Estate of Bolles v. Comm’r, T.C. Memo. 2020-71 | June 1, 2020 | Goeke J. | Dkt. No. 4803-15
Short Summary: Petitioner sought a determination that advances from the decedent to her son were loans.
Key Issue: Whether advances made by the decedent to her son were loans despite the lack of any loan agreements or attempts to force repayment.
- Certain advances to the son were not loans because the evidence demonstrated that the son’s financial situation and employment history did not warrant a conclusion that the decedent truly expected repayment. But advances made to the son while his financial situation was more favorable were loans because the decedent could expect repayment based on the son’s improved financial condition.
Key Points of Law:
- Generally, a court applies the following nine factors to determine if an advance is a gift or a loan: (1) there was a promissory note or other evidence of indebtedness, (2) interest was charged, (3) there was security or collateral, (4) there was a fixed maturity date, (5) a demand for repayment was made, (6) actual repayment was made, (7) the transferee had the ability to repay, (8) records maintained by the transferor and/or the transferee reflect the transaction as a loan, and (9) the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.
- The nine factors above, however, are not exclusive.
- With respect to situations involving loans to family members, an actual expectation of repayment and an intent to enforce the debt are critical to sustaining the tax characterization of the transaction as a loan.
Insight: The Estate of Bolles case illustrates how courts will scrutinize advances to family members more deeply than in other scenarios. Specifically, this case demonstrates that the Tax Court will only characterize advances to a family member as loans if there is an actual expectation of repayment and an intent to enforce the debt based upon the facts and circumstances. In essence, the Tax Court can look to the financial condition of the family member receiving the advances to determine the “donor’s” expectation of repayment, and can bifurcate the characterization of the advances if the family member’s financial condition changes over time.
For more Tax Court insights, see Freeman Law’s “The Tax Court in Brief,” where we cover every substantive Tax Court opinion on a weekly basis.
For a link to our podcast covering the Tax Court in Brief, download here, on our Podcast page, or check out other episodes of The Freeman Law Project.