Spiegel v. Commissioner

12 T.C. 524, 1949 U.S. Tax Ct. LEXIS 232

• Court: United States Tax Court
• Decided: March 31, 1949
• Docket: Docket No. 14658
• Status: Published

Opinions

OPINION.

OppeR, Judge:

The first question, and the only one on the merits, is whether respondent erred in disallowing as charitable deductions for 1942 two contributions, one of $5,000, and another of $2,800, made by decedent by checks dated December 30, 1942, and delivered on December 31,1942, but not cashed until in January 1943. The $5,000 check was cashed on January 11, after decedent’s death on January 8, and the $2,800 check on January 4,1943. It being conceded that the payee organizations were within the permitted class described in section 23 (o) (2), the issue is whether the contributions were, under the circumstances, paid in 1942. In the disposition of this controversy, certain principles must be taken as generally accepted.

From the time of the adoption of the Uniform Negotiable Instruments Law, the concept of a check as an equitable assignment of a portion of the drawer’s account fell into the discard. But both commercial usage and legal authority thereafter considered a payment by check as at least “conditional payment.”¹ See Swope v. McClure, 239 Ill. App. 578. It was necessarily placed in a different category from a mere promise to pay; or even from such a promise reduced to formal terms and issued in the form of a negotiable promissory note. Cf. Eckert v. Burnet, 283 U. S. 140, with Estate of M. A. Bradley, 19 B. T. A. 49.

The condition imported in the transfer of funds by means of the delivery of a check is that the check must be paid upon presentation. But the problem remains whether that condition be thought of as precedent or subsequent, or, to adopt practical and ordinary terms, whether the check when paid should be considered as having constituted payment at the time it was delivered or at the time it was honored. That seems to us the test which will dispose of the pending question. We may assume that decedent’s delivery of checks to the charities in question was at the time no more than a conditional payment of the charitable contribution for which the deduction is here sought. If the subsequent honoring of the checks by fulfilling the condition subsequent related the payment back to the date of delivery, the fact of the contribution and the time it was paid would become fixed.

Upon that point, an examination of the authorities renders it impossible to entertain the slightest doubt.

Payment by bill or check becomes absolute payment of the debt when the check Is paid on presentation. On such payment of the check, the debt is deemed to have been discharged from the time the check, was given. Thus, it has been held that a contract which is invalid because made on Sunday is not relieved of its invalidity by reason of the fact that a check given on that day was paid on a secular day. And if under the circumstances of a particular case it is necessary to make a payment at a particular time, as for example to satisfy the part payment provision of the statute of frauds, a check given and received at that time, but not cashed until after the specified time, will operate as a payment as of the date when given. [Emphasis added.] [40 Am. Juris. 775.]

In Estate of M. A. Bradley, supra, p. 51, the Board of Tax Appeals said:

At the- least, the payment * * * was a conditional one. * * * The check was duly paid. Under well established law the payment of the check * * * related hack to the date of its delivery and the debt is deemed to be discharged from that date. 21 R. C. L. 70; Hooker v. Burr, 137 Cal. 663; McFadden v. Follrath (Minn.), 130 N. W. 542. [Emphasis added.]

On review (Commissioner v. Bradley (C. C. A., 6th Cir.), 56 Fed. (2d) 728, 729), the opinion notes:

* * * When, therefore, the check was paid promptly on such presentation, the condition to which this payment was subject was performed, and what had been, at the time of the acceptance of the check, a conditional payment by the deceased, became an absolute payment by him as of that time. [Emphasis added.]

In Mark D. Eagleton, 35 B. T. A. 551, 558; affd. (C. C. A., 8th Cir.), 97 Fed. (2d) 62, the rule is stated to be:

Payment by check is a conditional payment subject to the condition subsequent that the check is paid on presentation thereof to the drawee. When this method of payment is carried through to the performance of the condition subsequent, it is reasonable to conclude that the payment dates back to the time of giving the check, and it has been held accordingly. * * *

As recently as Estate of James W. Hubbell, 10 T. C. 1207, this language from the Eagleton case was quoted with approval.

Similarly, in Thomas v. Prudential Insurance Co. of America (C. C. A., 4th Cir.), 104 Fed. (2d) 480, the court stated :

* * * In Kendrick v. Insurance Co., 124 N. C. 315, 32 S. E. 728, 70 Am. St Rep. 592, it was held that a check mailed a few hours before the insured died constituted payment of premium during his lifetime. See, also, Whitley v. Insurance Co., 71 N. C. 480; Taylor v. Merchants’ Fire Ins. Co., 9 How. 390, 13 L. Ed. 187.

And, in Potter v. Sager, 184 App. Div. 327; 171 N. Y. S. 438; affd., 228 N. Y. 526; 126 N. E. 920:

* * * Following this general current of authority, we conclude that the check drawn to the order of plaintiff’s salesman, and honored in due course, constituted a payment of cash to plaintiff as of the time of the delivery of the automobile to defendants * * *. [Emphasis added.]

To quote from Sardeson v. Menage, 41 Minn. 314; 43 N. W. 66:

* * * Of course payment by check, unless otherwise expressly agreed, is always upon the implied condition that it be honored and paid on presentation. If duly presented and not honored, it will turn out to have been no payment * * *. But, on the other hand, if it be duly paid, as contemplated, the payment * * * is usually deemed to relate back to the time of its delivery * * *.

See also Cole v. Cole (Utah), 122 Pac. (2d) 201.

In Pennsylvania the rule is stated in somewhat different fashion, but to a similar effect:² “A check is not an absolute but a conditional payment defeasible on the nonpayment of the check.” (Wedmore v. McInnes, 69 Pa. Super. 220, 222.)

And in California:

* * • In general mercantile and commercial transactions a check, after all, is but a convenient form of transferring money, and operates either as payment absolute or payment conditional, as the parties themselves intend. * * * But in all such transactions, where a check is received as conditional payment, the payment becomes absolute, and relates to the date of the delivery of the check, when its recipient actually cashes it. [Hooker v. Burr, 137 Cal. 663; 70 Pac. 778.]

This case was cited as authority in Texas Mutual Life Insurance Association v. Tolbert (Tex. Sup. Ct.), 136 S. W. (2d) 584, for the conclusion that:

* * * The correct calculation should be, we think, computed from the date of notice of the assessment to the time of the delivery of the check to the association, for in such “transactions, where a check is received as conditional payment, the payment becomes absolute, and relates back to the date bf the delivery of the check, when its recipient actually cashes it. * * *”

And in Illinois, the situs of the instant transactions, Hooker v. Burr, supra, has also been cited with approval. Swope v. McClure, supra.

It would seem to us unfortunate for the Tax Court to fail to recognize what has so frequently been suggested, that as a practical matter, in everyday personal and commercial usage, the transfer of funds by check is an accepted procedure. The parties almost without exception think and deal in terms of payment except in the unusual circumstance, not involved here, that the check is dishonored upon presentation, or that it was delivered in the first place subject to some condition or infirmity which intervenes between delivery and presentation.

Furthermore, as a matter of common parlance we think it is most common to speak of “paying” an obligation by giving one’s check for it. That is the common method of paying bills in this country. * * * [Anthony P. Miller, Inc. v. Commissioner (C. C. A., 3d Cir.), 164 Fed. (2d) 268, 269, modifying 7 T. C. 729; certiorari denied, 333 U. S. 861.]

It would seem, however, that this court should take judicial notice of the fact that checks and drafts are usual and ordinary means of transacting business and transferring money in all business transactions. * * * [Potter v. Sager, supra.]

“A check, after all, is but a convenient form of transferring money.” Hooker v. Burr, supra.

* * * It would subject the public to vast inconvenience, and to increased risk even, if it be held that all the transactions with public officers in the payment of taxes, redemptions, etc., must be through the medium of bank bills and coin, instead of being done, as they are largely, through the banks, by means of certificates and demand checks. * * * [Sardeson v. Menage, supra.]

With knowledge of the prevalence of this practice, and of the necessity of treating tax questions from a practical rather than a theoretical viewpoint, it would be astonishing indeed if by the use of the word “payment,”³ in section 23 (o), Congress did not intend to include a check given absolutely and in due course subsequently presented and paid. See Beers v. Federal Security Administrator (Dist. Ct. Conn.), 80 Fed. Supp. 183. We conclude that decedent, upon the issuance and delivery of the checks in question, made a conditional payment of charitable contributions which, upon the presentation and payment of the checks, became absolute and related back to the time when the checks were delivered.

One case stands as an obstruction in this almost universal course of the smooth flow of practical and legal treatment. That is Estate of John F. Dodge, 13 B. T. A. 201. There, checks drawn and issued on December 31 by a taxpayer who subsequently died were denied deduction as charitable contributions by the decedent for that year. Upon the issuance of the checks a “liability for payment” was assumed in the opinion. But on the supposed hypothesis that to a cash-basis taxpayer the existence of such a liability would not warrant a deduction, the Board of Tax Appeals said (p. 219) that “a contribution is not made even though liability for payment has attached, until it is completed by payment either in money or money’s worth.” Cf. C. H. Musselman, 1 B. T. A. 41.

Notwithstanding that statement, the Dodge case was distinguished in Estate of M. A. Bradley, supra, on the theory of “lack of consideration” for a gift or contribution, and the consequent absence of liability, in order to arrive at the decision in that case that a check given by a decedent in payment of taxes but not cashed until after his death was nevertheless deductible as a payment by him. The theory of Estate of M. A. Bradley is hence so inconsistent with that stated in Estate of John F. Dodge that we must view it as tantamount to a reversal of that case. And it is not an irrelevant circumstance that a search has failed to reveal that the Dodge case has ever been followed since that time.

The discussion of the necessity for “consideration” ⁴ contained in the Dodge case appears on analysis to be the pursuit of an irrelevant factor, for example, the statement that:

* * * the transactions involving the checks in question can not be considered as more than attempts on the part of John F. Dodge to make gifts; and they were not completed until the checks were paid, accepted, or certified by the banks. * * * [p. 220.]

It seems evident that the same contention could have been made with respect to the payment of the taxes in the Bradley case, and that they were no more than “attempts” to pay the taxes, since until the checks were honored, they were not payment either. For a cash-basis taxpayer the mere delivery of a check can not constitute payment in cash, even of an admitted liability, except on the theory of relation-back. What must be viewed as the critical point is that in all of the cases we have considered the checks were promptly presented and were duly paid upon presentation, and that, according to the principles generally accepted and previously discussed, the payment which upon delivery of the check was conditional not only became absolute upon presentation, but related back to the time of the original delivery. And that is a concept that has nothing to do with consideration or the lack of it.

As we have already noted, the language of the applicable section now⁵ calls for “payment” of charitable contributions in order for them to be deductible. The purpose of this approach was to place cash and accrual taxpayers upon an equal footing with respect to charitable contributions.⁶ Instead of a contribution being deductible when “made,” as was required when the Bodge case was decided, it is now determined by “payment,” which, as we have seen, is, upon the ultimate honoring of the check, assumed to be as of the date of its delivery.

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. Particularly the concept that a gift can not have consideration and can not be of a binding nature must be modified in construing section 23 (o). The committee report, quoted in footnote 6, supra, by referring to accrual systems of accounting and to the accrual of charitable pledges, demonstrates that there may be enforcible obligations growing out of a contribution to charity and that Congress so recognized, as without enforcibility there could never be an accrual. United States v. Anderson, 269 U. S. 422; Dixie-Pine Products Co. v. Commissioner, 320 U. S. 516.

The legislation in its present form, revolving as it does around “payment,” was designed to and did eliminate the possibility of 'a distinction between cash- and accrual-basis taxpayers in the field of charitable contributions. But we are asked to hold here that the time of payment by check depends upon whether or not the check was itself a binding obligation because supported by a consideration. Cf. Estate of M. A. Bradley, supra. If we did so, there would arise in each case where the charitable payment is founded on a pledge asserted to be enforceable — a claim made by the petitioner in this very proceeding with respect to the check honored after decedent’s death — an additional uncertainty of the exact nature which the statute was intended to eliminate. The same investigation of obscure and equivocal facts, the same application and possibly unequal operation of local law would be required as formerly existed in determining accruability. We can not construe the sense in which Congress used the term “payment” as creating anew the very ambiguities which it was attempting by the use of that term to eliminate. This may in itself be sufficient to distinguish Estate of John F. Dodge, supra. If not, we regard that decision as erroneous. In any event, it will no longer be followed.

The remaining question concerns the death of decedent prior to the cashing of one of the checks for which deduction is claimed. It is suggested that death revoked the authority of the bank to cash the check, whatever might be the situation where the drawer remains alive, and that the contribution can not hence be treated as paid. In this respect, however, the contention appears to be in error. In Commissioner v. Bradley, supra, the drawer taxpayer had also died prior to presentation. The court said (p. 729):

The fact that the death of the drawer of the check before its presentation revoked the authority of the drawee to pay it did not affect the validity or effect of such check as between the drawer and the payee, at least after its payment by the drawee * * *.

Nor in the absence of knowledge on the part of the drawee would there be a duty upon it to withhold payment of the check or any liability consequent upon its payment.

* * * It is well settled that payment by a bank of a check of a depositor after his death, made by it in good faith without knowledge of the death or of facts sufficient to cause an inquiry, is a valid payment. * * * [Lourie v. Chase National Bank, 42 N. Y. S. (2d) 205.]

* * * A bank is not liable to the drawer’s estate for paying his check without knowledge or notice of his'death. [9 C. J. S. § 353, p. 704.]

And the fact that under such circumstances the check was issued without consideration would not call for a different conclusion.

* * * Very many * * * must have been the cases where * * * the check toas given without value, and the bank has paid it after death, in ignorance of that fact. Vet, in my research, I have not been able to find in the reports in this country or in England a case where it was sought, under such circumstances, to hold the bank liable, except the Rogerson Case, 1 Bing. 93; 7 J. B. Moore, 412; 1 L. J. C. P. 6, in which the attempt failed. [Glennau v. Rochester Trust & S. D. Co., 209 N. Y. 12, 102 N. E. 537.] [Emphasis added.]

Dealing, as we are here, with contributions made by checks delivered and accepted unconditionally, which were presented and paid in due course; which, as we have seen, upon such payment are viewed as having been paid at the time of the original delivery of the check; and recognizing that a different rule and a different factual situation would, of course, exist had the checks been withdrawn, Mark D. Eagleton, supra, or refused payment upon presentation, Estate of James W. Hubbell, supra; we conclude that here the contributions were made by the decedent in his lifetime in the year in issue, and that they are hence deductible in full as claimed by petitioners.

The foregoing disposition of the substantive question renders unnecessary consideration of petitioners’ further contention that the deficiency is barred by the statute of limitations.

Reviewed by the Court.

Decision will be entered under Rule 50.

1 “Of course, ordinarily a check is not considered payment unless it is accepted as such with the intention that the delivery of the check operate as a release of the original obligation. * * *

“But whether or not it be considered that the checks were given and accepted as payment and extinguishment of the original duty of the defendants * * * it must be remembered that such checks are at least a conditional payment * • (Beers v. Federal Security Administrator (Dist. Ct. Conn.), 80 Fed. Supp. 183.)

2 Note a comparable statement of the Canadian rule:

“The mere receipt of a cheque is not per se payment of the amount represented by the check * * * but it operates as payment until it has been presented and payment refused.” (Hughes v. Canada Permanent Loan Soc., 39 U. C. Q. B. (Ont.) 221, 229.)

3 SEC. 23. deductions FROM GROSS INCOME.

In computing net income there shall be allowed as deductions:

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(o) Charitable and Other Contributions. — In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:

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4 It is not improbable that the preoccupation with the matter of consideration is a residual concept lacking real validity since the adoption of the Uniform Negotiable Instruments Law. The “equitable assignment” theory extensively accepted up to that time applied only to checks issued for value, and was subject to a recognized exception in the case of a mere gift. Martin v. Martin, 89 Ill. App. 147. On that approach the presence or lack of consideration was a determining factor.

5 Revenue Act of 1938, sec. 23 (o).

6 “SECTIONS 23 (o) and 23 (q). DEDUCTION FOR CHARITABLE AND OTHER CONTRIBUTIONS.

“These subsections provide the basic rule for the allowance of deductions of contributions or gifts for charitable or other purposes in the case of individuals (sec. 23 <o)) and all corporations (sec. 23 (q)).

“ünder the various revenue acts the deduction for contributions is allowed for the taxable year in which the contribution is made. Hence, a taxpayer on an accrual basis of accounting may claim that he is entitled to a deduction for the amount of a charitable pledge in one year, although he does not actually pay it until a later year, or indefinitely postpones payment. The doubt and confusion in such cases is aggravated by reason of the uncertainty and diversity in the law of the various States on the question as to when the liability of a subscriber to a charitable fund is fully incurred. In the interest of certainty In the administration of the revenue laws, it is desirable to dispel this confusion by enacting a clear and uniform statutory rule to govern this situation.

“The bill provides that the deduction for contributions or gifts for charitable and other purposes shall be allowed only for the taxable year in which the contribution is actually paid regardless of whether the taxpayer is reporting income on the cash or the accrual basis. The allowance of the deduction in the year when actually paid will provide a clearer rule without hardship to the taxpayer and will eliminate the uncertainty in the administration of the deduction. Of course the payment of the contribution or gift cannot result in a double deduction.” (Rept. No. 1860, Ways and Means Committee, 75th Cong., 3d sess., P. 19.)