Third Circuit Affirms That Uncashed Checks Had to be Included in Gross Estate

(Parker Tax Publishing July 2023)

The Third Circuit affirmed a Tax Court decision that a decedent's gross estate included the value of checks the decedent gave as gifts to his children because the checks were delivered before the decedent's death but not paid until after he died and therefore were not completed gifts. The court found that under Reg. Sec. 25.2511-2 and applicable state law, the delivery of the checks alone did not complete the gifts because the decedent had the power to revoke them until the time the checks were deposited or cashed. Estate of DeMuth v. Comm'r, 2023 PTC 187 (3d Cir. 2023).

Background

In 2007, William DeMuth, Jr., signed a power-of-attorney agreement appointing his son, Donald DeMuth, as his agent. In that capacity, Donald made annual monetary gifts to family members from 2007 to 2014. William was diagnosed with an end-stage medical condition in early September 2015. On September 6, 2015, Donald wrote out eleven checks to family members totaling $464,000 from his father's investment account with the Mighty Oak Strong America Investment Company (Mighty Oak) and mailed or personally delivered the checks to the payees. William died on September 11, 2015. Ten of the checks were paid from the Mighty Oak account to the respective payees after William's death.

As executor of William's estate, Donald filed an estate tax return in December 2016, which excluded the value of the ten checks from the estate's assets. The IRS determined that the estate's return should have included the value of the checks and so it issued a notice of deficiency for estate tax due in the amount of $179,130.

The estate petitioned the Tax Court for reconsideration of the deficiency. Before the Tax Court, the IRS agreed to exclude three of the checks from the total, which reduced the deficiency to $131,774. In Estate of DeMuth v. Comm'r, T.C. Memo. 2022-72, the Tax Court held that the funds from the remaining seven checks were part of William's estate because the checks were not completed gifts under Pennsylvania law before William's death. The estate appealed to the Third Circuit.

Under Code Sec. 2001(a), the estate tax is imposed on the transfer of a decedent's taxable estate. Code Sec. 2051 defines the taxable estate as the value of the decedent's gross estate less any allowable deductions. The gross estate consists of the value of the decedent's property and interest in property at the time of the decedent's death. Under Reg. Sec. 20.2031-5, the gross estate includes 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." In the case of gifts of such property, Reg. Sec. 25.2511-2(b) provides that where "the donor has so parted with dominion and control as to leave in him no power to change its disposition . . . the gift is complete," and therefore the value of the gift is not includible in the gross estate. However, under Reg. Sec. 25.2511-2(c), a gift is "incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself."

Whether a gift in the form of a check is completed is determined under state law. Under Pennsylvania law, an inter vivos gift is a gift given with the intention of being completed when the donor is living. To find an inter vivos gift has been completed, there must be (1) an intention to make the gift and (2) an actual or constructive delivery at the same time, of a nature sufficient to divest the giver of all dominion. In the case of a check, delivery alone does not complete the gift because the donor may revoke the gift up until the time it is deposited or cashed.

William's estate argued that the seven checks were properly excluded because they were given in contemplation of William's death, and therefore were completed gifts "in causa mortis." Under Pennsylvania law, gifts "causa mortis" are gifts prompted by the donor's belief that his death is impending, and are made as a provision to the donee if death ensues. Where the circumstances support a finding of a gift causa mortis, Pennsylvania courts have found that checks delivered before, but paid after, the decedent's death are completed gifts.

A gift causa mortis differs from an inter vivos gift in that it is made when the donor believes he is about to die, and is revocable should he survive. To determine whether a gift was given in causa mortis, one must show that at the time of the alleged gift, the decedent intended to make a gift, the decedent apprehended death, the gift property was either actually or constructively delivered, and death actually occurred. Thus, the donor's state of mind primarily determines whether a gift was given in causa mortis.

Analysis

The Third Circuit affirmed the Tax Court after finding that the estate failed to show that William wrote the checks as gifts in causa mortis. In the court's view, the only evidence arguably supporting the estate's position was that William was diagnosed with an end-stage medical condition in early September 2015, and that the yearly gifts given to family members were generally given in December rather than September. However, the court found that there was no evidence indicating that William directed Donald to distribute the September 2015 checks in contemplation of his death. The court noted that the only directions William gave to Donald as his agent was that Donald was authorized to "give gifts to [William's] issue in an amount not to exceed the annual exclusion from the federal gift tax," and to "give gifts to any permitted donee for tuition."

As such, the court concluded that the estate's argument that the checks were properly completed gifts in causa mortis failed because there was nothing to show that William contemplated death when the checks were written on his behalf. Thus, the court held that the value of the seven remaining checks was improperly excluded from the gross estate.

For a discussion of when a gift is completed, see Parker Tax ¶221,520.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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