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Gift was completed when check was deposited; relation-back doctrine applied to noncharitable gift.

Albert Metzger wanted his property to be given to his heirs before he died. He executed a power of attorney giving his son John the authority to make such gifts (in addition to other powers).

As part of a plan to carry out his father's wishes, John wrote two $10,000 checks on Albert's account, payable to himself and his wife Shirley. The checks were written on December 14, 1985, and deposited to John and Shirley's account on December 31, 1985. They cleared on January 2, 1986.

Later that year, John repeated this process, writing two more $10,000 checks to himself and his wife. Both checks were deposited and cleared in 1986.

Albert died in 1987. On his father's estate tax return, John reported 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 the estate tax return and increased the amount of taxable gifts by $20,000, claiming Albert made taxable gifts of $10,000 each to John and Shirley in 1986.

The IRS argued that under the laws of their home. state, 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 in gifts to each donee uncovered by the gift tax exclusion.

Generally, under regulations section 25.2511-2(b) 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. 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 that met the court's criteria. Under this doctrine, the payment date 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, regardless of a state law to the contrary. The Tax Court considered applying the relation-back doctrine to noncharitable gifts but had not yet done so. (See also Gagliardi Est., 89 TC 1207.)

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

The Tax Court said the following elements must be proved for the relation-back doctrine to apply to noncharitable gifts:

* The donor intended to make a gift.

* Delivery of the check was unconditional.

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

* Metzger Est., 100 TC no. 14.
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Publication:Journal of Accountancy
Date:Jun 1, 1993
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