*99 Decision will be entered under Rule 50.
Intrafamily transfer by a nonresident alien of real property situated in the United States in return for a note secured by a mortgage, the face amount of which was less than the fair market value of the property, held, on the facts, to constitute a gift of an interest in property situated in the United States; held, further, gifts of cash abroad sufficient to retire the note, made without prearrangement in a later year, were not gifts of property situated in the United States.
*525 Respondent has determined deficiences in gift tax against Geoffrey C. Davies on account of transfers of property of T. Clive Davies as follows:
| Year | Deficiency |
| 1950 | $ 12,480 |
| 1951 | 12,480 |
Petitioner concedes his liability for any gift tax due. The issues remaining for decision are (1) whether real property situated within the United States was transferred by a nonresident alien directly or indirectly by gift; and, if so, (2) whether this transfer by gift was accomplished in either 1950 or 1951 or partially in *100 each of the years in issue.
FINDINGS OF FACT
The stipulated facts are hereby found accordingly.
Petitioner, a British subject, has resided in Honolulu, Hawaii, for many years. During the years in issue, petitioner was the British *526 consul in Hawaii and an employee of and stockholder in Theo. H. Davies & Co., Ltd. (hereinafter called the company). Petitioner's grandfather, Theo. H. Davies (hereinafter called grandfather), acquired control of the company in the early 1870's.
Petitioner's father, T. Clive Davies, was a British subject and a resident of England during the years here in issue. He was born on September 28, 1871, and died on November 16, 1952.
Property consisting of 12.92 acres of land and improvements thereon in Honolulu, Hawaii (hereinafter called Craigside), had been acquired by the grandfather toward the end of the 19th century. This property was devised in the grandfather's will to that member of the family who was in Hawaii working for the company. Two of the grandfather's sons, petitioner's father and an uncle, were living in Hawaii and working for the company at the time of the grandfather's death. The two sons reached an agreement that petitioner's *101 father would take Craigside.
Petitioner's father continuously owned Craigside from the time of that agreement up to the years in issue. He was a permanent resident of Craigside until 1922, and after that time he continued to spend 2 to 3 months at Craigside every 2 or 3 years.
Craigside was regarded as the family home in Honolulu. Petitioner's only brother, who was killed in September 1941 during the Second World War, occupied Craigside until some time in 1940. Petitioner and his family occupied it rent-free from some time in 1946 until petitioner acquired it from his father. During this period the father paid all of the costs of maintaining the property, including taxes, sewer assessments, and the cost of a yardman to maintain the grounds.
While petitioner was visiting England in the late summer and early fall of 1949, he and his father had several discussions concerning Craigside. Petitioner's father expressed his desire to retain Craigside in the family and he manifested concern with the British exchange control regulations and the increasing cost of maintaining Craigside.
During the time that petitioner's father owned Craigside, the maintenance costs were paid by the company*102 and charged to the father's account. The balance in this account would be offset by quarterly dividends on the 3,000 shares of the company owned by petitioner's father. Petitioner's father indicated that he was limited in the amount of dollars he was allowed to spend by the British exchange control regulations requiring all dollar income to be remitted to England. Despite permission to withhold an amount for upkeep of Craigside, petitioner's father stated that he was having difficulty in meeting the rising costs and, for this reason, he wanted to transfer ownership to petitioner. He stated that he wanted to sell Craigside because he *527 did not want to involve himself with gift tax in the United States, since he did not think he could get a license for the dollars to pay United States gift taxes.
During the conversations in 1949 regarding the possible sale of Craigside, petitioner's father stated to petitioner that he understood that any cash gifts made by him to petitioner would be included in his taxable estate and subject to British estate duty if he died within 5 years of the gift. At that time the father was 78 years of age. There was no currency problem in paying*103 British estate duty.
During these discussions, petitioner pointed out that he would have difficulty in financing the purchase. His father indicated his willingness to take a note and mortgage for a portion of the purchase price. Petitioner further stated that he did not have the cash available to make the downpayment. His father thereupon assured him that he would make a cash gift to him in pounds sterling of an amount sufficient to cover the downpayment and further indicated that he would, if he possibly could, help petitioner to pay off the note. Petitioner agreed to obligate himself in this way and told his father that when it became necessary to finance the note himself he probably would be able to raise the cash by using as security the land and petitioner's holdings in the company.
Following these discussions in England, petitioner returned to Honolulu and, at his father's request, obtained and sent to his father an appraisal dated December 16, 1949, in which it was stated that $ 88,500 was the then "fair and reasonable market value" of Craigside. On September 15, 1950, petitioner's father wrote to him as follows:
I have agreed to sell to you Craigside, comprising the buildings, *104 easements, and about thirteen acres of land, for the sterling equivalent of $ 88,500.00; or such other value as is set by the Revenue Authority. Payment is to be made £ 5000 in cash and the balance of, say, $ 74,500. by a note, secured by mortgage of the property, payable in one year from date, with interest at 2 1/2%.
I hope that you will enjoy as happy a life in this family homestead as has been my lot.
On September 23, 1950, petitioner's father deposited a sterling check of £ 5,000 to petitioner's sterling account at the Westminster Bank, Ltd., Petersfield, Hants, England (hereinafter called the bank). Petitioner's understanding with his father was that this would be the source of the downpayment for Craigside.
On October 4, 1950, petitioner sent the following letter to his father:
I am pleased that you are willing to sell me "Craigside" for the sum of £ 31,500-0-0d, payable £ 5,000 in cash and the balance of £ 26,500 by a note secured by mortgage of the property, payable one year from date, with interest at 2 1/2% per annum.
I have had Smith, Wild, Beebe & Cades prepare a Deed of the property, which I am sending to be signed by you and Mother. Please return the original and*105 one signed copy to Smith, Wild, Beebe & Cades.
*528 I also send you my check drawn on the Westminster Bank, Limited, in Petersfield for the amount of £ 5,000., and Note for the balance of £ 26,500. I have not dated the Note, but I would appreciate it if you will fill in the blank space with the same date as the Deed.
I have executed a Mortgage securing the Note, a copy of which I send you herewith. The original and copies which I have signed are being held by Smith, Wild, Beebe and Cades, to be filed in the Office of the Assistant-Registrar of the Land Court at the time that the signed Deed is returned and likewise filed.
Arthur Smith showed me a sketch prepared by you, of an area which you wanted to acquire from Iolani School Corporation to round out your present area at "Craigside", and he tells me that you have had this in mind for many years. He also states that he has notified the Iolani Officers that if the school ever disposes of its Nuuanu property, it should sell you the portion indicated on your sketch at the same rate per acre at which you sold the entire tract to the Church. If I am able to acquire all or any part of this area I shall, of course, expect to include*106 it in my mortgage to you by a supplemental document.
Mr. Smith also tells me that the enclosed copy of the Mortgage is in the form of a "Purchase Money Mortgage" generally used by the Banks and Trust Companies in Hawaii.
You desire me to turn the Mortgage and Certificate of Title over to Theo. H. Davies & Company, Limited, for safe-keeping, after the same are returned from the Land Court registration office. I shall do this.
The deed to Craigside was executed by petitioner's father and mother in England on October 12, 1950, and registered in the Office of the Assistant Registrar, Land court, Honolulu, on November 17, 1950, at 12:10 p.m., and the purchase money mortgage which petitioner and his wife had signed on October 4, 1950, was marked "made this 12th day of October 1950" and registered on November 17, 1950, at 12:11 p.m. The note for the unpaid balance of the agreed purchase provided as follows:
ON OR BEFORE one (1) year from the date hereof, for value received, I, GEOFFREY CLIVE DAVIES, promise to pay to the order of THEOPHILUS CLIVE DAVIES, at Hawkley Hurst, Hampshire, England, TWENTY-SIX THOUSAND FIVE HUNDRED POUNDS STERLING (£ 26,500-0-0d) with interest thereon at the rate*107 of two and one-half per cent (2 1/2%) per annum from the date hereof.
The note was originally dated October 4, 1950. Petitioner's father, upon petitioner's direction, changed the date to October 12, 1950, to coincide with the date of the deed.
The balance of the note, £ 26,500, was paid in the following manner: Petitioner's father, who also had an account with the bank, would deposit an amount in petitioner's account. As soon as the bank notified petitioner of the deposit, he would make a payment to his father by sterling check drawn against this account of an equivalent amount to be applied against the principal of the note. After receiving notification of each individual deposit, petitioner did not make any inquiries *529 of his father as to the possibility of any further deposits. The dates and amounts of these transactions were as follows:
| Deposit to | Payment to | |
| Amount | petitioner's | father |
| account | ||
| £ 5,000 | Jan. 10, 1951 | Jan. 17, 1951 |
| £ 5,000 | Feb. 10, 1951 | Feb. 17, 1951 |
| £ 5,000 | Mar. 10, 1951 | Mar. 20, 1951 |
| £ 5,000 | Apr. 10, 1951 | Apr. 16, 1951 |
| £ 5,000 | May 10, 1951 | May 18, 1951 |
| £ 1,500 | June 12, 1951 | June 25, 1951 |
No interest was paid on the note. With *108 the exception of these transactions, petitioner's balance in the bank never exceeded £ 100.
Petitioner was surprised that his father acted so promptly in helping him solve his financial problem. Petitioner's salary from the company during this time was approximately $ 8,000 a year and he had annual dividend income of $ 6,000 on his company stock. He held 600 shares of the company's stock which had a value during the years in issue of approximately $ 135 or $ 140 a share, a total value of $ 81,000 to $ 84,000. The company's stock paid approximately $ 10 a share in each of the years 1950 and 1951. Had he not received the payments from his father, petitioner had expected to pay off the note at maturity by borrowing money at a bank, using Craigside and his stock in the company as security.
On June 25, 1951, petitioner's father inscribed and signed on petitioner's note the following endorsement: "The within note has been settled in full this twenty-fifth day of June 1951." On July 18, 1951, petitioner's father executed a release of petitioner's purchase money mortgage, which release was registered in the Office of the Assistant Registrar, Land court, Honolulu, on August 23, 1951, at*109 9:10 a.m.
Petitioner's father made gifts to his children and grandchildren both before and after 1950. He left a gross estate after his death in November 1952 in excess of $ 1,350,000 and a net estate in excess of $ 1 million. His estate paid, in dollars, approximately $ 200,000 in U.S. Federal estate taxes. The estate was required to receive permission from the Bank of England to sell assets of the estate, pay the tax to the United States in dollars, and remit the remainder of the proceeds to Great Britain. Petitioner's father's assets were substantially the same in 1950 as in 1952 except for the effects, if any, of inflation.
In the original British estate duty return for the father's estate, a cash gift of £ 26,000 to petitioner on October 12, 1950, was included in answer to the question, "Did the deceased make any gift or gifts of money or other property within five years of his death?" In the summer of 1961, an amendment was made to the estate duty return to correct *530 this and reflect the proper amount of the series of cash gifts, totaling £ 31,500. The estate duty resulting from the correction of the error and the increase of the net estate by £ 5,500 was paid by*110 petitioner.
In his deficiency notice, respondent determined for 1950 "that the transfer of residential property * * * made by [petitioner's father] to his son * * * on or about October 12, 1950, represented a taxable gift to the extent of the fair market value of such property of $ 88,500.00" and for 1951 that "In the event that it should be held that the transfer of residential property * * * did not constitute a completed gift in the year 1950, then it is determined, in the alternative, that a taxable gift was made in the year 1951 to the extent of the fair market value of such property of $ 88,500.00."
OPINION
There is no dispute as to the making of a gift to petitioner by his father, nor as to the valuation of any gift that was made. The parties are in disagreement only as to what it was that constituted the subject matter of the gift, and, incidentally, perhaps as to the year of its occurrence. Ordinarily it would be of no consequence that a gift was in cash rather than property where the value is concededly the same. The issue arises here because the donor was a nonresident alien and if cash gifts were made in the country of his domicile they would not be subject to U.S.*111 gift tax, whereas the real property involved was situated in U.S. territory and any gift of that character carries with it a liability for Federal gift tax. "The [gift] tax * * * in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States." Sec. 1000(b), I.R.C. 1939.
It seems to us clear that an interest in Craigside, the family estate situated in Honolulu, was given to petitioner. He received the downpayment from the donor before any "sale" on the express condition that it be used for that purpose. It makes little difference whether we say that Craigside, a property with an agreed value of about $ 88,000, was turned over to petitioner upon his undertaking to pay some $ 74,000 for it and hence that the transfer was for less than full and adequate consideration; 1 or that a gift of an equity in Craigside of a value of approximately $ 15,000 was completed by the delivery to *531 petitioner of a deed in exchange solely for his purchase money mortgage of $ 74,000 or so. See Estate of Koert Bartman, 10 T.C. 1073">10 T.C. 1073, 1079 (1948); Gertrude H. Blackburn, 20 T.C. 204">20 T.C. 204 (1953).*112 On any approach, we think there can be no question that a gift of an interest in real property in the United States was made to petitioner in 1950 by his father on the facts affirmatively appearing from the record.
Respondent would have us go further and characterize, as the gift of an interest in the same property, the cash which the donor subsequently made available to petitioner and with which he paid off the purchase money mortgage. But we cannot go so far. The transfers to petitioner's credit were made in pounds sterling in Britain. They were not conditioned, as was the downpayment, *113 upon their use in any specified manner. Nor were they agreed to as part of the original transaction by either petitioner or the donor in the way that the original downpayment was treated. They did not fulfill any prearranged plan or commitment, see Nathan R. Allen, 38 B.T.A. 160">38 B.T.A. 160 (1938); Rev. Rul. 58-261, 1 C.B. 143">1958-1 C.B. 143, as respondent apparently concedes. 2 "The fact that * * * [the seller] may have given * * * [the purchasers] money with which the * * * [payments] were made does not defeat the sales so long as the gifts were free and unencumbered and the money belonged to * * * [the purchasers] to do with as they pleased." Cap Andrew Tilles, 38 B.T.A. 545">38 B.T.A. 545, 547 (1938), affd. 113 F.2d 907">113 F.2d 907 (C.A. 8, 1940), certiorari denied 311 U.S. 703">311 U.S. 703.
*114 We conclude that these subsequent transfers were no more than cash gifts of English funds which took place in Britain. That the donor may have hoped and, indeed, expected that they would be used to clear the encumbrance on the property does not succeed in elevating the transaction to the dignity of a transfer of the real property itself any more than would be the case if the mortgage had been held by a third person.
Respondent's reference to the series of transfers in pounds sterling as the attribute which is relied on by petitioner to prevent the transaction from being a gift is wide of the mark. What removed it from the category of gifts, except to the extent of the downpayment, was petitioner's valid, enforceable, and subsisting agreement to pay for the property and the effectuation of that agreement by the execution and recording of the purchase money mortgage.
The fact that * * * [the donor] indicated he would probably not collect on the note and would cancel portions of it from time to time if business conditions continued to be good, and the fact that the officers and incorporators of * * * *532 [the donee] did not think they would be called upon to pay the note, do*115 not support a conclusion that * * * [the donor] intended to make a completed gift * * *.
* * * The * * * [note], on * * * [its face], evidenced a binding obligation to pay a sum certain, and there is no evidence to conclude that * * * [it was] without consideration, invalid, unreal, or otherwise than what * * * [it] purported to be * * *. The mere fact that the original payee indicated he might or might not attempt to collect on the * * * [note], or that he might forgive all or portions of * * * [it] in the future, makes the * * * [note] no less * * * [a] binding * * * [obligation] until the events occurred which would relieve the obligation.
Nelson Story III, 38 T.C. 936">38 T.C. 936, 941-942 (1962).
We intimate no opinion as to what would have been the effect of a gratuitous subsequent forgiveness of this mortgage and the accompanying obligation to pay. That is not what occurred. Whether there would otherwise have ensued a gift of real property in the United States as opposed to British funds in England, we need hence not consider on this record. Cf. Nelson Story III, supra.
The lack of any prior plan or arrangement serves to*116 distinguish this case from Minnie E. Deal, 29 T.C. 730">29 T.C. 730, 737 (1958), Marie-Anne De Goldschmidt-Rothschild, 9 T.C. 325">9 T.C. 325 (1947), affd. 168 F.2d 975">168 F.2d 975 (C.A. 2, 1948), and John E. Andrus, Jr., 15 B.T.A. 479">15 B.T.A. 479, 482 (1929), revd. 50 F.2d 332">50 F.2d 332 (C.A.D.C. 1931).
Except to the extent of the value of the downpayment or equity in Craigside transferred in 1950, we accordingly regard respondent's determinations as erroneous.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 1002 [I.R.C. 1939]. 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.↩
2. Respondent says in his brief: "[Petitioner] * * * apparently seeks to substitute * * * arguments such as that 'the father was under no commitment, legal or moral, to make * * * deposits to petitioner's account.' Of course that is true, but it is only true to the same extent, and with the same irrelevancy, as is the fact that the father was under no commitment to make the gift of Craigside which he did make * * *."↩