ADVENTURES IN FORGIVENESS AND FORGETFULNESS, PART 2: INTRA-FAMILY SALES FOR BEGINNERS

By Philip J. Hayes, Esq.^*

I. INTRODUCTION

Part 1 of this article, published in the preceding issue of the California Trusts and Estates Quarterly, discussed intra-family loans, the history of judicial and Congressional treatment of below-market loans, avoiding below-market loan status under Internal Revenue Code section 7872, and quantifying the damage if a loan is deemed below-market. No article about intra-family loans is complete, however, unless it also addresses loans in the context of sales transactions, which adds a sometimes inscrutable layer of complexity to the relatively straightforward loan rules. Thus we present Part 2, the abstract counterpart to intra-family loans: intra-family sales.

As we learned in Part 1, Section 7872¹ is complicated, and, in practice, often ignored. The complexity is exacerbated in sales transactions, which implicate both the income tax and gift tax safe harbor of section 7872 and the overlapping income tax (and gift tax?) safe harbors of Sections 483 and 1274 governing installment sales. Focusing on Section 7872, Part 1 dwelled on structuring loans to avoid imputed income tax and gift tax liabilities. This article will mainly try to sort out which rules will apply to a particular transaction—whether Section 7872, or its income tax counterparts Sections 483 and 1274, or both—and will focus on utilizing the proper interest rate and terms to avoid imputed income. Where the concern with Section 7872 intra-family gift loans is mainly with avoiding imputed income and an imputed gift, additional concerns with sales transactions are the characterization of payments received by the lender, and the timing of recognition.