February 2003

The Relation-Back Doctrine Revisited

By Albert Kalter and Lawrence Newman

Under the relation-back doctrine, checks mailed to charitable donees prior to the donor’s death, but not paid until after death, relate back to the date of delivery. Such checks represent completed gifts and the underlying funds are not includible in the donor’s gross estate [Estate of Belcher, 83 TC 227 (1984)]. This result follows the income tax rule that a charitable contribution made by check that is delivered in the year the check is issued but deposited in the following year relates back to the earlier year for deduction purposes [Estate of Spiegel, 12 TC 524 (1949)].

The application of the relation-back doctrine to noncharitable gifts has been the subject of several cases and rulings in recent years. In Rosano v. United States [245 F.3d 212, 87 AFTR 2d 1619 (CA-2, 2001)], the decedent died on January 21, 1990. In December 1989, Mary Rosano had gifted two checks from an account at European American Bank (EAB), each in the amount of $9,950, to Ronda and Raymond Gallucci. The checks were dated and claimed to have been deposited on December 29, 1989, but did not clear until January 3, 1990. On January 5, 1990, Rosano gifted two more checks from her EAB account, each in the amount of $9,990, to Ronda and Raymond Gallucci. These checks cleared on January 30, 1990, after Rosano’s death. Rosano also issued a series of 43 checks totaling $431,454.87 from an account at Merrill Lynch that cleared after her death.

For tax purposes, Rosano’s estate treated the checks given to Ronda and Raymond Gallucci as two gifts, those made in 1989 for $9,950 and the others made in 1990 for $9,990. Rosano’s estate did not include the Merrill Lynch account as part of her gross estate. Upon audit, the IRS treated all of the Gallucci checks as gifts made in 1990, totaling $19,940. The IRS also included the value of the Merrill Lynch account on the day after Mary’s death as part of the gross estate.

In Estate of Gagliardi [89 TC 1207 (1987)], the Tax Court declined to extend the relation-back doctrine to noncharitable gifts where the donor died while the checks were still outstanding. The donor’s son, acting with a power of attorney, issued gift checks to himself and his brother and sisters. One of the checks was paid prior to the donor’s death, but the others were not paid until after the donor died. The court held that the funds represented by the check paid before the donor’s death were excluded from the donor’s gross estate because the funds were no longer on deposit or otherwise in the donor’s possession. The funds represented by the outstanding checks were includible in the estate because they still belonged to the decedent.

Under circumstances similar to Gagliardi, the Seventh Circuit, in McCarthy [806 F.2d 129, 59 AFTR2d 87-1193 (CA-7, 1986)], also declined to extend the relation-back doctrine to noncharitable gifts. The appellate court reasoned that charitable gifts had special characteristics. First, there is the possibility that the estate would receive an offsetting charitable deduction if the funds represented by the checks are included in the gross estate. Second, for income tax purposes, charitable contributions made by check are deductible in the year the checks are issued rather than the year in which they are paid. Not following the income tax rule might result in payments deductible for income tax purposes yet includible in the donor’s gross estate.

In Estate of Metzger [100 TC 204 (1993), affd. 38 F.3d 118, 74 AFTR2d 94-7486 (CA-4, 1994)], the Tax Court applied the relation-back doctrine to annual exclusion gift checks drawn on December 14 and deposited on December 31. The checks did not clear the bank until January 2. The court stated that it would apply the relation-back doctrine to noncharitable gifts where the taxpayer is able to establish the donor’s intent to make a gift, unconditional delivery of a check, and presentment of the check in the year for which favorable tax treatment is sought and within a reasonable time of issuance.

More recently, in Estate of Newman [111 TC No. 3 (1998)], the IRS determined a deficiency in estate tax, based on its conclusion that funds in a bank account represented by six outstanding checks were includible in the decedent’s gross estate. The IRS took the position that the checks did not represent completed gifts because the decedent maintained dominion and control over the underlying funds until her death. The Newman court held that the three-part test set forth in Metzger is inapplicable if the donor dies before the checks are paid. This rationale was also expressed by the Fourth Circuit in affirming the Tax Court’s decision in Metzger.

Relevant Rulings

In Revenue Ruling 67-396 (1967-2 CB 351), a donor issued a noncharitable gift check on December 25 and requested that the donee not deposit or cash the check for a few days until he could cover the check. The donee held the check until January 2. The donor’s bank account had sufficient funds to cover the check from the date of its issuance until it was cashed. Revenue Ruling 67-396 concluded that the gift was not complete for gift tax purposes until January 2 because, prior to the check’s payment, the donor had not relinquished dominion and control over the funds.

In view of the Fourth Circuit’s holding in Metzger, the IRS in Revenue Ruling 96-56 (1996-2 CB 161) reconsidered the conclusion in Revenue Ruling 67-396. Revenue Ruling 96-56 provides that the delivery of a check to a noncharitable donee is a completed gift for gift and estate tax purposes on the earlier of the date on which the donor has parted with dominion and control under local law so as to leave him no power to change its disposition, or the date on which the donee deposits the check (or cashes the check against available funds of the donee) or presents the check for payment, if the following circumstances exist:

Revenue Ruling 96-56 states that the result in Revenue Ruling 67-396 would remain the same under this modification for two reasons. First, the check in Revenue Ruling 67-396 was not delivered unconditionally (the donor requested that the donee not deposit or cash the check for a few days). Second, the check was not presented for payment in the same calendar year for which completed gift treatment was sought. Consequently, the annual exclusion for the later year applies and the annual exclusion for the earlier year is wasted.

In Rosano, the court refused to extend the relation-back doctrine to noncharitable gifts where the donor was not alive at the time the bank paid the checks. Relying on Metzger and Revenue Ruling 96-56, the court concluded that the gifts represented by the first set of checks were completed when they were deposited for payment because the decedent was alive at the time the bank paid these checks. Based on the decision in Newman, however, the remaining checks were held not to relate back to the date the checks were issued because those checks did not clear within the decedent’s lifetime.

Applying the Relation-Back Doctrine

Certain conclusions may be drawn from these cases and rulings:

Albert Kalter, JD, LLM, CPA, and Lawrence Newman, LLB, SJD, practice law in New York City. They are members of the graduate tax faculty of the Lubin School of Business of Pace University and are fellows of the American College of Trust and Estate Counsel.

Edwin B. Morris, CPA
Rosenberg Neuwirth & Kuchner

This Month | About Us | Archives | Advertise| NYSSCPA
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2003 CPA Journal. Legal Notices

Visit the new cpajournal.com.