Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 84 C 8941 - Paul E. Plunkett, Judge.
Before BAUER, Chief Judge, and FLAUM and EASTERBROOK, Circuit Judges.
This is an appeal from an order of the district court granting the plaintiff taxpayer's motion for summary judgment and compelling the Government to issue an estate tax refund. We reverse the order of the district court and remand this case for further consideration in light of our holding herein.
This case arises from the imposition of an estate tax deficiency by the Internal Revenue Service against the estate of Melanie B. McCarthy ("decedent"). The plaintiff-appellees, Daniel F. McCarthy ("McCarthy") and First National Bank & Trust Company of Evanston serve as trustees of the McCarthy estate.
The decedent died on May 24, 1980. Prior to her death she maintained a joint checking account with her son, McCarthy, at First National Bank and Trust of Evanston. McCarthy had authority to write checks on the account and did so on many occasions to pay the decedent's bills and to make gifts upon her request. During the period from May 15, 1980 to May 22, 1980 McCarthy wrote nine $3,000 checks which the decedent intended as gifts to various relatives. While all of the checks were delivered or mailed to the intended donee prior to the decedent's death, none were cashed before that time.
The plaintiffs did not include as assets of the estate, the nine $3,000 checks totaling $27,000 remaining in the decedent's checking account at the time of her death. The Internal Revenue Service assessed the estate for additional taxes totaling $8,349 plus interest relating to the inclusion of the $27,000. The district court held that the uncashed checks were completed gifts for purposes of federal estate tax law and therefore, not includible in the decedent's estate. Additionally, the court held that even if the gifts were not complete until paid by the banks, upon such payment, the date of the completed gift related back to the date of original delivery. For the reasons set forth below, we reverse the order of the district court.
The particular issue presented for review here arises upon the timing of the decedent's death between the writing of the disputed checks and the debiting of decedent's account. Section 2031(a) of the Internal Revenue Code defines gross estate as including " . . . the value at the time of his [decedent's] death of all property, real or personal, tangible or intangible, wherever situated." I.R.C. § 2031(a) (1985). Section 2035(a) provides that gifts made by a decedent within three years of death are to be included in the gross estate. Id. § 2035(a). However, an exception to this general rule appears in section 2035(b)(2) which excludes any gift made by a decedent up to $3,000 per donee, per calendar year. I.R.C. § 2035(b)(2)(1980).*fn1 Whether the decedent in fact "made" or completed a gift of the nine checks prior to her death is the question now before us.
The district court concluded that within the meaning of federal tax law the decedent relinquished dominion and control of the checks sufficient to establish a completed gift. In so holding, the court indicated that while it found Illinois state law "influential," federal law determined whether a gift was complete for federal estate tax purposes. We conclude that the district court erred in disregarding the relevant Illinois law.
This case involves the link between gift and estate taxation, the provisions of which must be read together. Estate of Sanford v. Commissioner, 308 U.S. 39, 44, 84 L. Ed. 20, 60 S. Ct. 51 (1939). The estate tax is levied on all the decedent's "property, real or personal, tangible or intangible." 26 U.S.C. § 2031(a). The definition of "property" is a problem of state law, because that is the source of rules identifying and limiting personal interests in assets. Howard v. United States, 125 F.2d 986, 989 (5th Cir. 1942). But whether Mrs. McCarthy had a "property" interest in the money represented by the checks depends on whether her gifts were completed by the time of her death. That depends initially on whether the gifts would be sufficient to trigger a gift tax (in the absence of the $3,000 exclusion), for under the Code if the property was not given, sold, or destroyed, it must still be in the estate.
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 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." See also Burnet v. Guggenheim, 288 U.S. 280, 286, 77 L. Ed. 748, 53 S. Ct. 369 (1933), and Estate of Sanford, 308 U.S. at 43, both emphasizing that the existence of a gift depends on effectual transfer of control over the economic benefits of property. Cf. Dickman v. Commissioner, 465 U.S. 330, 338 n.7, 79 L. Ed. 2d 343, 104 S. Ct. 1086 (1984). Whether Mrs. McCarthy had "power" over the money in her checking account after writing the checks or instead had relinquished "dominion and control" also is a question of state law, for no federal rules govern when checks must be paid. The Supreme Court's cases confirm this principle. The Court has consistently said that "state law creates legal interests but . . . the federal statute determines when and how they shall be taxed." Burnet v. Harmel, 287 U.S. 103, 110, 77 L. Ed. 199, 53 S. Ct. 74 (1932); see also United States v. Mitchell, 403 U.S. 190, 197, 29 L. Ed. 2d 406, 91 S. Ct. 1763 (1971) ("In the determination of ownership, state law controls."); Blair v. Commissioner, 300 U.S. 5, 9-10, 57 S. Ct. 330, 81 L. Ed. 465 (1936) ("The question of the validity of the assignments is a question of local law."); cf. Helvering v. Stuart, 317 U.S. 154, 161, 87 L. Ed. 154, 63 S. Ct. 140 (1942).
Hence, we must examine the relevant Illinois law regarding the completion of a gift. To constitute a valid gift, it is essential that the donee prove delivery of the property by the donor, with the intent to pass the title to the donee absolutely and irrevocably, and the donor must relinquish all present and future dominion and power over the subject matter of the gift. In re Estate of Waggoner, 5 Ill. App. 2d 130, 125 N.E.2d 154 (3rd Dist. 1955); In re Estate of Jarmuth, 329 Ill. App. 619, 70 N.E.2d 336 (1st Dist. 1946): Estate of Williams v. Tuch, 313 Ill. App. 230, 39 N.E.2d 695 (1st Dist. 1942). The gift must be completed and executed in the lifetime of the donor, and if not so completed ...