Miller provides clues for preventing treatment of intrafamily loan as gift.

• Author: Robbins, Andrew

The Miller case, TC Memo 1996-3, highlights the importance of establishing a bona fide creditor-debtor relationship in the context of an intrafamily loan to avoid its characterization as a transfer subject to gift tax.

Miller made loans of $100,000 to assist each of her sons with the acquisition of a home during 1982. The two sons signed noninterest-bearing demand notes, which had a stated maturity if no demand for payment was made; no collateral or security was required. Miller's accountants recorded the disbursements as loans on her general ledger, based on notations made on the check stubs.

During the term of the demand notes, one son made a partial repayment of $15,000; no other payments were received by Miller. Amounts were later forgiven by Miller, evidenced in some instances by letters advising the sons of the forgiveness and, in others, by gift tax returns disclosing the forgiveness. At no point did Miller request repayment of the notes. The opinion states that there were discrepancies between the amounts listed on gift tax returns, the letters evidencing the amounts forgiven, and the trial testimony.

The IRS contended that each transfer, in substance, was a gift. Miller apparently argued that only the interest forgone on the demand loans, and not their principal, was a gift for Federal gift tax purposes, relying on Dickman, 465 US 330 (1984). The Tax Court found this argument to be unpersuasive, since Dickman first requires there to be a bona fide debt.

The opinion lays out the importance of a bona fide creditor-debtor relationship. The presumption that a transfer between family members is a gift may be rebutted by an affirmative showing that, at the time of the transfer, the transferor had a real expectation of repayment and an intention to enforce the debt. The determination of whether a transfer meets this test depends on all the facts and circumstances, including whether (1) there was a promissory note or other evidence of indebtedness, (2) interest was charged, (3) there was any security or collateral, (4) there was a fixed maturity date, (5) a demand for repayment was made, (6) any actual repayment was made, (7) the transferee had the ability to repay, (8) any records maintained by the transferor and the transferee reflected the transaction as a loan and (9) the transaction was reported for Federal tax purposes as a loan.

The court then applied these criteria to the facts of the case, citing applicable precedent for each...