The Internal Revenue Service (IRS) issued a notice of deficiency determining a deficiency in federal estate tax of $179,130. The notice was issued to Donald L. DeMuth in his capacity as the executor of the estate of his deceased father, William E. DeMuth, Jr. (decedent). Donald DeMuth filed a Petition in this Court pursuant to section 6213(a) for redetermination of the deficiency.
The parties submitted this case for decision without trial under Rule 122. The sole issue for our decision is whether the value of ten checks written before but paid after decedent's death is properly includible in his gross estate. For the reasons detailed below, we hold that seven of the ten checks are includible in decedent's gross estate.
The following facts are derived from the Stipulation of Facts and the jointly stipulated exhibits contained therein. Decedent was domiciled in Pennsylvania when he died testate on September 11, 2015. Donald DeMuth is the executor of his late father's estate and resided in Pennsylvania when he timely filed the instant Petition.
In January 2007, decedent executed a power of attorney (POA) appointing his son, Donald DeMuth, as his agent. Pursuant to the POA, Donald DeMuth was authorized to give gifts to decedent's issue in amounts not exceeding the annual exclusion from the federal gift tax.
Among decedent's financial assets was an investment account at Mighty Oak Strong America Investment Co. (Mighty Oak) that featured a checking function.
In the summer of 2015, decedent's health began to fail. By early September of that year, decedent was in an end-stage medical condition, and he passed away on September 11. On September 6, prior to decedent's death, Donald DeMuth wrote eleven checks, totaling $464,000, from decedent's investment account. The checks are consecutively numbered 1214 through 1224.
Of these eleven checks, however, only check No. 1216 was paid by Mighty Oak before decedent's passing. While checks Nos. 1215, 1219, and 1221 were deposited by the respective payees on September 11, seemingly before decedent's death, those checks were not paid by Mighty Oak until September 14—three days after he passed away. Thus, ten of the eleven checks (totaling $436,000) were not paid by Mighty Oak until after decedent's death. The order by which Mighty Oak paid out the eleven checks is as follows:
On Schedule B, Stocks and Bonds, of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Donald DeMuth, acting in his capacity as the estate's executor, reported that the value of the Mighty Oak investment account was $442,639, which excluded the value of all eleven checks he wrote (on decedent's behalf) on September 6, 2015. The return was selected for examination and audit.
On July 18, 2019, the IRS issued a notice of deficiency, which determined that the value of the investment account (and by extension, William DeMuth's gross estate) reported on the return was understated by $436,000—the value of the ten checks that were not paid by Mighty Oak until after decedent's death.
I. Burden of Proof
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of showing that those determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Submission of a case under Rule 122 does not alter the burden of proof. See Rule 122(b). Accordingly, petitioner bears the burden of showing that the value of the ten checks (totaling $436,000) that were paid by Mighty Oak after decedent's death is not includible in his gross estate.
II. Legal Framework and Application
Section 2033 provides: "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." Treasury Regulation § 20.2031-5 further specifies that 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." To that end, the value of any check written by a decedent that still belongs to them at their death is includible in their gross estate; however, the funds from such a check no longer belong to a decedent at their death if they executed a completed gift of the check during their life. As such, we must determine whether the checks at issue represent completed gifts.
Treasury Regulation § 25.2511-2(b) provides 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." For purposes of this regulation, we must look to the relevant state law to determine when a decedent parts with dominion and control of the funds in their account after they draw a check. See Burnet v. Harmel, 287 U.S. 103, 110 (1932) (holding that state law creates legal interests whereas federal law determines how and when those interests should be taxed); Estate of Dillingham v. Commissioner, 88 T.C. 1569, 1575 (1987), aff'd, 903 F.2d 760 (10th Cir. 1990). Consequently, we turn to Pennsylvania law to determine when the gift of a check is deemed complete.
Under 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) (emphasis added). Mere delivery of a check does not complete a gift. See In re Mellier's Estate, 182 A. 388, 389 (Pa. 1936). This principle makes sense given that the Pennsylvania Commercial Code allows the drawer
Though some interpretation is necessary, the Pennsylvania Commercial Code answers this specific question:
13 Pa. Cons. Stat. § 4303(a) (2015) (emphasis added).
This statute stands for the proposition that once a check has reached any one of the aforementioned stages in its processing at the time a stop-payment order is made, then the stop-payment order is too late; at that time, a charge may be validly made against the drawer's account. Therefore, the first (but not the only) possible time at which a gift of a check may be deemed complete is when the drawee
In the instant case, Mighty Oak did not accept, certify, or make final payment on any of the ten checks at issue until after decedent's death.
If we could stop here, we would hold that the full value of all ten checks paid by Mighty Oak after decedent's death ($436,000) is properly includible in his gross estate.
III. Relevant Terms of Art
In all matters before this Court, the use of proper terminology is of the utmost importance. In the instant case, both parties have seemingly misconstrued the term "drawee bank" to mean "depositary bank." As discussed supra note 7, these two terms have distinct meanings; a drawee bank is the entity ordered by the drawer to make payment whereas a depositary bank is the entity that a payee uses to deposit a check. Drawee banks are often distinct entities from depositary banks; they are not interchangeable.
The first time the parties mistakenly refer to the payees' depositary banks as drawee banks is in the Joint Stipulation of Facts; in reference to checks Nos. 1215, 1219, and 1221, the parties stipulated to the following language: "On September 11, 2015, the following Mighty Oak checks were deposited and credited to the accounts of the following payees by their respective drawee banks." (Emphasis added.). To be clear, those payees deposited their checks and had their accounts credited by their respective depositary banks, not the drawee bank. The misuse of the term "drawee bank" did not end there, however, as it was repeatedly used incorrectly in both petitioner's and respondent's Simultaneous Opening Briefs. At no point did either party formally recognize the error or attempt to correct it.
This terminological distinction is critical in the instant case because respondent conceded (in his Simultaneous Opening Brief) that checks Nos. 1215, 1219, and 1221 were not includible in decedent's gross estate—seemingly on the basis that the checks had been "credited by drawee banks" before decedent's death.
IV. Respondent's Concession on Brief
At issue now is whether or not we are to hold respondent to a concession he made on brief in the context of a case that has been submitted for decision without trial under Rule 122 when the concession is inconsistent with the applicable law. While this particular issue has seemingly never come before the Court, we have previously disallowed the Commissioner's withdrawal of a concession in the context of post-trial briefing. See Glass v. Commissioner, T.C. Memo. 1988-550, 1988 Tax Ct. Memo LEXIS 579, at *12 n.12 ("In his brief, [the Commissioner] seeks to withdraw the concession. We are not inclined to accept such withdrawal, however, as it would put [the taxpayer] at a disadvantage, since it tried and argued the case in light of the concession."), aff'd, 904 F.2d 33 (2d Cir. 1990) (unpublished table decision); Cogan v. Commissioner, T.C. Memo. 1980-328, 1980 Tax Ct. Memo LEXIS 259, at *21 ("[The taxpayers] had every right to rely on the concession of [the Commissioner's] counsel at trial and we will not permit [the Commissioner] to withdraw his concession or attempt to modify it after trial.").
Glass and Cogan both dealt with the Commissioner's attempt to withdraw concessions (which were made before and at trial) during post-trial briefing, whereas the parties here have submitted this case for decision without trial under Rule 122. Despite the difference in procedural posture, the principle remains the same. Respondent has not attempted to withdraw his concession at any point. Perhaps more importantly, however, petitioner relied upon respondent's concession regarding checks Nos. 1215, 1219, and 1221 in the drafting of his Simultaneous Answering Brief. Thus, although all ten checks at issue would otherwise apparently be includible in decedent's gross estate under a proper legal analysis, to ignore the concession respondent made in his brief sua sponte would be prejudicial to the petitioner. We will therefore hold respondent to his concession: checks Nos. 1215, 1219, and 1221, which total $70,000, will not be included in decedent's gross estate. The remaining seven checks at issue, which total $366,000, are included in the gross estate.
We have considered all of the arguments made by the parties and, to the extent they are not addressed herein, we deem them to be moot, irrelevant, or without merit. To reflect the foregoing,
Decision will be entered under Rule 155.