Opinion ID: 409490
Heading Depth: 2
Heading Rank: 1

Heading: Bargain Exchanges Involving Term Loans

Text: 20 In Blackburn v. Commissioner, 20 T.C. 204 (1953), the taxpayer transferred property worth $245,000 to her children for a 30-year secured promissory note in the amount of $172,517.65, bearing interest at 2.25%. At that time, the usual rate of interest for a similarly secured note was 4%. The taxpayer conceded that the difference between the value of the property transferred and the face amount of the note was a gift. The issue presented was whether a gift resulted from the transfer of property worth $172,517.65 for a note in that exact amount but bearing a below-market interest rate. The Tax Court held that it was, and that the amount of the gift was the difference between $172,517.65 and the note's fair market value, which reflected a discount because of its low interest rate. 21 The same reasoning was applied in Estate of Berkman v. Commissioner, 387 T.C.M. (CCH) 183 (1979). There the decedent made five loans to his daughter, her husband and their controlled corporation during the years from 1968 to 1972. The loans were each evidenced by a promissory note, with the principal payable in a balloon at the end of 20 years. None of the notes was secured. On Mr. Berkman's death in 1974, none of the loans had been repaid. The Commissioner argued that the difference between the amount lent and the value of the notes, discounted to reflect their below-market interest rate, gave rise to a taxable gift. The Tax Court agreed that the loans were not arms-length transactions, and therefore any difference between the amount of each transfer and the fair market value of each promissory note given in exchange constitutes a taxable gift. Id. at 186. 22 These cases would appear to require gift taxation when a non-interest-bearing term note is used to secure a loan. The taxpayers argue, though, that they lend no guidance here simply because they involved bargain exchanges. We find that the taxpayers' efforts to distinguish the principles underlying these cases are unavailing; the cases suggest that the transfers here resulted in taxable gifts to the extent that the value of property transferred exceeded the value of the notes given in return by Artesian and Lyle.