Metzger v. C.I.R.

• Decision Date: 18 October 1994
• Docket Number: No. 93-2112,93-2112
• Citation: 38 F.3d 118
• Parties: John A. METZGER; Z. Townsend Parks, Jr., Personal Representatives for the Estate of Albert F. Metzger, Deceased, Petitioners-Appellees, v. COMMISSIONER OF the INTERNAL REVENUE SERVICE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 118

38 F.3d 118

John A. METZGER; Z. Townsend Parks, Jr., Personal Representatives for the Estate of Albert F Metzger, Deceased, Petitioners-Appellees, v. COMMISSIONER OF the INTERNAL REVENUE SERVICE, Respondent-Appellant.

No. 93-2112.

United States Court of Appeals, Fourth Circuit.

Argued April 15, 1994.

Decided Sept. 1, 1994.

Corrected Opinion Filed Oct. 18, 1994.

ARGUED: Thomas J. Clark, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellant. Luther Benjamin Ditch, Parks, Hansen, Ditch & Zaharris, Towson, MD, for appellees. ON BRIEF: Michael L. Paup, Acting Asst. Atty. Gen., Gary R. Allen, Richard Farber, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellant.

Before LUTTIG and WILLIAMS, Circuit Judges, and PAYNE, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge WILLIAMS wrote the majority opinion, in which Judge PAYNE joined. Judge LUTTIG wrote a separate dissenting opinion.

OPINION

WILLIAMS, Circuit Judge:

This is an appeal by the Commissioner of Internal Revenue from a decision of the United States Tax Court in favor of the taxpayer, the estate of Albert F. Metzger. The issue presented is whether noncharitable gifts in the form of checks are complete for federal gift tax purposes at the time of the unconditional delivery and deposit of the checks, or when the checks were actually honored by the drawee bank. The Tax Court concluded that, in the limited circumstances of this case, the bank's acceptance of the checks should "relate back" to the year in which they were delivered and deposited. We agree and affirm.

I.

On August 26, 1985, Albert F. Metzger signed a power of attorney authorizing his son, John Metzger, to make gifts of property to Albert Metzger's heirs, legatees, and their spouses. Pursuant to this power of attorney, on December 14, 1985, John wrote four checks on his father's bank account, each in the amount of $10,000, payable to himself, his wife, his brother, and his brother's wife. ¹ John and his wife deposited their checks into their joint bank account on December 31, 1985, but the checks did not clear Albert Metzger's account until January 2, 1986, after the New Year's holiday. Albert Metzger made additional gifts of $10,000 each to John and his wife in 1986, which cleared Albert Metzger's account in 1986.

Albert Metzger died on May 29, 1987, his estate was probated, and an estate tax return was filed with the IRS. The IRS audited the return and issued a notice of deficiency on January 25, 1991. The Internal Revenue Code exempts from gift tax the first $10,000 in gifts to a single person during a calendar year. In the course of the audit of Albert Metzger's estate tax return, the IRS determined that the checks delivered to John and his wife in December 1985 were gifts made in 1986 for gift tax purposes, because the drawee bank did not honor the checks until 1986. Consequently, the IRS concluded that in 1986 Albert Metzger had made gifts to John and his wife of $20,000 each, $40,000 total, of which $20,000 were taxable gifts that should have been reported on Albert Metzger's federal estate tax return. The IRS issued a notice of deficiency in the amount of $11,701 against Albert Metzger's estate.

Albert Metzger's estate (the taxpayer) challenged the notice of deficiency by filing a petition in the United States Tax Court. The parties stipulated to the relevant facts and presented, in cross-motions for summary judgment, the legal question regarding in which tax year these gifts were made. The Tax Court agreed with the Commissioner that, under the applicable Maryland law, gifts in the form of checks are not completed until they are actually honored by the drawee bank. Nevertheless, the Tax Court granted summary judgment to the taxpayer under the "relation-back" doctrine. Applying the relation-back doctrine, the Tax Court held that, once the checks were honored by the bank, the completed gifts related back to the date they were deposited for federal gift tax purposes. The Commissioner appeals.

II.

Whether the noncharitable gifts Albert Metzger made by check to his son and daughter-in-law should be treated as completed gifts as of the date John and his wife deposited the checks is a question of law that we review de novo. Balkissoon v. Commissioner, 995 F.2d 525, 527 (4th Cir.), cert. denied, --- U.S. ----, 114 S.Ct. 473, 126 L.Ed.2d 424 (1993). The Internal Revenue Code imposes taxes on the transfer of property at the time of death, as well as on certain inter vivos transfers of property. See United States Trust Co. v. Helvering, 307 U.S. 57, 60, 59 S.Ct. 692, 693-94, 83 L.Ed. 1104 (1939); Estate of Sanford v. Commissioner, 308 U.S. 39, 44, 60 S.Ct. 51, 56, 84 L.Ed. 20 (1939). Estate taxes are calculated by computing a tentative tax on the sum of the amount of the taxable estate and the amount of adjusted taxable gifts. 26 U.S.C. Sec. 2001(b)(1). Adjusted taxable gifts are the total amount of the decedent's taxable gifts made after December 31, 1976. 26 U.S.C. Sec. 2001(b). Adjusted taxable gifts do not, however, include any gift which qualifies for the $10,000 annual exclusion provided in Sec. 2503(b). ² Thus if Mr. Metzger's gifts to John and his wife do not exceed $10,000 each per year, and they qualify for the 2503(b) exclusion, his estate tax will be calculated only on the amount of his taxable estate. In order to qualify for the annual exclusion, gifts must be completed during the calendar year for which the exclusion is claimed. Sanford, 308 U.S. at 43-44, 60 S.Ct. at 55-56.

The question we must decide in this case is whether the $10,000 gifts that Albert Metzger made to his son and daughter-in-law were completed in 1985 or in 1986 for gift tax purposes. If the gifts were completed in 1985, they qualify for the annual exclusion under Sec. 2503(b); if the gifts were not completed until 1986, they must be combined with the other $10,000 gifts made to the son and daughter-in-law in that year. Therefore, Albert Metzger would have exceeded the annual exclusion for 1986, resulting in $20,000 of taxable gifts.

According to the gift tax regulations, a gift is complete when "the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another." 26 C.F.R. Sec. 25.2511-2(b) (1993). The regulations further provide that "relinquishment or termination of a power to change the beneficiaries of transferred property ... is regarded as the event that completes the gift and causes the tax to apply," 26 C.F.R. Sec. 25.2511-2(f) (1993), and "[a] gift is incomplete in every instance in which a donor reserves the power to revest the beneficial titles to the property in himself," 26 C.F.R. Sec. 25.2511-2(c) (1993).

We refer to state law to determine whether a donor has relinquished dominion and control over a gift in the form of a check, Estate of Dillingham v. Commissioner, 903 F.2d 760, 763 (10th Cir.1990), and the parties agree that Maryland law is controlling. The Tax Court held, and we agree, that under Maryland law the delivery of a personal check is only conditional payment, and the gift remains incomplete until the donee presents the check for payment and the check is accepted by the drawee bank. See Malloy v. Smith, 265 Md. 460, 290 A.2d 486, 487-88 (1972); accord Ward v. Federal Kemper Ins. Co., 62 Md.App. 351, 489 A.2d 91, 95 (1985). ³ Thus, applying Maryland law, Albert Metzger did not completely relinquish dominion and control of the funds given to his son and daughter-in-law until January 2, 1986, when the check was accepted by his bank and his account was debited. Therefore, under Sec. 25.2511-2(b) the gift was not completed until 1986. This brings us to the Tax Court's application of the relation-back doctrine, which the IRS contends is contrary to the regulations.

The Tax Court first applied the relation-back doctrine in the context of income tax deductions for charitable contributions. Estate of Spiegel v. Commissioner, 12 T.C. 524, 1949 WL 182 (1949). In Spiegel, the IRS disallowed tax deductions for charitable contributions in the year checks were delivered because they were not deposited until the following year. The Tax Court found that because the checks had been unconditionally delivered, promptly presented for payment, and duly paid upon presentment, the payment of the checks related back to the date of delivery, and thus the charitable deductions should have been allowed for the year of delivery. Id. at 533.

The Tax Court subsequently applied the relation-back rule from Spiegel in the context of estate taxes and charitable donations in Estate of Belcher v. Commissioner, 83 T.C. 227, 1984 WL 15603 (1984). In Belcher, checks were mailed to charitable donees prior to the donor's death but not paid until after his death. The Tax Court held that the funds were not part of the gross estate because the conditional payment that occurred when the checks were delivered became absolute upon presentment and payment by the drawee bank, and related back to the date of delivery. It is significant to note that the very same gift tax regulations applicable in Belcher are relevant in this case. The IRS contends that a strict interpretation of the gift tax regulations does not support invocation of the relation-back doctrine in the estate tax context. Even if this assertion is true, Belcher was equally inconsistent with the regulations, and the Commissioner did not challenge that application of the relation-back doctrine. Rather, the Commissioner merely asserted that for policy reasons noncharitable gifts should be treated differently. Because the Tax Court has incorporated the doctrine into the estate tax area in cases such as Belcher where circumstances warranted, we also look beyond the regulation to consider whether its incorporation is warranted here.

Despite its extension of the...