Checks written before death are includible in decedent’s estate

The Tax Court held that the value of checks written prior to but paid after a decedent’s date of death were includible in the decedent’s gross estate.

Facts: William E. DeMuth Jr. was domiciled in Pennsylvania when he died testate on Sept. 11, 2015. He had executed a power of attorney in January 2007 giving his son, Donald DeMuth, authority to make gifts to family members up to the amount of the annual federal gift tax exclusion. Donald consistently made these gifts from 2007 to 2014. By September 2015, William’s health deteriorated. On Sept. 6, 2015, five days prior to William’s death, Donald wrote 11 gift checks totaling $464,000 from William’s investment account at Mighty Oak Strong America Investment Co. Of these 11 checks, one was deposited and paid by Mighty Oak prior to William’s death, three checks were deposited on the date of death and paid by Mighty Oak on Sept. 14, and the remaining seven checks were deposited and paid post-death. In short, Mighty Oak did not pay 10 of the 11 checks, totaling $436,000, until after William’s death.

On the decedent’s Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Donald, as executor of his father’s estate, excluded the value of all 11 checks that were written on Sept. 6, 2015, and reported the value of the Mighty Oak account as $442,639. The IRS issued a notice stating that the Mighty Oak account was undervalued by $436,000, which equaled the value of the 10 checks that were paid after William’s death. The estate filed a Tax Court petition.

Issues: Sec. 2033 states that a decedent’s gross estate includes the value of all property “to the extent of the interest therein of the decedent at the time of his death.” Regs. Sec. 20.2031-5 states 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.” Regs. Sec. 25.2511-2(b) states 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.”

In determining whether the decedent had parted with dominion and control and therefore had made completed gifts, the court looked to the law in William’s home state of Pennsylvania.

Pennsylvania defines an inter vivos gift as having “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.” Accordingly, mere delivery of a check does not complete a gift (In re Mellier’s Estate, 182 A. 388 (Pa. 1936)). The court noted that “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 invest the 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.”

The court further looked to state law to understand at what point a drawer of a check is unable to make a stop-payment order, as that will dictate the time in which the gift of a check becomes irrevocable and complete. The court concluded that because Mighty Oak had not accepted, certified, or made final payment (13 Pa. Cons. Stat. §4303(a) (2015)) on any of the 10 checks, the possibility of a stop-payment order remained so that the gifts were to be construed as incomplete and, therefore, includible in the decedent’s gross estate.

However, the court was unable to stop its analysis there, due to a recurring error in terminology by both parties. Both sides mistakenly used the term “drawee bank” (the entity ordered by the drawer to make payment) when referring to the “depository bank” (the entity the payee uses to deposit the check). In its opening brief, the IRS conceded that the three checks (totaling $70,000) deposited by the payees on the day William died were not includible in his estate, seemingly because they were “credited by drawee banks” prior to William’s death. The court deemed this concession erroneous because simply depositing a check at a depository bank does not complete a gift; the drawee bank must also relinquish the funds. Nevertheless, the court ruled that the IRS concession stood because its withdrawal would be prejudicial to the petitioner.

Holding: Based on applicable law, the court would have ruled that the full value of all 10 checks ($436,000) should be includible in the decedent’s estate.

However, due to the IRS’s erroneous concession rooted in a misunderstanding of the terms of art between a “depository bank” and a “drawee bank,” the court held that only the total value of the seven checks not deposited by the date of death ($366,000) was includible in the decedent’s estate.

■ Estate of DeMuth, T.C. Memo. 2022-72

— David R. Silversmith, CPA, CFP, CFE, is a senior tax manager in Hauppauge, N.Y.; Mani Gupta, CPA, is a senior tax manager in Cranford, N.J.; and Bhakti Shah, CPA, J.D., is a partner in Cranford, N.J., all with PKF O’Connor Davies LLP.