1984 U.S. Tax Ct. LEXIS 39">*39
Decedent mailed checks to a number of charitable donees. The checks did not clear the drawee bank until after the date of decedent's death. Decedent's estate did not try to recover the proceeds of the checks from the donees. The aggregate amount of the checks is deductible as a charitable contribution for purposes of computing decedent's final income tax liability.
83 T.C. 227">*227 Respondent determined a deficiency in Federal estate tax against petitioner in the amount of $ 37,282.72. After a concession by petitioner, the issues for decision are as follows:
(1) Whether $ 94,960 in decedent's checking account is includable in decedent's gross estate under section1984 U.S. Tax Ct. LEXIS 39">*42 2031, 1 where checks totaling this amount had been mailed to charitable donees before decedent's death but did not clear the drawee bank until after her death;
(2) Whether petitioner is entitled to deduct the amount of the checks as a charitable contribution under section 2055; 2 and
(3) Whether petitioner is entitled to deduct the amount of the checks as a claim against the estate under section 2053.
83 T.C. 227">*228 FINDINGS OF FACT 3
1984 U.S. Tax Ct. LEXIS 39">*43 Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.
Petitioner is the Estate of Ella M. Belcher, decedent.
Decedent's will provides a series of specific bequests, among them, bequests to six named grandchildren of decedent; the will then provides as follows:
Ninth: I order and direct my Executors, hereinafter named, to divide all the rest, residue and remainder of my personal1984 U.S. Tax Ct. LEXIS 39">*44 property of which I shall die seized or possessed, or of which I shall be entitled to dispose at the time of my death, including all lapsed money legacies, into as many equal parts or shares as there shall be children, me surviving, of my daughter, VIRGINIA BELCHER TOULMIN, and of my son, BENJAMIN MOORE BELCHER, and children of said daughter and of my said son who shall have predeceased me leaving issue, me surviving; and I give and bequeath one of said equal parts or shares to each of said children, me surviving, of my said daughter and of my said son, and one of said equal parts or shares to the issue, me surviving, of each of said children of my said daughter and of my said son who shall have predeceased me leaving issue, me surviving, in equal shares,
In mid-December 1973, decedent, Belcher, and a part-time secretary met in order to consider decedent's charitable giving in the remainder of 1973. After their decisions were made, checks and accompanying letters were to be prepared and sent 83 T.C. 227">*229 to the charitable donees. Thirty-six checks (in amounts aggregating1984 U.S. Tax Ct. LEXIS 39">*45 $ 94,960) were drawn on decedent's checking account (hereinafter sometimes referred to as the account) at Manufacturers Hanover Trust Co. The 36 checks, together with their accompanying letters, were sent on or about December 21, 1973. On December 21, 1973, there were sufficient funds in the account to cover all of the checks. These checks cleared the drawee bank during January 1974 -- 29 checks ($ 88,225) by January 10, 1974, and the remaining 7 ($ 6,735) by January 31, 1974. The payees of all 36 checks are organizations described in section 2055(a). These organizations are hereinafter referred to collectively as the donees.
The executors did not take any action to stop payment on the 36 checks, nor did they take any action to recover the proceeds of the checks from the donees.
Pursuant to the policy of decedent's family, no pledge cards or other similar obligatory instruments in favor of the donees were in existence before December 21, 1973. None of the checks were contracted for, nor were any made for, an adequate and full consideration in money or money's worth.
During December 1971 and December 1972, decedent made charitable contributions totaling $ 64,690 and $ 75,093, 1984 U.S. Tax Ct. LEXIS 39">*46 respectively, to various organizations, including many of the donees.
On decedent's 1973 Federal individual income tax return, charitable contribution deductions under section 170 were claimed, and allowed by respondent, for the amount of each of the checks. 4 On decedent's Federal estate tax return, the executors reported only the net amount of cash on deposit in the account on December 31, 1973, reduced by the $ 94,960 in checks outstanding on that date.
OPINION
Petitioner contends that decedent's gross estate does not include $ 94,960 of the amount in the account, because decedent made gifts aggregating this portion of the account to charitable donees before her death. Respondent contends that the $ 94,960 is includable in decedent's gross estate under 83 T.C. 227">*230 section 2033 because it was in the account, and decedent had an1984 U.S. Tax Ct. LEXIS 39">*47 interest in the account, at the time of her death.
We agree with petitioner.
The value of a decedent's gross estate includes, under sections 2031(a) 5 and 2033, 6 the value of all property to the extent of the decedent's interest therein at the time of her death.
Section 20.2031-5, Estate Tax Regs., provides:
Sec. 20.2031-5 Valuation of cash on hand or on deposit. 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, 1984 U.S. Tax Ct. LEXIS 39">*48 is included in the decedent's gross estate.
We have emphasized the second sentence of the above-quoted regulation because we believe it should be the focal point of our inquiry in this case. While petitioner makes an alternative argument on brief that the checks in question taken together with the letters to the charitable donees which accompanied the checks constitute pledges, the testimony of petitioner's two witnesses, Benjamin Moore Belcher and William Fowle, 7 was that it was the decedent's consistent practice not to make pledges, and the letters to the charitable donees unequivocally bear this out. Mr. Belcher testified that the letters in question constituted letters of intent, not pledges, although he also testified that the Belcher family, 1984 U.S. Tax Ct. LEXIS 39">*49 which presumably included his mother, always lived up to that letter of intent.
Mr. Belcher further testified that for a number of years, he met with his mother during the month of December and went 83 T.C. 227">*231 over her list of charitable donees. Both counsel for petitioner and counsel for respondent questioned Mr. Belcher regarding his own state of mind in connection with the checks, apparently for the reason that this would also reflect decedent's state of mind. He stated that "when I write a check to an eleemosynary institution I consider that a donation has been made." In any event, it seems indisputable that no pledges were intended and therefore that the checks in question were not given in discharge of bona fide legal obligations of the decedent (assuming arguendo that charitable pledges do in fact create legal obligations).
The foregoing, 1984 U.S. Tax Ct. LEXIS 39">*50 however, does not end our inquiry and we do not assume that the quoted language of the regulation necessarily precludes the exclusion of the outstanding checks from the gross estate under sections 2031 and 2033. A further analysis of the premises presumptively underpinning the regulation is in order.
First, it appears to us that if respondent's argument is correct, that Connecticut law requires the inclusion of outstanding checks in the gross estate on the ground that any bank customer can stop payment on a check until it is honored by the bank, 8 then there is no technical justification for respondent's regulation permitting the exclusion of an outstanding check given in discharge of a bona fide legal obligation. In such case, except for the rule hereinafter discussed, respondent would have to concede that a decedent retained actual command over the account until the instant of death. Nevertheless, the regulation applies a practical rule of reason since outstanding checks given in payment of bona fide legal obligations incurred for an adequate and full consideration, even though includable in the gross estate, would also be deductible under section 2053(a)(3) as claims against1984 U.S. Tax Ct. LEXIS 39">*51 the estate, thus creating a "wash."
Second, it seems obvious that the regulation is intended to exclude ordinary gifts from its coverage, although done sub 83 T.C. 227">*232 silentio, again perhaps for practical reasons, although the justification for doing so is not quite so readily apparent. It is plausible to assume that at the time the regulation was adopted, the intent was to thwart any possible argument that the outstanding check represented a gift not made in contemplation of death or not intended to take effect at or after death.
A reason for concern about the status of outstanding1984 U.S. Tax Ct. LEXIS 39">*52 checks drawn to noncharitable donees is perhaps suggested by the facts in
We think a convincing argument can be made for the proposition that the situation presently before us simply was1984 U.S. Tax Ct. LEXIS 39">*53 not contemplated by the regulation. 9 As we have demonstrated, perfectly defensible policy considerations justify the exclusion of outstanding checks issued by a decedent to satisfy binding obligations. Similarly, policy considerations may well justify inclusion in the gross estate of outstanding checks issued to noncharitable donees. No such policy considerations, however, would justify the inclusion of outstanding checks issued in good faith by the decedent to charitable donees prior to his death but cashed after his death. The inclusion of these checks would at the very least create the possibility that they would qualify as section 2055 charitable deductions, again creating a wash.
Any other answer would result in endless confusion and create needless complications in the routine administration of 83 T.C. 227">*233 estates. For example, if an executor did not stop payment on an outstanding1984 U.S. Tax Ct. LEXIS 39">*54 check or seek to recover the proceeds thereof, 10 he would be subject to surcharge by a beneficiary on the ground that he permitted a dissipation of the estate's funds. If the executor wished to ratify the payment of the checks by an appropriate disclaimer prior to the filing of the estate tax return, he would be able to do so only with the approval of all the beneficiaries of the estate. If he dispensed with obtaining such approval, he would also run the risk of surcharge. Where some of the beneficiaries are minors (as will often be the case), this would involve a court proceeding with the appointment of guardians ad litem, etc. For this Court to unnecessarily put an executor in such a position would be totally unreasonable.
1984 U.S. Tax Ct. LEXIS 39">*55 In
83 T.C. 227">*234 We posed the question to be decided in
We may assume that decedent's delivery of checks to the charities in question was at the time no more than a conditional payment of the charitable contribution for which the deduction is here sought. If the subsequent honoring of the checks by fulfilling the condition subsequent
Upon that point, an examination of the authorities renders it impossible to entertain the slightest doubt.
[Emphasis added.]
In
In
Unquestionably, the word "payment" appears in an income tax provision; i.e.,
What we said in
What must be viewed as the critical point is that in all of the cases we have considered the checks were promptly presented and were duly paid upon presentation, and that, according to the principles generally accepted and previously discussed, the payment which upon delivery of the check was conditional not only became absolute upon presentation, but related back to the time of the original delivery. And that is a concept that has nothing to do with consideration or the lack of it. [
In deciding to allow a deduction on the decedent's last income tax return, we also stated (
It would seem to us unfortunate for the Tax Court to fail to recognize what has so frequently been suggested, that as a practical matter, in everyday personal and commercial usage, the transfer of funds by check is an accepted procedure. The parties almost without exception think and deal in terms of payment except in the unusual circumstance, not involved here, that the check is dishonored upon presentation, or that it was delivered in the first place subject to some condition or infirmity which intervenes between delivery and presentation.
We went on to state that "With knowledge of the prevalence of this practice, and of the necessity of treating tax questions
Adopting such an approach, we hold that the amount of the checks in question is not includable in the gross estate under sections 2031 and 2033. We do so on the basis that, upon prompt presentation and actual payment of the checks by the bank, the conditional payment which occurred when the checks1984 U.S. Tax Ct. LEXIS 39">*60 were issued became "absolute and related back to the time when the checks were delivered" (
Respondent concedes the propriety of an income tax deduction in the year in which a check is unconditionally delivered, notwithstanding the fact that the issuer has died before the check is cashed, but argues that the income tax and the estate and gift tax are not to be construed in pari materia. In response to this argument petitioner points out, as we have already noted, that we are dealing with a question of fact, not a question of law. Petitioner states on brief that "If it is a fact that
While we have decided this case on the basis1984 U.S. Tax Ct. LEXIS 39">*61 of our agreement with petitioner's principal argument, we deem it appropriate to discuss briefly one of petitioner's alternative arguments, not only since both parties have briefed the question extensively but also in light of the opinion of the Second Circuit Court of Appeals (the court to which this case would be appealed) in
The relevant provisions of the regulations under section 2055 are as follows:
Sec. 20.2055-2 Transfers not exclusively for charitable purposes --
(b)
As noted, we have emphasized the relevant language in the regulation. Mr. Belcher testified that the executors never considered stopping payment on the checks in question, that there was never 1984 U.S. Tax Ct. LEXIS 39">*63 any discussion among the executors with regard to stopping payment, and that there was never any discussion among the executors with regard to suing to recover any of the amounts from the charitable beneficiaries. He also testified that he never discussed with any of the beneficiaries of the estate the issue of stopping payment on the checks, at least not until after the Internal Revenue Service had raised questions in connection with the payments. He also testified that he never discussed with the beneficiaries the idea of suing the charities to recover any of the amounts that were paid.
The precise amount passing to the charities was determinable by adding the face amounts of the checks, and we think the uncontroverted testimony of Mr. Belcher regarding the decedent's pattern over a number of years of making substantial donations to charity late in the year is sufficient to meet the test of the regulation that the likelihood that the charitable gifts would be defeated by some occurrence was, in the words of the regulation, "so remote as to be negligible." We are somewhat hesitant to categorically pursue this approach in the instant case, however, by reason of the decision of the1984 U.S. Tax Ct. LEXIS 39">*64 Second Circuit Court of Appeals in
In
As described by the Second Circuit,
The trust gave the "entire gross or net income" to the trustee income beneficiary. The trustee was given extremely broad powers to manage and reinvest the principal at his sole discretion in any type of investments, including the power to invest1984 U.S. Tax Ct. LEXIS 39">*65 in partnership interests in any brokerage or other firm and in real property, "all without regard to any law concerning the investment of trust funds." The trustee was also given power to charge all operating and maintenance expenses against trust corpus. He was authorized to loan any part or the whole of the trust estate, as trustee, to anyone, including to himself as an individual, for any purpose whatsoever, upon any terms, in his sole discretion. In addition, the Will excused the trustee from the duty to render to any Court annual or other periodic accounts whether or not provided by law and directed that any allocation of expenses in relation to the settlement or approval of the accounts made by the trustee was to be binding upon all persons interested. [
Based upon the foregoing facts, the Second Circuit applied the "so remote as to be negligible" test of section 20.2055-2(b) of the Estate Tax Regulations, by saying that "this exception applies only to contingencies that are subject to mathematical, actuarial computation, and here the taxpayer's position is supported only by factual evidence relating to the business reputation1984 U.S. Tax Ct. LEXIS 39">*66 of the trustee and his longtime friendship with the decedent."
We do not believe we are required to speculate, however, as to whether the Second Circuit would apply the result in
One final word. In
Hamblen,
The conclusion of the majority is a commonsense result which1984 U.S. Tax Ct. LEXIS 39">*68 does no disservice to respondent. In certain instances in which the marital deduction is utilized, 2 the increase in the value of the estate resulting from the inclusion of such outstanding checks, as are involved here, would correlatively increase the marital deduction, while, simultaneously, the included amount of such checks, generally should be allowed as a deduction as a charitable gift. 3 Such a consequence would 83 T.C. 227">*240 create an unanticipated deduction for petitioner, unintended by respondent. "Nothing astonishes man so much as common sense and plain dealing." 4
1984 U.S. Tax Ct. LEXIS 39">*69
Chabot,
The first sentence of section 20.2031-5, Estate Tax Regs., requires "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, [to be] included in the decedent's gross estate." The second sentence of this regulation provides an exception from this rule in the case of outstanding checks subsequently honored by the bank, but only if the checks are "given in discharge of bona fide legal obligations of the decedent incurred for an adequate and full consideration in money or money's worth".
The majority make this second sentence "the focal point of [their] inquiry in this case." (Majority opinion p. 230.) They justify this second sentence because, if the amount of outstanding checks to which the second sentence of the regulation applies were included in the gross estate, then the same amount "would also be deductible under section 2053(a)(3) as claims against the estate, thus creating a 'wash'." 1984 U.S. Tax Ct. LEXIS 39">*70 (Majority opinion p. 231.)
So far, so good. It is what the majority do next that creates the problem. The majority create a second exception to the general rule of the first sentence, an exception for checks "issued in good faith" (Majority opinion p. 232.) to charitable donees.
Firstly, if the majority mean what they say in note 9 of their opinion ("this case presents no occasion to in any way question the validity or even the reasonableness of the regulation"), 83 T.C. 227">*241 then they must acknowledge that the first sentence of the regulation requires inclusion of the amount of the checks in the gross estate, and the second sentence's exception does not apply to these checks. 1
1984 U.S. Tax Ct. LEXIS 39">*71 Secondly, the most the majority can say about checks to charitable donees is that "inclusion of these checks would at the very least
1984 U.S. Tax Ct. LEXIS 39">*72 Thirdly, the majority write a second exception into the regulation (for checks "issued in good faith" to charitable donees) simply because they wish the regulation would have this second exception. We have authority to invalidate a regulation in whole or in part (e.g.,
The majority look to
In
Firstly, the statutory language in the instant case is different from what we faced in
Secondly,
1984 U.S. Tax Ct. LEXIS 39">*75 Thirdly, the majority in the instant case do not point to "commercial usage" or "legal authority" or Federal courts or State courts holding, or even stating, that the writer of a check no longer has an interest in the funds represented by that check. Indeed, writers of checks are permitted to stop payment on checks they have written.
Fourthly, as Judge Whitaker points out in his dissenting opinion,
The majority have determined what result1984 U.S. Tax Ct. LEXIS 39">*76 they wish to reach. In order to reach that result, (1) they ignore the language of the statute, (2) they rewrite a regulation (all the while protesting that the regulation is reasonable and valid), and (3) they draw comfort from a closely reasoned and well-supported case while ignoring that case's reasoning, and provide, in the instant case, absolutely nothing by way of support for their interpretation.
The majority have taken what appears to be a hard case and have succeeded in making bad law.
Since it does not appear that the amount of the checks, if includable in the gross estate, would be deductible under section 2055 or section 2053(a)(3), I cannot concur in the result and so must dissent.
83 T.C. 227">*244 Whitaker,
1984 U.S. Tax Ct. LEXIS 39">*78 The majority in this case appears to view as the issue before us the determination of the amount of decedent's cash on deposit at the date of death. On the authority of our decision in
I agree with the majority that decedent's cash was depleted as of the date of death by the aggregate amount of these checks given by her to charities upon payment by the drawee bank. 31984 U.S. Tax Ct. LEXIS 39">*80 83 T.C. 227">*245 However, the majority chooses to ignore another facet of State law which directly affects the size of the gross estate. Although I have located no Connecticut case precisely in point, it is widely accepted that an estate has the power to recover the proceeds of a check reflecting a gift by a decedent where the check is not cashed until after the decedent's death. 4 I have found no Connecticut1984 U.S. Tax Ct. LEXIS 39">*79 case or statute which tends to suggest that Connecticut law is to the contrary. This right of recovery clearly constitutes an asset of decedent's estate for purposes of section 2031(a), includable at its fair market value, unless, in some fashion, the asset was rendered worthless. Here, the executors took no affirmative action to enforce this right. Whether or not they were aware of its existence prior to trial is unclear. By statute, the State of Connecticut recognizes the power of a person, including the executor of an estate, to disclaim an interest or asset to which the estate otherwise would be entitled. 51984 U.S. Tax Ct. LEXIS 39">*81 Under this statute, petitioner, acting through the executors, had a clear right to file a notice of disclaimer with the probate court, but there is nothing in the facts to indicate that this privilege was exercised. 6
Petitioner has argued that the failure by the executors to exercise this right to require the charitable recipients of the 83 T.C. 227">*246 checks to reimburse the estate would create some kind of an estoppel, precluding the executors from doing so after the filing of the Federal estate tax return. I have searched without success under the laws of Connecticut as well as the common law for some support for the proposition that failure to pursue this right of reimbursement prior to the filing of 1984 U.S. Tax Ct. LEXIS 39">*82 the Federal estate tax return would create estoppel or waiver or constitute a common law disclaimer. Such a proposition would allow us either to conclude that the asset was valueless, or perhaps that, for purposes of section 2055, payment of the checks was a transfer to charity subject to a condition or power, the occurrence or exercise of which was so remote as to be negligible within the meaning of sec. 20.2055-2(b), Estate Tax Reg. Unfortunately, in the absence of a disclaimer or a basis for waiver or estoppel, this estate includes as an asset the right to require the charities to return the amounts of the checks. That asset must be valued and accounted for as part of the gross estate.
The majority's strongest argument for its "practical result" is the Supreme Court's admonishment in
1. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect as of the date of decedent's death.↩
2. This issue was not raised in the notice of deficiency or the pleadings. However, both parties address it at trial and on brief. This issue was tried by consent.
3. The Court adopts the findings of fact made by Judge Herbert L. Chabot, before whom this case was heard. The case was referred to Judge Arthur L. Nims III↩ for opinion on July 13, 1984.
4. So stipulated. However, it appears that four of the checks are not clearly or fully reflected on decedent's 1973 tax return. Neither side seeks to enlighten us as to these differences.↩
5. SEC. 2031. DEFINITION OF GROSS ESTATE.
(a) General. -- The value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.↩
6. SEC. 2033. PROPERTY IN WHICH THE DECEDENT HAD AN INTEREST.
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.↩
7. Mr. Belcher is a son of the decedent and one of her executors. Mr. Fowle was, in 1973, the treasurer of Salisbury Congregational Church, one of the decedent's charitable donees.↩
8. Connecticut law provides:
(1) A customer may by order to his bank stop payment of any item payable for his account but the order must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it prior to any action by the bank with respect to the item described in section 42a-4-303. [Conn. Gen. Stat. Ann. (West 1960).]↩
9. Certainly, this case presents no occasion to in any way question the validity or even the reasonableness of the regulation.↩
10. The possibility of stopping payment would be remote, if not nonexistent, in Connecticut, at least, since the executor would usually not have been issued letters testamentary prior to the time that the checks normally would have been presented for payment. Under Connecticut law, a putative executor must apply for probate within 30 days from the decedent's date of death, and a noticed hearing must be held prior to the probate court's proving or disapproving the will, unless all interested parties file a written waiver of notice, or the court, for cause shown, dispenses with the notice.
1.
2. An unlimited marital deduction is available to estates of decedents dying after Dec. 31, 1981. Sec. 2056 as amended by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 301. If the unlimited marital deduction is elected, the charitable gift deduction would be inconsequential.↩
3. Sec. 20.2056(c)-1(b), Estate and Gift Tax Regs.; sec. 2055. See
4. R.W. Emerson, Essays,
1. The majority have found (Majority opinion p. 229.) "None of the checks were contracted for, nor were any made for, an adequate and full consideration in money or money's worth." The majority have concluded (Majority opinion p. 231.) "it seems indisputable that no pledges were intended and therefore that the checks in question were not given in discharge of bona fide legal obligations of the decedent". Accordingly, it is clear that the amount of the checks does not meet the requirements for exclusion from the gross estate under sec. 20.2031-5, Estate Tax Regs. (as promulgated by the Department of the Treasury); also this amount is not deductible under sec. 2053(a)(3) as a claim against the estate. See, e.g.,
2. In order to be allowed a deduction under sec. 2055, petitioner must show that, with respect to the facts as of the date of decedent's death, the possibility of the charities' not receiving and keeping the money represented by the checks is so remote as to be negligible.
3. "But, as we have indicated, the issue before us is
4. See
5. See note 4 in the dissenting opinion of Judge Whitaker,
1. See
2. In
"In
3. The majority correctly concludes that petitioner's right to stop payment on the checks was at best illusory. This is especially true under Connecticut law which expressly provides that the drawee bank may continue to honor checks for a period of 10 days after receiving knowledge of the customer's death.
(1) * * * Neither death nor incompetence of a customer revokes such authority to accept, pay, collect or account until the bank knows of the fact of death or of an adjudication of incompetence and has reasonable opportunity to act on it.
(2) Even with knowledge a bank may for ten days after the date of death pay or certify checks drawn on or prior to that date unless ordered to stop payment by a person claiming an interest in the account. * * *↩
4. See
"This section does not prevent an executor or administrator from recovering the payment from the holder of the check. It is not intended to affect the validity of any gift causa mortis or other transfer in contemplation of death, but merely to relieve the bank of liability for the payment."
See, e.g.,
5.
6. I presume that no disclaimer was filed. The majority complains that the executor could disclaim "only with the approval of all of the beneficiaries of the estate." Whether this is a requirement of Connecticut law is unstated, but we note, in any event, that the residuary beneficiaries were decedent's grandchildren, whose parents were among the coexecutors. I further invite the attention of the majority to the fact that it is not this Court which would be imposing on the executors the burden of a disclaimer; rather it is the law of the State of Connecticut which we (the majority included) are bound to apply.↩