Checks Written Before But Cashed After Death Includible in Gross Estate

In a recent Tax Court case[1], the Court held that the combined value of ten checks written prior to the decedent’s death, but cashed after his death, was included in the gross estate of the decedent. However, as discussed below, the IRS had conceded that three of the ten checks were not included in the decedent’s gross estate. Due to this IRS concession, the decedent’s estate did get a small win here in excluding the combined value of those three checks although the combined value of the other seven was includable. The Court noted the combined value of the other three checks should have been includible as well, but since the IRS conceded that point, the Court held the IRS to the concession to avoid prejudicing the decedent’s estate.

Facts

In 2007, William E. Demuth, Jr. (“Decedent”) signed a power of attorney (“POA”) appointing his son, Donald Demuth (“Donald”), as his agent. The POA authorized Donald to make annual gifts not to exceed the annual exclusion from federal gift tax on behalf of the Decedent, and Donald did so, making annual gifts from Decedent to himself, his brothers, and other family members from 2007 through 2014.

In 2015, Decedent’s health began to fail. On September 6, 2015, Donald, pursuant to his power under the POA, wrote out eleven checks, totaling $464,000, from Decedent’s financial account. The checks were consecutively numbered from 1214 to 1224. All but one of the checks were for either $14,000 or $28,000, which would make sense due to the gift tax annual exclusion[2] being $14,000 for 2015. However, Check 1224 was for $240,000. The opinion does not provide any clarity on this issue as to why some amounts appear to be either the annual exclusion or double the annual exclusion and one is for $240,000, nor does the opinion shed light whether Decedent was married and was doubling the annual exclusion for some gifts via gift splitting, which allows one spouse to make a gift and treat such gift as having been made one-half from him or herself and one-half from his or her spouse.

On September 11, 2015, Decedent passed away. The only check that had been cashed at that time was Check 1216 for $8,000, cashed on September 9, 2015. The remaining ten checks had not been cashed when Decedent passed. They were all subsequently cashed at some point from September 14, 2015 through September 30, 2015. When Decedent died, he was a resident of and domiciled in Pennsylvania.

On the Decedent’s estate tax return, the financial account value was reported as $442,639, which excluded the value of all eleven checks. The estate tax return was audited, and a Notice of Deficiency (the “NOD”) was issued increasing the value of the account by $436,000, the amount of the ten checks that had not been cashed by Decedent’s date of death.

The IRS, in it’s opening brief, conceded that Checks 1215, 1219, and 1221 were not includible in decedent’s gross estate, apparently on the basis that the checks had been “credited by drawee banks” before Decedent’s death. However, as it turns out, such was not the case. The Court noted that it could not be certain why the IRS conceded the combined value of the three checks but noted that such concession had been made, regardless of whether it might have accidentally been made due to a misunderstanding of terms of art used in financial matters.

Analysis

The Court began its analysis noting that §2033 states that the value of the gross estate “estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.” Treasury Regulation § 20.2031-5 provides further that the “amount of cash belonging to the decedent at the date of his death, whether in his possession or in the possession of another, or deposited with a bank, is included in the decedent’s gross estate.” As a result, the value of any check that still belongs to a decedent is includible, but the value of any check that is a completed gift is not so included. Accordingly, the question at hand is whether the checks Decedent wrote constituted completed gifts as of his date of death.

The general rule for a completed gift is that a gift is not complete until the donor has “parted with dominion and control as to leave him no power to change its disposition.”[3] In order to determine whether the donor has indeed parted with such “dominion and control” for purposes of a check that has been written but not yet cashed, courts must look to state law. Since Decedent resided in Pennsylvania at the time of his death, the Court turned to Pennsylvania law to figure out when the gift of a check was deemed to be a completed gift.

Under Pennsylvania law, in order to make a valid inter vivos gift, there must be “a clear, satisfactory, and unmistakable intention of the giver to part with and surrender dominion over the subject of the gift, with an intention to invest the donee with the right of disposition beyond recall, accompanied by an irrevocable delivery , actual or constructive.”[4] Pennsylvania case law, in a case directly on point to the present facts, states that the delivery of a check does not complete a gift.[5] As the Court notes, this makes sense because the Pennsylvania Commercial Code allows the drawer of a check to “stop payment of any item drawn on [their] account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it.”[6] Based on this provision, as along as the drawer of a check can make a stop-payment, the check is revocable and thus the gift is incomplete.

Thus, so long as the drawer of a check can make a stop-payment order on that check, the delivery of the check is revocable. Although the drawer of a check may very well have the intention to vestthe payee with the right of disposition beyond recall, if that intention is not coupled with an irrevocable delivery, the drawer has not surrendered dominion and the gift is incomplete under Pennsylvania law. As such, our main query now is determining at what point a drawer can no longer make a stop-payment order, as that will determine the point at which the gift of a check becomes irrevocable and is therefore completed.

In the present case, none of the ten checks at issue had been accepted, certified, or final payment made, and accordingly, under the Pennsylvania Commercial Code, a stop-payment could still be made and still be effective. As such, none of the ten checks constituted a completed gift and the combined value of  the ten checks was included in the Decedent’s gross estate.

The Court noted that, if it were to stop there, the entire value of the NOD, $436,000, would be upheld. However, as noted earlier, the IRS, in its opening brief, conceded that Checks 1215, 1219, and 1221 were not includible in decedent’s gross estate. There seems to be some misunderstanding on the IRS’ part as to the status of these three checks at the Decedent’s death, and perhaps some banking terminology used caused some confusion on the IRS’ part when it made the concession in the first place. Nevertheless, the concession was made.

The Court noted that, while this particular issue has seemingly never come before the Court, the Court has previously disallowed the Commissioner’s withdrawal of a concession in the context of post-trial briefing.[7]

Both Glass and Cogan dealt with the IRS attempting to withdraw a concession during a post-trial briefing, whereas the parties here have submitted this case for decision without trial under Rule 122. The Court noted that:

Despite the difference in procedural posture, the principle remains the same. Respondent has not attempted to withdraw his concession at any point. Perhaps more importantly, however, petitioner relied upon respondent’s concession regarding checks Nos. 1215, 1219, and 1221 in the drafting of his Simultaneous Answering Brief. Thus, although all ten checks at issue would otherwise be includible in decedent’s gross estate under a proper legal analysis, to ignore the concession respondent made in his brief sua sponte would be prejudicial to the petitioner.

Accordingly, the combined value of Checks 1215, 1219, and 1221 was not included in Decedent’s estate, the total such exclusion being $70,000. The combined value of the remaining checks, totaling $366,000, was included in the Decedent’s estate.

Conclusion

Whether a gift is complete can often have major consequences. In the present case, while the opinion does not say so, it is likely that the Decedent’s estate was taxable, and to the extent any of the checks were eligible for the annual exclusion for 2015, estate tax could have been avoided. If the full value of $366,000 would have otherwise qualified for the annual exclusion, the estate tax that could have been saved with a completed gift versus the result in the present case was $146,400 ($366,000 x 40%). It would have been more had the IRS not inadvertently conceded another $70,000. Practitioners advising in these situations would be wise to take whatever steps are necessary to make sure gifts are complete when they are intended to be complete. The issue of uncashed checks seems to come up quite often, and the result appears to always be the same as the present case, the gift was not complete.

Often, we see this come up in timing of an annual exclusion gift where an check is written and given to the recipient around Christmas, but not cashed until after the new year. The result is that the gift was not made until the next year, a result that can often cause timing problems with annual exclusion gifts if the donor is making such gifts every year. One remedy might be to deliver cashier’s checks or deliver the checks earlier with specific instructions that they be cashed earlier. Another method that has been used to make gifts at year end when practical issues stand in the way, is an escrow arrangement whereby cash is transferred to an escrow account for the benefit of the intended done. The donor would transfer the cash at year end and retain no right to get it back, a completed gift.

[1] Estate of William E. Demuth, Jr., et ux. v. Comm’r, T.C. Memo. 2022-72.

[2] §2503(b); Current annual exclusion for 2022 is $16,000 per donor, per done. During the year at issue, 2015, the annual exclusion was $14,000 per donor, per donee.

[3] Treas. Reg. § 25.2511-2(b).

[4] Packer v. Clemson, 112 A. 107, 107 (Pa. 1920).

[5] In re Mellier’s Estate, 182 A. 388, 389 (Pa. 1936).

[6] 13 Pa. Cons. Stat. § 4403(a) (2015).

[7] Glass v. Comm’r,  T.C. Memo. 1988-550; Cogan v. Comm’r,  T.C. Memo. 1980-328.