No. 95-1155

IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

CHARLES SCHUSTERMAN AND LYNN N. SCHUSTERMAN, PETITIONERS

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI 
TO THE UNITED STATES COURT OF APPEALS 
FOR THE TENTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

DREW S. DAYS, III
Solicitor General
 
LORETTA C. ARGRETT
Assistant Attorney General

RICHARD FARBER
CHARLES BRICKEN
Attorneys

Department of Justice
Washington, D.C. 20530
(202) 514-2217

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QUESTION PRESENTED

Whether Section 483 of the Internal Revenue Code,
26 U.S.C. 483, relieves petitioners of gift tax liabil-
ity that otherwise would be imposed under Section
2512(1), 26 U.S.C. 2512(b), on their below-market in-
stallment sale of property to their children.

(I)

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TABLE OF CONTENTS

Opinions below  . . . . 1 
Jurisdiction  . . . . 1
Statutes and regulations involved  . . . . 2 
Statement  . . . . 2
Argument  . . . . 8
Conclusion  . . . . 14
Appendix  . . . . 1a


TABLE OF AUTHORITIES

Cases

Ballard v. Commissioner, 854 F.2d 185(7th Cir.
1988)  . . . . 7, 8, 10
Blackburn v. Commissioner, 20 T.C.204 (1953) .. . . . 9
Commissioner v. Wemyss, 324 U. S.303 (1945) . . . . 4 
Estate of Berkman v. Commissioner, 38 T.C.M.
(CCH) 183(1979) . . . .  9
Estate of Reynolds v. Commissioner, 55 T.C. 172
(1970)  . . . . 
Frazee v. Commissioner,98   T.C. 554(1992) . . . . 8, 11
Krabbenhoft v. Commissioner, 939 F.2d 529 (8th
Cir.1991), cert. denied, 502 U.S. 1072(1992) . . . .  6, 8
Mason v. United States, 513 F.2d 25(7th Cir.
1975)  . . . .  9

Statutes and regulations

Internal Revenue Code (26 U. S.C.):
 453  . . . .  12
 483 (1976)  . . . . 2, 3, 5, 6, 7, 8, 9, 10, 11-12, 13
 483(a)(1976)  . . . . 10, 14
 483(a).(c) (1976) . . . .  14
 483(e)(formerly 483(g)) . . . . 14
 1001  . . . . 12, 13
 100l(b) . . . .  12
 1274(b)(2)(B) . . . .  13
 1274(c)(3)(F)  . . . .  14

(III)

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IV

Statutes and regulations-Continued:        

Page

1274(d)  . . . .  2, 5, 9, 11, 13
1274(d)(2)(B) . . . . 13
1274(d)(2)(B)  . . . . 4
2501  . . . . 2, 3, 7
2512  . . . . 2, 7, 9, 10
2512(a) . . . . 4
2512(b)  . . . . 4, 9, 13
7872  . . . .  2
7872(e)(i)  . . . .  13
Tax Reform Act of 1984, Pub. L. No. 98-369,
98 Stat. 494:
   41(a), 98 Stat. 31  . . . . 4, 8, 13
   172(a), 98 Stat. 699  . . . . 4
26 C. F. R.:
  Section 1.483-1 (1980)  . . . . 2 
  Sections 1.483-1 to 1.483-3  . . . . 2, 11 
  Section 1.483-l(a)  . . . . 4, 13
  Section 1.483-l(c)(2)(ii)(B) (1980)  . . . . 3 
  Section 1.483-l(d) (l)(ii)(B) (1980)  . . . . 3, 5
  Section 1.483-2  . . . . 4 
  Section 1.483-2(a)(l)(i)  . . . . 13
  Section 1.483-2(a)(2)  . . . . 13 
  Section 1.483-3(a)  . . . . 4, 13
  Section 1.483-3(b)(1)  . . . . 14
  Section 25.2512-8  . . . . 2, 4

Miscellaneous:

H.R. Rep. No. 749, 88th Cong., 1st Sess. 0963)  . . . . 3 
IRS Gen. Couns. Mere., G.C.M. 39,566 (Oct. 23,
1986)  . . . . 11
S. Rep. No. 830, 88th Cong., 2d Sess. (1964)  . . . . 3 

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In the Supreme Court of the United States

     OCTOBER TERM, 1995

       No. 95-1155

    CHARLES SCHUSTERMAN AND
  LYNN N. SCHUSTERMAN, PETITIONERS

         v.

    UNITED STATES OF AMERICA

   ON PETITION FOR A WRIT OF CERTIORARI
   TO THE UNITED STATES COURT OF APPEALS
       FOR THE TENTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION


       OPINIONS BELOW

The opinion of the court of appeals (Pet. App. A1-
A16) is reported at 63 F.3d 986. The order and judg-
ment of the district court (Pet. App. A17-A24) is
unreported.

       JURISDICTION

The judgment of the court of appeals was entered on
August 22, 1995. A petition for rehearing was denied
on October 20, 1995 (Pet. App. A25). The petition for a
writ of certiorari was filed on January 17, 1996. The
jurisdiction of this Court is invoked under 28 U.S.C.
1254(1).

(1)

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2

STATUTES AND REGULATIONS INVOLVED

The relevant portions of Sections 483 (1976) and
2512 of the Internal Revenue Code (26 U. S. C.) and of
former Treasury Regulation  1.483-1 (26 C. F. R.)
(1980) are set forth at Pet. App. A26-A36. The rele-
vant portions of Sections 1274(d), 2501 and 7872 of the
Internal Revenue Code (26 U.S.C.), Treasury Regula-
tion 25.2512-8, and current Treasury Regulations
 1.483-1 to 1.483-3. (26 C. F.R.) are set forth in the
Appendix, infra, 1a-4a.
       
 STATEMENT

1. a. In 1980, when the transactions at issue in this
case took place, capital gains were taxed at a lower
rate than ordinary income, while the interest portion
of deferred payments received for the sale of capital
was fully taxable as ordinary income. Section 483 of
the Internal Revenue Code governs unstated interest
in installment sales of property where part or all of
the payments are due more than one year after the
date of the sale. If no interest rate is stated in such
an installment contract, or if the stated interest rate
is less than a specified minimum rate (the "test" or
"safe harbor" rate), the Internal Revenue Service
(IRS) will impute interest to the transaction. 26
U.S.C. 483 (Pet. App. A26-A27). Thus, where a con-
tract contains unstated interest, Section 483 allows
the IRS to recharacterize a portion of the deferred
payments due under the contract as interest rather
than as capital gain, and to tax the interest portion as
ordinary income.
The Department of the Treasury's regulations im-
plementing Section 483 set forth the minimum inter-
est rates necessary to avoid the imputation of inter-
est. As effective during September, 1980, the regula-

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tions provided that no interest would be imputed in a
transaction that provided for the payment for the payment of inter-
est at a rate of six percent or greater.  26 C.F.R.
1.483-1(d)(1)(ii)(B)  (1980) (Pet. App. A35).  If the
transaction provided for payment of interest at less
than six percent, the IRS would impute a seven per-
cent interest rate.  26 C.F.R. 1.483-1(c)(2)(ii)(B) (1980)
(Pet. App. A34).
Congress enacted Section 483 in 1964 to curb a
specific abuse under the income tax laws.  Before
Section 483 was enacted, if the parties to a contract
for the sale of a capital asset on an installment basis
did not expressly provide for the payment of interest 
on the deferred payments, the seller, reporting her or
his gain under the installment method, could treat the
entire amount received (to the extent it exceeded the
seller's adjusted basis in the property) as capital gain,
even though some of that amount in reality repre-
sented interest income on the deferred payments of
principal.  In this manner, interest income was hidden
as capital gain, and taxed at lower rates.  Congress
enacted Section 483 to prevent that specific manipu-
lation of the income tax laws.  S. Rep. No. 830, 88th 
Cong., 2nd Sess. 102 (1964);  H.R. Rep. No. 749, 88th
Cong., 1st Sess. 72(1963).  (To the extent, however,
that market interest rates exceeded the six percent
test rate specified in the regulation, the seller who 
reported only a six percent interest on the deferred
payments.)
b.  Installment contracts may also effectuate gifts,
on which gift tax may be due.  The Code imposes a tax
on any "transfer of property by gift" made by an in-
dividual during the calendar quarter.  26 U.S.C. 2501 
(App., infra, 1a).  The value of a gift is determined as

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4

of the date of the gift. 26 U.S.C. 2512(a) (Pet. App.
A29). When property is transferred for less than full
consideration, "the amount by which the value of the
property exceeded the value of the consideration shall
be deemed a gift," and is thus subject to gift tax. 26
U.S.C. 2512(b) (Pet. App. A29). The applicable regu-
lations specify that transfers reached by the gift tax
include "sales, exchanges, and other dispositions of
property for a consideration to the extent that the
value of the property transferred by the donor ex-
ceeds the value in money or money's worth of the
consideration given there for." .26 C.F.R. 25.2512-8
(App., infra, 4a). See, generally, Commissioner v.
Wemyss, 324 U.S. 303, 306 (1945). When a gift
includes interest foregone (i. e. when it is effectuated
through a below-market loan or a sale with deferred
payments at below-market interest rates), the value
of the gift is determined by reference to market in-
terest rates.
c. As part of broad tax reform legislation in 1984,
Congress added Section 1274(d) to the Internal Rev-
enue Code. Tax Reform Act of 1984, Pub. L. No. 98-
369,  41(a), 172(a), 98 Stat. 531, 540, 699. Section
1274(d) adopted an adjustable, market-based interest
rate-referred to as the Applicable Federal Rate, or
AFR-for use as, inter alia, the test rate under
Section 483 for determining when installment sales
contain unstated interest, see 26 C.F.R. 1.483-1(a),
1.483-2, 1.483-3(a) (effective April 4, 1994) (App., infra,
2a-3a), and for use in valuation of debt instru-
ments issued in exchange for property, 26 U.S.C.
1274(b)(2)(B).1

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1 There are three Applicable Federal Rates: a short-term
rate for obligations maturing in three years or less from the

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5

2. On September 21, 1980, petitioners transferred
420 shares of Tilco, Inc., Class B common stock to five
irrevocable trusts of which the beneficiaries were
their descendants. Pet. App. A2, A17. The fair mar-
ket value of the stock at the time of the transfers was
7,956,046.60. Ibid. The trustees of the trusts issued
promissory notes to petitioners with a stated aggre-
gate principal amount of $7,956,046.60. Ibid. The
notes were payable over terms of up to 20 years, at a
stated annual interest rate of six percent. Id. at A2,
A18. Petitioners and the trustees chose to have the
notes bear interest at the rate of six percent because
that was the "safe harbor" or "test" rate under Sec-
tion 483 when the notes were issued. Id. at AZ.
The IRS examined the transfers of stock between
petitioners and the trusts and determined that peti-
tioners had made taxable gifts to the trusts on which
they owed gift taxes. Pet. App. A2. In making that
determination, the IRS did not challenge the parties'
valuation of the Tilco stock at $7,954,046.60, but ob-
served that the current fair market value of the
promissory notes paid in exchange for the stock was
substantially less than the stock. The IRS informed
petitioners that their use of the test rate under Sec-
tion 483 and Treasury Regulation  1.483-l(d)(1) (ii)(B)
(1980) did not preclude valuation of the payments due
under the promissory notes in accordance with the

___________________(footnotes)

issue date, a mid-term rate applied to obligations with terms of
more than three but not more than nine years and a long-term
rate for obligations maturing more than nine years from issue.
The AFRs are determined and published by the IRS monthly
and are based on the "average market yield" on outstanding
marketable obligations of the United States with maturity dates
falling within the three ranges. See 26 U.S-C. 1274(d) (App.,
infra, la-2a).

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6

prevailing market interest rate, which the parties
stipulated to be 11.5 percent.  Pet. App. A2-A3.
Discounting the value of the payments due under the
promissory notes by 11.5 percent over their 20-year
terms revealed their present value to be $4,601,551.
Id. at A3. The IRS determined that the $3,352,489 by
which the value of the stock exceeded the present fair
market value of the notes petitioners received in
exchange constituted taxable gifts by petitioners to
the trusts. ld. at A3.
Petitioners each filed gift tax returns and each paid
gift taxes of $528,043.61 for the quarter ended Septem-
ber 30,1980, and assessed interest of $578,563.86. Pet.
5; Pet. App. A19. They filed timely claims for refund
of the gift taxes and assessed interest paid, together
with statutory interest. Pet. App. A3. The IRS dis-
allowed the refund claims, and petitioners sued in
district court. Ibid.
3. On cross-motions for summary judgment, the
district court granted judgment in favor of the
government, Pet. App. A17-A24. The court rejected
petitioner's "broad application of 483: and instead
followed Krabbenhoft v. Commissioner, 939 F.2d 529,
532 (8th Cir. 1991), cert. denied, 502 U.S. 1072 (1992),
which held that Section 483 is concerned only with
the characterization of a payment as principal or
interest-an issue that does not affect its actual fair
market value for gift tax purposes. The district court
concluded that, although Section 483 applies "[f]or
purposes of this title, " i.e., for purposes of the entire
Internal Revenue Code, characterization of amounts

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7

paid as interest or principal "is irrelevant to a 26
U. S.C. 2512 valuation of gifts." Pet. App. A23.2
4. The court of appeals affirmed. Pet. App. A1-A16.
The language of the statute did not, in the court's
view, support petitioner's position:  "We believe a
careful examination of the plain language of the
statute reveals Congress' clear intent in enacting
483. Section 483 insures that a taxpayer does not
avoid income taxes by structuring an installment
contract to provide only for the payment of principal
(taxed as capital gains) without interest (taxed as
ordinary income)." Id. at A8.  Section 483 thus
determines only "whether payments under an install-
ment sales contract contain interest hidden as
principal." Id. at A13.
The court noted that Sections 2501 and 2512, in
contrast, deal not with imputation of interest, but
with valuation and taxation of gifts. Those Sections
authorize the IRS to "impose a gift tax when the
value of property transferred by a taxpayer exceeds
the present value of a promissory note that bears a
below market interest rate." Pet. App. A9. The court
stated that "the safe harbor interest rate referenced
in I.R.C,  483(c)(l)(B) and specified in Treas. Reg.
1.483-l(d)(l)(ii) (B) is irrelevant to gift tax valuation
under I.R.C. $2512." Pet. App. A13. "[Although the
safe harbor rate insulates a taxpayer from the ad-
verse income tax effects of  483(a), we find nothing in
483 that indicates that the safe harbor rate insu-

___________________(footnotes)

2 The district court declined to follow Ballard v. Com-
missioner, 854 F.2d 185 (7th Cir. 1988), which relied principally
on the phrase "[f]or purposes of this title."  Acknowledging
that " 483 indisputably applies to the entire Code,'' the district
court believed that reasoning "begs the question" of "how
should it apply." Pet. App. A22.

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8

lates a taxpayer from the adverse gift tax effects of
2512." Id: at A14.
The court accordingly concluded that, under Sec-
tion 483, the promissory notes petitioners received
"do not contain interest hidden as principal." Pet.
App. A15. "Because the notes bore interest below the
market rate," however, petitioners "made a gift to the
trusts consisting of the difference between the value
of the stock and the present discounted value of the
promissory notes." Id. at A15-A16. The court held
that, "although the promissory notes bore interest at
the 483 safe harbor rate, the IRS was entitled under
2512 to determine the discounted present value of
the notes using the prevailing market interest rate."
Id. at A16.

       ARGUMENT

Certiorari should be denied because the decision of
the court of appeals is correct, and what minimal
practical impact the question may have had has been
eliminated by the Tax Reform Act of 1984, Pub. L. No.
98-369,  41(a), 98 Stat. 531,540, and current Treasury
Regulations implementing the 1984 Act. In the 32
years that have elapsed since Section 483 was en-
acted, the question presented here has arisen in only
three other reported cases.  This Court denied
certiorari in Krabbenhoft v. Commissioner, 939 F.2d
529, 532 (8th Cir. 1991), cert. denied, 502 U.S. 1072
(1992), notwithstanding that that decision, like the
court of appeals' decision in this case, conflicted with
Ballard v. Commissioner, 854 F.2d 185 (7th Cir.
1988).3: Those cases, like this one, dealt with pre-1984

___________________(footnotes)

3 See also Frazee v. Commissioner, 98 T.C. 994 (1992) (fol-
lowing Krabbenhoft).

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transactions. The 1984 Act has since removed any
Fingering doubt about the correct application of these
statutes by adding Section 1274(d) to the Code, which
ties to market interest rates the test rate of interest
to be used for purposes of income taxation on install-
ment sales, thus conforming those rates to the inter-
est rates applicable to valuation under 26 U.S.C. 2512
of gifts effectuated by installment sales.
1. a. The court of appeals correctly held that
Section 483 had no role in determining for gift tax
purposes under Section 2512(b) the value of the in-
stallment payments petitioners received in exchange
for their stock. Petitioners made a taxable gift of
approximately $3.3 million when they transferred
to the trusts stock with a fair market value of
$7,954,046.60 in exchange for notes with an aggregate
fair market value of only $4,601,551.
It has long been settled that, in order to determine
whether a transfer of property has effected a gift, the
value of any note issued as complete or partial con-
sideration for the transfer must be taken into account
at its fair market value, not at its face value. E.g.,
Blackburn v. Commission, 20 T.C. 204 (1953);
Estate of Berkman v. Commissioner, 38 T.C.M. .
(CCH) 183 (1979); cf. Mason v. United States, 513 F.2d
25 (7th Cir. 1975), Fair market value is a function of
the market interest rate, the date of maturity of the
instrument, and other pertinent factors such as secu-
rity for the obligation and the solvency of the debt-
or. Blackburn, 20 T.C. at 207; Estate of Berkman, 38____
T.C.M. (CCH) at 187. The IRS thus correctly relied
on the 11.5 percent prevailing market interest rate at
the time of the transfers to determine the value of
petitioners' gifts under Section 2512(b).

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10

In arguing that the IRS should have used the
Section 483 test rate, rather than the market interest
rate, in determining the current fair market value of
the installment payments under their contract, peti-
tioners rely principally on the language in Section
483(a) stating that its provisions are applicable "[f]or
purposes of this title." Pet. 9-13. They reason that
because the term "title" refers to the entire Internal
Revenue Code, which includes, inter alia, subtitle A
(income taxes) as well as subtitle B (estate and gift
taxes), the Section 483 test rate applies to gift tax
valuations as well as income tax assessment. Pet. 10-
11. Petitioners read Section 483 to provide that a bar-
gain sale using the Section 483 test rate is thereby
immune from the provisions of Section 2512 that
impose a gift tax on bargain sales of property. Pet. 15;
see also Ballard v. Commissioner, 854 F.2d at 188.
Where interest is unstated in a deferred-payment
contract, Section 483 determines the portion of sales
proceeds that is to be recharacterized as interest. As
the court of appeals correctly held, Pet App. A16,
however, that provision is not relevant for gift valu-
ation purposes: Rather, valuation focuses on the
current fair market value of the deferred installment
payments. Determining current fair market value
depends on the actual market interest rate that the
trusts would have paid in order to defer payments for
the stock. To the extent that the Section 483 test
rate was not, at the time of the sales at issue here, the
actual market rate, the test rate is inapplicable to the
gift valuation question.4

___________________(footnotes)
                             
4 Petitioners seek to rely on proposed regulations that the
Treasury Department released in 1986, which took the position
that Section 483 would be relevant in determining the value of

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b. Contrary to petitioners' contention (Pet. 16-19),
the court of appeals' decision does not impose an peti-
tioners inconsistent treatment under the income tax
laws and the gift tax laws. First, because petitioners . .
specified a six percent interest rate, no recharac-
terization of principal amounts was called for and that
aspect of Section 483 by its terms simply did not apply
to their transactions. It followed that those transac-
tions were subject to the same gift and income tax
consequences that obtained with respect to all similar
bargain sales transactions made prior to 1964, when
Section 483 was adopted. Second, although Section_
483 prevented petitioners from understating the por-
tion of payments they received that constituted inter-
est, it did so only up to a point. The parties stipulated
that, when the transactions at issue took place, the
relevant market interest rate (11.5 percent) exceeded
the six percent test rate. The effect of the Section
___________________(footnotes)

a below-market debt instrument for gift tax purposes. Pet. 13-
14. Because those proposed regulations were never adopted,
they are without legal significance. Moreover, as the Tax
Court has noted, the IRS in 1986 took inconsistent positions as
to whether Section 483 had any relevance for gift tax purposes.
Frazee  v. Commissioner, 98 T.C. 554, 581-582 (1992). While the
proposed regulations suggested that Section 483 is relevant to
valuation for purposes of the gift tax, an IRS General Counsel
Memorandum (G.C.M. 39,566 (Oct. 23, 1986)) took the contrary
position that Section 483 and the regulations thereunder have
no relevance for gift tax purposes.  The IRS's litigating
position consistently has been that expressed in the General
Counsel Memorandum.  In any event, those regulations,
proposed in 1986, would not have applied to petitioners' 1980
sales, and have since been superseded by 26 U.S.C. 1274(d) and
Treasury Regulations 1.483-1 to 1.483-3, adopting the
Applicable Federal Rate as the Section 483 test rate. See page-
8, supra, and pages 13-14, infra.

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12

483 test rate was to limit but not eliminate peti-
tioners' income tax advantage by allowing them to
characterize more of. the installment payments they
received as principal than they would have been able
to had interest been required to be reported at market
rates. The fact that Section 483 did not also give
petitioners an advantage with respect to gift tax,
however, is not an inconsistency, but a reflection of
the limited role  of the six percent test rate.
Contrary to petitioners' suggestion, they were not
required for income tax purposes to treat the amount
realized on the sale as the $7,956,046.60 face amount of
the notes rather than as the $4,601,551 fair market
value used by the IRS in determining their gift tax
liability. For income tax purposes, the taxpayer who
makes a bargain sale of property realizes taxable gain
to the extent the value of the consideration received
exceeds his or her basis in the property sold. See 26
U.S.C. 1001. Under the express terms of Section
100l(b), the amount that petitioners realized on their
bargain sale of the stock was the $4,601,551 fair mar-
ket value of the notes they received from the trusts,
not the $7,956,046.60 face amount of the notes. Thus,
if petitioners had reported the transaction under Sec-
tion 1001, their gain would have been computed under
Section 100l(b) and would have been equal to the
amount by which the fair market value of the notes
they received exceeded their basis in the stock they
transferred to the trusts.
Petitioners, however, chose to report their gain by
the installment method under Section 453. By elect-
ing that method of reporting, petitioners became en-
titled to report the gain on a pro rata basis over the
years as they received the payments on the notes
from the trusts, rather than having to report the

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13

entire gain (and pay the entire tax due thereon) in the
year of the sale, as would have been required under
Section 1001. In electing installment reporting under
Section 453, however, petitioners were required to
treat the full face amount of the notes issued by the
trusts as the amount realized on the sale. It was thus
petitioners' choice to defer payment of the tax under
Section 453 that required them for income tax pur-
poses to treat the amount realized on the sales as the
face amount of the notes, while for gift tax purposes
the notes were taken into account at their fair market
value.
2. The issue presented in this case has little
continuing significance to the administration of the
tax laws due to the enactment of Section 1274(d) of the
Internal Revenue Code in the Tax Reform Act of
1984, Pub. L. No. 98-369,  41(a), 98 Stat. 531, 540. The
inconsistency that petitioners claim the court of
appeals' decision tolerates-between treatment of
interest for income tax and for gift tax purposes-has
been eliminated by the adoption of the market-based
Applicable Federal Rate (AFR). Treasury regula-
tions specify the AFR as the test rate under Section
483. 26 C.F.R. 1.483-1(a), 1.483-2(a)(1)(i), (2), 1.483-3(a);
cf. 26 U.S.C. 7872(e)(1) (employing the AFR as the
rate at which "foregone interest" will be valued in
interest-free or below-market loans). The AFR thus
replaces the six percent test rate for purposes of
imputation of interest. The AFR is adjusted monthly.
26 U.S.C. 1274(d)(1)(B). That rate is also the market
rate the IRS uses for purposes of determining the
present value of installments due in an installment
sale. See 26 U.S.C. 1274(b)(2)(B). Thus, if the AFR is
used as the interest rate in an installment sale, there

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14

will be no gift under Section 2512(b) effectuated by
use of below-market interest rates.
Petitioners urge that, where the six percent test
rate was used for purposes of determining whether an
installment sale contains unstated interest, it also
should be used to calculate current market value for
gift tax purposes. That below-market test rate, how-
ever, no longer applies. Instead, a market-based rate
applies for purposes of-determining unstated interest
in installment sales and for purposes of determining
the present value of gifts effectuated by installment
sales. The question presented in this case is thus of
little continuing importance and does not warrant
this Court's review. 5

___________________(footnotes)

5 Petitioners also erroneously assert (Pet. 19-23) that the
court of appeals' decision "subverts the will of Congress" with
respect to intra-family sales under Section 483(e) (formerly
483(g)). Section 483(e), unlike Section 483(a)-(c), does not use
the new market-based AFR, but uses a ceiling test rate of 6
percent. See 26 U.S.C. 1274(c)(3)(F); 26 C.F.R. 1.483-3( b)(1).
Section 483(e) is not at issue in this case, however, because
petitioners' transactions did not involve land, and this case is
thus not an appropriate vehicle for review of Section 483(e). In
any event, there is no reason to believe that the test rate
applicable under Section 463(e), any `more than the Section
483(a) test rate petitioners used, was intended to be used for
gift valuation purposes. See pages 9-13, supra.

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15

      CONCLUSION

The petition for a writ of certiorari should be
denied.

Respectfully submitted.

          DREW S. DAYS, III
           Solicitor General

          LORETTA C. ARGRETT
           Assistant Attorney General

          RICHARD FARBER
          CHARLES BRICKEN
           Attorneys

APRIL 1996

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        APPENDIX

1. Section 1274 of Title 26, United States Code, as
added by  41(a) of the Tax Reform Act of 1984, Pub. L.
No. 98-369,98 Stat. 531, provides in pertinent part:

26 U.S.C. 1274. Determination of Issue Price in
the Case of Certain Debt Instruments Issued for
Property      *****

(d) Determination of applicable Federal rate
  For purposes of this section-

  (1) Applicable federal rate

    (A) In general

In the case of a debt   The applicable Federal
instrument                  rate is:
with a term of:
Not over 3 years  . . . . . The Federal
		             short-term rate.
Over 3 years but not
over 9 years  . . . . . The Federal
            		 mid-term rate.
0ver  9 years  . . . . . The Federal
             		long-term rate.

   (B) Determination of rates

    During each calendar month, the Sec-
    retary shall determine the Federal short-
    term rate, mid-term rate, and long-term
    rate which shall apply during the follow-
    ing calendar month.

   (C) Federal rate for any calendar month
    For purposes of this paragraph-

(la)

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2a

(i) Federal short-term rate
The Federal short-term rate shall be
the rate determined by the Secretary
based on the average market yield (dur-
ing any l-month period selected by the
Secretary and ending in the calendar
month in which the determination is
made) on outstanding marketable obliga-
tions of the United States with re-
maining periods to maturity of 3 years
or less.

(ii) Federal mid-term and long-term
  rates

The Federal mid-term and long-term
rate shall be determined in accordance
with the principles of clause (i).
   *****

2. Section 2501 of Title 26, United States Code,
provides in pertinent part:

26  U.S.C .  2501. Imposition of tax

(a) Taxable transfers

(1) General rule
A tax, computed as provided in section
2502, is hereby imposed for each calendar
quarter on the transfer of property by gift
during such calendar quarter by any
individual, resident or nonresident.

	* * * * * 

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         3a

3. Section 1.483-1 of Title 26, Code of Federal
Regulations (1995), provides in pertinent part:

1.483-1 Interest on certain deferred payments.

(a) Amount constituting interest in certain de-
ferred payment transactions-(l) In general. Ex-
cept as provided in paragraph (c) of this section, sec-
tion 483 applies to a contract for the sale or exchange
of property if the contract provides for one or more
payments due more than 1 year after the date of the
sale or exchange, and the contract does not provide
for adequate stated interest, In general, a contract
has adequate stated interest if the contract provides
for a stated rate of interest that is at least equal to
the test rate (determined under 1.483-3) and the
interest is paid or compounded at least annually.
        
(2) Treatment of contracts to which section 483
applies-(i) Treatment of unstated interest. If sec-
tion 483 applies to a contract, unstated interest under
the contract is treated as interest for tax purposes.
Thus, for example, unstated interest is not treated as
part of the amount realized from the sale or exchange
of property (in the case of the seller), and is not in-
cluded in the purchaser's basis in the property ac-
quired in the sale or exchange.
        *****
4. Section 1.483-2 of Title 26, Code of Federal
Regulations (1995), provides in pertinent part:

1.483-2 Unstated interest.

(a) In general-(1) Adequate stated interest.
For purposes of section 483, a contract has unstated

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4a

interest if the contract does not provide for adequate
stated interest.  A contract does not provide for
adequate stated interest if the sum of the deferred
payments exceeds-
(i) The sum of the present values of the deferred
payments and the present values of any stated
interest payments due under the contract; or
(ii) If the case of a cash method debt instrument
(within the meaning of section 1274A(c)(2)) received
in exchange for property in a potentially abusive
situation (as defined in  1.1274-3), the fair market
value of the property reduced by the fair market value
of any consideration other than the debt instrument,
and reduced by the sum of all principal payments that
are not deferred. payments.
(2) Amount of unstated interest. For purposes
of section 483, unstated interest means an amount
equal to the excess of the sum of the deferred pay-
ments over the amount described in paragraph (a)(l)(i)
or (a)(1)(ii) of this section, whichever is applicable.
        
*****

5. Section 1.483-3 of Title 26, Code of Federal
Regulations (1995), provides in pertinent park

1.483-3 Test rate of interest applicable to a
contract.

(a) General rule. For purposes of section 483,
the test rate of interest for a contract is. the same as
the test rate that would apply under 1.1274-4 if the
contract were a debt instrument. Paragraph (b) of
this section, however, provides fox a lower test rate in
the case of certain sales or exchanges of land between
related individuals.

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5a

(b) Lower rate for certain sales or exchanges of
land between related individuals-(l) Test rate. In
the case of a qualified sale or exchange of land be-
tween related individuals (described in section 483(e)),
the test rate is not greater than 6 percent, com-
pounded semiannually, or an equivalent rate based on
an appropriate compounding period.

        *****

6. Section 25.2512-8 of Title 26, Code of Federal
Regulations (1995), provides in pertinent part:

25.2512-8 Transfers for insufficient consideration.

Transfers reached by the gift tax are not
confined to those only which, being without a valuable
consideration, accord with the common law concept of
gifts, but embrace as well sales, exchanges, and other
dispositions of property for a consideration to the
extent that the value of the property transferred by
the donor exceeds the value in money or money's
worth of the consideration given therefor. However, a
sale, exchange, or other transfer of property made in
the ordinary course of business (a transaction which
is bona fide, at arm's length, and free from any
donative intent), will be considered as made for an
adequate and full consideration in money or money's
worth. * * *