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The taxpayers in Frazee sold property to family members in
exchange for a note. The interest rate on the note, although
less than a market rate, was sufficient to avoid the
recharacterization of any part of the stated principal of the
note as interest under section 483. The Frazee taxpayers argued
that as a result, the note could not be a “below-market loan”
subject to section 7872. We disagreed. In our view, sections
483 and 1274 were enacted to ensure the proper characterization
of payments as principal or interest for income tax purposes. By
contrast, the key issue for gift tax purposes is the valuation of
all payments (both principal and interest). See Krabbenhoft v.
Commissioner, 94 T.C. 887, 890 (1990), affd. 939 F.2d 529 (8th
Cir. 1991). We held in Frazee that sections 483 and 1274 simply
were not relevant for that gift tax purpose.
The Commissioner’s primary position in Frazee was that the
value of the intrafamily note for gift tax purposes should be its
“present value” under section 7872 (i.e., a value determined by
reference to the applicable Federal rate), rather than its fair
market value under general tax principles (i.e., a value
determined by reference to market interest rates). Although we
found this position to be “anomalous” because it was contrary to
the traditional fair market value approach, Frazee v.
Commissioner, supra at 590, we nevertheless accepted the
Commissioner’s treatment of the intrafamily note as a below-
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