SCOTUS Reports

Tag: Payment by Check

  • Broussard v. Commissioner, 16 T.C. 1315 (1951): Deductibility of Charitable Contributions Via Check

    16 T.C. 1315 (1951)

    A charitable contribution is deductible in the year the check is delivered to the charity, even if the charity deposits the check in a subsequent year.

    Summary

    Estelle Broussard sought to deduct charitable contributions made via checks delivered to the Sisters of the Holy Cross on December 31, 1946. The checks were not deposited until 1947. The Tax Court held that the contributions were deductible in 1946. The court reasoned that delivery of the checks to a representative of the charity constituted payment in 1946, regardless of when the checks were actually deposited and cleared by the bank. This decision aligns with the principle that delivery to the payee signifies payment for tax purposes.

    Facts

    On December 31, 1946, Beaumont Rice Mills issued two checks totaling $6,000 payable to the Sisters of the Holy Cross. These checks were charged to the Broussard Trust, which in turn charged them to Estelle Broussard’s account (the petitioner). C.E. Broussard delivered the checks to Sister Mary Rita Estelle, a member of the Sisters of the Holy Cross, for transmittal to the Order. The checks were not deposited and collected by the Sisters of the Holy Cross until 1947.

    Procedural History

    The Commissioner of Internal Revenue disallowed the deduction for 1946. Broussard petitioned the Tax Court for review. The Tax Court reversed the Commissioner’s decision, holding that the contributions were deductible in 1946.

    Issue(s)

    Whether charitable contributions made via checks delivered to the charity on December 31, 1946, but not deposited until 1947, are deductible in 1946.

    Holding

    Yes, because delivery of the checks to the Sisters of the Holy Cross on December 31, 1946, constituted payment in that year, regardless of when the checks were deposited.

    Court’s Reasoning

    The Tax Court relied on Section 23(o) of the Internal Revenue Code, which allows deductions for charitable contributions, payment of which is made within the taxable year. The court also cited Section 29.23(o)-1, Regulations 111, stating that a deduction is allowed only for contributions actually paid during the taxable year. The court emphasized that the checks were made out directly to the “Sisters of the Holy Cross” and delivered to Sister Mary Rita Estelle for direct transmittal to the Order. The court stated, “When this is done, we think a payment of the $6,000 in question to the Sisters of the Holy Cross took place on December 31, 1946.” The court found no substantive distinction between this case and Estate of Modie J. Spiegel, 12 T.C. 524, where similar checks were deemed deductible in the year of delivery, not the year of deposit. The court reasoned that delivery to a member of the order was equivalent to delivery to the order itself, effectively transferring ownership of the funds at that time.

    Practical Implications

    This case provides clarity on the timing of charitable contribution deductions when payment is made by check. It reinforces the principle that a charitable contribution is deemed paid when the check is unconditionally delivered to the charity. Legal practitioners can use this case to advise clients on the proper timing for claiming charitable deductions. Taxpayers can rely on this case to support a deduction in the year of delivery, even if the check isn’t cashed until the following year. The case highlights the importance of proper documentation, such as maintaining records of when checks were issued and delivered. Later cases have cited Broussard and Spiegel to reinforce the principle that delivery of a check constitutes payment, provided the check is honored upon presentation. This ruling benefits taxpayers by allowing them to plan their charitable giving strategically to maximize tax benefits within a given year.

  • Spiegel v. Commissioner, 12 T.C. 524 (1949): Deductibility of Charitable Contributions Made by Check

    12 T.C. 524 (1949)

    A charitable contribution made by check is deductible in the year the check is delivered, provided the check is honored by the bank upon presentation in due course, even if that occurs in a subsequent year or after the drawer’s death.

    Summary

    The estate of Modie J. Spiegel sought to deduct charitable contributions made by checks written in December 1942 but cashed in January 1943. The Tax Court addressed whether these contributions were “paid” in 1942, as required for deduction under Section 23(o) of the Internal Revenue Code. The court held that the contributions were deductible in 1942 because the subsequent honoring of the checks by the bank related back to the date of delivery, establishing payment in the year the checks were issued, regardless of the drawer’s death before cashing.

    Facts

    Modie J. Spiegel wrote two checks on December 30, 1942, to qualifying charitable organizations: one for $5,000 to the Anti-Defamation League and another for $2,800 to Jewish Charities of Chicago. He delivered the checks on December 31, 1942. The Anti-Defamation League deposited its check on January 8, 1943, and it cleared on January 11, 1943. Jewish Charities of Chicago deposited its check on January 4, 1943, and it cleared the same day. Spiegel died on January 8, 1943. His estate sought to deduct these contributions on the 1942 income tax return.

    Procedural History

    The Commissioner of Internal Revenue disallowed the deduction, arguing that the contributions were not “paid” within the 1942 taxable year. The estate petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    Whether charitable contributions made by check are deductible in the year the check is delivered to the charity, even if the check is not cashed until the following year or after the death of the drawer?

    Holding

    Yes, because payment by check is a conditional payment that becomes absolute when the check is honored. The payment relates back to the date of delivery of the check, thus satisfying the requirement that payment be made within the taxable year.

    Court’s Reasoning

    The Tax Court reasoned that delivering a check constitutes a conditional payment. When the bank honors the check upon presentation, that condition is satisfied, and the payment becomes absolute, relating back to the date the check was delivered. The court emphasized the practical realities of using checks for payment in everyday commerce and sought to apply tax laws in a way that aligns with common business practices. The court explicitly overruled Estate of John F. Dodge, 13 B.T.A. 201, which held that a contribution is not made until completed by payment either in money or money’s worth. The court noted that Congress intended to eliminate the possibility of a distinction between cash- and accrual-basis taxpayers. The court also stated: “It would seem to us unfortunate for the Tax Court to fail to recognize what has so frequently been suggested, that as a practical matter, in everyday personal and commercial usage, the transfer of funds by check is an accepted procedure. The parties almost without exception think and deal in terms of payment except in the unusual circumstance, not involved here, that the check is dishonored upon presentation, or that it was delivered in the first place subject to some condition or infirmity which intervenes between delivery and presentation.”

    Practical Implications

    This case provides clarity on the deductibility of charitable contributions made via check. It establishes that taxpayers can deduct contributions in the year they relinquish control of the funds by delivering the check, rather than waiting for the check to clear. This ruling simplifies tax planning for both individuals and organizations, aligning tax treatment with the common understanding of when payment is considered to have occurred. This decision emphasizes the importance of the date of delivery, provided the check is presented and honored in due course. The dissent underscores the importance of completed gifts and the ability to revoke a check before it is cashed.

  • Hubbell Estate v. Commissioner, 10 T.C. 1207 (1948): Deductibility of Check for Taxes Unpaid Due to Death

    Hubbell Estate v. Commissioner, 10 T.C. 1207 (1948)

    A taxpayer on the cash basis cannot deduct a state income tax payment made by check if the check was mailed before death but not cashed until after death, because the conditional payment by check never became absolute due to the check not being honored.

    Summary

    The Tax Court addressed whether a decedent’s estate could deduct a state income tax payment made by a check mailed before death but not cashed until after death. The decedent, James W. Hubbell, mailed a check for state income taxes shortly before his death. The check was received and deposited but not presented for payment until after his death, at which point the bank refused payment. The executrix then issued a new check. The court held that the initial check did not constitute payment for tax deduction purposes because the conditional payment never became absolute due to the check not being honored. The deduction was therefore disallowed.

    Facts

    James W. Hubbell died on July 20, 1944. Prior to his death, on July 10, 1944, he mailed a check to the New York State Tax Commissioner for $928.02, representing a quarterly payment of his state income tax. Hubbell’s bank account contained sufficient funds to cover the check. The check was received and deposited by the tax commissioner but was not presented to Hubbell’s bank for payment before his death. Upon presentation after his death, the bank refused payment. The tax commissioner returned the check to Hubbell’s executrix, who then issued a new check from the estate to cover the tax liability.

    Procedural History

    The executrix of James W. Hubbell’s estate filed an income tax return for the period of January 1 to July 20, 1944, and claimed a deduction for the $928.02 payment. The Commissioner disallowed the deduction, leading to a dispute brought before the Tax Court.

    Issue(s)

    Whether a taxpayer on the cash basis can deduct a state income tax payment made by check when the check was mailed before death but not cashed until after death, due to the bank’s refusal to honor the check after the taxpayer’s death.

    Holding

    No, because payment by check is a conditional payment that becomes absolute only when the check is honored by the drawee bank. Since the check was not honored due to Hubbell’s death, the conditional payment never became absolute, and therefore, the amount was not deductible as a tax payment by the decedent.

    Court’s Reasoning

    The court reasoned that payment by check is conditional, subject to the condition that the check is paid upon presentation. Citing Commissioner v. Bradley, 56 F.2d 728 and Eagleton v. Commissioner, 97 F.2d 62, the court emphasized that unless the check is actually paid, the tax is not considered paid. The court highlighted that in the absence of an agreement to the contrary (which was not present here), the acceptance of a check is not considered payment. Furthermore, the court pointed out that New York law requires taxes to be paid in money, and a tax collector lacks the authority to accept checks in lieu of money. Therefore, the decedent’s check, which was never honored, did not constitute payment, and the subsequent payment by the executrix was considered the actual payment of the tax. The court stated, “Conditional payment never became absolute.”

    Practical Implications

    This case clarifies that for cash-basis taxpayers, the deductibility of expenses paid by check depends on the check being honored. If a check is issued but not honored for any reason (such as insufficient funds or, as in this case, the taxpayer’s death), the deduction is not allowed until actual payment occurs. This has implications for estate planning and tax preparation, emphasizing the importance of ensuring that checks issued for deductible expenses are honored promptly, especially near the time of death. Legal practitioners should advise clients to consider alternative payment methods (e.g., wire transfer) to ensure payment is completed before death when timing is critical. Later cases may distinguish this ruling based on specific factual nuances, such as agreements between the taxpayer and the taxing authority regarding the acceptance of checks as final payment.