Are Gift Demand Loans of Tangible Property Subject to Gift Tax ?

Joseph M. Dodge, Florida State University

Abstract

The publicity surrounding a prominent political figure’s rent-free use of a portion of a friend’s house in Washington, D.C., has raised the issue of whether the rent-free use of tangible property is a gift for federal gift tax purposes. The 1984 case of Dickman v. Commissioner, 465 U.S. 330 (1984), involving an interest-free demand loan of money, intimated that such might be the case, but there has apparently been no effort by the IRS to enforce such a position. The federal gift tax will be the only federal transfer tax left standing if the estate tax and generation-skipping tax are repealed, and, even if these taxes survive in their present form, the gift tax will be increasingly prominent on account of the lower lifetime exemption of $1 million (compared to $3.5 million for the other taxes).

This article takes the position that rent-free demand loans of personal-use tangible property to relatives and friends should generally not be considered gifts for gift tax purposes. The article begins by dissecting Dickman and finding that its rationales are confused, ungrounded in gift tax doctrine, and disrespectful of the purpose of the gift tax to back up the estate and income taxes. Next, it is shown that demand loans of property are distinguishable from demand loans of money. Most gift demand loans of property are revocable transfers that do not convey any property interest to the donee, and have no potential to avoid estate tax or income tax. Additionally, the personal use of loaned property is not the equivalent of a cash distribution from a revocable trust. Finally, the focus on gift demand loans of personal-use property raises, and has implications for, the broader topic of gifts of consumption generally.