Relation-back doctrine ok'd for certain noncharitable gifts.

Albert Metzger gave a power of attorney to his son John, authorizing him to make gifts of Albert's property to various heirs. John drafted two $10,000 checks on Albert's account, one each payable to John and his wife Shirley.

The checks were drafted on December 14, 1985, and deposited to John and Shirley's account on December 31, 1985. They cleared on January 2, 1986.

John repeated this process in 1986, drafting two more $10,000 checks for himself and his wife. These two cheeks were deposited and cleared in 1986.

Albert died in 1987. On his father's estate tax return, John reported that Albert had made no lifetime taxable gifts, since in his view all of Albert's gifts were covered by the $10,000-per-donee annual gift-tax exclusion.

The Internal Revenue Service audited Albert's estate tax return and increased the amount of taxable gifts by $20,000. The IRS claimed Albert made taxable gifts of $10,000 each to John and Shirley during 1986.

The IRS argued that, under relevant state law (Maryland), a gift by check is completed only after the check is presented for payment and accepted by the bank. Under this view, the checks drafted in 1985 were incomplete until they were paid in 1986. Thus, the gifts made to John and Shirley in 1986 totaled $20,000 each, not $10,000, leaving $10,000 of gifts to each donee uncovered by the gift-tax exclusion.

Generally, a gift is completed for gift-tax purposes only when the donor has given up control over the gift and can no longer revoke or change it (regulations section 25.2511-2(b)). Whether a donor has given up control is governed by state law. Dillingham Est., 88 TC 1569 (1987), aff'd (10th Cir., 1990).

The "relation-back" doctrine has been applied by the Tax Court in cases of noncharitable gifts meeting the criteria set forth by the court. Under this doctrine, the date of payment on a gift check relates back to the date the check is delivered to the donee, and the gift is considered completed on delivery of the check, despite state law to the contrary. The Tax Court had considered applying the relation-back doctrine to noncharitable gifts but had not done so to date. See Gagliardi Est., 89 TC 1207; Dillingham Est., 88 TC 1569.

The Tax Court held that the relation-back doctrine applied and the gifts in question were considered complete on the date they were deposited. The IRS appealed the decision to the Fourth Circuit Court of Appeals.

Result: For Metzger. The Tax Court had applied the relation-back doctrine correctly to these noncharitable gifts. Thus, even though under Maryland law the gifts were not completed until the drawee bank accepted the checks, the gifts were considered completed in 1985 because of the relation-back doctrine and Albert's estate was not increased by the $20,000.

The Fourth Circuit said the relation-back doctrine could apply to noncharitable gifts in the limited circumstances the Tax Court set forth:

1. The donor's intent to make a gift was established.

2. The delivery of the check was unconditional.

3. The check was presented during the year for which favorable tax treatment was sought and within a reasonable time of its issuance.

The Fourth Circuit further noted there was no danger of a scheme to avoid estate taxes.

* Metzger Est. (4th Cir., 1994), aff'g 100 TC no. 14.