One of the most basic planning techniques utilized to reduce transfer taxes is the $10,000 (as indexed) annual gift exclusion. The importance of planning for gift giving was recently illustrated by the U.S. District Court in Robert Rosano vs. Comm'r, where a New York taxpayer was unable to utilize the annual exclusion for a gift given by check.
As analyzed in Rosano, several factors are used to determine when a gift in the form of a personal check occurs. These factors include the date the check is presented to the bank, the date the check clears the bank, and whether the donor is alive when the check clears. For example, let's say that Gift Giving Harry, a New York State resident, issues a $10,000 check on December 22, 1999, to Gift Taking Henry, who presents the check to his bank on December 31, 1999, and the check clears on January 5, 2000. Based on these circumstances, will this gift qualify for the annual exclusion for 1999? To answer this question, we need to determine whether Federal or New York State law controls in determining when the gift is complete and the effect that the relation-back doctrine has on this determination.
Treasury Regulations section 25.2511-- 2(b) says the date that the donor has so parted with "dominion and control" as to leave in the donor "no power to change its disposition, whether for his own benefit or for the benefit of another" is when a gift is complete. To determine whether the donor parted with dominion and control is a matter of state law. According to the U.S. Supreme Court (United States vs. Irvine [114 S. Ct. 1473, 1481(1994)]), "state law creates legal interests and rights in property, [and] Federal law determines whether and to what extent those interests will be taxed." Since state law determines the rights in property, it governs when a gift is complete.
Under New York law, there are four elements that must be demonstrated in order to prove a valid gift. These elements are 1) mental capacity of the donor, 2) the donor's intention to make a gift, 3) the completed delivery of the gift, and 4) acceptance of the gift by the donee. The essential requirements, according to Avery's Estate [76 NYS 2d 790, 795 (1948)], are donative intent and executed delivery. Under New York law, a gift is complete when the check is paid during the lifetime of the maker. Payment is critical because the donor retains control to stop payment until paid by the bank.
Estate of Metzger vs. Comm'r (38 F.3d 118), a 1994 Fourth Circuit Court of Appeals case, challenged the position that state law controls when a gift is complete. In that case, the court concluded that state law may not determine when a gift is complete for Federal transfer tax purposes if the donor is alive when the check clears. The IRS presented its position as to the applicability of state law in Revenue Ruling 96-56.
In Metzger, the donor gifted (by power of attorney) a series of checks equal to the annual exclusion to his son and his daughter-in-law. Two of these checks were drawn on December 14, 1985, deposited on December 31, 1985, and cleared by the bank on January 2, 1986. In 1986, another series of checks were issued and paid to the same donees, each in the amount of the annual exclusion. Upon the donor's death in 1987, the estate return reported that the decedent made no taxable gifts within his lifetime. The IRS, however, argued that the 1985 gifts were not eligible for the annual exclusion in 1985, because the gifts were not "complete" in 1985 under applicable state (Maryland) law. Although the Tax Court agreed with this analysis, it ultimately concluded the gifts were made in 1985. …