In Demuth v. Commissioner (T.C. Memo 2022-72), the Tax Court held that certain checks issued and deposited before, but paid after, a decedent’s passing weren’t includable in the decedent’s taxable estate, based on the misuse of terms of art by counsel for both the taxpayer and the Internal Revenue Service.
Good Facts Make Good Law. Sometimes.
The Father in the case executed a power of attorney in 2007, appointing Son as his agent. Pursuant to the power of attorney, Son made annual exclusion gifts to Father’s descendants from 2007 through 2014.
Father and Son were both residents of Pennsylvania.
In the summer of 2015, Father’s health began to fail. By September, Father was suffering from an end-stage medical condition. On Sept. 6, 2015, Son, as agent, wrote 11 checks from Father’s investment account (the Investment Account) at Investment Company which featured a checking function. Ten of the checks were for amounts eligible for the annual gift tax exclusion. In total, $464,000 was transferred by the 11 checks.
One check was paid by Investment Company on Sept. 9, 2015. Three checks (1215, 1219 and 1221) were deposited on Sept. 9 and paid by Investment Company on Sept. 14.
On Sept. 11, Father died.
The remaining checks were deposited after Father’s death and paid by Investment Company between Sept.15 and Sept. 30.
Son, acting as Father’s executor, timely filed an Estate Tax Return on which he excluded the value of the 11 checks in reporting the value of the Investment Account. On audit, the IRS issued a notice of deficiency determining that the value of the Investment Account was understated by the value of the 10 checks paid by Investment Company after Father’s death (i.e., $436,000).
Beware of Grantors Bearing Checks
Internal Revenue Code Section 2033 includes in a decedent’s gross estate the value of the decedent’s interest in property at the time of the decedent’s death. The related regulations specifically include cash belonging to the decedent at his death “whether in his possession or in the possession of another, or deposited with a bank.” The value of a check is included in the writer’s gross estate unless such check constitutes a completed gift during the writer’s life.