SCOTUS Reports

Tag: Relation-Back Doctrine

  • Estate of Newman v. Commissioner, 111 T.C. 81 (1998): When Unpaid Checks Do Not Constitute Completed Gifts for Estate Tax Purposes

    Estate of Sarah H. Newman, Deceased, Mark M. Newman, Co-Executor and Minna N. Nathanson, Co-Executor v. Commissioner of Internal Revenue, 111 T. C. 81 (1998)

    Checks written before but paid after a donor’s death are not considered completed gifts and must be included in the donor’s gross estate for estate tax purposes.

    Summary

    Before her death, Sarah Newman’s son, acting under power of attorney, wrote checks from her account to family members. These checks, intended as gifts, were not cashed until after Newman’s death. The court ruled that because the checks were not accepted by the bank before Newman’s death, they did not constitute completed gifts. Thus, the funds remained part of her estate for tax purposes. The decision hinged on the principle that a gift is not complete until the donor relinquishes control, and checks do not transfer control until accepted by the bank. This ruling distinguishes between charitable and noncharitable gifts in terms of the “relation-back doctrine,” impacting how estate planners must consider the timing of gift checks.

    Facts

    Sarah H. Newman appointed her son, Mark, as her attorney-in-fact. Before her death on September 28, 1992, Mark wrote six checks from Newman’s checking account, payable to family members and others, totaling $95,000. These checks were dated and delivered before Newman’s death but were not accepted or paid by the bank until after her death. Newman’s estate argued these checks represented completed gifts and should not be included in her gross estate for tax purposes.

    Procedural History

    The estate filed a tax return excluding the funds represented by the checks from Newman’s gross estate. The Commissioner of Internal Revenue challenged this, asserting the checks were not completed gifts and should be included. The case was brought before the United States Tax Court, which had to determine if the funds were part of Newman’s gross estate.

    Issue(s)

    1. Whether the checks drawn on Newman’s account before her death but paid after her death constitute completed gifts, thus not includable in her gross estate?
    2. Whether the “relation-back doctrine” applies to noncharitable gifts made by check, which were paid after the donor’s death?

    Holding

    1. No, because the checks were not accepted or paid by the bank before Newman’s death, she retained dominion and control over the funds, and thus the gifts were not complete.
    2. No, because the “relation-back doctrine” does not apply to noncharitable gifts when the donor dies before the checks are paid, as established in prior cases like Estate of Gagliardi and McCarthy v. United States.

    Court’s Reasoning

    The court applied the legal principle that a gift is not complete until the donor relinquishes control over the property. Under D. C. law, a check is considered conditional payment until accepted by the bank. The court relied on Estate of Metzger, which clarified that a check remains revocable until accepted by the drawee bank. Newman retained the ability to stop payment on the checks, even if practically she might not have been able to exercise this power. The court distinguished this case from those involving charitable contributions where the “relation-back doctrine” might apply, citing Estate of Gagliardi and McCarthy v. United States, where the doctrine was not extended to noncharitable gifts paid after the donor’s death. The court’s decision was influenced by policy considerations to prevent estate tax avoidance, as noted in McCarthy.

    Practical Implications

    This ruling has significant implications for estate planning and tax law. Estate planners must now ensure that gifts by check are cashed or accepted by the bank before the donor’s death to be considered completed and excluded from the gross estate. The decision underscores the difference in treatment between charitable and noncharitable gifts regarding the timing of payment. Practitioners should advise clients that any noncharitable gift checks outstanding at the time of death will be included in the gross estate, potentially affecting estate tax liabilities. This case also reaffirms the principle that mere possession of the power to revoke a gift is controlling, not the practical ability to exercise it. Subsequent cases have continued to apply this ruling, reinforcing its impact on estate tax planning strategies.

  • Estate of Metzger v. Commissioner, 100 T.C. 204 (1993): When Gifts by Check Are Considered Complete for Tax Purposes

    Estate of Albert F. Metzger, Deceased, John A. Metzger and Z. Townsend Parks, Jr. , Personal Representatives v. Commissioner of Internal Revenue, 100 T. C. 204 (1993)

    A gift by check is complete for tax purposes upon unconditional delivery and deposit within the same year, even if the check is not cleared until the following year.

    Summary

    In Estate of Metzger v. Commissioner, the Tax Court held that gifts made by check are considered complete for tax purposes when unconditionally delivered and deposited within the same year, even if not cleared until the next year. Albert Metzger’s son, acting under a power of attorney, issued checks in December 1985 that were deposited by the donees on December 31 but not cleared until January 1986. The court applied the relation-back doctrine, ruling that the gifts were complete in 1985 and thus qualified for the annual exclusion, impacting how attorneys should advise clients on the timing of year-end gifts.

    Facts

    Albert Metzger executed a power of attorney authorizing his son, John, to make gifts on his behalf. On December 14, 1985, John issued four checks from Albert’s account to himself, his wife, and two others. These checks were deposited into a joint account on December 31, 1985, but not cleared by the bank until January 2, 1986. Albert died in 1987, and his estate did not report these gifts on the federal estate tax return.

    Procedural History

    The Commissioner determined a deficiency in the estate tax, asserting that the gifts were taxable because they were completed in 1986. The estate petitioned the U. S. Tax Court for a redetermination. Both parties filed cross-motions for partial summary judgment, and the case was decided based on stipulated facts.

    Issue(s)

    1. Whether the gifts made by check were complete in 1985 when the checks were delivered and deposited, or in 1986 when the checks were cleared by the bank.
    2. Whether the relation-back doctrine applies to noncharitable gifts made by check.

    Holding

    1. No, because under Maryland law, a gift by check is not complete until accepted by the drawee bank. However, yes, because the relation-back doctrine applies to relate the acceptance back to the time of deposit in 1985.
    2. Yes, because the relation-back doctrine can apply to noncharitable gifts when the checks are unconditionally delivered and deposited within the year, and cleared shortly thereafter.

    Court’s Reasoning

    The court first established that under Maryland law, a gift by check remains incomplete until the check is presented for payment and accepted by the drawee bank. The court noted that the power of attorney did not change this rule, as the donor could still revoke the gift before it was cleared. However, the court applied the relation-back doctrine, previously used for charitable gifts, to this case involving noncharitable gifts. The court reasoned that since the checks were unconditionally delivered and deposited within 1985, and cleared shortly thereafter, the payment related back to the time of deposit. The court cited Estate of Spiegel and Estate of Belcher for the practical realities of commerce, extending the doctrine to noncharitable gifts under specific conditions. The court emphasized that the gifts were intended, unconditionally delivered, and presented for payment within the year, supporting the application of the relation-back doctrine.

    Practical Implications

    This decision clarifies that gifts by check can be considered complete for tax purposes in the year they are unconditionally delivered and deposited, even if not cleared until the following year. Attorneys should advise clients to ensure checks are deposited by year-end to qualify for the annual exclusion. This ruling may encourage year-end gift planning to minimize estate taxes. The decision distinguishes between charitable and noncharitable gifts, but extends the relation-back doctrine to the latter under specific conditions. Subsequent cases like Estate of Dillingham and Estate of Gagliardi have further refined the application of this doctrine, impacting how similar cases are analyzed.