The Tax Court’s recent decision in Estate of Galli v. Commissioner, issued March 5, 2025, addresses the treatment of intra-family loans and gift tax. The case involved a $2.3 million transfer from a mother to her son, documented with a promissory note at the applicable federal rate (AFR). The IRS argued that the loan lacked common commercial safeguards and suggested that part of the original transfer should be treated as a gift. However, the court sided with the taxpayer, holding that the loan met the requirements of IRC § 7872 and was therefore not a gift.
This case reinforces the idea that AFR-compliant loans are generally treated as loans, not gifts, though the IRS sometimes challenges intra-family transactions based on facts and circumstances. The case serves as a reminder that proper documentation, interest payments, and consistent reporting are important in avoiding potential gift tax issues.