## Facts

- Geoffrey C. Davies, a British subject residing in Honolulu, petitioned to challenge federal gift tax deficiencies for 1950 and 1951 arising from transfers made by his father, T. Clive Davies, a nonresident alien residing in England.
- The property involved was “Craigside,” a 12.92-acre parcel with improvements in Honolulu, Hawaii (U.S.-situs real property).
- The father transferred Craigside to Geoffrey in exchange for a promissory note secured by a mortgage on the property.
- The face amount of the note was less than the agreed fair market value of Craigside.
- In later periods, the father made transfers of cash in the United Kingdom (pounds sterling), deposited to Geoffrey’s account in England, which Geoffrey used to service and retire the note.
- The later cash transfers were not shown to be part of a binding, prearranged plan integrated with the original conveyance of Craigside.
- Geoffrey conceded liability for any gift tax properly due; the dispute centered on whether and when taxable gifts occurred and the situs characterization of the transfers.

## Issues

1. Whether the transfer of U.S. real property by a nonresident alien to his son for a note and mortgage with a face amount below fair market value constituted a transfer “directly or indirectly by gift” of U.S.-situs property.
2. If a taxable gift occurred, whether it was made in 1950, in 1951, or partially in each year.
3. Whether later cash transfers made abroad and used to retire the note constituted gifts of property situated in the United States.

## Decision

- The court held that the conveyance of Craigside in exchange for inadequate consideration was a part-sale/part-gift transaction; the excess of fair market value over the note amount was a taxable gift of an interest in U.S.-situs property.
- The court held that later cash transfers made abroad, without prearrangement, were gifts of foreign-situs cash and were not gifts of property situated in the United States.
- The court tied the timing of the taxable gift to the completion of the property transfer (execution/delivery of the conveyancing instruments), not to the later foreign cash gifts.
- The result was a split outcome: the Commissioner was sustained as to the existence of a U.S.-situs gift in the real-property transfer, and rejected as to treating the later foreign cash transfers as U.S.-situs gifts.

## Legal Principles

- A transfer for consideration less than fair market value is treated as a part-sale/part-gift; the gift equals the value transferred in excess of the consideration received.
- For nonresident alien donors, U.S. gift tax applies to gifts of property situated in the United States; U.S. real property is U.S.-situs for this purpose.
- Cash transferred while located abroad is foreign-situs property; absent a binding prearrangement integrating later payments with the original conveyance, later foreign cash gifts used to pay a U.S. debt do not become gifts of U.S.-situs property.
- Timing of a gift is determined by when the donor completes the transfer of the gifted property interest (i.e., when the conveyance becomes effective), rather than by subsequent, separate transfers.

## Conclusion

The Tax Court treated the father’s below-market conveyance of Hawaii real estate to his son as a taxable gift by a nonresident alien to the extent of the bargain element, but held that later, unplanned cash gifts made abroad to help retire the note were foreign-situs transfers and not taxable as gifts of U.S.-situated property.


Davies v. Commissioner, 40 T.C. 525 (1963)