## Facts

- A taxpayer in Houston, Texas sought to transfer real property to her two sons in a tax-efficient manner during 1961.
- She made an outright gift of rural property valued at $28,180; that transfer and valuation were not disputed.
- She also transferred two city properties to her sons by deeds subject to vendor’s liens.
- Each son executed a vendor’s lien note to the taxpayer equal to the full fair market value of the property received ($16,500 to one son; $16,000 to the other), payable $3,000 per year beginning the day after the deeds were executed.
- The notes bore no interest and were secured by deeds of trust on the transferred properties.
- At the time of the transfers, the taxpayer intended not to collect the annual payments and intended to cancel each $3,000 installment as it came due; the sons knew this.
- The taxpayer canceled the initial $3,000 payments due immediately after the transfers and later canceled subsequent $3,000 installments in later years.
- The Commissioner determined a 1961 gift tax deficiency, treating the city-property transfers as outright gifts of their full $32,500 value on the view that the notes had no fair market value given the taxpayer’s intent not to collect.

## Issues

1. Whether, for 1961 gift tax purposes, the taxpayer’s transfers of city property in exchange for secured vendor’s lien notes constituted gifts of the full fair market value of the properties.
2. Whether the notes had fair market value notwithstanding the taxpayer’s contemporaneous intent to forgive the installment payments.
3. Whether the gift in 1961 was limited to the amount of installments canceled in 1961 rather than the entire property value.

## Decision

- The Tax Court rejected the Commissioner’s position that the notes were valueless and that the full $32,500 was a 1961 gift.
- The court held that the vendor’s lien notes and deeds of trust were enforceable consideration with fair market value.
- The court held that the taxpayer made 1961 gifts from the city-property transactions only to the extent of $3,000 to each son, reflecting the installments canceled in 1961.
- Any later cancellations of additional $3,000 installments were treated as separate gifts in the years canceled, not as proof that the notes lacked value in 1961.
- The deficiency was to be recomputed consistent with limiting the 1961 gift element from the city-property transfers to $6,000 total.

## Legal Principles

- A transfer of property is not a gift to the extent the transferor receives adequate and full consideration in money or money’s worth, including enforceable promissory obligations.
- An enforceable, adequately secured vendor’s lien note may have fair market value for gift tax purposes even if the transferor intends to forgive future payments.
- A donor’s intent to cancel future installments does not, by itself, reduce an otherwise enforceable obligation’s value to zero at inception.
- Cancellation or forgiveness of a debt obligation is a taxable gift in the year the obligation (or installment) is discharged.

## Conclusion

The court treated the city-property transactions as sales supported by valuable, enforceable secured notes, limiting the taxpayer’s 1961 gifts to the $3,000 installments she canceled that year (one per son) and treating later cancellations as gifts in the later years.


Haygood v. Commissioner, 42 T.C. 936 (1964)