Page 477 - JoFA_2022

TAX MATTERS

Mighty Oak did not pay 10 of the 11 the delivery of the check is revocable.
checks, totaling $436,000, until after Although the drawer of a check may
William’s death. very well have the intention to invest
On the decedent’s Form 706, United the payee with the right of disposition
States Estate (and Generation-Skipping beyond recall, if that intention is not
Transfer) Tax Return, Donald, as execu- coupled with an irrevocable delivery,
tor of his father’s estate, excluded the the drawer has not surrendered domin-
value of all 11 checks that were written ion and the gift is incomplete under
on Sept. 6, 2015, and reported the value Pennsylvania law.”
of the Mighty Oak account as $442,639. The court further looked to state
The IRS issued a notice stating that the law to understand at what point a
Checks written before Mighty Oak account was undervalued drawer of a check is unable to make a
death are includible in by $436,000, which equaled the value stop-payment order, as that will dictate
decedent’s estate of the 10 checks that were paid after the time in which the gift of a check
William’s death. The estate filed a Tax
becomes irrevocable and complete. The
The Tax Court follows state Court petition. court concluded that because Mighty
law in determining whether Issues: Sec. 2033 states that a dece- Oak had not accepted, certified, or
delivered but unpaid checks were dent’s gross estate includes the value of made final payment (13 Pa. Cons. Stat.
completed gifts. all property “to the extent of the interest §4303(a) (2015)) on any of the 10
therein of the decedent at the time of his checks, the possibility of a stop-payment
By David R. Silversmith, CPA; death.” Regs. Sec. 20.2031-5 states that order remained so that the gifts were
Mani Gupta, CPA; and the “amount of cash belonging to the de- to be construed as incomplete and,
Bhakti Shah, CPA, J.D. cedent at the date of his death, whether therefore, includible in the decedent’s
in his possession or in the possession gross estate.
The Tax Court held that the value of of another, or deposited with a bank, is However, the court was unable to
checks written prior to but paid after a included in the decedent’s gross estate.” stop its analysis there, due to a recurring
decedent’s date of death were includible Regs. Sec. 25.2511-2(b) states that a error in terminology by both parties.
in the decedent’s gross estate. gift is not complete until the donor has Both sides mistakenly used the term
Facts: William E. DeMuth Jr. “parted with dominion and control as “drawee bank” (the entity ordered by the
was domiciled in Pennsylvania when to leave him no power to change its drawer to make payment) when referring
he died testate on Sept. 11, 2015. He disposition.” to the “depository bank” (the entity the
had executed a power of attorney in In determining whether the decedent payee uses to deposit the check). In its
January 2007 giving his son, Donald had parted with dominion and control opening brief, the IRS conceded that the
DeMuth, authority to make gifts to and therefore had made completed gifts, three checks (totaling $70,000) depos-
family members up to the amount of the the court looked to the law in William’s ited by the payees on the day William
annual federal gift tax exclusion. Donald home state of Pennsylvania. died were not includible in his estate,
consistently made these gifts from 2007 Pennsylvania defines an inter vivos seemingly because they were “credited
to 2014. By September 2015, William’s gift as having “a clear, satisfactory, and by drawee banks” prior to William’s
health deteriorated. On Sept. 6, 2015, unmistakable intention of the giver to death. The court deemed this concession
five days prior to William’s death, part with and surrender dominion over erroneous because simply depositing
Donald wrote 11 gift checks totaling the subject of the gift, with an intention a check at a depository bank does not
$464,000 from William’s investment to invest the donee with the right of complete a gift; the drawee bank must
account at Mighty Oak Strong America disposition beyond recall, accompanied also relinquish the funds. Nevertheless,
Investment Co. Of these 11 checks, one by an irrevocable delivery, actual or the court ruled that the IRS concession
was deposited and paid by Mighty Oak constructive.” Accordingly, mere delivery stood because its withdrawal would be
prior to William’s death, three checks of a check does not complete a gift prejudicial to the petitioner. IMAGE BY AMANDA GOEHLERT/GETTY IMAGES
were deposited on the date of death (In re Mellier’s Estate, 182 A. 388 (Pa. Holding: Based on applicable law,
and paid by Mighty Oak on Sept. 14, 1936)). The court noted that “so long the court would have ruled that the full
and the remaining seven checks were as the drawer of a check can make a value of all 10 checks ($436,000) should
deposited and paid post-death. In short, stop-payment order on that check, be includible in the decedent’s estate.

32 | Journal of Accountancy November 2022