He wrote $464,000 in checks before his father's death; the IRS later challenged the gifts

Eleven checks worth $464000 became the subject of a federal estate tax dispute after a Pennsylvania man wrote them on behalf of his father just five days before his death. The Internal Revenue Service (IRS) challenged the estate's decision to exclude the checks from the value of the father's investment account on his federal estate tax return.

Donald L. DeMuth wrote the checks on September 6, 2015 while acting under a power of attorney for his father, William E. DeMuth Jr. William had died on September 11, 2015.

Only one check worth $28000, was paid by the investment company before William's death. The other 10 checks, totalling $436000 were paid afterward.


The dispute eventually reached the US Court of Appeals for the Third Circuit, which upheld a Tax Court ruling requiring seven checks worth $366000 to be included in William's gross estate for federal estate tax purposes. The appeals court issued its decision on July 12, 2023 and designated it as nonprecedential, as per US Court of Appeals for the Third Circuit.

Why Donald DeMuth wrote $464,000 in checks before his father's death

William appointed Donald as his agent under a power of attorney in January 2007. The arrangement authorised Donald to make gifts to William's descendants within the applicable annual federal gift tax exclusion.

Donald made annual monetary gifts to family members under that authority between 2007 and 2014.

William's health deteriorated during the summer of 2015. And by early September he had reached an end stage medical condition.

On September 6, Donald wrote 11 checks from William's investment account with Mighty Oak Strong America Investment Company. The checks totalled $464,000 and included payments to family members of $28,000 or less, as well as a $240,000 payment to a savings plan.

Donald mailed or personally delivered the checks to the recipients. William died five days later.

According to the court records, Mighty Oak paid only one check, worth $28,000, before William's death. Three other checks were deposited by their recipients on September 11, the day William died, but were not paid by Mighty Oak until September 14.

As a result, the 10 checks paid after William's death totalled $436000.

Why the IRS challenged the $436000 in checks

In December 2016, Donald filed his father's federal estate tax return as executor. The return excluded the value of all 11 checks from the reported value of William's investment account.

The IRS challenged that treatment and issued a notice of deficiency assessing $179130 in additional federal estate tax.

During the Tax Court proceedings, the IRS agreed that three checks, totalling $70000, should be excluded from the disputed amount. This reduced the asserted deficiency to $131774.

The remaining dispute involved seven checks worth $366000.

The Tax Court ruled that these seven checks had to be included in William's gross estate because the gifts had not been completed before his death under Pennsylvania law.

The court also addressed the IRS's agreement to exclude the three other checks. It allowed that concession to stand because withdrawing it would prejudice the estate, as per US Tax Court opinion, T.C. Memo.

When does a check count as a completed gift under Pennsylvania law

The main legal question was whether writing and delivering a check was enough to complete a gift before account holder died.

As William was domiciled in Pennsylvania, the courts applied Pennsylvania law to determine whether the gifts had been completed.

Under the legal principles discussed in the case, delivering a check does not necessarily complete a gift. The donor must relinquish control over the property, and a check generally remains revocable until it is paid.

The court also considered an exception under Pennsylvania law for a check drawn for the whole and exact amount held in the relevant account. In such circumstances, the check may qualify as an equitable assignment and be treated as a completed gift.

The seven disputed checks did not qualify for that exception. Because they had not been paid before William's death, their value had to be included in his gross estate for federal estate tax purposes.

This was a decision applying Pennsylvania law to the facts of the case, rather than a universal rule governing every check or gift across the United States.

Why the court rejected the argument that the checks were gifts in contemplation of death

The estate also argued that the checks should qualify as gifts made in contemplation of death, a legal concept known as causa mortis.

The appeals court rejected this argument. Focusing on the donor's state of mind. The relevant question was whether William intended the payments to be gifts in contemplation of death, not whether Donald knew his father's health was deteriorating.

The court found no evidence that William had directed Donald to make the payments on that basis. Donald's awareness of his father's medical condition was not sufficient to establish that the checks qualified as gifts causa mortis.

US appeals court upholds the estate tax ruling

On July 12, 2023 the Third Circuit affirmed the Tax Court's decision.

The ruling upheld the inclusion of seven checks worth $366000 in William's gross estate for federal estate tax purposes.

The appeals court designated its decision as nonprecedential. The ruling resolved the dispute between the estate and the IRS but does not constitute binding precedent for other cases.