the Merrill Lynch account as part of the gross estate. (Def. 56.1
Stat. at ¶ 10).
On its Internal Revenue Service Form 706, "United States Estate
(and Generation-Skipping Transfer) Tax Return," the decedent's
estate reported that it owed an estate tax liability of
$238,041.41. (Def. 56.1 Stat. at ¶ 11) Upon audit, the Internal
Revenue Service made total adjustments of $510,960.58 to the
taxable estate. (Def. 56.1 Stat. at ¶ 12) The plaintiffs do not
dispute $67,191.58 of the audit adjustments, and do not seek a
refund of the additional tax amount attributable thereto. (Def.
56.1 Stat. at ¶ 13).
Upon audit, the Internal Revenue Service treated all of the
Gallucci checks as gifts made in 1990, and therefore calculated
that the decedent gave Ronda and Raymond J. Gallucci each
$19,940. (Def. 56.1 Stat. at ¶ 14). Plaintiffs dispute this
adjustment and seek a refund of the resulting additional
The remaining $423,889 of the adjustments relate to the Merrill
Lynch account. The Internal Revenue Service included the value of
the Merrill Lynch account on the day after the decedent's death
as part of the gross estate. (Def. 56.1 Stat. at ¶ 15) Plaintiffs
dispute this adjustment and seek a refund of the resulting
additional tax. (Id.).
Due to the audit adjustments, $200,948.57 in additional taxes
were assessed against the decedent's estate. (Def. 56.1 Stat. at
¶ 16) The Internal Revenue Service assessed penalties against the
decedent's estate in the amount of: (a) $33,842, pursuant to
26 U.S.C. § 6662 and (b) $1,507 for failure to pay taxes. (Def. 56.1
Stat. at ¶ 17) Plaintiffs dispute these assessments and seek a
refund of the assessed penalties. (Id.) The Internal Revenue
Service assessed interest totaling $63,702.30 on the tax
liability described above. (Def. 56.1 Stat. at ¶ 18) Decedent's
estate paid the assessments in full, filed a timely
administrative claim for a refund, and filed this action on
September 17, 1997.
I. SUMMARY JUDGMENT STANDARD
A motion for summary judgment will be granted when no material
issue of fact remains to be decided and the undisputed facts
warrant judgment for the moving party as a matter of law.
Fed.R.Civ.P. 56(c); Raskin v. Wyatt Co., 125 F.3d 55, 60 (2d
Cir. 1997); Tomka v. Seiler Corp., 66 F.3d 1295, 1299 (2d Cir.
1995) (citing Celotex v. Catrett, 477 U.S. 317, 322-23, 106
S.Ct. 2548, 91 L.Ed.2d 265 (1986)); Chambers v. TRM Copy Centers
Corp., 43 F.3d 29, 36 (2d Cir. 1994). If a reasonable jury could
return a verdict for the non-movant, then a material issue of
fact remains and the motion must be denied. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202
(1986); Chambers, 43 F.3d at 36.
The burden of proving that no material issue of fact remains in
dispute rests with the movant. Celotex, 477 U.S. at 322, 106
S.Ct. at 2551. However, once a motion for summary judgment has
been made, the non-moving party must set forth specific factual
allegations to avoid summary judgment in the movant's favor.
Kurisoo v. Providence and Worcester R.R. Co., 68 F.3d 591, 594
(2d Cir. 1995); Fahle v. Braslow, 913 F. Supp. 145, 149
(E.D.N.Y. 1996), aff'd, 111 F.3d 123, 1997 WL 177185 (2d Cir.
1997) (citations omitted). Conclusory, ispe dixit assertions
will not defeat a summary judgment motion. Western World Ins. v.
Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990).
The parties may not rely on the pleadings, but must support
their respective positions with affidavits, exhibits, discovery
responses or deposition testimony. Celotex, 477 U.S. at 324,
106 S.Ct. at 2553; Rule v. Brine, Inc., 85 F.3d 1002 (2d Cir.
1996); United States v. Rem, 38 F.3d 634, 635 (2d Cir. 1994).
Any ambiguities and all inferences must be drawn in the
favor. Institute for Shipboard Educ. v. Cigna Worldwide Ins.,
Co., 22 F.3d 414, 418 (2d Cir. 1994); Twin Labs., Inc., v.
Weider Health & Fitness, 900 F.2d 566, 568 (2d Cir. 1990).
Finally, this Court is charged with "issue finding" and not issue
resolution, and is barred from trying issues of fact at this
stage. Kerzer v. Kingly Manufacturing, 156 F.3d 396, 400 (2d
Cir. 1998); Gallo v. Prudential Residential Servs. Ltd.
Partnership, 22 F.3d 1219, 1223-24 (2d Cir. 1994). With these
principles at hand, we now turn to the instant motion.
II. RELEVANT PROVISIONS OF THE UNITED STATES TAX CODE
In order to properly analyze the issue presented, a brief
review of the relevant United States Tax Code provisions is
necessary. Section 2001(a) imposes a tax "on the transfer of the
taxable estate of every decedent who is a citizen or resident of
the United States." 26 U.S.C. § 2001 (1989 and Supp. 1999). The
taxable estate is defined in Section 2051 as the gross estate
less deductions. 26 U.S.C. § 2051 (1999). Pursuant to sections
2031 and 2033, the value of the gross estate generally includes
the value of all property to the extent of the interest therein
of the decedent at the time of her death. 26 U.S.C. § 2031(1999);
26 U.S.C. § 2033 (1989); Estate of Gagliardi v. Commissioner,
89 T.C. 1207, 1210, 1987 WL 257913(1987). Section 20.2031-5 of
the Estate Tax Regulations provides, "[t]he amount of cash
belonging to the decedent at the date of his death, whether in
his possession or in the possession of another, or deposited with
a bank, is included in the decedent's gross estate."
26 C.F.R. § 20.2031-5 (1998).
Although Section 2051 imposes a tax on the transfer of property
by gift, Section 2503(b) provides that the first $10,000 of gifts
made to any person during a year are excluded in computing the
total amount of gifts made during that year. 26 U.S.C. § 2503
(1989 and Supp. 1999). Therefore, a gift of $10,000 or less,
completed prior to the donor's death, is neither included in her
gross estate nor taxed as a gift.
III. GOVERNING LAW
The parties dispute which law, state or federal, controls the
determination whether decedent's checks at issue were completed
gifts at the time of her death. The plaintiffs, relying upon
Major Realty Corp. and Subsidiaries v. Commissioner,
749 F.2d 1483 (11th Cir. 1985), assert that state law does not govern, but
rather federal law applies. According to the federal gift tax
regulations, a gift is complete when "the donor has so parted
with the dominion and control so as to leave him no power to
change its disposition, whether for his own benefit or for the
benefit of another." 26 C.F.R. § 25.2511-2(b)(1998). The
regulations further provide that "[a] gift is incomplete in every
instance in which a donor reserves the power to revest the
beneficial titles to property in himself."
26 C.F.R. § 25.2511-2(c)(1998).
Defendant contends that the narrow issue of when a donor has
"relinquished dominion and control over a gift in the form of a
check" is a matter of state law. (Def. Reply Mem. at 3, citing
Metzger v. C.I.R., 38 F.3d 118, 122 (4th Cir. 1994)). The
parties agree, however, that if state law controls, the law of
New York State should be applied.
This Court finds that state law governs. It is well-settled
that rights in property are created by state law. As explained by
the United States Supreme Court, "state law creates legal
interests and rights in property, [and] federal law determines
whether and to what extent those interests will be taxed."
United States v. Irvine, 511 U.S. 224, 238, 114 S.Ct. 1473,
1481, 128 L.Ed.2d 168 (1994). The plaintiffs' reliance on Major
is misplaced. In that case, the issue presented to the Eleventh
Circuit was "when a sale is complete for purposes of federal
income tax." Major, 749 F.2d at 1486. Explaining
that "the time of passage of title and the legal rights thereby
created are determined by state law," the court turned to Florida
law and determined that "title to real property is transferred
upon delivery by the grantor of a valid deed to the grantee."
Likewise, in Metzger v. Commissioner of Internal Revenue
Service, a case with similar issues as the case at bar, the
court applied state law to determine when gifts in the form of
checks are completed. Metzger v. Commissioner of Internal
Revenue Service, 38 F.3d 118, 121 (4th Cir. 1994) (citation
omitted). Further, in McCarthy v. United States, 806 F.2d 129
(7th Cir. 1986), the Seventh Circuit, reversing the district
court, explained the "definition of `property' is a problem of
state law, because that is the source of rules identifying and
limiting personal interests in assets." Id. at 130 (citation
omitted). Accordingly, the court of appeals found that the
district court erred in disregarding relevant Illinois law when
determining whether "the decedent had relinquished dominion and
control of the checks sufficient to establish a completed gift."
Id. The McCarthy case, like the case at bar, turned on when
the checks were completed gifts. Accordingly, this Court applies
the law of New York State.
IV. STANDARDS UNDER NEW YORK LAW
There are four elements which must be demonstrated in order to
prove a valid gift in New York State. These elements are: 1)
mental capacity of the donor; 2) intention to make a gift; 3)
completed delivery, and 4) acceptance by the donee. In re
Avery's Estate, 76 N.Y.S.2d 790, 795 (1948). The essential
requirements, however, are donative intent and executed delivery.
Id. Here, the defendant concedes, for the purposes of this
motion, that the checks at issue were given with the requisite
intent. See Defendant's Supporting Mem. at 2, and Defendant's
Reply Mem. at 5, fn. 7. Accordingly, this Court will examine
whether delivery was executed.
Under New York law, "[i]t seems well established that checks
are orders on the bank to pay certain sums; that they do not
constitute a transfer and delivery of that fund until presented
at the bank and paid, because that fund still remains subject to
the control and order of the [donor]; and therefore such checks
do not constitute gifts. . . ." In re Gibbons' Estate, 139
Misc. 658, 660, 249 N.Y.S. 753, 755 (1931). See also, Estate of
Newman, 111 T.C. No. 3, 1998 WL 420689 (U.S.Tax Ct. July 28,
1998) ("[p]etitioner does not direct us to, nor have we found,
any state that recognizes delivery of a check to be a completed
gift of the underlying funds"); In re Uris' Estate, 188 Misc. 772,
773, 71 N.Y.S.2d 620, 622 (1946) ("[a] gift by check is
without effect until the check is cashed").
Further, "[t]he rule is well settled in this state that a gift
by check is complete only when the check has been paid during the
lifetime of the maker." In re Grauds' Estate, 43 N.Y.S.2d 803,
817 (1943). In the matter of Grauds' Estate, the surrogate's
[w]here a check is not paid until after the maker's
death, the gift is incomplete and no valid transfer
of the fund is effectuated. . . . It appears to be
the rule, moreover, that a gift is incomplete where
the check is not paid during the maker's lifetime
even though the refusal of the depositary to honor
the check is unjustified and erroneous. . . . The
theory underlying these rules is that the issuance of
a check does not operate to transfer the sum to the
payee until it has been accepted by the bank. By the
death of the maker, the authority of the holder to
draw the money is revoked and payment by the bank
thereafter confers no right to possession upon the
Id. at 817.
Because a donor can order a bank to stop payment on a check any
while the check is still outstanding, a completed gift will not
be deemed to have occurred until the check is paid by the bank.
Therefore, a gift check that is written and delivered to the
donee prior to the donor's death but not paid by the bank until
after the donor's death, will not be considered a completed gift
upon the donor's death.
V. THE RELATION-BACK DOCTRINE
Under the relation-back doctrine, taxpayers may obtain
favorable gift or estate tax treatment because the payment of the
checks would be deemed to have occurred on the date the checks
were presented for deposit at the recipient's bank. Originally,
only charitable donations were permitted to reap the benefit of
this legal fiction. See, e.g., Estate of Belcher v.
Commissioner, 83 T.C. 227, 232, 1984 WL 15603 (1984); Estate of
Spiegel v. Commissioner, 12 T.C. 524, 1949 WL 182 (1949);
Estate of Gagliardi v. Commissioner, 89 T.C. 1207, 1210, 1987
WL 257913 (1987),(declining to extend the relation-back doctrine
to non-charitable gifts); McCarthy v. United States,
806 F.2d 129 (7th Cir. 1986) (declining to extend the relation-back
doctrine because too much time had elapsed between the time the
checks were issued and when they were presented for payment);
Dillingham v. Commissioner, 88 T.C. 1569, 1987 WL 31366 (1987).
Recently, courts expanded the relation-back doctrine. The
initial application of the relation-back doctrine by the tax
court to a non-charitable gift involved a factual scenario very
similar to the case at bar. In the Estate of Metzger v.
Commissioner, 38 F.3d 118 (4th Cir. 1994), non-charitable gift
checks written and deposited at the end of 1985 were not paid by
the bank until early 1986. There, the donor also wrote another
set of checks to the same donees, all of which were delivered and
paid in 1986. Upon the donor's death on May 29, 1987, his son
reported that the decedent had not made any taxable gifts within
In deciding whether to apply the relation-back doctrine to the
checks written in 1985, the court examined Dillingham v.
Commissioner, 88 T.C. 1569, 1987 WL 31366 (1987). Similar to
Dillingham, because the donor had not died prior to the payment
of the checks, none of the estate tax avoidance concerns were
present. However, unlike Dillingham, in Metzger, the gift
checks were presented for payment just seventeen days after they
were issued. Relying on the Eleventh Circuit's explanation that
it "express[ed] no opinion as to circumstances where the late
December gifts are cashed immediately after the New Year
holidays, when financial institutions are closed," because these
circumstances were present in Metzger, the Fourth Circuit
extended the application of the relation-back doctrine. The court
[i]n such limited circumstance, where noncharitable
gifts are deposited at the end of December and
presented for payment shortly after their delivery
but are not honored by the drawee bank until after
the New Year holiday, we agree with the Tax Court
that the gifts should relate back to the date of
Metzger, 38 F.3d at 123. Accordingly, the Metzger court held
that when the taxpayer establishes: "(1) [t]he donor's intent to
make a gift, (2) unconditional delivery of the check, and (3)
presentment of the check within the year in which for which
favorable tax treatment is sought and within a reasonable time of
issuance," the relation-back doctrine should apply. Id.
The Commissioner of the Internal Revenue Service announced that
it would follow the Fourth Circuit's decision in Metzger in
limited circumstances. Accordingly, the Internal Revenue Service
modified Revenue Rule 67-396. The revised rule now provides
that the delivery of a check to a non-charitable
donee will be deemed to be a completed gift for
federal gift and estate
tax purposes on the earlier of (i) the date the donor
has so parted with dominion and control under local
law as to leave in the donor no power to change its
disposition, or (ii) 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 it is established that: (1) the check
was paid by the drawee bank when first presented to
the drawee bank for payment; (2) the donor was alive
when the check was paid by the drawee bank; (3) the
donor intended to make a gift; (4) delivery of the
check by the donor was unconditional; and (5) the
check was deposited, cashed, or presented in the
calendar year for which completed gift treatment is
sought and within a reasonable time of issuance.
Rev. Rul. 96-56, 1996-2 C.B. 161, 1996-50 I.R.B. 7, 1996 WL
698319 (I.R.S. Dec.9, 1996).