Decision will be entered under Rule 50.
In 1947, petitioner transferred to her two children real property in the city of Amarillo, Texas, having a fair market value of $ 245,000. She received from her children in part consideration for the transfer a note in the face amount of $ 172,527.65, secured by a mortgage upon the property. The note bore interest at the rate of 2 1/4 per cent per annum and was payable in monthly installments of $ 600, payable over a period of 34 years and 6 months. The usual rate of interest charged on real estate mortgage loans in Amarillo at the time of this transaction was 4 per cent per annum. Held, the fair market value of the note at the time it was received was $ 134,538.30. Held, further, the amount of the gift which petitioner made to her two children by such transfer was the difference between $ 245,000, the fair market value of the property, and $ 134,538.30, the fair market value of the note which the children gave her as part consideration for the property.
*204 The Commissioner determined a deficiency of $ 23,360.21 in petitioner's gift *179 tax for the calendar year 1947. The deficiency was based on a determination by the Commissioner that the gift of the property involved to petitioner's son and daughter was a gift of future interests, subject to a life estate in the property. The petitioner contends that the transaction constituted a bona fide sale which was a bargain purchase on the part of the children, and that the amount of the gift is the difference between the value of the property at the time of transfer and the face amount of the installment note given by the children to their mother. The respondent now concedes that the transaction involved herein is not a gift of future interests.
In the alternative, respondent contends that the fair market value of the note dated December 31, 1947, was not in excess of $ 134,538.30 and has amended his answer accordingly. The parties have agreed that the fair market value of the property involved on December 31, 1947, was $ 245,000. Respondent's position, therefore, is that the amount of the gift is $ 110,461.70, the difference between the value of the property and the consideration received for it.
The petitioner now contends that the value of the gift is the difference *180 between $ 245,000, the stipulated value of the property transferred, and the face value of the note which petitioner received from her children, $ 172,527.65. Petitioner contends that this note was worth its face value and should not be discounted. Thus, the issue here involves the valuation of the aforesaid note, whether its value was $ 134,538.30 or $ 172,527.65.
*205 FINDINGS OF FACT.
Some of the facts were stipulated and are found as stipulated.
Petitioner, who was on December 31, 1947, 62 years of age, is a widow residing in the city of Amarillo, Texas. Petitioner filed her gift tax return for the year 1947 with the collector for the second district of Texas.
Prior to December 31, 1947, the date of the gift, petitioner was the owner of Lots 11 and 12, Block 80 of Plemons Addition in the city of Amarillo, Texas. On these lots was located an office and store building known as the Blackburn Building. Petitioner's adjusted basis for this property on December 31, 1947, was $ 172,517.65.
On December 31, 1947, Gertrude H. Blackburn executed and delivered a general warranty deed transferring the foregoing described property to Calvin Henry Blackburn and Marjorie Norene Lane, adult son and *181 daughter of the grantor. These two persons were the only children of Gertrude H. Blackburn. As a part of this same transaction, the grantees executed and delivered to petitioner a certain promissory note in the principal amount of $ 172,517.65. As security for this note the grantees executed a deed of trust covering the property transferred by warranty deed. On her income tax return for the year 1947, petitioner reported a consideration of $ 172,517.65 received for the transfer of the real property. In addition, petitioner filed a gift tax return showing gifts to the grantees of $ 52,482.34 by reason of the transfer. This amount was so computed on the gift tax return by placing a fair market value of $ 225,000 on the real property, with this value reduced by the face amount of the note.
On December 31, 1947, in Amarillo, Texas, the usual rate of interest charged on real estate mortgage loans to individuals, amply secured by commercial real estate similar to the property securing the loan in this proceeding, was 4 per cent per annum. The note executed by Calvin Henry Blackburn and Marjorie Norene Lane provided for an interest rate of 2 1/4 per cent per annum and contained the following *182 provision:
The principal and interest of this note is payable in monthly installments of $ 600.00 each, the first installment being due and payable on or before the first day of February, 1948 and a like installment of $ 600.00 being due and payable on or before the first day of each succeeding month thereafter until the whole principal sum and all interest has been paid, each installment first to be applied to the monthly accrued interest on the unpaid balance, and the balance to principal, and all past due interest and principal shall bear interest from maturity at the rate of ten percent per annum.
An amortization schedule introduced in evidence shows that the note executed by Calvin Henry Blackburn and Marjorie Norene Lane at the time it was taken would run according to its terms for a period *206 of 414 months, or 34 years and 6 months. Evidence in the record establishes that there was due to be paid in interest and principal under the note and mortgage during its life, $ 248,108.44. Evidence in the record establishes the fact that $ 134,538.30 invested at 4 per cent payable $ 600 per month over 414 months would require total payments of $ 248,108.27.
Just prior to November 1951, Calvin *183 H. Blackburn and his sister Marjorie Norene Lane made application to the Southwestern Life Insurance Company for a loan of approximately $ 135,000 for the purpose of paying the balance due on their indebtedness to their mother, the petitioner herein. The loan was granted and bore interest at the rate of 4 1/2 per cent per annum for a period of 15 years, with monthly payments of $ 1,032.25. Southwestern Life Insurance Company paid the proceeds to petitioner on the balance due on the note in question, except $ 24,000 which was withheld pending the outcome of this tax litigation.
The fair market value of the note which petitioner received from her two children at the time of transfer was $ 134,538.30.
OPINION.
Originally the Commissioner determined a deficiency in petitioner's gift tax for the year 1947 of $ 23,360.21. He based his determination on a holding that the gifts which petitioner made to her two children on December 31, 1947, were of future interests in property subject to a life estate reserved in petitioner and that petitioner was not entitled to any exclusions of $ 3,000 each. The Commissioner now concedes that he was in error in this determination and that whatever gifts *184 there were to the two children in the transfer of the property in question were gifts of present interest and that petitioned is entitled to two exclusions of $ 3,000 each. Respondent, however, amended his answer at the hearing so as to contend that the fair market value of the note having a face value of $ 172,517.65, received by petitioner in consideration for the transfer of the property, was not in excess of $ 134,538.30. Respondent, therefore, now contends that the amount of the gift which petitioner made to her two children on December 31, 1947, was $ 110,461.30, instead of $ 165,314.95 which was determined in his deficiency notice.
On her gift tax return petitioner reported a value of $ 52,482.34. Petitioner now contends on her part that the amount of the gift was $ 72,482.35 which represents the difference between $ 245,000, the agreed value of the property, and $ 172,517.65, the face value of the note.
Thus it will be seen that the only issue now between the parties is as to the value of the note which petitioner received in partial consideration from her children for the transfer of the property in question. *207 The applicable statute and Regulations are printed in the margin. *185 1*186
As we have already stated, petitioner contends that the note which petitioner received from her two children had a fair market value equal to its face value of $ 172,517.65. Respondent contends that the note had a fair market value of not more than $ 134,538.30. This represents the point of difference between the parties. Respondent bases his contention upon the fact that the note bore interest at only 2 1/4 per cent per annum, whereas the usual rate of interest charged on real estate mortgage loans to individuals, amply secured by commercial real estate similar to the property securing the loan in this proceeding, was 4 per cent per annum in the city of Amarillo. Applying this factor, respondent contends that the note in question had a fair market value of $ 134,538.30 on the date it was received. We think respondent must be sustained in this contention. It seems to us that it would be unrealistic for us to hold that a note with a face value of $ 172,517.65, *187 bearing interest only at the rate of 2 1/4 per cent per annum and having 34 1/2 years to run, had a fair market value on the date of its receipt equal to its face value. Undoubtedly, petitioner was fully justified in believing that the note would be paid in full according to its terms, but that factor alone does not determine the fair market value of a note. Other factors such as the rate of interest which the note bears and the length of maturity must be considered.
After a careful consideration of all the evidence we have concluded that the note, secured by the mortgage, had a fair market value of $ 134,538.30 at the time it was received by petitioner on December 31, 1947. That figure should be used in a computation of petitioner's gift tax arising from the gift which she made to her two children on December 31, 1947.
Decision will be entered under Rule 50.
Footnotes
1. Internal Revenue Code.
SEC. 1002. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.
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, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.
Regulations 108.
Sec. 86.8 Transfers for a Consideration in Money or Money's Worth. -- Transfers reached by the statute 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 in money or money's worth to the extent that the value of the property transferred by the donor exceeds the value 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. A consideration not reducible to a money value, as love and affection, promise of marriage, etc., is to be wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift.