The case of Estate of Demuth, Jr. v. Commissioner, TC Memo 2022-72 discusses the issue of the impact of a concession by the IRS when the court finds that the conceded item would be taxable but for the concession. The Tax Court finds the concession binding and allows a reduction of the taxable estate based on the pre-trial concession. There is some conflicting law.
About four decades ago, I tried a case in which I argued a theory of the case that the revenue agent had not put forward. The taxpayer in my case had given some property to charity. The agent partially disallowed the deduction based on the value of the property. I argued that the property was inventory in the hands of the taxpayer and he was limited to his basis in the property which was very close to zero. I did not amend the pleadings to assert an additional deficiency because the amount of additional tax was small and I raised the theory later than I would have preferred. The court bought my argument and tacked on the additional tax even though I had not requested it. The taxpayer in my case engaged in unsavory behavior, and I think that influenced the court’s decision. The IRS is almost always limited to what it requests and the court is tough on letting the IRS change its mind near to trial.
Another case I remember from long ago involved the fraud penalty. My office had handled the criminal case of a very well-known individual but the review of the notice of deficiency went to another office. That office inexplicably removed the fraud penalty from the case. I had the Tax Court case transferred back to our office and we filed a motion to add the fraud penalty onto the taxpayer relatively early in the life of the case but the judge would not let us do it.
read more...In the Demuth case the decedent made, or attempted to make, several end of life gifts by check. Ten of the checks were not cashed at the time he died. The IRS conceded in the stipulation that the estate should get the benefit of three of the checks. The stipulation in this case was a full stipulation because the case was submitted under Tax Court Rule 122 that allows the parties to submit a case fully stipulated and then brief it.
The IRS convinced the court that under the laws of the state in which the decedent lived none of the gifts were consummated at death. The court stated:
This statute stands for the proposition that once a check has reached any one of the aforementioned stages in its processing at the time a stop-payment order is made, then the stop-payment order is too late; at that time, a charge may be validly made against the drawer’s account. Therefore, the first (but not the only) possible time at which a gift of a check may be deemed complete is when the drawee bank accepts, certifies, or makes final payment of the check. In this context, acceptance means “the drawee’s signed agreement to pay a draft as presented.” 13 Pa. Cons. Stat. § 3409(a) (2015). Similarly, for a check to be certified means that the check has been “accepted by the bank on which it is drawn.” Id. § 3409(d).
In the instant case, Mighty Oak did not accept, certify, or make final payment on any of the ten checks at issue until after decedent’s death. Consequently, a stop-payment order could have theoretically been placed on any of those checks before final payment. Therefore, under Pennsylvania law, none of the ten checks at issue represented completed gifts prior to decedent’s death.
If we could stop here, we would hold that the full value of all ten checks paid by Mighty Oak after decedent’s death ($436,000) is properly includible in his gross estate.
The court says that the parties seem to have misconstrued the term drawee bank to mean depositary bank and that caused the concession of the three checks.
Then the court moves to the consequence of the stipulation in a setting where the concession is at odds with the applicable law. The court says this issue has not come before it previously, which makes you think the decision here might be a precedential decision, before it cites to a pair of earlier TC Memo opinions in which the court did not allow the IRS to withdraw a concession during post-trial briefing. While those cases, Glass v. Commissioner, TC Memo 1988-550 and Cogan v. Commissioner, TC Memo 1980-328, concerned concession made before and during trial in the post-trial brief and while they are not precedential opinions, the court finds they are sufficiently relevant to a Rule 122 case to drive the decision here. The court was also concerned that accepting a withdrawal of the concession in the stipulation in this case put the petitioner at a disadvantage since the estate relied upon the concession in drafting the brief.
The case shows the power of stipulations to drive an outcome even when the outcome is wrong. It emphasizes the importance of knowing the law prior to drafting briefs because you often need to know it at the time of drafting the stipulations. This can present challenges for both respondent’s and petitioner’s counsel because sometimes you do not know everything at the time of the drafting of the stipulations. When fully stipulating a case, this becomes even more important because you don’t have a trial to perhaps clear up some uncertainty. In a footnote the court cited to the case of Gale v. Commissioner, TC Memo 2002-54 where information came out at trial different from what the IRS previously understood and the court did allow the IRS to repudiate a concession. It stated that the facts were different in the Demuth case leading to a different result.
Keith,
Thanks for the posting.
I am not sure Estate of Demuth is right. The IRS, for the reason noted by the Court, just erroneously thought the three checks were not includable as a matter of law. I analogize that type of concession to a stipulation of law.
In Siemer Milling Co. v. Commissioner, Dkt. # 21655-15 Unpublished Order dated 12/4/17, p. 2, n. 3, the Court said: “A stipulation can include a statement of application of law to fact, but Rule 91(a) does not expressly contemplate stipulations as to pure questions of law.”
Thus, in Estate of Demuth, having conceded non-inclusion on the basis of facts requiring inclusion as a matter of law, I would think that the Court is required to or in the exercise of discretion should apply the correctly determined law to the facts.
To be sure, if there were any reasonable set of facts that the taxpayer could have developed in trial or by further stipulation, then a court could exercise discretion not to consider the newly discovered law at a late stage such as Estate of Demuth. But it seems that, as presented in the Estate of Demuth opinion, there was no reasonable factual defense the taxpayer could make had the purely legal mistake not been made.
I don’t see how the Tax Court was compelled to render an opinion that is legally incorrect solely because the parties misperceived the law.