Tax Court in Brief | Estate of DeMuth v. Commissioner | Are Uncashed Gift Checks Includable in an Estate for Federal Income Tax Purposes?

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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:

Primary Holdings:

Key Points of Law:

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.