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Revenue Ruling 77-299

Internal Revenue Service
1977 C.B. 14 (1977)

Written by Eric Miller, JD

Facts

G wanted to give A, G’s grandchild, a tract of non-income-producing real property, Blackacre, which had a fair market value of $27,000. To minimize G’s liability for federal gift tax, G’s attorney structured a transfer under which G sold Blackacre to A in return for interest-free installment notes payable in yearly amounts of $3,000—the maximum amount of the annual exclusion for federal gift tax. [Editor’s Note: The maximum yearly exclusion is now $17,000.] The notes were secured by a purchase-money mortgage on the property. In addition, a letter expressed G’s intention to forgive each payment as it became due. The Internal Revenue Service considered the issue of whether G’s transfer of Blackacre to A was a bona fide sale or a sham transaction designed to function as a gift but avoid the gift tax.

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