Estate of Elizabeth C. Dillingham, Deceased, Dan L.dillingham and Tom B. Dillingham, Co-executors,petitioners-appellants, v. Commissioner of Internal Revenue, Respondent-appellee, 903 F.2d 760 (10th Cir. 1990)

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed. R. App. P. 34(a); 10th Cir.R. 34.1.9. The cause is therefore ordered submitted without oral argument.

Appellant-Petitioner appeals an adverse decision of the United States Tax Court.

* These cases were submitted on fully stipulated facts. Appellant is the estate of Elizabeth C. Dillingham. (Elizabeth C. Dillingham is hereinafter referred to as "decedent.") Decedent's estate is represented by Dan L. Dillingham and Tom B. Dillingham, coexecutors and residents of Enid, Oklahoma. The decedent was a resident of Enid, Oklahoma. On or about December 24, 1980, the decedent delivered six checks ("the checks") in the following amounts to the following six individuals:

 Name Amount Ethel B. Gauley $ 3,000 Tom B. Dillingham $ 3,000 Dan L. Dillingham $ 3,000 Kay C. Dillingham $ 3,000 Robert Hutton $ 3,000 Jeanne G. Dillingham $ 3,000 ------- $18,000 ------- -------

On or about January 28, 1981, the donees presented the checks to the drawee bank for payment and the checks were paid. Also on or about January 28, 1981, the decedent delivered an additional check in the amount of $3,000 to each of the donees. That same day, the donees presented these additional checks to the drawee bank for payment and the additional checks were paid. Decedent died on June 7, 1981.

Respondent issued a statutory notice of deficiency to petitioner in the estate tax case on April 8, 1985, asserting additional federal estate taxes of $369,644.05. The statutory notice in the estate tax case was not issued within the three-year limitation period established in I.R.C. Sec. 6501(a).¹  Respondent also issued a statutory notice of deficiency to petitioner in the gift tax case on April 19, 1985. Petitioner filed a petition with the United States Tax Court in the estate tax case on June 28, 1985, asserting the bar of the three-year statute of limitation. Respondent answered by raising the affirmative defense that the six-year statute of limitation provided in I.R.C. Sec. 6501(e) (2) was applicable.² 

Appellant also argued before the tax court that the gifts represented by the checks were complete in 1980 because the payment of the checks "relates back" to the date the checks were delivered. Respondent countered that the gifts were not complete in 1980 because the "relation back doctrine" does not apply to noncharitable gifts and because the decedent did not part with "dominion and control" over the checks in 1980.

The tax court held that the payment of the checks in 1981 did not relate back to the delivery of the checks in 1980. The tax court further held that the decedent did not part with "dominion and control" over the property until payment of the checks by the decedent's bank during 1981.

On appeal, appellant asserts (1) that the tax court should have placed the burden of proof on the respondent to demonstrate the applicability of the six-year statute of limitation of Sec. 6501(e) (2) and (2) that the respondent failed to sustain its burden of proof before the tax court.

With respect to the gift tax deficiency, the parties agree that if the checks constitute gifts in 1980, the checks qualify for the annual exclusion in the amount of $3,000 per donee pursuant to I.R.C. Sec. 2503(b). Conversely, if the checks constitute gifts in 1981, the checks do not qualify for the annual exclusion.

With respect to the estate tax deficiency, the parties agree that if the checks constitute gifts in 1980, (1) petitioner has not omitted $36,000 (the sum of the checks and the additional checks) from the decedent's gross estate, (2) the six-year limitation period on assessment and collection under Sec. 6501(e) (2) is not applicable in the instant case, and (3) the assessment of the estate tax deficiency determined by respondent in the statutory notice of deficiency is barred by the three-year limitation period under Sec. 6501(a). Conversely, if the checks constitute gifts in 1981, (1) $36,000 was omitted from the decedent's gross estate, (2) the six-year limitation period on assessment and collection under Sec. 6501(e) (2) is applicable in the instant case, and (3) the assessment of the estate tax deficiency determined by respondent in the statutory notice of deficiency is not barred by that limitation period.

II

A. Statute of Limitations Burden of Proof.

Appellant first argues that, because the respondent issued the notice of deficiency in the estate tax case after the expiration of the three-year limitation period, respondent has the burden to establish that the alternate six-year limitation period applies.³  We agree. To obtain the extended limitation period of Sec. 6501(e) (2), respondent must show that omitted amounts were properly includible in the gross estate and that an amount in excess of twenty-five percent of the gross estate was omitted. See, Weikel v. Commissioner, 51 T.C.M. (CCH) 432 (1986); Reis v. Commissioner, 1 T.C. 9 (1942), aff'd, 142 F.2d 900 (6th Cir. 1944). Accordingly, respondent in this case must show that the six checks delivered by the decedent on December 24, 1980, were properly includible in decedent's gross estate. However, as we discuss below, we conclude that respondent's burden was satisfied as a matter of law through the facts as stipulated.

B. Dominion and Control.

I.R.C. Sec. 2501 imposes a tax on the transfer of property by gift, and I.R.C. Sec. 2511 defines the transfers to which the gift tax applies. Providing further definition, Treas.Reg. 25.2511-2(b) states that a gift is complete when "the donor has so parted with dominion and control [over the property] as to leave in him no power to change its disposition." Subsection (c) adds that a gift is incomplete when "a donor reserves the power to revest the beneficial title to the property in himself." Accordingly, in order to establish that the checks delivered in 1980 do not constitute gifts in 1980, but are instead properly includible in the estate, respondent must show that the decedent did not part with "dominion and control" over the funds in her checking account at the time she disbursed the checks.

To determine whether, on the facts as stipulated, decedent retained "dominion and control" over the property represented by the checks, we must look to the relevant state law, in this case the law of Oklahoma. Burnet v. Harmel, 287 U.S. 103, 110, 53 S. Ct. 74, 77, 77 L. Ed. 199 (1932) ("state law creates legal interests but the federal statute determines when and how they shall be taxed").

A survey of Oklahoma law statutes demonstrates that, absent consideration from the payee to the drawer of a check, a stop payment order by the drawer operates to extinguish liability of the drawer to the payee.⁴  Here, the checks were not distributed in exchange for consideration. Thus, under Oklahoma law, decedent retained the power to stop payment and thereby defeat the claims of the donees from the time the checks were delivered (in 1980) until they were cashed (in 1981). Accordingly, respondent has met its burden of establishing that decedent retained "dominion and control" over the checks throughout 1980 and therefore that the proceeds of the checks were properly includible in the estate.

C. The Relation Back Doctrine.

Notwithstanding our conclusion above, this court could still hold that the checks constituted completed gifts in 1980 if we determine that the cashing of a check delivered as a noncharitable gift "relates back" to the time the check was written. The relation back doctrine was first articulated in Estate of Spiegel v. Commissioner, 12 T.C. 524 (1949), where the tax court held that for purposes of allocating annual income tax deductions, a check delivered as a charitable contribution was considered a payment in the year delivered, even though not debited from the donor's account until the subsequent year. Id. at 529. This doctrine was expanded to the estate tax area in Estate of Belcher v. Commissioner, 83 T.C. 227 (1984), where the tax court held that a bank's payment after the donor's death of a check delivered for charitable purposes relates back to the date of delivery so that the funds disbursed by the check are not includible in a decedent's gross estate. Id. at 235.

In Belcher, the tax court specifically declined to decide whether the relation back doctrine would also extend to noncharitable donations:⁵ 

One final word. In Spiegel, we observed that "Charitable contributions may be gifts in the broad sense, but for tax purposes they fall into a special class and there is special legislation dealing with them. What we say here is intended to apply to charitable contributions and not necessarily to all categories of gifts." Similarly, we intend our holding in this case to apply only to charitable contributions for estate tax purposes. Sufficient unto another day the question of includability of noncharitable gifts under similar circumstances.

Belcher, 83 T.C. at 238-39.

Since Belcher, one circuit court, the Seventh in McCarthy v. United States, 806 F.2d 129 (7th Cir. 1986), has considered whether the payment, after the death of the donor, of a check distributed for the purpose of making a noncharitable gift relates back to the date the check was distributed. In determining not to so extend relation back treatment, the McCarthy court noted at least one significant practical distinction for estate tax purposes between charitable and noncharitable gifts. The court reasoned that if the proceeds of a check made out to a charitable organization and cashed after the death of the decedent are not afforded relation back treatment and thus are included in the gross estate under I.R.C. Sec. 2031(a), " ' [t]he inclusion of [this check] would at the very least create the possibility that [it] would qualify as [a Sec. 2055] charitable deduction [ ], ... creating a "wash." ' "⁶  806 F.2d at 132 (quoting Belcher, 83 T.C. at 232). A similar statutory "wash" would be created if the check was written in satisfaction of a bona fide legal obligation. Bona fide legal claims against an estate may be deducted from the value of the gross estate under I.R.C. Sec. 2053. However, there is no statutory vehicle for deducting from the value of the gross estate noncharitable gifts that remain unpaid at death. On the contrary, the exclusion from a decedent's gross estate of noncharitable gifts up to the statutory amount operates only upon completion of that gift prior to the donor's death. I.R.C. Sec. 2035(b) (2); McCarthy, 806 F.2d at 132. The McCarthy court went on to conclude:

[T]here remains sufficient justification compelling the inclusion [in the gross estate] of outstanding checks issued to noncharitable donees. The Internal Revenue Code now exempts only those gifts made by a decedent up to $10,000 per donee, per year. I.R.C. Sec. 2035(b) (2) (1985). To the extent of that exemption, application of the relation back doctrine fosters estate tax avoidance. By issuing a check to a noncharitable donee with the understanding that it not be cashed until after his death, a decedent may effectively bequest up to $10,000 per donee, thus avoiding the estate tax consequences normally attending such transactions.

Id. (emphasis partially added).

Of course, the instant case differs from McCarthy and Belcher in that the checks here were cashed prior to decedent's death. However, since the checks here were not cashed in the year for which favorable tax treatment is sought, adoption of the relation back doctrine in this case might still "foster tax avoidance."

The tax scheme as amended in 1981 now exempts noncharitable gifts up to the amount of $10,000 per donee, per year. I.R.C. Secs. 2035, 6019 and 2503. As we discussed in section II.A. of this opinion, Congress has established specific regulatory guidelines for determining whether a gift has been completed within a particular year and thus whether favorable tax treatment applies. At least one of the requirements for that favorable treatment is that the donated property be removed from the "dominion and control" of the donor during the applicable tax year.

Were we to extend the relation back doctrine to the circumstances of this case, the tax scheme established by Congress and the policy choices that scheme represents could be easily frustrated through a mutual understanding between donor and donee that gifted checks not be cashed until some future date after the end of the year. The donor would thereby be able to reap the favorable estate and gift tax benefits attending limited yearly transfers of property when, in fact, he has not relinquished the control and use of the property (the cash in this case). This court is not inclined to open the door to such arrangements. Accordingly, we decline to extend the relation back doctrine to the circumstances of this case, where all of the checks were distributed in one year, 1980, and cashed on the same day in late January 1981.⁷ 

III

In conclusion, we hold that the respondent has the burden of proof in demonstrating the applicability of the six-year statute of limitation under Sec. 6501(e) (2). However, we also hold that respondent has met his burden in this case by showing that the checks distributed to noncharitable donees in 1980 were not cashed until 1981. Finally, we decline to extend the application of the relation back doctrine to the circumstances of this case. The decision of the tax court is therefore AFFIRMED.