The article Revisiting Dickman: Are Loans of Tangible Property Gifts? by Joseph M. Dodge, recently posted on SSRN, exhaustively covers this central question left unanswered by the Supreme Court in its 1984 Dickman decision. Dodge describes a common scenario in wealthy families: informally, parents allow their adult child to use their vacation home rent-free for an unspecified time. The piece then delves into the query about whether or not that familiar occurrence is a taxable gift. To answer that question, the article takes the reader into a wide-ranging discussion that includes property interests, imputed income, psychic benefits, Internal Revenue Code section 7872 (dealing with gift tax and income tax consequences of below-market interest loans of money), revocable transfers, and the estate tax consequences of the retained enjoyment of property.
Dodge argues against subjecting tangible personal use property to the gift tax. After all, he suggests, when you swim in a neighbor’s pool, that neighbor has not transferred a property interest to you. The permission to use property does not create a property interest in the user because it implicitly includes the power to revoke that permission. Dodge analyzes Dickman, criticizing the court’s minimizing the real problem of cost-free loans of personal-use tangible property when it stated that the IRS was not interested in taxing such neighborly or familial gifts. The court too easily dismisses the issue by saying that, in any event, the annual exclusion and credit exemptions would shelter those transactions from any transfer tax. He critiques the court’s overgeneralizations and explains that the gift tax is not a tax on foregone economic opportunities but a tax on wealth transfers. Moreover, he states that the annual exclusion would not be available if a transaction was characterized as forming a tenancy at will plus a reversion, because there would be no ascertainable present value of the child’s interest. After examining the case under different transfer tax principles, Dodge concludes that Dickman was doctrinally confused and wrongly decided.
Indeed, Dodge wishes that the court had not chosen to decide Dickman, because Congress was already working on Internal Revenue Code section 7872, which provides a statutory imputed cross payment approach. Dodge considers that provision to be the best unified solution to both the gift and income tax issues in the case; in addition, he contends that it correctly does not apply to the rent-free use of tangible personal-use property. Dodge does not believe that Dickman should be extended to his hypothetical scenario because in allowing such cost-free personal use of the parents’ vacation home, there is no property transfer (generally such event would not constitute even a tenancy at will); alternatively, if there is a property transfer, the transfer is incomplete because of the retained power to revoke. Further, it lacks value and has no tax avoidance potential.
When Dodge focuses on the policy issue of whether or not such loaned use of personal use property can have the effect of transfer tax avoidance, he asks whether or not by making their vacation home available to their adult child, the parents are diminishing their estate and he concludes that they are not. It is axiomatic that a gift of services is not subject to transfer tax because there is no diminution of the transferor’s estate. According to Dodge, a loan of tangible personal use property likewise does not result in a transfer of wealth. While the recipient receives something of value, the property owner has not thereby reduced his assets.
Moreover, although the gift tax is sometimes described as a backup to the income tax, according to Dodge, there is no danger of income tax abuse by shifting income to the property owner’s child. In this factual setting, the child would lack the right to rent the property to another so that any rental income derived by illegally renting the property would belong to the owner. Dodge acknowledges that it is reasonable for the income tax, an annual tax incorporating the concept of realization, to tax interest-free loans of money. However, he considers it unsound for the gift tax to tax a child’s rent-free use of a vacation home because the gift tax is imposed once, only at the time of a completed gift of a property interest.
Dodge concludes by distinguishing between a gift term loan of tangible property and gift demand loan of similar property in a non-commercial context. He explains that a gift term loan is a taxable gift that should be taxed and valued under the applicable Code section depending on whether the gift is made to a family member, to a non-related individual, or to a charity. A gift demand loan to an individual, by contrast, should not be subject to gift tax because there is no property transfer, there is an incomplete gift, Dickman does not provide a basis to extend its holding to this activity, or it represents only a consumption or quasi-support benefit given to third parties.
Dodge’s article is imaginative, insightful, and very well written. It is a must read. How often you find an article that teaches you an incredible amount about transfer taxes, and at the same time provides a piercing review of one of the most revolutionary and recent Supreme Court pronouncements in the gift tax and income tax areas?
