                        T.C. Memo. 1996-3



                     UNITED STATES TAX COURT


        ELIZABETH B. MILLER, Petitioner v. COMMISSIONER OF
                    INTERNAL REVENUE, Respondent

        ROBERT N. MILLER III, Petitioner v. COMMISSIONER OF
                    INTERNAL REVENUE, Respondent



      Docket Nos. 23465-93, 23558-93.   Filed January 11, 1996.



      Ward R. Nyhus, Jr., for petitioners.

      Steven M. Roth, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

      CHIECHI, Judge:   Respondent determined the following defi-

ciencies under section 2501(a)1 in petitioners' Federal gift tax:

1
    All section references are to the Internal Revenue Code (Code)
                                                    (continued...)
                               - 2 -


                Petitioner             Year2          Deficiency

           Elizabeth B. Miller         1989       $31,500
           Robert N. Miller III3       1989        31,500

     The issues remaining for decision in these cases are:

     (1)   Was each of the two $50,000 transfers that petitioner

Elizabeth B. Miller4 made during 1982 to her son Stephen Miller a

transfer by gift for purposes of section 2501(a)?      We hold that

it was.

     (2)   Was the $100,000 transfer that petitioner Elizabeth B.

Miller made during 1982 to her son Robert N. Miller IV a transfer

by gift for purposes of section 2501(a)?5      We hold that it was.


1
 (...continued)
in effect for the years relevant to the transactions at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
2
   By virtue of the operation of the unified credit under sec.
2505, respondent determined deficiencies for 1989 even though the
basis for those deficiencies relates to transfers made during
1982.
3
   Respondent's determinations against petitioner Robert N.
Miller III, who is and was during the years relevant to the
transactions at issue the spouse of petitioner Elizabeth B.
Miller, result solely from his being treated as having made gifts
by operation of sec. 2513(a)(1). Under that section, a gift by
one spouse to a third person is treated as made one-half by that
spouse and one-half by the spouse of that spouse, provided that
both spouses have consented to such treatment as provided in sec.
2513(a)(2) and (b).
4
   Hereinafter, references to petitioner are to Elizabeth B.
Miller.
5
   Petitioner issued a $100,000 check to Robert N. Miller IV on
Oct. 4, 1982. That check was not presented for payment until
January 1983. Petitioners do not claim, and respondent does not
                                                   (continued...)
                                 - 3 -


                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Petitioners resided in Santa Barbara, California, at the

time the petitions were filed.

     During all years relevant to the transactions at issue,

petitioners operated an agricultural business known as Thornhill

Ranches on property of the same name that was owned by petitioner

and located in southern California.      During those years, peti-

tioners, operating as Thornhill Ranches, employed their two sons

Stephen Miller (Stephen) and Robert N. Miller IV (Robert) to

assist them in managing the business and determined the salaries

and bonuses that they received.6    During those same years, peti-

tioners also owned and operated a commercial property business

located in Georgia that their son Robert helped manage.

     Throughout the period 1982 through 1985, petitioner retained

the accounting firm of Pannell, Kerr, and Forster (PKF) to

maintain her financial records and to prepare her Federal gift



5
 (...continued)
contend, that the transfer to Robert N. Miller IV was made in
1983 rather than 1982. We therefore accept the parties' agree-
ment that petitioner made the $100,000 transfer to Robert N.
Miller IV in 1982.
6
   Stephen and his wife filed joint Federal income tax returns
for the years 1982 through 1985 in which they reported gross
income, including wages and salaries, that ranged from approxi-
mately $64,000 to $73,000. Robert filed individual Federal
income tax returns for the years 1982, 1984, and 1985 in which he
reported gross income, including wages and salaries, that ranged
from approximately $79,000 to $90,000.
                                - 4 -


tax returns.   During those years, Lesile Delmarter (Mr.

Delmarter), a certified public accountant employed by that firm,

was responsible for the supervision and performance of those

services.   In providing those services to petitioner, employees

of PKF, including Mr. Delmarter, relied on the records, such as

check registers, check stubs, bank statements, and canceled

checks, that petitioner forwarded to PKF relating to her finan-

cial transactions.    Mr. Delmarter and other employees of PKF

followed whatever characterization petitioner had reflected in

those records as to the nature of her transactions and did not

independently determine whether those characterizations accurate-

ly reflected the nature of those transactions.    For example, if

petitioner had noted on a check stub that a check she wrote was a

loan, Mr. Delmarter and other employees of PKF accepted that

notation as accurately indicating the purpose for which that

check was written.

Petitioner's Transfer to Stephen

     Petitioner transferred $100,000 to her son Stephen by giving

him two $50,000 checks on June 18, 1982, and on September 9,

1982, respectively.    Petitioner wrote the word "loan" on the

check register and the check stub, respectively, for those

checks, and she sent those check records to PKF.    Because peti-

tioner had written the word "loan" on those records, on December

31, 1982, PKF recorded each of the $50,000 checks petitioner
                               - 5 -


issued to Stephen in an account labeled "Notes Receivable--S.

Miller" in petitioner's general ledger.7

     Petitioner gave8 Stephen the two $50,000 checks in question

in response to his request for her assistance in paying off a

mortgage in the approximate amount of $56,000 that encumbered the

house that he and his wife had purchased in 1980 for $300,000 and

that became due in 1982.   In November 1982, Stephen used approxi-

mately $56,000 of the $100,000 that he received from petitioner

in order to retire that mortgage.

     In connection with petitioner's issuance of the two $50,000

checks to Stephen, he signed a non-interest-bearing note dated

September 14, 1982 (September 1982 note) in the principal amount

of $100,000 that was payable to petitioner.   Although petitioner

was generally familiar with the concept of secured obligations,

she did not request Stephen to secure that note, and it was not

secured, by real property or any other collateral.

     The September 1982 note provided that Stephen was to pay

petitioner $100,000 on demand or on September 14, 1985, if no

demand was made.   In other words, pursuant to the terms of that



7
   While Mr. Delmarter was responsible for supervising PKF's
maintenance of petitioner's financial records, other individuals
employed by PKF made the actual entries in those records to
reflect petitioner's financial transactions.
8
   The use herein of the words "gave", "note", "obligation",
"loan", "principal", "forgiveness", "indebtedness", and similar
words does not reflect the Court's view of the substance of the
transactions at issue.
                               - 6 -


note, if petitioner did not demand payment from Stephen prior to

September 14, 1985, he was to pay her the principal amount in all

events on that date.   (Hereinafter, the date of September 14,

1985, that was stated in the September 1982 note will sometimes

be referred to as the due date of that note.)

      At the time Stephen signed the September 1982 note, peti-

tioner believed that the date on which he was to pay her the

principal amount was open, and she did not consider the September

14, 1985 date stated in that note to be a fixed date on which

Stephen was in all events to pay her the principal amount.

Furthermore, at that time, she had no intention of demanding

payment on September 14, 1985, or on any other date, and there

was no discussion between petitioner and Stephen as to what, if

any, consequences would result in the event he did not make the

payment required by the terms of the September 1982 note.

      Petitioner did not make a written or oral request of Stephen

to repay the September 1982 note on or after September 14, 1985.

Petitioner and Stephen had no discussions on or after the due

date of the September 1982 note with respect to a possible

extension of the time within which he was to pay off that note or

as to any other matter relating to that note.

      On November 29, 1982, Stephen made a $15,000 payment to

petitioner, which was documented by a receipt signed by petition-

er.   Stephen made no other payments to petitioner during the

three-year period following the date on which he signed the
                                   - 7 -


September 1982 note.     Stephen did not make an offer of repayment

or an actual repayment of the September 1982 note on or after

September 14, 1985, the date on which it was in all events pay-

able.     Even though Stephen failed to pay off the September 1982

note on its due date, petitioner never instituted legal proceed-

ings or took other steps to enforce repayment.

        Rather than requesting Stephen to pay off the September

1982 note, at or near the various dates set forth below, peti-

tioner wrote and delivered a letter (forgiveness letter) to him

in which she stated that, as of the date of the letter, she was

"reducing the principal balance" of the September 1982 note by

the amount stated in the letter.        The date of each forgiveness

letter to Stephen and the reduction of the "principal balance"

(amount forgiven) stated in each such letter was as follows:

                                                  Amount
                      Date of Letter             Forgiven

                      Dec. 20,   1982        $5,000
                      Aug. 5,    1983         5,000
                      Jan. 22,   1984        15,000
                      Mar. 31,   1985        15,000
                      Jan. 3,    1986        15,000
                      Feb. 9,    1987         5,000
                      Jan. 6,    1988        20,000
                      Jan. 3,    1990         5,000
                        Total                85,000

        Petitioner determined the amount forgiven that was stated in

each of the forgiveness letters to Stephen by reference to the

total amount that petitioner and her husband were permitted to

give him in a particular year without the imposition of Federal
                                 - 8 -


gift tax, after taking account of the annual exclusion provided

by section 2503(b) and the gift-splitting provisions of section

2513(a)(1).

      In an undated letter that petitioner wrote to Stephen, and

that Stephen signed on February 6, 1987 (February 1987 letter to

Stephen), petitioner summarized the amounts that she considered

paid as of January 3, 1986, with respect to the $50,000 check

that she had issued to him on June 18, 1982, as follows:9

                     Aug. 5, 1983         $2,500
                     Jan. 22, 1984         7,500
                     Mar. 31, 1985         7,500
                     Jan. 3, 1986          7,500

Petitioner made no reference in the February 1987 letter to

Stephen to the $50,000 check that she had issued to him on

September 9, 1982.    Petitioner omitted from that letter the

$5,000 amount forgiven that was stated in her forgiveness letter

dated December 20, 1982.    Nor did that letter refer to any

portion of the $15,000 payment that Stephen had made to her on

November 29, 1982.    Stephen reviewed that letter prior to signing

it.   However, he did not notice, or question the reasons for,

those omissions.

      PKF recorded a $15,000 credit and a $10,000 credit to the

"Notes Receivable--S. Miller" account in petitioner's general

9
   In determining the amounts petitioner considered   paid by
Stephen as of Jan. 3, 1986, she applied one-half of   each amount
forgiven that was stated in each of the forgiveness   letters for
the years 1983, 1984, 1985, and 1986 to the $50,000   check that
she had issued to him on June 18, 1982.
                                - 9 -


ledger on December 31, 1982, and on December 31, 1983, respec-

tively.    No other credit entries were made to that account during

the period 1982 through 1989.

       Petitioner filed a Federal gift tax return for 1982 that was

prepared by PKF.    That return did not reflect as a gift to

Stephen the $5,000 amount forgiven that was stated in the for-

giveness letter to him dated December 20, 1982.    Petitioner did

not file Federal gift tax returns for the years 1983 through

1986.    Petitioner filed Federal gift tax returns for the years

1987 through 1990.    Petitioner's 1987 Federal gift tax return

showed a $20,000 gift to Stephen as a result of forgiveness of

indebtedness, while her forgiveness letter to him for that year

stated that the amount forgiven was $5,000.    Petitioner's 1988

Federal gift tax return showed a cash gift of $20,000 to Stephen

and no gift as a result of forgiveness of indebtedness, while her

forgiveness letter to him for that year stated that the amount

forgiven was $20,000.    Petitioner's 1989 Federal gift tax return

showed a $20,000 gift to Stephen as a result of forgiveness of

indebtedness, but petitioner sent no forgiveness letter to him

during that year.

Petitioner's Transfer to Robert

       On October 4, 1982, petitioner gave a check in the amount of

$100,000 to her son Robert.    Petitioner wrote the word "loan" on

the check stub for that check, and she sent that check stub to

PKF.    Because petitioner had written the word "loan" on that
                              - 10 -


check stub, on September 30, 1983, PKF recorded the $100,000

check petitioner issued to Robert in an account labeled "Note

Receivable--B. Miller" in petitioner's general ledger.

     Having assisted Stephen in connection with his acquisition

of real property and wishing equivalent treatment for her son

Robert, petitioner encouraged Robert to acquire his first house

and offered him $100,000 to assist in that acquisition.     In addi-

tion to the $100,000 that Robert had received from petitioner, as

of October 4, 1982, he had approximately $100,000 that was in-

vested in various checking, savings, and security accounts.

     On January 21, 1983, Robert acquired a house for $185,000 by

paying almost $170,000 in cash and assuming the seller's existing

mortgage of about $16,000.   As of the date of the purchase of the

house, Robert's gross assets consisted of his newly acquired

house and approximately $30,000 that was invested in checking,

savings, and securities accounts.

     In connection with the issuance by petitioner of the

$100,000 check to Robert, he signed a non-interest-bearing note

dated October 4, 1982 (October 1982 note) in the principal amount

of $100,000 that was payable to petitioner.   Although petitioner

was generally familiar with the concept of secured obligations,

she did not request Robert to secure that note, and it was not

secured, by real property or any other collateral.

     The October 1982 note provided that Robert was to pay peti-

tioner $100,000 on demand or on October 4, 1985, if no demand was
                                - 11 -


made.   In other words, pursuant to the terms of that note, if

petitioner did not demand payment from Robert prior to October 4,

1985, he was to pay her the principal amount in all events on

that date.   (Hereinafter, the date of October 4, 1985, that was

stated in the October 1982 note will sometimes be referred to as

the due date of that note.)

     Petitioner wanted to treat both her sons Stephen and Robert

in the same or essentially the same manner.   Thus, the terms of

the October 1982 note signed by Robert were very similar to the

terms of the September 1982 note signed by Stephen.   At the time

Robert signed the October 1982 note, there was no discussion

between petitioner and Robert as to what, if any, consequences

would result in the event he did not make the payment required by

the terms of the note, and he did not expect to repay the entire

principal amount of $100,000 by October 4, 1985.

     Petitioner did not make a written or oral request of Robert

to repay the October 1982 note on or after October 4, 1985.

Petitioner and Robert had no discussions on or after the due date

of the October 1982 note with respect to a possible extension of

the time within which he was to pay off that note or as to any

other matter relating to that note.

     Robert made no payments to petitioner with respect to the

October 1982 note during the three-year period following the date

on which he signed that note.    Nor did he repay that note on or

after October 4, 1985, the date on which it was in all events
                                - 12 -


payable.   Even though Robert failed to repay the October 1982

note on its due date, petitioner never instituted legal proceed-

ings or took other steps to enforce repayment.

     Rather than requesting Robert to pay off the October 1982

note, at or near the various dates set forth below, petitioner

wrote and delivered a letter (forgiveness letter) to him in which

she stated that, as of the date of the letter, she was "reducing

the principal balance" of the October 1982 note by the amount

stated in the letter.   The date of each forgiveness letter to

Robert and the reduction of the "principal balance" (amount for-

given) stated in each such letter was as follows:

                                              Amount
                    Date of Letter           Forgiven

                    Jan. 22,   1984      $15,000
                    Mar. 31,   1985       15,000
                    Jan. 3,    1986       15,000
                    Feb. 9,    1987       15,000
                    Jan. 6,    1988       20,000
                    June 16,   1989       20,000
                      Total              100,000

     In addition, in an unsigned letter to Robert dated April 9,

1983 (unsigned forgiveness letter to Robert), petitioner stated

that, as a part of her 1982 annual gift to Robert, she was

"reducing the principal balance" of the October 1982 note by

$10,000 ($10,000 amount forgiven).

     Petitioner determined the amount forgiven that was stated in

each of the forgiveness letters to Robert and the $10,000 amount

forgiven that was stated in the unsigned forgiveness letter to
                               - 13 -


him by reference to the total amount that petitioner and her

husband were permitted to give him in a particular year without

the imposition of Federal gift tax, after taking account of the

annual exclusion provided by section 2503(b) and the gift-split-

ting provisions of section 2513(a)(1).

     In an undated letter that petitioner wrote to Robert, and

that Robert signed on February 5, 1987 (February 1987 letter to

Robert), petitioner summarized the amounts that she considered

paid as of January 3, 1986, with respect to the $100,000 check

that she had issued to him on October 4, 1982, as follows:

                      Jan. 22, 1984     $15,000
                      Mar. 31, 1985      15,000
                      Jan. 3, 1986       15,000

Petitioner omitted from the February 1987 letter to Robert the

$10,000 amount forgiven that was stated in the unsigned forgive-

ness letter to him.

     PKF recorded a $10,000 credit to the "Note Receivable--B.

Miller" account in petitioner's general ledger on December 31,

1983.   No other entries were made to that account during the

period 1982 through 1989.

     Petitioner filed a Federal gift tax return for 1982 that was

prepared by PKF.   The $10,000 amount forgiven that was stated in

the unsigned forgiveness letter to Robert was not reflected as a

gift to Robert in petitioner's 1982 Federal gift tax return.

Petitioner did not file Federal gift tax returns for the years

1983 through 1986.    Petitioner filed Federal gift tax returns for
                                - 14 -


the years 1987 through 1989.    Each of those returns showed a gift

to Robert resulting from forgiveness of indebtedness.    Peti-

tioner's 1987 Federal gift tax return showed a $20,000 gift to

Robert as a result of forgiveness of indebtedness, while her

forgiveness letter to him for that year stated that the amount

forgiven was $15,000.

                                OPINION

     Petitioners bear the burden of proving that respondent's

determinations are erroneous.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     Petitioners have attempted to satisfy their burden of proof

in these cases through testimonial and documentary evidence.

With respect to the testimonial evidence, petitioner testified on

her own behalf.    Her self-serving testimony was at times vague,

conclusory, internally inconsistent, and contradicted by documen-

tary evidence.    Although petitioner maintained throughout her

testimony that she intended the transfers at issue to be loans,

her recollection of specific matters pertaining to those trans-

fers was poor or at best hazy.    In an attempt to corroborate

petitioner's testimony, petitioners presented the testimony of

their sons Stephen and Robert.    Their respective testimony, which

was intended to serve the interests of their parents, also was at

times vague, conclusory, internally inconsistent, and/or contra-

dicted by documentary evidence.    Under the circumstances present-

ed here, we are not required to, and we do not, accept the
                              - 15 -


testimonial evidence presented by petitioners to sustain their

burden of establishing error in respondent's determinations.    See

Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989),

affg. T.C. Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688,

689-690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159;

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).   With respect to

the documentary evidence, certain documents in the record

contradict other documents and/or testimony.   Under such

circumstances, we are not required to, and we do not, rely on the

documentary evidence presented by petitioners to sustain their

burden of showing error in respondent's determinations.

     Section 2501(a)(1) generally imposes a tax for each calendar

year on the transfer of property by gift during such year by an

individual.   Although the Code does not explicitly define what

constitutes a gift for purposes of section 2501(a)(1), section

2512(b) provides:   "Where property is transferred for less than

an adequate and full consideration in money or money's worth,

then the amount by which the value of the property exceeded the

value of the consideration shall be deemed a gift".   Section

25.2511-1(g)(1), Gift Tax Regs., provides in pertinent part:

     Donative intent on the part of the transferor is not an
     essential element in the application of the gift tax to
     the transfer. The application of the tax is based on
     the objective facts of the transfer and the circumstan-
     ces under which it is made, rather than on the subjec-
     tive motives of the donor. * * * The gift tax is not
     applicable to a transfer for a full and adequate con-
     sideration in money or money's worth, or to ordinary
     business transactions, described in §25.2512-8.
                                - 16 -


     The parties agree that petitioner transferred $100,000 to

each of her sons during 1982.    The only dispute here is whether

the transfers at issue were loans or gifts.    Petitioners contend

that each of those transfers was in form and in substance a loan,

and not a gift, for Federal gift tax purposes because petitioner

entered into a bona fide creditor-debtor relationship with each

of her sons at the time of such transfers.10   Respondent contends

that although each of the transfers at issue was, in form, a loan

that purported to establish such a relationship, in substance,

each such transfer was a gift.

     The question whether a taxpayer has entered into a bona fide

creditor-debtor relationship pervades the Federal tax law.   See,

e.g., Estate of Maxwell v. Commissioner, 98 T.C. 594, 603-604

(1992), affd. 3 F.3d 591 (2d Cir. 1993); Estate of Kelley v.

Commissioner, 63 T.C. 321, 325 (1974); Estate of Van Anda v.

Commissioner, 12 T.C. 1158, 1162 (1949), affd. per curiam 192

F.2d 391 (2d Cir. 1951).   "Transactions within a family group are

subject to special scrutiny, and the presumption is that a trans-

fer between family members is a gift".    Harwood v. Commissioner,

82 T.C. 239, 258 (1984) (citing Estate of Reynolds v. Commis-


10
   Although petitioners' argument is not entirely clear, they
appear to contend that under Dickman v. Commissioner, 465 U.S.
330 (1984), only the interest foregone on demand loans, and not
the principal of such loans, may be considered a gift for Federal
gift tax purposes. Petitioners' reliance on Dickman is
misplaced, since Dickman requires a finding of a bona fide debt.
That is the precise issue presented in these cases.
                              - 17 -


sioner, 55 T.C. 172, 201 (1970)), affd. without published opinion

786 F.2d 1174 (9th Cir. 1986).   That presumption may be rebutted

by an affirmative showing that at the time of the transfer the

transferor had a real expectation of repayment and an intention

to enforce the debt.   Estate of Van Anda v. Commissioner, supra

at 1162.   The mere promise to pay a sum of money in the future

accompanied by an implied understanding that such promise will

not be enforced is not afforded significance for Federal tax

purposes, is not deemed to have value, and does not represent

adequate and full consideration in money or money's worth.   See

Estate of Maxwell v. Commissioner, supra at 604-605; Estate of

Musgrove v. United States, 33 Fed. Cl. 657, 664 (1995).

     The determination of whether a transfer was made with a real

expectation of repayment and an intention to enforce the debt

depends on all the facts and circumstances, including whether:

(1) There was a promissory note or other evidence of indebted-

ness, (2) interest was charged, (3) there was any security or

collateral, (4) there was a fixed maturity date, (5) a demand for

repayment was made, (6) any actual repayment was made, (7) the

transferee had the ability to repay, (8) any records maintained

by the transferor and/or the transferee reflected the transaction

as a loan, and (9) the manner in which the transaction was re-

ported for Federal tax purposes is consistent with a loan.   See

Zimmerman v. United States, 318 F.2d 611, 613 (9th Cir. 1963);

Montgomery v. United States, 87 Ct. Cl. 218, 229, 23 F. Supp.
                                - 18 -


130, 136 (1938); Estate of Maxwell v. Commissioner, supra at 604;

Estate of Kelley v. Commissioner, supra at 323-324; Rude v.

Commissioner, 48 T.C. 165, 173 (1967); Clark v. Commissioner, 18

T.C. 780, 783 (1952), affd. 205 F.2d 353 (2d Cir. 1953); Estate

of Van Anda v. Commissioner, supra at 1162-1163; Estate of

Musgrove v. United States, supra at 664-665.    No one factor may

be determinative.    See Estate of Maxwell v. Commissioner, supra

at 604.

     With the foregoing factors in mind, we turn to the facts and

circumstances surrounding each of the transfers at issue to

determine whether at the time of each such transfer petitioner

entered into a bona fide creditor-debtor relationship with each

of her sons.

     1.   Whether There Was a Promissory Note or Other Evidence
          of Indebtedness With Respect to the Transfers at Issue

     Stephen and Robert signed notes, dated September 14, 1982,

and October 4, 1982, respectively, stating that they promised to

repay the $100,000 that petitioner transferred to each of them

during 1982.     See, e.g., Estate of Van Anda v. Commissioner,

supra at 1162.

     2.   Whether Interest Was Charged on the September
          1982 Note and the October 1982 Note

     Neither the September 1982 note signed by Stephen nor the

October 1982 note signed by Robert was to bear interest.    See,

e.g., Clark v. Commissioner, supra at 783.
                               - 19 -


     3.    Whether There Was Any Security or Collateral for
           the September 1982 Note and the October 1982 Note

     Petitioner transferred $100,000 to each of her sons to

assist them in connection with their respective acquisitions of

real property.11   Neither the September 1982 note signed by

Stephen nor the October 1982 note signed by Robert was secured by

the real property each acquired.   Indeed, petitioner never even

asked Stephen and Robert to secure their respective notes by that

real property or by any other collateral.   See, e.g., Estate of

Musgrove v. United States, supra at 664.

     4.   Whether There Was a Fixed Maturity Date for the
          September 1982 Note and the October 1982 Note

     The September 1982 note signed by Stephen stated that he was

to pay petitioner $100,000 on demand or on September 14, 1985, if

no demand was made.   At the time Stephen signed the September

1982 note, petitioner believed that the date on which he was to

pay her the principal amount was open, and she did not consider

the September 14, 1985 date stated in that note to be a fixed

date on which Stephen was in all events to pay her the principal

amount.   Furthermore, at that time, she had no intention of

demanding payment on September 14, 1985, or on any other date,


11
   Petitioner transferred $100,000 to Stephen in order to assist
him in satisfying in 1982 a mortgage of approximately $56,000
that he and his wife assumed at the time that they purchased a
house in 1980. Neither petitioner nor Stephen explained why she
transferred $100,000 to him when he needed only about $56,000 to
satisfy that mortgage.
                              - 20 -


and there was no discussion between petitioner and Stephen as to

what, if any, consequences would result in the event he did not

make the payment required by the terms of the note.   In fact,

despite Stephen's failure to remit the payment due under the

September 1982 note on its due date, petitioner made no request

of Stephen to repay that amount on or after that date, and they

had no discussions on or after September 14, 1985, with respect

to a possible extension of time within which he was to pay off

that note or as to any other matter relating to that note.   See,

e.g., Clark v. Commissioner, supra at 783.

     Although the October 1982 note signed by Robert was not part

of the record in these cases, the record establishes that the

terms of that note were very similar to the terms of the

September 1982 note signed by Stephen; that is to say, the

October 1982 note signed by Robert stated that he was to pay

petitioner $100,000 on demand or on October 4, 1985, if no demand

was made.   The record further establishes that petitioner wanted

to treat both her sons Stephen and Robert in the same or essen-

tially the same manner.   Thus, we infer that petitioner's inten-

tions and expectations with respect to both notes were, or were

virtually, identical; that is to say, we infer that at the time

Robert signed the October 1982 note, petitioner believed that the

date on which he was to pay her the principal amount was open,

she did not consider the October 4, 1985 date stated in that note
                                - 21 -


to be a fixed date on which Robert was in all events to pay her

the principal amount, and she had no intention of demanding

payment on October 4, 1985, or on any other date.     The record

establishes that at the time Robert signed the October 1982 note,

there was no discussion between petitioner and Robert as to what,

if any, consequences would result in the event he did not make

the payment required by the terms of the note, and he did not

expect to repay the entire principal amount of $100,000 by

October 4, 1985.    In fact, despite Robert's failure to remit the

amount due under the October 1982 note on its due date, petition-

er made no request of Robert to repay that amount on or after

that date.    Nor did they have any discussions on or after October

4, 1985, with respect to a possible extension of time within

which he was to pay off that note or as to any other matter

relating to that note.    See, e.g., Clark v. Commissioner, 18 T.C.

at 783.

     5.      Whether a Demand Was Made for Repayments of the
             September 1982 Note and the October 1982 Note

     At the time of each of the transfers at issue, there was no

discussion between petitioner and either of her sons regarding

the circumstances that would arise if either son defaulted on the

note each signed.     Although each of the notes in question that

was signed by Stephen and Robert, respectively, stated that

petitioner had the right to demand repayment of the principal

balance of each such note throughout a three-year period follow-
                               - 22 -


ing the date on which each such note was signed, the record does

not establish whether petitioner made such a demand for repayment

during that three-year period.    The record does establish, and we

have found as a fact, that petitioner made no demand for repay-

ment of the principal balance of each such note on its due date

(viz., September 14, 1985, in the case of the September 1982 note

and October 4, 1985, in the case of the October 1982 note) or at

anytime thereafter.    Stephen did not offer to repay the principal

balance of the September 1982 note on or after its due date.    The

record does not establish whether Robert made an offer to repay

the principal balance of the October 1982 note on its due date.

Petitioner did not discuss with either of her sons the possibil-

ity of extending the due date of each of the notes in question.

       Based on our review of the entire record before us, we find

that on the respective dates on which Stephen signed the Septem-

ber 1982 note and Robert signed the October 1982 note petitioner

did not expect them to carry out their respective obligations

stated in those notes.    In addition, although neither Stephen nor

Robert carried out those obligations, petitioner did not insti-

tute legal proceedings or take any other steps to enforce repay-

ment of those notes.    See, e.g., Rude v. Commissioner, 48 T.C. at

173.
                             - 23 -


     6.   Whether There Were Actual Repayments With Respect to
          the September 1982 Note and the October 1982 Note

     Except for one $15,000 payment in 1982, Stephen made no

payments to petitioner after he signed the September 1982 note.

See, e.g., Estate of Maxwell v. Commissioner, 98 T.C. at 604.

     As for the $15,000 payment, Stephen paid that amount to

petitioner on November 29, 1982, approximately two months after

petitioner had given him a second check for $50,000.   Neither

petitioner nor Stephen was able to explain why he paid petitioner

$15,000 approximately two months after she had transferred to him

during 1982 an additional $50,000.    The record is also unsatis-

factory as to why petitioner transferred a total of $100,000 to

Stephen when he needed only approximately $56,000 during 1982 to

pay off an outstanding mortgage on his house.   Moreover, peti-

tioner testified that the $15,000 payment that Stephen made to

her on November 29, 1982, was a partial repayment with respect to

the two $50,000 transfers she had made to him on June 18, 1982,

and September 9, 1982, respectively.   However, petitioner made no

reference to any portion of that payment in the February 1987

letter to Stephen in which she summarized the amounts she consid-

ered paid as of January 3, 1986, with respect to the $50,000

transfer she had made to him on June 18, 1982, and he raised no

questions about that omission when he signed that letter.   Based
                                - 24 -


on the state of the record in these cases, we do not place any

particular weight on the $15,000 payment that Stephen made to

petitioner on November 29, 1982, in resolving whether petitioner

made a gift or a loan to Stephen for Federal gift tax purposes.

       Robert did not repay any portion of the October 1982 note he

signed.     See, e.g., Estate of Maxwell v. Commissioner, supra at

604.

       7.    Whether Stephen and Robert Had the
             Ability To Repay Their Respective Notes

       With respect to Stephen, except for the house that he and

his wife purchased in September 1980 for $300,000, the record

does not contain any information relating to his assets at the

time petitioner made each of the two $50,000 transfers to him

during 1982 or at any time thereafter.     During 1982, Stephen

retired a mortgage that encumbered his house in the approximate

amount of $56,000.     Although that fact indicates that Stephen had

some equity in his house, the record does not disclose whether

that equity, alone or in conjunction with his other assets, would

have been sufficient to repay the $100,000 petitioner transferred

to him during 1982.     Even if we were to assume that Stephen had

sufficient equity in his house which, alone or together with his

other assets, would have enabled him to repay that amount, there
                              - 25 -


is no indication in the record that petitioner would have re-

quired him to sell or refinance his house for that purpose.

     It is also significant that the gross income reported by

Stephen and his wife in their joint Federal income tax returns

for the years 1982 through 1985 ranged from approximately $64,000

to $73,000.   Stephen testified that his income was to be the

source of repayment.   However, the record does not establish that

Stephen's income during the years 1982 through 1985 was suffi-

cient not only to cover all his personal living expenses, his

other expenses, and his income tax liabilities, but also to

permit him to accumulate sufficient assets to repay no later than

September 14, 1985, the $100,000 petitioner transferred to him in

1982.

     On the record before us, petitioners have failed to estab-

lish that at the time in 1982 when petitioner transferred

$100,000 to Stephen she reasonably believed that he would be able

to repay that amount on demand or on September 14, 1985, if peti-

tioner made no demand prior to that date.   See, e.g., Zimmerman

v. United States, 318 F.2d at 613.
                              - 26 -


     With respect to Robert, in addition to the $100,000 that he

had received from petitioner, as of October 4, 1982, he had

approximately $100,000 that was invested in various checking,

savings, and securities accounts.   On January 21, 1983, Robert

acquired a house for $185,000 by paying almost $170,000 in cash

and assuming the seller's existing mortgage of about $16,000.     As

of the date of the purchase of the house, Robert's gross assets

consisted of his newly acquired house and approximately $30,000

that was invested in checking, savings, and securities accounts.

Although Robert had equity of about $170,000 in his newly ac-

quired house, there is no indication in the record that petition-

er would have required him to sell or refinance his house to

repay the $100,000 she transferred to him in 1982.   Robert's

liquid assets of about $30,000 would not have been sufficient to

satisfy a demand for repayment of $100,000.

     It is also significant that Robert's gross income for the

years 1982, 1984, and 1985, as reflected in his Federal income

tax returns for those years, ranged from approximately $79,000 to

$90,000.   Robert testified that his income was to be the source

of repayment.   However, the record does not establish that

Robert's income during the years 1982 through 1985 was sufficient

not only to cover his personal living expenses, his other expens-

es, and his income tax liabilities, but also to permit him to
                             - 27 -


accumulate sufficient assets to repay no later than October 4,

1985, the $100,000 petitioner transferred to him in 1982.    In

fact, although Robert testified that he believed at the time

petitioner transferred $100,000 to him that he was obligated to

repay that entire amount by October 4, 1985, he also testified

that he probably would not have repaid that entire amount by that

date.12

     On the record before us, petitioners have failed to estab-

lish that at the time in 1982 when petitioner transferred

$100,000 to Robert she reasonably believed that he would be able

to repay that amount on demand or on October 4, 1985, if

petitioner made no demand prior to that date.   See, e.g.,

Zimmerman v. United States, supra at 613.

     8.   Whether Any Records of Petitioner and/or Her Sons
          Reflected Each of the Transfers at Issue as a Loan

     Certain records relating to the transfers at issue that were

maintained by petitioner or on petitioner's behalf are, or are in

part, consistent with petitioners' position in these cases that

those transfers were loans that petitioner forgave over the

period 1982 through 1990 and with other evidence in the record.


12
   Robert further testified that while he would have been able
to repay by Oct. 4, 1985, a substantial portion of the $100,000
petitioner transferred to him, he believed he could have obtained
an extension of time from her within which to repay the remainder
of that amount.
                              - 28 -


By way of illustration, petitioner wrote the word "loan" on the

check register and the check stub, respectively, for the two

$50,000 checks she issued to Stephen during 1982 and on the check

stub for the $100,000 check she issued to Robert during that

year.   Petitioner sent those check records to PKF, and PKF re-

corded the transfers to Stephen and Robert in petitioner's gener-

al ledger in accounts labeled "Notes Receivable--S. Miller" and

"Note Receivable--B. Miller", respectively.   In addition, on

December 31, 1982, and on December 31, 1983, PKF recorded a

$15,000 credit and a $10,000 credit, respectively, to the "Notes

Receivable--S. Miller" account in petitioner's general ledger.

Those entries correspond to the $15,000 payment that Stephen made

to petitioner on November 29, 1982, and the $10,000 total of the

$5,000 amount forgiven that was stated in each of the forgiveness

letters to Stephen dated December 20, 1982, and August 5, 1983.

On December 31, 1983, PKF also recorded a $10,000 credit to the

"Note Receivable--B. Miller" account in petitioner's general

ledger.   That entry corresponds to the $10,000 amount forgiven

that was stated in the unsigned forgiveness letter to Robert.

     Petitioner's designation as to the character of the trans-

fers at issue and any other actions relating to those transfers

is not necessarily indicative of their substance.   See Alterman

Foods, Inc. v. United States, 505 F.2d 873, 877 (5th Cir. 1974).
                              - 29 -


Nor do PKF's entries in petitioner's general ledger lend credence

to petitioner's contention that the transfers at issue were loans

that petitioner forgave over the period 1982 through 1990.    Those

entries merely reflected the labels that petitioner placed on

those transfers and related actions and were not based on any

independent research conducted by PKF to ascertain whether the

substance of such transfers and actions was consistent with

petitioner's characterization of them.

     It is also significant that the general ledger maintained

for petitioner by PKF is in part inconsistent with petitioner's

position here and with other evidence in the record.   No other

credit entries were recorded in the accounts in petitioner's

general ledger labeled "Notes Receivable--S. Miller" and "Note

Receivable--B. Miller".   Yet the record herein contains forgive-

ness letters to Stephen and to Robert, respectively, in which

petitioner purports to forgive stated portions of the respective

amounts each of them allegedly owed her.

     Other inconsistencies in the evidence relating to the trans-

fers at issue cast further doubt on whether those transfers were

genuine loans.   By way of illustration, in the February 1987

letter to Stephen in which petitioner summarized the amounts that

she considered paid as of January 3, 1986, with respect to the

$50,000 transfer she had made to him on June 18, 1982, petitioner
                               - 30 -


did not refer to any portion of the $15,000 payment that Stephen

had made to her on November 29, 1982.    However, she testified

that some portion of that payment was made with respect to that

transfer.    Petitioner also omitted from the February 1987 letter

to Stephen the $5,000 amount forgiven that was stated in her for-

giveness letter to him dated December 20, 1982.    In the February

1987 letter to Robert in which petitioner summarized the amounts

that she considered paid as of January 3, 1986, with respect to

the October 1982 note, petitioner omitted the $10,000 amount

forgiven that was stated in her unsigned forgiveness letter to

him.    In addition, while petitioner transferred $100,000 to

Robert, the amounts forgiven stated in the forgiveness letters to

him and the $10,000 amount forgiven stated in the unsigned for-

giveness letter to him totaled $110,000.13

       9.   Whether the Manner in Which Each of the
            Transfers at Issue Was Reported for Federal
            Tax Purposes Is Consistent With a Loan

       Assuming arguendo that each of the transfers by petitioner

to her sons had been a loan, a portion of which she forgave over


13
   Petitioners attempt to explain the discrepancies involving
Robert by contending that petitioner did not intend the unsigned
forgiveness letter to him dated Apr. 9, 1983, to be effective.
However, petitioner led PKF to believe that that letter was
effective, since, based on information she provided to that
accounting firm, on Dec. 31, 1983, it recorded a $10,000 credit
to the "Note Receivable--B. Miller" account in petitioner's
general ledger.
                              - 31 -


a period of time, the amounts so forgiven would have constituted

a transfer by gift for Federal gift tax purposes.    See Estate of

Kelley v. Commissioner, 63 T.C. at 326.     Although petitioner

treated each of the transfers at issue as a loan, and not as a

gift, for Federal gift tax purposes, she did not consistently

report as gifts for Federal gift tax purposes the amounts for-

given in excess of $10,000 that were stated in the forgiveness

letters to Stephen and to Robert.14    See, e.g., Zimmerman v.

United States, 318 F.2d at 613; cf. Estate of Kelley v. Commis-

sioner, supra at 323.   By way of illustration, petitioner did not

file Federal gift tax returns for any of the years 1984 through

1986.   However, in each of those years, petitioner wrote forgive-

ness letters addressed to each of her sons in which she indicated

that $15,000 was the amount forgiven.

     For the years 1987 and 1988, petitioner filed Federal gift

tax returns in which she reported as forgiveness of indebtedness

and thus as gifts amounts that were different from the amounts

forgiven that were stated in the forgiveness letters to Stephen

and/or to Robert for those years.     For example, with respect to


14
   In the case of a transfer by gift, a Federal gift tax return
must be filed unless the dollar amount transferred to each donee
is $10,000 or less and is thus excluded under sec. 2503(b), the
transfer is excluded as a qualified educational or medical
expense under sec. 2503(e), or the transfer is to a spouse for
which a deduction is allowed under sec. 2523. Sec. 6019(a).
                              - 32 -


Stephen, the forgiveness letter addressed to him dated February

9, 1987, stated an amount forgiven of $5,000, while the Federal

gift tax return filed on behalf of petitioner for 1987 reported a

$20,000 gift to Stephen as a result of forgiveness of indebted-

ness.   With respect to Robert, the forgiveness letter addressed

to him dated February 9, 1987, stated an amount forgiven of

$15,000, while the Federal gift tax return filed on behalf of

petitioner for 1987 reported a $20,000 gift to Robert as a result

of forgiveness of indebtedness.

     Based on our examination of the entire record in these

cases, we find that petitioners have not established that peti-

tioner entered into a bona fide creditor-debtor relationship with

either of her sons at the time of the transfers at issue.     We

further find that petitioners have failed to satisfy their burden

of proving that the transfers at issue constituted loans and not

gifts as determined by respondent.     We therefore sustain

respondent's determinations in these cases.

     To reflect the foregoing and petitioners' concessions,

                                     Decisions will be entered for

                               respondent.
