The Tax Court in Brief – July 11th – July 15th, 2022

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Tax Litigation: The Week of July 11th, 2022, through July 15th, 2022

Estate of DeMuth, v. Comm'r, T.C. Memo. 2022-72 | July 12, 2022 | Jones, J. | Dkt. No. 18724-19

Opinion

Short Summary: William E. Demuth, Jr. (the "Decedent") was domiciled in Pennsylvania and died testate on September 11, 2015. Donald Demuth, the Decedent's son ("Mr. DeMuth"), was appointed executor of the Decedent's estate. Prior to his death, the Decedent executed a power of attorney and appointed Mr. DeMuth as his agent. Mr. DeMuth was authorized to give gifts from the Decedent's financial assets to the Decedent's issue in amounts not exceeding the annual gift exclusion. One of the Decedent's financial assets was an investment account at Mighty Oak Strong America Investment Co. ("Mighty Oak") with a checking function.

On September 6, 2015—five days before the Decedent's death—Mr. DeMuth wrote eleven checks, totaling $464,000, from the Decedent's Mighty Oak account. One check was paid before Decedent's passing. Three checks were deposited by the payees on September 11, 2015, but paid by Mighty Oak on September 14, 2015. The remaining seven checks were paid by Mighty Oak on or after September 15, 2015.

On Schedule B of the Decedent's estate tax return (Form 706), Mr. DeMuth reported the value of the Mighty Oak account as $442,639—a value that excluded all of the checks written on September 6, 2015. The return was selected for examination. On July 18, 2019, the Internal Revenue Service issued a notice of deficiency, determining that the Mighty Oak account was undervalued by $436,000—the value of the ten checks paid after the Decedent's death. Mr. DeMuth timely petitioned the Tax Court on behalf of the estate and submitted the case for decision without trial under Rule 122.

Key Issues:

  • Whether the value of ten checks written before but paid after Decedent's death is properly includible in the Decedent's gross estate.

Primary Holdings:

  • Seven of the ten checks are includible in the Decedent's gross estate.

Key Points of Law:

  • The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death. I.R.C. § 2033.
  • 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." Treas. Reg. § 20.2031-5.
  • A gift is not considered complete until a donor has "parted with dominion and control as to leave him no power to change its disposition." Treas. Reg. § 25.2511-2(b).
  • According to Pennsylvania law, in order to make a valid inter vivos gift, there must be "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." Packer v. Clemson, 112 A. 107, 107 (Pa. 1920). Mere delivery of a check does not complete a gift. See In re Mellier's Estate, 182 A. 388, 389 (Pa. 1936).
  • The first possible time at which a gift of a check may be deemed complete is when the drawee bank accepts, certifies, or makes final payment of the check. In context, acceptance means "the drawee's signed agreement to pay a draft as presented." 13 Pa. Cons. Stat. § 3409(a) (2015).
  • Generally, in post-trial briefing, the Tax Court is not included to accept the Commissioner's withdrawal of a previous concession, as it would put the taxpayer at a disadvantage since it tried and argued his/her case in light of the concession. See Glass v. Commissioner, T.C. Memo. 1988-550, 1988 Tax Ct. Memo LEXIS 579, aff'd, 904 F.2d 33 (2d Cir. 1990).

Insight: DeMuth underscores the timing (and reporting) issue related to payments issued from an estate prior to (but deposited after) the decedent's death. Given the underlying legal issues related to when the gift of a check is complete, a review of state law is critical—pointing to the importance of the taxpayer's domicile in Tax Court proceedings. Further, the Tax Court notes that concessions made by the Commissioner are not typically allowed to be withdrawn given the obvious disadvantages to taxpayers.

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