Document Type



The recently decided case of Crown v. Commissioner reinforced the tax court's position that imputed interest on an interest-free loan is not a taxable gift. The Internal Revenue Service (IRS) continues to take the contrary position that interest-free loans do constitute gifts of an amount equal to the interest charge that it usually made for the use of that amount of money.

The IRS position on the taxation of interest-free loans is consistent with both economic reality and gift tax principles. An examination of the economic substance of interest-free loans highlights the court's reliance on the form of the transaction. The right to the use of money and other property is a valuable property interest, and when no charge is made for the transfer of this property interest there is a transfer for less than adequate consideration. This constitutes a gift.

Because courts are reluctant to interfere in intrafamily loans, the decisions emphasize the formal and procedural difficulties involved in the treatment of interest-free loans as gifts. The absence of a contractual obligation to pay interest is not always a bar to finding a gift under the tax laws, and even a demand note can be valued consistently with gift tax principles. Because some courts will not independently relinquish their "form over substance" reasoning, this Comment proposes that legislative direction is needed to assure that interest-free loans are consistently treated as gift taxable events.

Publication Date


Included in

Law Commons



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.