On June 1, 2020, the Tax Court issued a Memorandum Opinion in the case of Estate of Bolles v. Commissioner (T.C. Memo. 2020-71). The sole issue before the court in Estate of Bolles was whether the transfers from the decedent, Mary Bolles, to her son Peter, which transfers aggregated over $1m, should be treated as loans or gifts. According to the Tax Court, “Each side sees the answer as totally one way. We disagree with both parties as we explain herein.”
The Miller Factors
Ever since Thog thought Thag was giving him his saber-toothed tiger club, and Thag thought that made it clear (as clear as Neanderthal vocalizations could be) that he was just loaning the club to Thog to impress Thog’s new lady friend, humanity has dealt with the fundamental question of whether a transfer of valuable property was a loan or a gift. Not so far removed from Thag and Thog, the IRS and taxpayers continue to pick this battle. Surprisingly, the nine “traditional” factors that the parties rely upon in Estate of Bolles were first compiled in the 1996 Tax Court memorandum decision of Miller v. Commissioner, T.C. Memo. 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997). It is not that the factors had not existed before, in some form or another, but Miller’s distillation of the preceding caselaw into nine simple tests cut to the quick of the debate.
The determination of whether a transfer was made with a “real expectation of repayment” and “an intention to enforce the debt” depends on all the facts and circumstances. Miller, T.C. Memo. 1996-3 at *7. These facts and circumstances are embodied in the following questions derived from Miller. Was there a promissory note or other evidence of indebtedness? Was interest charged? Was there any security or collateral? Was there a fixed maturity date for repayment? Was there a demand for repayment? Was any actual repayment made? Did the transferee have the ability to repay? Were any records maintained by the transferor and/or the transferee that reflected the transaction as a loan? How was the transaction reported for Federal tax purposes, and is such reporting consistent with a loan?
Mary recorded the advances to Peter as loans and kept track of interest, yet there were no loan agreements or attempts to force repayment. Subsequent to Peter’s architecture firm folding in the late 1980s, Peter became financially unable to repay the advances from his mother. Consequently, when Mary realized that Peter would not be able to repay the loans, she created a trust in 1989 and specifically excluded Peter from receiving a distribution.
Thus, the Tax Court held, neither the petitioner (who advocated that all advances were loans) and the IRS (who advocated that all advances were gifts) were correct in their all-or-nothing approach. The Tax Court splits the difference and finds that until Peter became practically insolvent, Mary believed that there was a reasonable possibility of repayment, and the Tax Court uses this as the “objective measure of Mary’s intent.” Therefore, the Tax Court held, the transfers prior to 1990 were loans, and thereafter became gifts.Add to favorites