So says Judge Holmes in Estate of Barbara Galli, Deceased, Stephen R. Galli, Executor, et al., Docket No. 7003-20, filed 3/5/25. Son Steve and the late Barbara, before she became the late Barbara, executed a nine-year loan note for $2.3 million which Barbara advanced in full at mid-term AFR (then 1.01%).

In support of his motion for summary J that this was a loan, not a gift, hence not reportable on a 709 when made, Steve introduces the note, Barbara’s income tax returns reporting interest received, and Steve’s bank statements showing interest paid. There’s a fight over the worth of the unpaid balance of the note in Barbara’s estate, but that’s not at issue here.

IRS’ position isn’t entirely clear (see Order, at pp. 2-3), but Judge Holmes finds IRS isn’t saying the whole loan arrangement was a sham, only that the loan terms were below-market, hence a partial gift, and the worth of the unpaid balance of the note in Barbara’s estate is undervalued, so both gift and estate taxes are due.

Steve says Section 7872(c) says it all. If this is a loan (and Judge Holmes says it is, because Steve has the receipts and IRS has the Michael Corleone gambit, classic variation), the AFR controls. And while characterizing a transaction as a loan involves a multi-prong test, Judge Holmes don’t need no “prongification” or dancing with the prongs (Order, at p. 4) to give Steve summary J.

“To sum up, the issue on these motions are whether the transaction was a gift, a loan, or a partial gift. We determine that the Commissioner is not asserting that the transaction was entirely a gift and would lose on the proof if he were. That leaves us to apply section 7872, and under that section, this transaction was not a gift at all.” Order, at p. 5.

Applicable Federal Rate means Applicable.