Gift or No Gift? A Tax Court Case Worth Considering

• 03/25/2025

We’re guessing that many of our readers are fully ensconced in Tax Season #1 and might welcome some “light reading” to take their minds off the tasks at hand. With that in mind, we’d like to share our take on a recent interesting Tax Court case that came to our attention.

Start With a Routine Transaction…
On March 5th, in Galli v. Commissioner, Docket Nos. 7003-20 and 7005-20 (one a gift-tax case and the other an estate-tax case), the Tax Court granted summary judgment motions to the taxpayer in connection with an IRS gift assertion relating to a $2.3 million loan made by the decedent during her lifetime to her son. The decedent had engaged in a fairly common estate planning transaction whereby she lent funds to her son, which loan bore interest at the mid-term AFR of 1.01%. The note (1) was in writing, albeit unsecured, (2) provided for annual payments of interest only, which were timely paid (and reported by the decedent on her individual income tax returns), and (3) provided for a balloon payment of principal at the end of nine years.

The Tax Court Weighs In.
For some reason, the IRS asserted that the loan did not have a value equal to its principal amount and that the decedent had made an unreported gift of $869,000 (or $544,000 under an alternate valuation methodology). The Tax Court, relying on Frazee v. Commissioner, 98 TC 554 (1992), held that §7872 governs valuation for gift tax purposes (i.e., there is a taxable gift, if the interest rate is below the AFR), i.e., there was no gift. This result probably came as no surprise to many tax professionals, and one has to wonder why the IRS brought the case. Perhaps, the IRS thought that the Tax Court might change its mind and not follow Frazee?

Now, Let’s Get Back to Business.
With tax season in full swing, we want to bring to your attention our three springtime Fundamentals programs, the first of which begins on April 29th. Registration also is open for all our Tax Planning Forum programs in the fall. Check out our full 2025 program schedule and register for the session of your choice below.