PLR 200603002
In general, if an individual makes a loan and, as part of a prearranged plan, intends to forgive or not collect on the note, the note will not be considered valuable consideration and the donor will have made a gift at the time of the loan to the full extent of the loan. See Rev. Rul. 77-299, 1977-2 C.B. 343; Maxwell v. Commissioner , 3 F.3d 591 (2 nd Cir. 1993); Deal v. Commissioner , 29 T.C. 730 (1958).
RR 77-299
. ***Thus, in the instant case, whether the transfer of property was a sale or a gift depends upon whether, as part of a prearranged plan, G intended to forgive the notes that were received when G transferred the property.
In the instant case, the facts clearly indicate that G, as part of a prearranged plan, intended to forgive the notes that were received in return for the transfer of G's land. Therefore, the transaction was merely a disguised gift rather than a bona fide sale.
RR 81-264
If an individual makes a loan and as part of a prearranged plan intends to forgive or not collect on the note, the note will not be considered valuable consideration and the promisee will have made a gift at the time of the loan to the full extent of the loan. Rev. Rul. 77-299, 1977-2 C.B. 343. If there was no such prearranged plan, but the promisee later forgives the debt, the promisee will have made a gift at the time of the forgiveness. The amount of the gift will equal the principal amount forgiven and the interest accrued to the date of the forgiveness. Section 25.2511-1 of the Gift Tax Regulations and Republic Petroleum Corp. v. United States, 397 F. Supp. 900 (E.D. La. 1975).
RR 81-286
For gift tax purposes, if a cash loan is made in a transaction that is not bona fide, at arm's length, and free from donative intent in exchange for a promissory note payable in a certain term, the promisee makes a completed gift in cash in the amount (if any) by which the amount of the loan exceeds the value of the promissory note on the date of the exchange. Section 2512(b) of the Code. This excess amount is the value of the right to use the money loaned. The right to use property, including money, is itself an interest in property, and the transfer of the interest is a gift for gift tax purposes. Rev. Rul. 73-61, 1973-1 C.B. 408. See Es tate of Berkman v. Commissioner, T.C.M. 1979-46.
RR 73-61
The tax in the instant case would be imposed on the value of the right to use the money. Such value is usually stated in terms of interest or some other equivalent in money or money's worth. The rate of interest that would represent full and adequate consideration may vary, depending upon the actual circumstances pertaining to the transaction. See Gertrude H. Blackburn v. Commissioner, 20 T.C. 204, (1953), which held that a taxable gift was made when a taxpayer sold a building to her children and received a note with interest payable at less than the usual local rate of interest on such transactions.