Last year Christian sold a tract of land (basis of $1 million) to Kate (an unrelated party) for $4 million, with a cash down payment of $1 million and notes for the balance. The notes carry a 7.5% rate of interest and mature annually at $1 million each over three years. (Christian did not elect out of the installment method.) Before any of the notes mature and when they have a fair market value of $2.8 million, Christian gives them to Grace.

a. Disregarding the interest element, what are the Federal income tax consequences of the gift?

b. Suppose that instead of making a gift, Christian dies and the notes pass to his estate. The executor sells the notes for $2.8 million. What is the Federal income tax result?