Jerry: Well, I cashed the checks, the checks bounced and now my Nana's missing!
Kramer: Well don't look at me!
Jerry: It's your fault!
Kramer: My fault?!? Your Nana, is missing, because she's been passing those bum checks all over town, and she finally pissed off the wrong people!
Luckily, Nana is found and all is resolved by the end of the episode.
On July 12th, the U.S. Tax Court issued a memorandum opinion in Estate of Demuth v. Commissioner regarding uncashed checks from a grandparent and whether they were completed gifts and therefore not includable in the decedent’s gross estate. Unfortunately for the taxpayer, the court found the gifts were not complete because the checks were not cashed before the decedent’s date of death.
In January 2007, William Demuth, appointed his son, Donald, as his agent giving him the power to make annual gifts to the William’s descendants in amounts not exceeding the annual exclusion from the federal gift tax. From 2007-2014, Donald made such annual gifts to family members. On September 6, 2015, five days before his father died on September 11, 2015, Donald wrote eleven checks totaling $464,000 to family members from one of his father’s accounts. One check was paid from the account before Williams’ death, however, the other ten were not paid until after William died. Three of the ten were deposited the day William died and the others were deposited after William died. The estate’s Form 706 did not include the value of eleven checks, i.e., $464,000, in the decedent’s gross estate. The IRS examined the tax return and issued a notice of deficiency, which determined the gross estate was understated by $436,000, the value of the ten checks that were not paid until after William died.
The Tax Court’s analysis started with a reference to Treasury Regulation Section 25.2511-2(b) which states that 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.” The court then looked at state law, in this case Pennsylvania law, which says that mere delivery of a check does not complete a gift because the drawer of the check can revoke the delivery by making “a stop-payment order on that check”. Although the Court could have held that the value of the ten uncashed checks were includible in the decedent’s gross estate, the parties had entered into a stipulation where the IRS conceded that the three checks that were deposited on the date of death should not be included in the decedent’s gross estate. Despite IRS counsel’s attempt to withdraw that concession, the Court held him to it and said that the remaining seven checks at issue, which totaled $366,000 were included in the gross estate.
The lesson from Seinfeld and Demuth? Cash Nana’s checks before it is too late and before Nana gets lost.
For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or firstname.lastname@example.org.