UNIVERSITY OF PHOENIX
DATE:December 3, 2007
TO: Garth Ferrell
FROM: ***** *****
RE: Miller Provides Clues for Preventing Treatment of Intrafamily Loan as Gift.
The article reviewed in this paper discusses the case of a mother making a loan of $100,000 to each of her two sons and not being repaid. The loans were considered by the IRS to be gifts, while the intent by the mother was that only the forgone interest was meant to be a gift. Both sons signed a non-interest bearing demand note with no collateral and a stated maturity date. The legal argument was whether or not this was a bona fide creditor-debtor relationship with a real expectation for repayment and an intention to enforce the debt. In order to be considered a creditor-debtor relationship, certain criteria apply. These criteria include a promissory note being signed, interest charged, security or collateral, a fixed maturity date, demand for repayment made, actual repayment made, ability to pay and being reported for Federal tax purposes as a loan. LEGAL ISSUE
Both notes signed by the sons were non-interest bearing, had no collateral or security, no demand for payment or ability to pay was proven and gift tax returns were filed but did not report the correct amount. Due to these facts, the court found that this was not considered a bona fide creditor-debtor relationship and that the transfer of monies was not proven to be a loan. MANAGERIAL PERSPECTIVE
The expectation of repayment is normally assumed in the case of family members. However, to insure that the loans are not considered a gift in the eyes of the law, all of the criteria of a creditor-debtor relationship must be met and all disbursements, repayments and actual gifts must be correctly recorded. Ms. Miller's situation could have been avoided if this criteria had been met. For example, if interest had been charged and then waived in separate record, if the houses bought by the sons had...