SCOTUS Reports

Tag: Checks

  • Estate of Dillingham v. Commissioner, 88 T.C. 1569 (1987): When a Gift by Check is Considered Complete for Tax Purposes

    Estate of Elizabeth C. Dillingham, Deceased, Dan L. Dillingham and Tom B. Dillingham, Coexecutors, Petitioner v. Commissioner of Internal Revenue, Respondent, 88 T. C. 1569 (1987)

    A gift by check is not complete for federal gift and estate tax purposes until the check is paid by the drawee bank, as the donor retains dominion and control over the funds until payment.

    Summary

    Elizabeth Dillingham delivered checks to six individuals on December 24, 1980, but they were not cashed until January 28, 1981. The key issue was whether the gift was complete in 1980 or 1981 for tax purposes. The Tax Court held that the gift was not complete until the checks were paid in 1981, as Dillingham retained the ability to stop payment, thus maintaining dominion and control over the funds. This ruling impacts when gifts by check are considered complete for tax purposes, affecting the application of annual exclusions and the statute of limitations for estate tax assessments.

    Facts

    Elizabeth C. Dillingham delivered six checks of $3,000 each to six different individuals on December 24, 1980. These checks were not cashed until January 28, 1981. On the same day, she delivered additional checks of $3,000 to the same individuals, which were also cashed on January 28, 1981. The checks were drawn on Dillingham’s personal account, and there was no evidence of any agreement that the checks would not be cashed until after her death.

    Procedural History

    The estate filed a petition with the U. S. Tax Court challenging a gift tax deficiency for the quarter ended December 31, 1980, and an estate tax deficiency. The cases were submitted fully stipulated, and the court focused on the issue of when the gifts were complete for tax purposes.

    Issue(s)

    1. Whether a noncharitable gift made by check is complete for federal gift and estate tax purposes when the check is delivered to the donee or when it is paid by the drawee bank.

    Holding

    1. No, because the gift is not complete until the check is paid by the drawee bank. The court found that Dillingham did not part with dominion and control over the funds until payment in 1981.

    Court’s Reasoning

    The court applied the legal principle that a gift is complete when the donor parts with dominion and control over the property. It rejected the ‘relation back doctrine’ for noncharitable gifts by check, noting that the doctrine had previously been applied only to charitable contributions. The court emphasized that Dillingham retained the power to stop payment on the checks until they were cashed, thus retaining control over the funds. The court also considered Oklahoma state law, which does not consider a gift by check complete upon delivery. The lack of evidence regarding unconditional delivery and the delay in cashing the checks further supported the court’s decision. The court cited prior cases like McCarthy v. United States and Estate of Belcher v. Commissioner, which expressed concerns about extending the relation back doctrine to noncharitable gifts.

    Practical Implications

    This decision clarifies that for tax purposes, a gift by check to a noncharitable donee is not complete until the check is paid by the bank. This affects the timing of when gifts are reported for gift tax purposes and the applicability of annual exclusions. It also impacts estate tax planning, as gifts made within three years of death are generally included in the gross estate unless completed earlier. Legal practitioners must advise clients that gifts by check should be cashed promptly to ensure they are considered complete for tax purposes. This ruling may influence how similar cases are analyzed in other jurisdictions, particularly those with similar state laws regarding checks.

  • Estate of Belcher v. Commissioner, 83 T.C. 227 (1984): When Charitable Contributions by Check Are Deductible Before Death

    Estate of Ella M. Belcher v. Commissioner of Internal Revenue, 83 T. C. 227 (1984)

    Checks mailed to charitable organizations before a decedent’s death but cleared after are considered paid at the time of mailing, allowing for a charitable deduction on the decedent’s final income tax return and exclusion from the gross estate.

    Summary

    Ella M. Belcher mailed checks totaling $94,960 to charitable organizations before her death, but they were not cleared until after she died. The IRS argued these checks should be included in her gross estate. The Tax Court, however, ruled that the checks were deductible as charitable contributions on Belcher’s final income tax return and should not be included in her gross estate. This decision was based on the principle that payment by check, if promptly presented and honored, relates back to the time of delivery. The ruling emphasizes practical considerations in estate administration and the distinct treatment of charitable contributions under tax law.

    Facts

    In mid-December 1973, Ella M. Belcher, with her son Benjamin and a secretary, planned her year-end charitable contributions. On or about December 21, 1973, she mailed 36 checks totaling $94,960 to various charitable organizations. There were sufficient funds in her account to cover these checks at the time of mailing. Belcher died on December 31, 1973. The checks were cleared by the bank in January 1974. Her executors did not attempt to stop payment or recover the proceeds from the charities. Belcher’s will directed the residue of her estate to be divided among her grandchildren.

    Procedural History

    The IRS determined a deficiency in Belcher’s estate tax, asserting the $94,960 should be included in her gross estate. The estate petitioned the Tax Court for a redetermination. The court heard the case and issued its opinion on August 16, 1984.

    Issue(s)

    1. Whether $94,960 in Belcher’s checking account, represented by checks mailed to charitable organizations before her death but cleared after, is includable in her gross estate under sections 2031 and 2033 of the Internal Revenue Code.
    2. Whether the estate is entitled to deduct the amount of the checks as a charitable contribution under section 2055.
    3. Whether the estate is entitled to deduct the amount of the checks as a claim against the estate under section 2053.

    Holding

    1. No, because the checks were considered paid when mailed, relating back to the time of delivery, and thus were not part of Belcher’s estate at the time of her death.
    2. This issue was not decided as the court found the checks were not includable in the gross estate, making the deduction question moot.
    3. This issue was also not decided for the same reason as issue 2.

    Court’s Reasoning

    The court relied on the precedent set in Estate of Spiegel v. Commissioner, which held that a check, if promptly presented and honored, constitutes payment at the time of delivery. The court applied this principle to conclude that Belcher’s checks were paid when mailed, thus not part of her estate at death. The court dismissed the relevance of a regulation allowing exclusion of checks given in discharge of legal obligations, arguing it did not apply to charitable contributions. The court also considered practical implications, noting that including such checks in the estate would complicate administration and potentially lead to surcharges against executors for not stopping payment. A concurring opinion emphasized the pragmatic approach, while dissenting opinions argued the majority misinterpreted the applicable regulations and statutes.

    Practical Implications

    This decision clarifies that checks mailed to charities before death but cleared afterward are considered paid at mailing, impacting how estates should treat such contributions. It simplifies estate administration by allowing executors to claim charitable deductions on the decedent’s final income tax return without including the checks in the gross estate. This ruling may encourage timely mailing of charitable contributions by individuals nearing the end of life, to secure tax benefits. It also highlights the distinct treatment of charitable contributions under tax law, potentially influencing estate planning strategies to maximize charitable giving while minimizing tax liabilities. Subsequent cases have cited Estate of Belcher in similar contexts, reinforcing its application in estate and tax planning.