Estate of William E. DeMuth, Jr., Donald L. DeMuth ( 2022 )

United States Tax Court
CORRECTED
T.C. Memo. 2022-72ESTATE OF WILLIAM E. DEMUTH, JR., DECEASED, DONALD L.
DEMUTH, EXECUTOR,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 18724-19. Filed July 12, 2022.
—————
William R. Kaufman, for petitioner.
Kathleen K. Raup, for respondent.
MEMORANDUM OPINION
JONES, Judge: 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. 1
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
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulatory references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
All monetary amounts are rounded to the nearest dollar.
Served 08/01/22
2
[*2] that seven of the ten checks are includible in decedent’s gross
estate.
Background
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. 2
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. 3
From 2007 through 2014, Donald DeMuth gave annual gifts to his
brothers and other family members in accordance with the POA.
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
2 While there is an unresolved issue in this Court as to whether a decedent’s
domicile at the time of death or the executor’s place of residence is controlling for
purposes of appellate venue, there is no conflict with respect to venue for appeal here
as Pennsylvania was both decedent’s domicile at the time of his death and Donald
DeMuth’s residence when the Petition was filed. See Estate of Clack v. Commissioner,
106 T.C. 131 (1996). Thus, absent stipulation to the contrary, this case is appealable
to the U.S. Court of Appeals for the Third Circuit. See § 7482(b)(1)(A).
3 In calendar year 2015, the annual exclusion was $14,000 per donee. See Rev.
Proc. 2014-61, § 3.35(1), 2014-47 I.R.B. 860, 868.
3
[*3] 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:
Check No. Amount Date Paid by Mighty Oak
1216 $28,000 09/09/2015
1215 28,000 09/14/2015
1219 28,000 09/14/2015
1221 14,000 09/14/2015
1220 14,000 09/15/2015
1224 240,000 09/16/2015
1217 28,000 09/17/2015
1218 28,000 09/17/2015
1223 14,000 09/18/2015
1214 28,000 09/25/2015
1222 14,000 09/30/2015
Total $464,000
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
4
[*4] by $436,000—the value of the ten checks that were not paid by
Mighty Oak until after decedent’s death. 4
Discussion
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
4 Respondent also determined that the amount of adjusted taxable gifts
reported on the return was understated by $11,824 for purposes of section
2001(b)(1)(B). But petitioner later conceded this determination.
5
[*5] 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 5 of a check to “stop
payment of any item drawn on [their] account or close the account by an
order to the bank describing the item or account with reasonable
certainty received at a time and in a manner that affords the bank a
reasonable opportunity to act on it.” 13 Pa. Cons. Stat. § 4403(a) (2015).
Thus, so long as the drawer of a check can make a stop-payment order
on that check, the delivery of the check is revocable. Although the
drawer of a check may very well have the intention to invest the payee 6
with the right of disposition beyond recall, if that intention is not
coupled with an irrevocable delivery, the drawer has not surrendered
dominion and the gift is incomplete under Pennsylvania law. As such,
our main query now is determining at what point a drawer can no longer
make a stop-payment order, as that will determine the point at which
the gift of a check becomes irrevocable and is therefore completed.
Though some interpretation is necessary, the Pennsylvania
Commercial Code answers this specific question:
Any . . . stop-payment order received by . . . a payor [drawee] bank
comes too late to terminate, suspend, or modify the right or duty
of the bank to pay an item or to charge the account of its customer
[drawer] for the item if the . . . stop-payment order . . . is received
. . . and a reasonable time for the bank to act thereon expires . . .
after the earliest of the following:
(1) The bank accepts or certifies the item.
5The “drawer” is the person who signs a draft (i.e., a check) or is identified as
the one ordering payment. See 13 Pa. Cons. Stat. § 3103(a) (2015).
6 The “payee” is the person to whom a check is payable. See 13 Pa. Cons. Stat.
§ 3110(a) (2015).
6
[*6] (2) The bank pays the item in cash.
(3) The bank settles for the item without having a right to
revoke the settlement under statute, clearinghouse, rule or
agreement.
(4) The bank becomes accountable for the amount of the
item under section 4302 (relating to responsibility of payor
[drawee] bank for late return of item).
(5) With respect to checks, a cutoff hour no earlier than one
hour after the opening of the next banking day after the
banking day on which the bank received the check and no
later than the close of that next banking day or, if no cutoff
hour is fixed, the close of the next banking day after the
banking day on which the bank received the check.
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 7 bank 8
accepts, certifies, or makes final payment of the check. In this context,
acceptance means “the drawee’s signed agreement to pay a draft as
presented.” 13 Pa. Cons. Stat. § 3409(a) (2015). Similarly, for a check to
be certified means that the check has been “accepted by the bank on
which it is drawn.” Id. § 3409(d).
7 The “drawee” (or alternatively, “payor bank”) is the person that is ordered in
a draft to make payment. See 13 Pa. Cons. Stat. § 3103(a) (2015); see also 13 Pa. Cons.
Stat. § 4105 (2015). In other words, the drawee is the drawer’s bank; it is the entity
which pulls the funds from the drawer’s account in order to make final payment of a
check. On the other hand, a payee deposits a check with a “depositary bank.” See 13
Pa. Cons. Stat. § 4105. The depositary bank is not always the same entity as the
drawee bank and must somehow present the check to the drawee bank for payment.
See 13 Pa. Cons. Stat. § 4204 (2015).
8 Brokerage firms offering checking services are considered “banks” for
purposes of bank deposits and collections provisions of Pennsylvania’s version of the
Uniform Commercial Code. See Nisenzon v. Morgan Stanley DW, Inc., 546 F. Supp. 2d
213, 224 (E.D. Pa. 2008).
7
[*7] 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. 9 Consequently, a stop-payment order could have theoretically
been placed on any of those checks before final payment. Therefore,
under Pennsylvania law, none of the ten checks at issue represented
completed gifts prior to 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
9 Although the payees of checks Nos. 1215 and 1219 seemingly deposited their
checks at Mighty Oak prior to decedent’s death, there is nothing in the record to
indicate that Mighty Oak either formally accepted or certified those checks before final
payment. Since a stop-payment order could have theoretically been placed at any point
up until the final payment of checks Nos. 1215 and 1219 on September 14, the gifts of
those checks were not complete under Pennsylvania law until after decedent’s death.
The same may be said of check No. 1221, which was deposited at a different bank prior
to decedent’s death but was also paid by Mighty Oak on September 14. Moreover, check
No. 1216 is not at issue as it was paid by Mighty Oak two days before decedent’s death,
and its value was not included in respondent’s notice of deficiency with respect to the
understatement of the Mighty Oak account.
8
[*8] 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. 10 As discussed previously, those
checks were not, in fact, credited by the drawee bank (Mighty Oak)
before decedent’s death. While we cannot necessarily be certain as to the
specific basis for respondent’s concession, we must nevertheless
acknowledge that respondent made the concession and that the
concession likely stems from a misunderstanding of the terms of art.
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
10 Respondent conditioned his concession on the Court’s finding that the gifts
of the checks in question were made inter vivos as opposed to causa mortis; however,
Pennsylvania law dictates that a causa mortis gift “differs from other gifts only in that
it is made when the donor believes he is about to die, and is revocable should he
survive.” In re Elliot’s Estate, 167 A. 289, 291 (Pa. 1933). Regardless of the name used
to describe the gift, “the elements necessary to a complete gife [sic] are not changed.
. . . In every valid gift a present title must vest in the donee, irrevocable in the ordinary
case of a gift inter vivos; revocable only upon the recovery of the donor in gifts mortis
causa.” Id. (emphasis added) (quoting Appeal of Walsh, 15 A. 470, 471 (Pa. 1888)).
Consequently, the distinction made by the parties between causa mortis and inter
vivos gifts is improper and irrelevant.
9
[*9] Commissioner] to withdraw his concession or attempt to modify it
after trial.”). 11
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.
11 But see Gale v. Commissioner, T.C. Memo. 2002-54, 2002 Tax Ct. Memo
LEXIS 57, at *34–35 (“In the cases at hand, [the Commissioner] took the position that
[the taxpayer] did not have receipt of the settlement proceeds in 1992 only after the
trial commenced. In the notice of deficiency, [the Commissioner] took the position that
the proceeds were taxable in 1992. We therefore do not elect to hold [the Commissioner]
to his trial concession. However, we should ameliorate any harm to [the taxpayer] by
requiring [the Commissioner] to bear the burden of proving all factual issues arising
out of [the Commissioner’s] change in position.”). In Gale, the Commissioner
repudiated his concession on the basis that a new Tax Court opinion (filed on the same
day he filed his opening brief) supported his original position and therefore justified
the repudiation. See id. at *31. These facts are not present in the instant case.
Consequently, Gale is distinguishable.