dissenting: Here, we have interest-free loans by the partnership in excess of $15 million and, if the gift is measured as suggested by the Commissioner, there is a gift in excess of $1 million. To conclude that such a transfer is not a taxable gift is inconsistent with the explicit terms of the statute, its intended scope as set forth in the legislative history, longstanding Treasury regulations, and the Supreme Court’s expansive interpretation of such provision. To hold that such a transfer is not a taxable gift also ignores economic reality. Nor is the Court correct in its assertion that the Commissioner’s attempt to impose the tax is unprecedented. With due respect to my colleagues, I must vigorously disagree with their conclusions.
Section 2511 broadly provides that the gift tax shall apply to any transfer "whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.” The present gift tax provisions were introduced in the Revenue Act of 1932, and the committee reports relating to those provisions declared:
The terms "property,” "transfer,” "gift,” and "indirectly” are used in the broadest and most comprehensive sense; the term "property” reaching every species of right or interest protected by law and having an exchangeable value.
The words "transfer * * * by gift” and "whether * * * direct or indirect” are designed to cover and comprehend all transactions (subject to certain express conditions and limitations) whereby, and to the extent * * * that, property or a property right is donatively passed to or conferred upon another, regardless of the means or the device employed in its accomplishment. * * * [H. Rept. No. 708, 72d Cong., 1st Sess. (1932), 1939-1 C.B. (Part 2) 457, 476; S. Rept. No. 665, 72d Cong., 1st Sess. (1932), 1939-1 C.B. (Part 2) 496, 524.]
In addition, section 2512(b) provides in part:
(b) Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift * * *
Though the statute and committee reports do not refer specifically to an interest-free loan, their language reveals that Congress intended to reach any gratuitous transfer of any interest in property and any gratuitous conferring of a benefit. There can be no doubt that the statutory definition includes the transfer of a privilege such as the one now before us; the privilege of using property or money certainly comes within the broad terms of the statute. Had the petitioner in this case arranged for the borrowers to obtain the money from financial institutions and agreed to pay the interest thereon, clearly, the payment of such interest would constitute a taxable gift. Here, we do not know how the petitioner obtained the funds, but irrespective of how the funds were obtained, the transfer of the privilege of using such funds is the making of a gift if adequate consideration is not paid for such transfer.
The relevant regulations are equally expansive in their scope and provide in part:
Transfers reached by the gift tax are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money’s worth of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. * * * [Sec. 25.2512-8, Gift Tax Regs.]
The Supreme Court in Commissioner v. Wemyss, 324 U.S. 303 (1945), held that when an individual made a transfer to his prospective wife to compensate her for trust income she would lose upon their marriage, such transfer was a taxable gift even though it was not motivated by donative intent. In reaching its conclusion, the Supreme Court stated at pages 306-307:
To reinforce the evident desire of Congress to hit all the protean arrangements which -the wit of man can devise that are not business transactions within the meaning of ordinary speech, the Treasury Regulations make clear that no genuine business transaction comes within the purport of the gift tax by excluding "a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent).” Thus on finding that a transfer in the circumstances of a particular case is not made in the ordinary course of business, the transfer becomes subject to the gift tax to the extent that it is not made "for an adequate and full consideration in money or money’s worth.” * * * [Citations omitted; emphasis in original.]
There is no claim in this case that the loans were made in the ordinary course of business, nor is there any basis for such a claim; thus, under sec. 2512(b), under sec. 25.2512-8, Gift Tax Regs., and under Wemyss, the only question is whether the value of the property transferred exceeded the value of the consideration furnished, and if so, the excess is the amount of the taxable gift. It is well established that in valuing the property exchanged, we are to use "the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.” Sec. 25.2512-1, Gift Tax Regs. There is no doubt that when a loan is made interest free or at a rate of interest below the prevailing rate for such a loan, an even exchange has not taken place. For example, if $100 is loaned for 1 year interest free when the prevailing interest rate for such a loan is 6 percent, the present value of the promise to repay such loan in 1 year is worth less than $100; on the marketplace, an informed buyer would only be willing to pay approximately $94 for the right to receive $100 a year later. In such a case, the amount transferred is $100, but the consideration received for it is only $94. There has been a gift of $6.
Such an approach has been recognized and adopted in Gertrude H. Blackburn, 20 T.C. 204 (1953). In that case, the petitioner transferred to her children property with a fair market value of $245,000 in exchange for a secured promissory note in the amount of $172,517.65, bearing interest at 2VÍ percent per annum. At that time, the usual rate of interest for a similarly secured note was 4 percent. Payments of $600 per month were to be made for 34 years and 6 months. There was no dispute that the transaction was part gift and part sale; but the petitioner contended that the amount of the gift was limited to the difference between the value of the property and the face amount of the note. On the other hand, the Commissioner argued, and the Court agreed, that the note was not worth its face value. It was worth only its discounted value, and since the interest charged was below the usual rate, the difference in such rates reduced the value of the note by approximately $40,000. We held that such amount represented part of the taxable gift made by the petitioner.
The principle of the Blackburn case is equally applicable herein, and the facts are virtually identical; the only difference is that in Blackburn, some interest was charged, while in this case, no interest was charged. However, such a difference is without any legal significance in determining whether there is a gift; the face amount of the note is to be discounted by the difference between the going rate of interest and that provided for in the note, irrespective of whether the amount set forth in the note is zero or some other amount.
The same approach has been applied in those cases involving members of a family exchanging property for an annuity. See Estate of Koert Bartman, 10 T.C. 1073 (1948); Estate of Sarah A. Bergan, 1 T.C. 543 (1943). In such cases, it was held that the present value of the annuity was to be computed and that if the value of the property exceeded the present value of the annuity, there was a taxable gift. The conclusion of the Court in this case has ignored the holdings in Blackburn, Bartman, and Bergan.
In those cases, the obligation was to be paid over a predetermined period of time, whereas in the present case, we have demand notes. Such a factual difference does raise an additional problem, but it does not alter the result. In the case of a demand note, it is impossible to determine the discounted value of the promise to repay since the time of repayment cannot be forecast. Yet, even though the discounted value of a demand note cannot be ascertained, the privilege of using the borrowed funds interest free is nonetheless valuable. The difference in facts means merely that we must find a different means for measuring the value of such privilege, and we are satisfied that the method used by the Commissioner is reasonable. Instead of valuing the obligation for repayment at the time of its creation, we wait until the money has been used for some period of time and then measure the value of such use.
Finally, we have recognized that the privilege of using property without charge may be treated as a charitable contribution for income tax purposes. Thriftimart, Inc., 59 T.C. 598, 615 (1973), remanded on other issues by order (9th Cir. 1975); John G. Allen, 57 T.C. 12, 13 (1971); Priscilla M. Sullivan, 16 T.C. 228, 231 (1951); Hubert Rutland, T. C. Memo. 1977-8. If a transfer of such privilege may be the subject of a charitable deduction, it surely may also be a taxable gift.
The majority of the Court relies heavily on the decision in Johnson v. United States, 254 F.Supp. 73 (N.D. Tex. 1966). Both the majority of this Court and the District Court assumed that when a loan is made interest free, there is no depletion of the estate, and for that reason, there was no reason to impose the gift tax. However, the assumption is not well grounded. If an individual makes a loan for 1 year and receives a note calling merely for the repayment of the principal, and if such individual then dies, the amount includable in his estate is the discounted value of the note, which is less than the amount transferred by the decedent. Furthermore, the District Court in Johnson utterly failed to apply the definition of gift set forth in the statute and the regulations and embraced by the Supreme Court in Wemyss.
Nor does our decision in J. Simpson Dean, 35 T.C. 1083 (1961), support the majority’s conclusion in this case. In that case, we did not hold that the interest-free loans failed to produce income; it was merely held that such loans did not result in. taxable income since it was assumed that there would be deductions to offset any income.
The majority’s conclusion also rests on the grounds that the Commissioner is now adopting a new interpretation of the gift tax provisions and that his proposed interpretation will have widespread ramifications and create administrative problems. However, such considerations do not justify the majority’s conclusion. It is well settled that the Commissioner may, even retroactively, change an earlier incorrect interpretation of the law applied by him. Dixon v. United States, 381 U.S. 68 (1965); Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957). It is not altogether certain that the interpretation urged by the Commissioner in this case is entirely new, but even if it is, he is certainly free to correct his prior mistakes and apply the gift tax to those transactions coming within the statutory definition. Though the majority is shocked by the consequences of applying the law to some family transfers, they overlook the fact that this case involves not the usual family transfer, but over $15 million. Furthermore, many of the family transfers to which the majority refers would not be subject to tax because of the annual exclusion of section 2503(b). The statute clearly shows that Congress desired a broad application of it, and if an application of the statute as written produces questionable results, those situations should be brought to the attention of Congress. Cf. Commissioner v. Hart, 106 F.2d 269, 271 (3d Cir. 1939), remanding on another ground 36 B.T.A. 1207 (1937). There is no reason to believe that a transfer of the magnitude involved in this case should avoid the gift tax.
Raum, Tannenwald, and Wilbur, JJ., agree with this dissent.