Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-94-05106/USCOURTS-ca10-94-05106-0/pdf.json

Parties Involved:
Charles Schusterman
Appellant
Lynn N. Schusterman
Appellant
United States of America
Appellee

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS F I L E D 

UD1tecl States court 0;r Appeals 

TENTH CIRCUIT Tenth Circuit 

AUG 2 2 1995 

CHARLES SCHUSTERMAN and LYNN 

N. SCHUSTERMAN, PATRICK FISHER - Clerk Plaintiffs-Appellants 

vs. No. 94-5106 

UNITED STATES OF AMERICA, 

Defendant-Appellee. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF OKLAHOMA 

(D.C. No. 92-C-590-E) 

Richard A. Freling, Dallas, Texas, (Donald A. Glassberg of 

Levenfeld, Eisenberg, Janger, Glassberg & Halper, Chicago, 

Illinois, Theodore A. Sinars of Madden, Jiganti, Moore & Sinars, 

Chicago, Illinois, David G. Glickman of Hopkins & Sutter, Dallas, 

Texas, with him on the brief), for Plaintiffs-Appellants. 

Charles Bricken, Attorney, Department of Justice, Washington, 

D.C., (Loretta C. Argrett, Assistant Attorney General, Richard 

Farber, Attorney, Stephen Charles Lewis, United States Attorney, 

Of Counsel, Department of Justice, Washington, D.C., with him on 

the brief), for Defendant-Appellee. 

Before ANDERSON, BARRETT, and BALDOCK, Circuit Judges. 

BALDOCK, Circuit Judge. 

Plaintiffs Charles and Lynn N. Schusterman ("Taxpayers") 

filed this tax refund action against Defendant United States in 

the district court pursuant to 28 u.s.c. § 1346(a) (1), contending 

the Internal Revenue Service ("IRS") erroneously assessed and 

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 1 
collected gift taxes from them. On cross motions for summary 

judgment, the district court entered judgment in favor of the 

United States. Our jurisdiction over Taxpayers' appeal arises 

under 28 U.S.C. § 1291. 

On September 21, 1980, Taxpayers transferred 420 shares of 

Tilco, Inc. Class B common stock to five irrevocable trusts 

("Trusts"). The Trustees of the Trusts executed promissory notes 

payable to Taxpayers in exchange for the Tilco stock, in the 

principal amount of $7,954,046.60, the undisputed fair market 

value of the stock. The promissory notes provided interest at six 

percent per annum. Taxpayers and the United States stipulated, 

however, that the prevailing market interest rate in September 

1980 was eleven and one-half percent. Tax counsel advised 

Taxpayers to set the interest rate of the promissory notes at six 

percent--the safe harbor rate referenced in I.R.C. § 483(c) and 

specified in Treas. Reg. § 1.483-1(d) (1) (ii) (B)--in order to 

prevent the IRS from assessing gift taxes under I.R.C. § 2512(b) 

on the amount by which the value of the stock exceeded the value 

of the notes, discounted to reflect the prevailing market interest 

rate. 

Despite Taxpayers' efforts, the IRS notified them that they 

owed gift taxes. The IRS determined Taxpayers owed a deficiency 

in gift taxes arising from the stock transfer because the 

promissory notes that served as consideration for the transaction 

did not provide the prevailing market interest rate. The IRS 

informed Taxpayers that use of the safe harbor interest rate under 

§ 483 and Treas. Reg. § 1483-1(d) (1) (ii) (B) did not preclude it 

-2-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 2 
from imposing gift taxes pursuant to I.R.C. § 2512(b) on the 

amount by which the value of the stock exceeded the present value 

of the notes, discounted to reflect the market interest rate. The 

IRS concluded that Taxpayers had made a gift to the Trusts because 

the value of the stock exceeded the value of the promissory notes 

received in exchange. That is, the promissory notes Taxpayers 

received in consideration for the transfer bore six percent 

interest, five and one-half percent less than the prevailing 

eleven and one-half percent market rate. Thus, the IRS 

disregarded the six percent rate specified in the promissory 

notes, and applied an annual discount rate of eleven and one-half 

percent. Discounting the principal amount of the promissory notes 

by eleven and one-half percent reduced the present value of the 

promissory notes to $4,601,551 which is $3,352,489 less than the 

$7,954,046.60 value of the stock. Pursuant to I.R.C. 

§§ 2501(a) (1), 2512(b), the IRS taxed the $3,352,489 difference 

between the present value of the promissory notes and the value of 

the stock as a gift by Taxpayers to the Trusts. 

Taxpayers filed gift tax returns and paid gift taxes with 

interest in the sum of $1,157,127.72. Thereafter, Taxpayers filed 

claims for refund of the taxes and interest, plus statutory 

interest. Taxpayers argued their use of the six percent safe 

harbor interest rate in the notes under I.R.C. § 483 prevented the 

IRS from determining the present discounted value of the 

promissory notes using the market interest rate of eleven and 

one-half percent and imposing gift taxes pursuant to I.R.C. 

§ 2512(b). 

-3-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 3 
After the IRS denied their refund claim, Taxpayers filed a 

refund action in the district court pursuant to 28 U.S.C. 

§ 1346(a) (1) contending the IRS had erroneously assessed and 

collected gift taxes. Taxpayers and the United States stipulated 

"[i]f the court determines that the 6% rate used by Plaintiffs is 

inapplicable to the stock-transfer transaction, then the 11.5% 

rate used by the IRS is applicable." On cross motions for summary 

judgment, the district court ruled that I.R.C. § 483 does not 

provide a safe harbor from the application of market interest 

rates for purposes of gift tax valuation. Consequently, the 

district court concluded that Taxpayers' use of the six percent 

I.R.C. § 483 safe harbor interest rate in the promissory notes did 

not prevent the IRS from discounting the value of the notes by the 

prevailing market rate to determine the present value of the 

consideration received in exchange for the stock. The district 

court ruled that under I.R.C. §§ 2501(a) (1), 2512(b) the IRS was 

authorized to determine the present discounted value of the 

promissory notes using the eleven and one-half percent prevailing 

market interest rate, and impose gift taxes on the $3,352,489 

difference between the $7,954,046.60 value of the stock and the 

$4,601,551 discounted value of the promissory notes. In sum, the 

district court held that I.R.C. § 483 "is irrelevant to a 26 

U.S.C. § 2512 valuation of gifts" and entered summary judgment in 

favor of the United States. This appeal followed. 

On appeal, Taxpayers contend the district court erred by 

ruling that § 483 is not relevant to a § 2512 valuation of an 

installment sales contract for purposes of gift tax liability. 

-4-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 4 
Specifically, Taxpayers argue that their use of the six percent 

safe harbor rate under I.R.C. § 483 prevents the IRS from using 

the prevailing market interest rate to determine the discounted 

present value of the promissory notes under§ 2512(b). 

I. 

Taxpayers' argument on appeal requires us to interpret I.R.C. 

§ 483 and I.R.C. § 2512. In statutory interpretation we look to 

the plain language of the statute and give effect to its meaning. 

United States v. Ron Pair Enter., Inc., 489 U.S. 235, 241 (1989); 

Johns v. Stewart, F.3d ___ , No. 94-4161, 1995 WL 365142, at *8 

(lOth Cir. June 20, 1995). "'Absent a clearly expressed 

legislative intention to the contrary, that language must 

ordinarily be regarded as conclusive.'" Kaiser Aluminum & Chern. 

Corp. v. Bonjorno, 110 S. Ct. 1570, 1575 (1990) (quoting Consumer 

Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108 

(1980)). If the statute is clear, that is the end of our inquiry. 

United States v. Morgan, 922 F.2d 1495, 1496 (lOth Cir.), cert. 

denied, 501 U.S. 1207 (1991). We review the district court's 

interpretation of a federal statute de novo. Eastern Inv. Corp. 

v. United States, 49 F.3d 651, 657 (lOth Cir. 1995). We review 

the district court's entry of summary judgment de novo, applying 

the same legal standard used by the district court under Fed. R. 

Civ. P. 56(c). State of Utah v. Babbitt, 53 F.3d 1145, 1148 (lOth 

Cir. 1995). 

A. 

The version of I.R.C. § 483 in effect when Taxpayers 

-5-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 5 
transferred the stock to the irrevocable trusts provided: 

Sec. 483. INTEREST ON CERTAIN DEFERRED PAYMENTS. 

(a) Amount Constituting Interest.--For purposes of 

this title, in the case of any contract for the sale or 

exchange of property there shall be treated as interest 

that part of a payment to which this section applies 

which bears the same ratio to the amount of such payment 

as the total unstated interest under such contract bears 

to the total of the payments to which this section 

applies which are due under such contract. 

(b) Total Unstated Interest.--For purposes of this 

section, the term "total unstated interest" means, with 

respect to a contract for the sale or exchange of 

property, an amount equal to the excess of--

(1) the sum of the payments to which this 

section applies which are due under the contract, 

over 

(2) the sum of the present values of such 

payments and the present values of any interest 

payments due under the contract. 

For purposes of paragraph (2), the present value of a 

payment shall be determined, as of the date of the sale 

or exchange, by discounting such payment at the rate, 

and in the manner, provided in regulations prescribed by 

the Secretary ... 

(c) Payments to Which Section Applies.--

(1) In general.--Except as provided in 

subsection (f), this section shall apply to any payment 

on account of the sale or exchange of property which 

constitutes part or all of the sales price and which is 

due more than 6 months after the date of such sale or 

exchange under a contract--

(A) under which some or all of the 

payments are due more than one year after the 

date of such sale or exchange, and 

(B) under which, using a rate provided 

by regulations prescribed by the Secretary for 

purposes of this subparagraph, there is a 

total unstated interest. 

Any rate prescribed for determining whether there is 

total unstated interest for purposes of subparagraph (B) 

shall be at least one percentage point lower than the 

rate prescribed for purposes of subsection (b) (2). 

-6-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 6 
26 U.S.C. § 483 (1976 ed.). We may determine the clear intent of 

Congress in enacting I.R.C. § 483 by explicating the individual 

sections which together comprise the whole. See Ron Pair Enter., 

Inc., 489 U.S. at 241. 

Section 483(c) defines the scope of I.R.C. § 483. Section 

483(c) provides that§ 483 applies to payments under a contract 

for sale or exchange of property due more than six months after 

the sale if the contract: (1) provides for any payment more than 

one year after the date of the sale, and (2) the payments contain 

"total unstated interest" "using a rate provided by regulations." 

I.R.C. § 483(c) (1). In addition to the time constraints, 

§ 483(c) (1) (B) clearly establishes that§ 483 applies only to 

payments under a contract for sale or exchange of property that 

contain "total unstated interest" when compared to an interest 

rate prescribed by regulation. Id.; see Treas. Reg. 

§ 1.483-1(d) (1) (ii) (B) (providing six percent interest rate at 

time of transaction in instant case) .1 

The concept of "total unstated interest" therefore constrains 

the scope of § 483. Section 483(b) sets forth a formula to 

calculate whether a contract for sales or exchange contains "total 

unstated interest." I. R. C. § 483 (b) . Implicit in the subsection 

is the truism that a payment will never contain "total unstated 

interest" if the contract provides interest at least at the level 

prescribed by the regulation referenced in§ 483(b), 

1 Treas. Reg. § 1.483- (d) (1) (ii) (B) provides: " [f]or payments 

on account of a sale or exchange of property entered into on or 

after July 24, 1975, and before July 1, 1981 ... the test rate 

prescribed by . . . this section shall be 6 percent per annum 

simple interest." 

-7-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 7 
(c) (1) (B) --i.e., the safe harbor rate. See I.R.C. § 483 (b), 

(c) (1) (B); Treas. Reg. § 1.483-1(d) (1) (ii) (B). The interest rate 

set by regulation is known as the "safe harbor" rate because a 

contract for the sale or exchange of property that employs the 

interest rate will by definition never contain "total unstated 

interest." Because the plain language of§ 483(c) (1) (B) 

establishes that contract payments that do not contain "total 

unstated interest" are outside the scope of I.R.C. § 483, the 

interest rate set by regulation carves out a safe harbor from 

application of I.R.C. § 483(a) itself. Thus, at the time of the 

transaction in the instant case, a contract for sale or exchange 

of property that provided interest on deferred payments at a rate 

at least equal to the six percent safe harbor rate set by Treas. 

Reg. § 1.483-1(d) (1) (ii) (B) was not subjected to I.R.C. § 483 (a). 

A contract for sale or exchange of property that fails to 

provide interest at least at the minimum safe harbor rate is 

subject to§ 483(a) because the payments contain "total unstated 

interest." I.R.C. § 483(c). The title of§ 483(a)--"Amount 

Constituting Interest"--announces the intent and effect of the 

section. Simply put, § 483(a) designates what amount of principal 

in each payment containing insufficient interest will be taxed as 

interest. I.R.C. § 483(a). Under the precise language of 

§ 483(a), for purposes of the entire tax code, payments under any 

contract for the sale or exchange of property that contain total 

unstated interest as defined in§ 483(b), (c) will be subjected to 

a ratio-based computation to determine what portion of each 

-8-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 8 
payment will be recharacterized as interest and taxed accordingly. 

I.R.C. § 483 (a). 

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). Unless payments under an installment 

contract provide interest at a minimum rate (the safe harbor 

interest rate) , the payments are deemed under operation of 

§ 483(b), (c) to contain "total unstated interest." Under 

§ 483(a), payments that contain "total unstated interest" are 

manipulated via a ratio-based formula to recharacterize a portion 

of the principal as interest--i.e., to impute a higher interest 

rate to the contract when insufficient interest was provided in 

the contract. In sum, I.R.C. § 483 prevents a seller of property 

under an installment contract for sale or exchange of property 

from converting ordinary income (interest) into capital gains 

(principal) . 

B. 

In contrast, I.R.C. § 2501(a) (1) imposes a tax on property 

transferred by gift. See I.R.C. § 2501(a) (1) ("A tax ... is 

hereby imposed ... on the transfer of property by gift."). 

Section 2512(a) provides: "[i]f the gift is made in property, the 

value thereof at the date of the gift shall be considered the 

amount of the gift." I. R. C. § 2512 (a) . Section 2512 (b) of the 

tax code provides that: "[w]here property is transferred for less 

-9-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 9 
than an adequate and full consideration in money or money's worth, 

then the amount by which the value of the property exceeded the 

value of the consideration shall be deemed a gift ... 

I.R.C. § 2512(b). Consequently, under I.R.C. §§ 2501(a) (1), 

2512(b), the IRS assesses a gift tax when the value of property 

transferred exceeds the value of the consideration received. See 

generally Commissioner v. Wemyss, 324 U.S. 303, 306 (1945) 

(observing that IRS may tax as a gift the difference in value 

between property transferred and inadequate consideration received 

in return). Under settled precedent, the IRS may determine for 

gift tax valuation purposes the amount by which the fair market 

value of property exceeds the value of an installment sales 

contract by examining the face value of the contract, the interest 

rate, the prevailing market interest rate, and the length of the 

contract. ~, Blackburn v. Commissioner, 20 T.C. 204, 207 

(1953). Pursuant to §§ 2501, 2512 the IRS may 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. Id. at 206-07. 

c. 

The conflict in the instant case presents a narrow issue 

based upon the tax code sections summarized above. A taxpayer who 

uses the safe harbor interest rate in an installment sales 

contract prevents the IRS from applying§ 483(a) to recharacterize 

portions of payments as interest. We must decide, however, 

whether the safe harbor interest rate prevents the IRS from 

discounting the present value of the same sales contract to 

-10-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 10 
reflect the higher prevailing market interest rate for gift tax 

valuation purposes.2 Taxpayers urge that we answer in the 

affirmative. 

The two circuits that have addressed this issue are in 

conflict. In Ballard v. Commissioner, 854 F.2d 185 (7th Cir. 

1988), the Seventh Circuit ruled that an installment sales 

contract that provided interest at the safe harbor rate was immune 

from operation of both§ 483(a) and§ 2512(b). The taxpayer in 

Ballard sold the family farm to her children under a contract 

bearing interest at the six percent safe harbor rate. The 

prevailing market interest rate, however, was eighteen percent. 

The IRS notified the taxpayer that she owed gift taxes because the 

value of the farm exceeded the present value of the contract, 

discounted by the prevailing market interest rate. Ballard, 854 

F.2d at 186-87. 

The taxpayer appealed the notice of the deficiency to the 

United States Tax Court, arguing that I.R.C. § 483 provided a safe 

harbor that permitted her to charge a six percent interest rate on 

an installment sales contract without suffering adverse income or 

gift tax consequences. The taxpayer contended that the 

introductory language of§ 483(a) states that it applies to all 

provisions of the tax code, including by definition the gift tax 

provisions. Because§ 483(a) applies to all provisions of the 

code, the taxpayer maintained that by using the six percent safe 

2 We note that Taxpayers and the United States stipulated that 

the $7,954,046.60 face value of the promissory notes equaled the 

fair market value of the stock transferred. Consequently, the 

only dispute concerns the interest rate used in the transaction. 

-11-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 11 
harbor rate in an installment sales contract, she prevented the 

IRS from using the prevailing eighteen percent market rate to 

determine the present value of the installment contract for gift 

tax purposes. The tax court affirmed the IRS' use of the eighteen 

percent market rate to determine the present discounted value of 

the sales contract, and held that § 483 was irrelevant to gift tax 

valuation. Id. at 187. 

On appeal, the Seventh Circuit reversed the Tax Court and 

ruled that I.R.C. § 483 applied to all provisions of the tax code, 

including income and gift tax provisions. Id. at 188-89. 

Further, the court observed that neither the plain language of 

I.R.C. § 483 nor the legislative history suggested that the 

provision did not apply to gift taxes. Id. at 188. Without 

identifying the precise statutory support for its ruling, the 

court concluded that the taxpayer's use of the I.R.C. § 483 safe 

harbor interest rate precluded the IRS from using the eighteen 

percent market rate to discount the present value of the 

installment contract for gift tax purposes. Id. at 189. Under 

the Seventh Circuit's ruling in Ballard, therefore, in addition to 

providing a safe harbor from operation of§ 483(a), the six 

percent interest rate constitutes a safe harbor from imposition of 

gift taxes under§ 2512(b) as well. 

In Krabbenhoft v. Commissioner, 939 F.2d 529 (8th Cir. 1991), 

cert. denied, 112 S. Ct. 967 (1992), the Eighth Circuit rejected 

the Seventh Circuit's reasoning in Ballard and ruled that I.R.C. 

§ 483 is irrelevant to the valuation of an installment sales 

contract for gift tax purposes. The taxpayers in Krabbenhoft sold 

-12-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 12 
the family farm to their sons by means of a contract for deed 

payable at the six percent safe harbor rate. The prevailing 

market interest rate, however, was eleven percent. The IRS 

notified the taxpayers that they owed a deficiency in gift taxes 

on the amount by which the value of the farm exceeded the present 

value of the contract for deed discounted by the prevailing market 

rate of eleven percent. Krabbenhoft, 939 F.2d at 530. 

The taxpayers petitioned the United States Tax Court for 

review, arguing that because§ 483(a) states it applies "[f]or 

purposes of this title," the IRS may not determine that the 

contractual interest was insufficient for gift tax purposes when 

the interest (the safe harbor rate) was sufficient for purposes of 

§ 483. The tax court upheld the gift tax assessment, Krabbenhoft 

v. Commissioner, 94 T.C. 887 (1990), aff'd, 939 F.2d 529 (8th Cir. 

1991), cert. denied, 112 S. Ct. 967 (1992), and the taxpayers 

appealed. 

On appeal, the Eighth Circuit ruled that because § 483 was 

irrelevant to the valuation of an installment sales contract for 

gift tax purposes, § 483 does not control the interest rate at 

which the IRS must determine the present value of an installment 

sales contract. Krabbenhoft, 939 F.2d at 533. The court 

initially observed that § 483 applies to the entire tax code 

because the section begins" [f]or purposes of this title." The 

Eighth Circuit noted, however, that the fact that § 483 applies to 

the entire tax code does not make the section relevant to 

§ 2512(b). "The flaw in this argument is the assumption that 

§ 483 is relevant to the determination of present value for gift 

-13-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 13 
tax purposes." Id. at 532. In its analysis, the Eighth Circuit 

quoted the tax court's opinion from which the taxpayers appealed: 

We agree that the prefatory language of section 483 is 

unambiguous, and that section 483 therefore applies to 

all sections of the Code to which it is relevant. 

However, we find nothing in the language of section 483 

that indicates that this section has anything to do with 

valuation. The section merely characterizes payments as 

principal or interest, while gift tax valuation is 

concerned with the value of all payments, whether of 

principal or of interest. The character of a payment 

does not affect its value for gift tax purposes. 

Id. (quoting Krabbenhoft, 94 T.C. at 890). Because the character 

of a payment under I.R.C. § 483--i.e., principal or interest--does 

not affect the overall value of the obligation for gift tax 

purposes under I.R.C. § 2512, the Eighth Circuit held that "§ 483 

is not relevant to the gift tax statute." Id. Instead, the court 

explained that use of the I.R.C. § 483 safe harbor interest rate 

in an installment contract prevents the IRS from recharacterizing 

certain payments as principal or interest and protects the 

taxpayers from adverse income tax liability, but does not protect 

taxpayers from adverse gift tax liability by preventing the IRS 

from employing the prevailing market rate of interest to discount 

the present value of the contract for gift tax purposes. Id. at 

532-33. Consequently, the Eighth Circuit rejected Ballard and 

held that "§ 483 does not limit the interest rate the Commissioner 

can use in valuing an installment contract for gift tax purposes 

because§ 483 is simply irrelevant to such a determination." Id. 

at 533. 

II. 

In the instant appeal, Taxpayers argue that we should follow 

the Seventh Circuit's reasoning in Ballard and reject the Eighth 

-14-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 14 
Circuit's analysis in Krabbenhoft. Taxpayers essentially contend 

that because§ 483(a) applies "[f]or purposes of this title," the 

IRS may not determine that interest sufficient for § 483 is 

insufficient for gift tax purposes. Taxpayers maintain that § 483 

operates to prevent the IRS from imputing additional interest to a 

sales contract under any section of the tax code if the contract 

provides interest at the minimum safe harbor level under § 483. 

Because the promissory notes used as consideration for the stock 

transfer in the instant case bore interest at the six percent safe 

harbor rate, Taxpayers contend we should reverse the district 

court and remand with instructions to enter summary judgment in 

favor of Taxpayers. 

We first note that we agree with the Seventh and Eighth 

Circuits that I.R.C. § 483 applies to the entire tax code because 

the section begins "[f]or purposes of this title." I.R.C. 

§ 483(a); see also Krabbenhoft, 939 F.2d at 532; Ballard, 854 F.2d 

at 188-89. Because the Eighth Circuit's analysis is founded on 

the plain language of § 483, we agree with its conclusion that the 

safe harbor interest rate referenced in I.R.C. § 483(c) (1) (B) and 

specified in Treas. Reg. § 1.483-1(d) (1) (ii) (B) is irrelevant to 

gift tax valuation under I.R.C. § 2512. See Krabbenhoft, 939 F.2d 

at 532-33. We therefore decline to adopt the Seventh Circuit's 

interpretation that § 483 limits the interest rate the IRS may use 

in valuing an installment sales contract for gift tax purposes. 

See Ballard, 854 F.2d at 188-89. 

Examining the plain language of the statute and giving effect 

to its meaning, Johns, 1995 WL 365142, at *8, we find that § 483 

-15-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 15 
establishes, for purposes of the entire tax code, whether payments 

under an installment sales contract contain interest hidden as 

principal. The text of § 483 is clear--payments under a contract 

for sale or exchange of property that pay interest at less than 

the safe harbor rate contain "total unstated interest." I.R.C. 

§ 483(c). Contract payments containing "total unstated interest" 

are subject to§ 483(a). Id. Section 483(a) operates via a 

ratio-based formula to designate a portion of each contract 

payment as interest. Id. § 483(a). Unless a contract for sale or 

exchange of property charges sufficient interest (the safe harbor 

rate), I.R.C. § 483(a) imputes additional interest to the 

contract. Id. Section 483, therefore, prevents taxpayers from 

hiding interest (taxed as income) as principal (taxed as capital 

gains). 

Contrary to Taxpayers' arguments, I.R.C. § 483 does not state 

that the interest rate referenced in§ 483(c) and specified in 

Treas. Reg. § 1.483-1(d) (1) (ii) (B) shall be deemed sufficient for 

purposes of all other sections of the tax code. The safe harbor 

interest rate only prevents the IRS from using§ 483(a) to 

manipulate the ratio of principal to interest in each contract 

payment. Thus, we agree with the Eighth Circuit that "'section 

[483] merely characterizes payments as principal or interest, 

while gift tax valuation is concerned with the value of all 

payments, whether of principal or interest.'" Krabbenhoft, 939 

F.2d at 532 (quoting 94 T.C. at 890). 

Consequently, although the safe harbor rate insulates a 

taxpayer from the adverse income tax effects of§ 483(a), we find 

-16-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 16 
nothing in § 483 that indicates that the safe harbor rate 

insulates a taxpayer from the adverse gift tax effects of § 2512. 

We therefore reject Taxpayers' contention that the language "[f]or 

purposes of this title" means that the IRS may not determine that 

a sales contract bears insufficient interest for gift tax purposes 

if the contract bears interest at the safe harbor rate. We 

conclude that § 483 does not determine the interest rate at which 

the IRS must value an installment sales contract for gift tax 

purposes under § 2512.3 See Krabbenhoft, 939 F.2d at 533 

("[Section] 483 does not limit the interest rate the Commissioner 

can use in valuing an installment sales contract for gift tax 

purposes because § 483 is simply irrelevant to such a 

determination."). 

We examine the transaction in the instant case informed by 

our interpretation of § 483. Taxpayers transferred stock to the 

Trusts in exchange for promissory notes payable at the six percent 

safe harbor rate. By so doing, Taxpayers insulated themselves 

from adverse income tax consequences under§ 483(a). That is, 

because the notes bore interest at the safe harbor rate referenced 

in§ 483(c), the IRS may not employ§ 483(a) to designate a 

portion of the principal as interest. See I.R.C. § 483(a), (c). 

3 Taxpayers support their argument with regulations proposed by 

the IRS nearly a decade ago which have never been adopted, and 

commentary published in professional journals. See Prop. Treas. 

Reg.§§ 25.2512-8, 1.1012-2(b), 1.483-2, 1.483-4(b) (2) (ii), 51 

Fed. Reg. 12022, 12037-40, 12098 (1986); Elliott Manning & Jerome 

M. Hesch, Intrafamily Sales and OID Safe Harbors: Transfer Tax 

Anomalies, 17 Tax Mgmt. Est., Gifts & Tr. J. 131 (1992); Andrew R. 

Henderson, Using the Imputed Interest Safe Harbor for Intrafamily 

Installment Sales, 74 J. Tax'n 100 (1991). We find these sources 

unpersuasive to the extent they conflict with the plain language 

of I.R.C. §§ 483, 2512. 

-17-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 17 
For purposes of the entire tax code, therefore, the notes do not 

contain interest hidden as principal. Id. 

Section 483, however, does not establish the value of the 

notes for gift tax purposes. Instead, settled gift tax provisions 

control this determination. Section 2512(b) provides that 

"[w]here property is transferred for less than an adequate and 

full consideration in money . . . the amount by which the value of 

the property exceeded the value of the consideration shall be 

deemed a gift." Because the notes bore interest below the market 

rate, the present value of the notes was less than the principal 

amount. Under§ 2512(b), therefore, Taxpayers 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. The IRS 

was entitled to tax this amount as a gift under § 2501(a) (1). 

In sum, we hold 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. Accordingly, we AFFIRM 

the district court's order granting summary judgment in favor of 

Defendant United States. 

-18-

Appellate Case: 94-5106 Document: 01019279627 Date Filed: 08/22/1995 Page: 18