. NO. 72-708, pt. 1, at 46-47 (1932); H. REP. NO. 72-708, pt. 2, at 491 (1932); S. REP. NO. 72-665, pt. 1, at 49-50 (1932); S. REP. NO. 72-665, pt. 2, at 532 (1932). By implication, the original 1931 understanding must have been that the phrase "possession or enjoyment" would encompass the actual receipt of income distributions. The leading case in this area, Estate of McNichol, 29 T.C. at 1183, so held. That case, nevertheless, found circumstantial evidence of an agreement or understanding from the very fact that the donor received all of the income. Id. at 1184; accord Skinner's Estate v. United States, 316 F.2d 517 (3d Cir. 1963). In my view, the enjoyment issue is separate from the retention issue, and the understanding or agreement requirement should be viewed as relating only to the latter. This point can be illustrated by the scenario in which a grantor creates an irrevocable trust, giving an independent trustee discretion to pay income to the grantor and there is no agreement or understanding that would negate the trustee's discretion. Suppose the trustee distributes some income to the grantor from time to time. There is no doubt that the grantor has obtained enjoyment from the trust. The fact that the enjoyment is not total should not wholly negate the application of section 2036(a)(1). The partial enjoyment may be evidence of a right to demand total enjoyment, in which case the entire trust should be included. See Strangi v. Commissioner, 417 F.3d 468, 476 (5th Cir. 2005), aff'd 85 T.C.M. (CCH) 1331 (holding that payments from assets transferred to a family limited partnership were irregular, but there was a finding that, under the circumstances, the decedent had the right to demand them at will to pay living expenses; since the "right" pertained to all the income, all of the property was included). Alternatively, if there is no right to demand total enjoyment, the amount includible should be that portion of the property which corresponds to the percentage of income received by the grantor. The Treasury itself seems to assume, however, that partial inclusion can occur only if there is a right to a fixed portion of the income. See Treas. Reg. [section] 20.2036-2(c)(2) (2008) (stating that the amount is includible where the retained interest was an annuity or unitrust interest, rather than an income interest); Rev. Rul. 79-109, 1979-1 C.B. 297 (ruling that one twelfth of vacation property is included). Whereas Treas. Reg. 80, Art. 18 (1937) defined "possession or enjoyment" broadly to include "the rents or other income or enjoyment of the transferred property, or any part thereof," the current regulation refers only to the "use, possession, right to income, or other enjoyment of the transferred property." Treas. Reg. [section] 20.2036-1(a)(3)(i) (2008). For discussion of whether the retention element of section 2036(a) should always require an agreement or understanding see infra note 269.

(267) Cf. Commissioner v. Irving Trust Co., 147 F.2d 946 (2d Cir. 1945) (holding that a similar scenario involving section 2037 did not constitute a retention of a reversionary interest in trust corpus).

(268) Retention should not be construed so strictly as to require a "right" in the transferor in all cases. In the discretionary trust scenario set forth supra note 267, the receipt of income by the grantor is not due to the trustee's random or independent generosity, but the fact that the grantor of the trust named herself as a discretionary beneficiary under the instrument of transfer. In contrast, in the case of non-trust transfers, the deed or other legal evidence of transfer would not channel future use back to the donor, and therefore some other indicia of retention would be appropriate.

(269) See Commissioner v. Estate of Holmes, 326 U.S. 480, 486 (1946) (construing "enjoyment" under section 2038(a)), quoted with approval in United States v. Byrum, 408 U.S. 125, 145, 146 (1972) (construing same word under section 2036(a)(2)). Byrum itself held that management powers and voting control of stock do not rise to the level of enjoyment. In Strangi, 411 F.3d at 477, it was noted in passing that the right to delay the payment of rent was itself a substantial economic benefit. Since the rent was for the use of a transferred residence, and since the rent was charged to the decedent's estate after death, however, the benefit was more than mere delay. In effect, the transferor had total enjoyment of the residence for life, and the rental obligation was shifted to others.

(270) Since the completed transfer of the remainder interest is subject to gift tax on the actuarial value of the remainder interest, there is no necessity, strictly as a matter of logic, for section 2036(a) to exist at all. The fact that it does exist manifests a policy decision that the property should be included in the gross estate even though all interests therein have either expired or have been previously disposed of by gift. An objective justification for section 2036 is that, without it, gifts of remainder interests could avoid tax by taking advantage of actuarial tables so that the taxable amount would understate the amount expected to be transferred even in present-value terms. Also, by reducing a testamentary transfer to its present value, the donor is able to take advantage of the large per-taxpayer exemption and/or lower marginal estate tax rate brackets.

(271) If one deposits funds in an account, and both the depositor and a related person has the power to withdraw the funds for her own benefit, there is no gift unless and until the funds are actually withdrawn by the other party. See Treas. Reg. [section] 25.2511-1(h)(4) (1997). Thus, no gift results from the empowerment of another party to withdraw money or property of the donor or which is under the donor's control.

(272) See Treas. Reg. [section] 25.2511-1(c)(1),(h)(1), (2), (3), (4), (10) (1997).

(273) See Treas. Reg. [section] 25.2511-2(a) (1999).

(274) See Treas. Reg. [section] 25.2511-2(c) (1999).

(275) See Treas. Reg. [section] 25.2511-2(b) (1999).

(276) See Burnet v. Guggenheim, 288 U.S. 280, 286-88 (1933). For further analysis, see supra note 24 and accompanying text.

(277) See Estate of Sanford v. Commissioner, 308 U.S. 39, 42-44 (1939). For further analysis, see supra text accompanying note 47.

(278) Burnet, 288 U.S. at 284 (citing Basket v. Hassell, 107 U.S. 602 (1883), for the proposition that a revocable gift was a nullity).

(279) See United States v. Byrum, 408 U.S. 125, 148-49 (1972) (finding a right to control corporation through voting stock).

(280) Treas. Reg. 25.2511-2(f).

(281) See STOEBUCK & WHITMAN, supra note 187, at 245.

(282) See supra note 215 and accompanying text.

(283) See I.T. 2145, IV-1 C.B. 43. Since gifts received are excluded from income under section 102(a), the income from a revocable transfer is only taxed once to the donor). See I.R.C. [section] 102(a).

(284) See supra note 135.

(285) A recurring tax on imputed income could run afoul of the requirement that direct taxes be apportioned. See Helvering v. Independent Life Ins. Co. of Am., 292 U.S. 371 (1934). An annual tax on a percentage of the value of property is characteristic of a property tax, which is a direct tax. The fact that the gift tax generally passes constitutional muster as an excise tax, see Bromley v. McCaughn, 280 U.S. 124 (1929), would not immunize a direct-tax feature of the gift tax. Cf. Murphy v. I.R.S., 493 F.3d 170 (D.C. Cir. 2007); Penn Mut. Indem. Co. v. Commissioner, 277 F.2d 16 (3d Cir. 1960) (holding that features of the income tax can be invalidated as a non-income direct tax or validated as a non-income indirect tax). For a discussion of the constitutional issue as it relates to imputed income, see Joseph M. Dodge, What Federal Taxes Are Subject to the Rule of Apportionment Under the Constitution?, 11 U. PA. J. CONST. L. 839, 934-37 (2009).

(286) Outlays of this nature are "personal and family" expenses that are nondeductible for income tax purposes. See I.R.C. [section] 262. By being nondeductible to the provider and excluded by the recipients, whether as gifts, support, or other in-kind benefits, the benefits obtained by the outlays are taxed to the provider and not the recipients. Even economic benefits provided by strangers in the course of commerce are not considered income. See United States v. Gotcher, 401 F.2d 118 (5th Cir. 1968).

(287) See Converse v. Commissioner, 5 T.C. 1014 (1945) (noting Service concession), aff'd, 163 F.2d 131 (2d Cir. 1947); Rev. Rul. 68-397, 1968-2 C.B. 414.

(288) See Harris v. Commissioner, 340 U.S. 106 (1950) (holding that transfers pursuant to court decree, or divorce settlement incorporated in court decree, are not gifts for gift tax purposes, even if they would not be transfers for full and adequate consideration). The majority opinion in Harris is difficult to fathom, but presumably it covers transfers mandated by law, other than those that satisfy marital inheritance rights, even though not covered by a court decree.

(289) The consideration idea only comes into play for transfers that are not mandated by law. See Rev. Rul. 60-160, 1960-1 C.B. 374. In this type of case, the consideration notion is used to identify transfers that are a substitute for transfer-tax-excluded support transfers. See Merrill v. Fahs, 324 U.S. 308 (1945) (holding that transfers under marital settlements are taxable gifts to the extent that they substitute for taxable estate transfers); Rev. Rul. 77-314, 1977-2 C.B. 349 (finding no gift to extent payment is substitute for exempt support transfers). These rules have been partially superseded in the case of divorce-related transfers. I.R.C. [section][section] 2043(b), 2516.

(290) See Rev. Rul 54-343, 1954-2 C.B. 318; G.C.M. 36496 (Nov. 24, 1975) (finding that payments of adult children's health and education bills were gifts; the result would have been otherwise if the donees were persons whom the donor was obligated to support).

(291) The Service at one time asserted that political contributions were gifts, but was rebuffed. Stern v. Commissioner, 436 F.2d 1327 (5th Cir. 1971); Carson v. Commissioner, 71 T.C. 252 (1978) (reviewing), aff'd, 1981 CCH U.S.T.C. [paragraph] 13,396 (10th Cir. 1981). Although the decisions themselves rested on the "ordinary course of business" exception, that exception in turn is based on the broader principle that there is no gift without a motive of generosity (to enrich another), as opposed to attaining one's own personal goals. See Treas. Reg. [section] 25.2512-8 (1992). Contributions to certain political organizations are now exempt. I.R.C. [section] 2501(a)(4).

(292) See supra notes 212, 214 and accompanying text.

(293) See AMERICAN LAW INSTITUTE, RECOMMENDATIONS FOR FEDERAL ESTATE AND GIFT TAXATION 5-6 (1969). Consumables were defined as assets that were expected to have no or insignificant value after twelve months. That proposal ultimately bore fruit in section 2503(e), holding that direct payments of another's educational and health bills are excluded from gift fax. I.R.C. [section] 2503(e).

(294) Cf., e.g., Swift Dodge v. Commissioner, 692 F.2d 651 (9th Cir. 1982); Rev. Proc. 75-21, 1975-1 C.B. 715 (treating leases as installment sales under income tax doctrine). A major focus of Article 2A of the Uniform Commercial Code is distinguishing leases from installment sales of chattels.

(295) Comments generally supportive of the consumption-exclusion concept include: ROBERT G. POPOVICH, Support Your Family but Leave Out Uncle Sam: A Call for Federal Gift Tax Reform, 55 MD. L. REV. 343, 376-77 (1996); ROBERT B. SMITH, Should We Give Away the Annual Exclusion?, 1 FLA. TAX REV. 361, 382 (1993). For critical commentary, see KERRY RYAN, Human Capital and Transfer Taxation, 62 Okla. L. Rev. 223 (2009) (arguing that a transfer tax should reach transfers of even human capital).

Joseph M. Dodge*

* Stearns Weaver Miller Weissler Alhadeff & Sitterson Professor of Law, Florida State University College of Law. Harvard, B.A., L.L.B.; N.Y.U., L.L.M. (in taxation). The author wishes to thank Brant Hellwig and Wendy Gerzog for their helpful comments.
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