Individuals are allowed to give away up to $10,000 in gifts per calendar year tax-free. Under state law, for a gift to be complete there must be (1) a competent donor, (2) a donee capable of receiving and possessing the gifted property, (3) delivery of the property and (4) acceptance of the gift by a donee who has the unrestricted right to the immediate use, possession or enjoyment of the property.
In Estate of Sarah H. Newman v. Commissioner , 111 TC no. 3 (7/28/98), the Tax Court held that gifts made by check and delivered to individual donees before a donor's death but presented for payment after the donor's death were not completed gifts during the donor's lifetime. As a consequence, the gift checks were included in the donor's gross estate.
Sarah Newman died on September 28, 1992. Shortly before her death, her son, as attorney-in-fact, drew six checks totaling $95,000 on her account and delivered them to several individuals, including himself and his wife. None of the checks were accepted or paid by Newman's bank until after her death.
The court was faced with the question of whether the funds in Newman's bank account relating to the six outstanding checks were includible in her gross estate.
The IRS argued that the checks were incomplete lifetime gifts and that the check amounts should be included in Newman's gross estate because she maintained dominion and control over the checking account until her death.
The estate argued that the checks constituted nontaxable completed gifts and should be excluded because the checks were dated before Newman's death.
The Newman estate relied on Estate of Metzger v. Commissioner , 100 TC no. 204 (1993), in which the court had previously allowed the relation-back doctrine. In Metzger , checks were issued to donees in December and deposited for payment on December 31 of the same year. The checks, however, did not clear until January of the next year. The court held that the gifts were complete as of the date of deposit.
But in Newman the court sided with the IRS. The court acknowledged that it had often applied the relation-back doctrine. However, it distinguished Metzger from Newman because, in the prior case, Metzger , the donor was alive when the checks were paid, and the checks were deposited in a reasonable period of time.
Observation. Donors should make gifts early in the year if possible and instruct donees to cash their checks as quickly as possible. In emergency situations, donors should use certified checks.
Individuals should take advantage of the $10,000 annual gift exemption (a $20,000 exemption is allowed for married couples). This amount will be indexed for inflation starting in 1999.
For year-end planning purposes, CPAs are advised to read revenue ruling 96-56, 1996-2 CB 161, in which the IRS announced its agreement with Metzger.
Michael Lynch, CPA, Esq., associate
professor of tax accounting at
Bryant College, Smithfield, Rhode Island .