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Appeals from the United States District Court for the Southern District of Texas.
For UNITED STATES OF AMERICA, Plaintiff - Appellee: Ivan Clay Dale, Tamara W. Ashford, Esq., Deputy Assistant Attorney General, Jonathan S. Cohen, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; Gilbert Steven Rothenberg, Esq., Deputy Assistant Attorney General, U.S. Department of Justice, Washington, DC; Andrew L. Sobotka, U.S. Department of Justice, Tax Division, Dallas, TX.
For ELAINE T. MARSHALL, Individually, as Executrix of the Estate of E. Pierce Marshall, as Trustee of the E. Pierce Marshall, Jr. Trust and as Trustee of the Preston Marshall Trust, Defendant - Appellant: William R. Cousins, III, Stephen A. Beck, Robert Don Collier, Esq., Brian J. Spiegel, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P., Dallas, TX; Don Jackson, Ware, Jackson, Lee & Chambers, L.L.P., Houston, TX.
For FINLEY L. HILLIARD, E. PIERCE MARSHALL, JR., Individually, and as Executor of the Estate of Eleanor Pierce Stevens, Defendant - Appellants: Emily A. Parker, Esq., Eric Gordon Reis, Scott Patrick Stolley, Thompson & Knight, L.L.P., Dallas, TX; Russell Hardin, Jr., Rusty Hardin & Associates, L.L.P., Houston, TX.
For PRESTON MARSHALL, Co-Trustee of the Eleanor Pierce (Marshall) Stevens Living Trust, Defendant - Appellant: John William Porter, Jeffrey D. Watters, Baker Botts, L.L.P., Houston, TX.
For TAX FOUNDATION & LAW PROFESSORS, Amicus Curiae: Marcus J. Brooks, Winstead, P.C., Austin, TX.
For NATIONAL BLACK CHAMBER OF COMMERCE, SIXTY PLUS ASSOCIATION, NATIONAL GRANGE, TAXPAYERS PROTECTION ALLIANCE, CENTER FOR INDIVIDUAL FREEDOM, NATIONAL TAXPAYERS UNION, Amicus Curiaes: Eileen Janette O'Connor, Esq., Attorney, Pillsbury Winthrop Shaw Pittman, L.L.P., Washington, DC.
For JOHNSON C. SMITH UNIVERSITY, BARBER-SCOTIA COLLEGE, BENNETT COLLEGE, CLINTON JUNIOR COLLEGE, WILBERFORCE UNIVERSITY, Amicus Curiaes: Suzanne Ross McDowell, Esq., Steptoe & Johnson, L.L.P., Washington, DC; Bennett Evan Cooper, Steptoe & Johnson, L.L.P., Phoenix, AZ.
ERIC RASMUSEN, Amicus Curiae, Pro se, Bloomington, IN.
Before REAVLEY, PRADO, and OWEN, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:
In 1995, J. Howard Marshall, II (" J. Howard" ) made what the IRS later determined was an indirect gift of Marshall Petroleum, Inc. (" MPI" ) stock to MPI's other shareholders: (1) Eleanor Pierce (Marshall) Stevens (" Stevens" ), J. Howard's former wife, who was the beneficiary of a trust that was funded by MPI stock; (2) E. Pierce Marshall (" E. Pierce" ), J. Howard's son; (3) Elaine T. Marshall (" Elaine" ), E. Pierce's wife; (4) the Preston Marshall Trust (" Preston Trust" ), which had been formed for the benefit of J. Howard's grandson, Preston Marshall; and (5) the E. Pierce Marshall, Jr. Trust (" E. Pierce Jr. Trust" ), which had been formed for the benefit of J. Howard's grandson, E. Pierce Marshall, Jr. At the time that he made this indirect gift, J. Howard did not pay gift taxes. He passed away shortly after making this gift.
After several years of negotiation over J. Howard's tax liability for this indirect gift, the IRS and J. Howard's Estate entered into a stipulation that determined the value and recipients of the indirect gifts. J. Howard's Estate still did not pay the gift tax, and, pursuant to I.R.C. § 6324(b), the IRS tried to collect the unpaid gift tax from the donees. E. Pierce's Estate paid approximately $45 million toward the unpaid gift tax for the benefit of donees E. Pierce, Elaine, the Preston Trust, and the E. Pierce Jr. Trust. Stevens's Estate has not paid any gift tax because the Estate disputes that Stevens was a beneficiary of the 1995 gift.
In 2010, the Government brought suit against the donees, seeking to recover the unpaid gift taxes and to collect interest from the beneficiaries. The Government also sought to recover from two individuals--E. Pierce Marshall, Jr. (" E. Pierce Jr." ) and Finley L. Hilliard (" Hilliard" )--who, as representatives of various estates and trusts, allegedly paid other debts before paying those owed to the Government. In a series of orders issued in 2012, the district court found: (1) the donees' debt under § 6324(b) was a liability independent from that of the donor's unpaid gift tax, and the donees had incurred interest on that independent liability; (2) Stevens was a donee of J. Howard's indirect gift; (3) Hilliard and E. Pierce Jr. were individually liable for several of the debts they paid as executors and trustees before they paid the debt owed to the Government.
On appeal, the Appellants argue the district court erred in each of those rulings. We affirm in part and reverse and render in part.
A. Legal Background
The Internal Revenue Code imposes a tax on a " transfer of property by gift." I.R.C. § 2501(a)(1). Subject to a few exceptions not presented in this case, this gift tax applies " whether the gift is direct or indirect," and includes transfers of property (like stock) when the transfer was " not made for an adequate and full consideration." I.R.C. § 2511(a); see Treas. Reg. § 25.2511-1(h). When the gift tax is not paid when it is due, the Internal
Revenue Code imposes interest on the amount of underpayment. I.R.C. § 6601(a).
" The donor, as the party who makes the gift, bears the primary responsibility for paying the gift tax." United States v. Davenport, 484 F.3d 321, 325 (5th Cir. 2007) (citing I.R.C. § 2502(c)). If the donor fails to pay the gift tax when it becomes due, the Internal Revenue Code provides the donee becomes " personally liable for such tax to the extent of the value of such gift." I.R.C. § 6324(b). The term tax includes interest and penalties, and so the donee can be held liable for the interest and penalties for which the donor is liable. See Treas. Reg. § 301.6201-1(a); 14 Mertens Law of Federal Income Taxation § 53:41 (2014). Donee liability is several, meaning that the donee can be held liable for the full amount of the gift tax that the donor owes, " regardless of what portion [of the gift the particular donee] may have received of the total amount distributed," subject to the cap in § 6324(b). 14 Mertens Law of Federal Income Taxation § 53:42.
The Government has two means of collecting an unpaid gift tax: (1) it can bring a court proceeding against the donee, and (2) it can initiate a procedure under I.R.C. § 6901. See I.R.C. § § 6901, 7402. Section 6901 specifies that donee liability is " subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred." I.R.C. § 6901(a).
B. Factual Background
1. The gift
In 1995, J. Howard sold his stock in MPI back to the company. Because he sold the stock back for a price below its fair market value, this sale increased the value of the stock of the remaining stockholders. At the time of the sale, there were five other individuals and trusts that held MPI stock, including E. Pierce, Elaine, the Preston Trust, and the E. Pierce Jr. Trust.
The fifth stockholder of MPI stock at the time was a Grantor Retained Income Trust (" GRIT" ), which paid income to Stevens. As part of her divorce settlement with J. Howard, Stevens received shares of MPI stock. In 1984, Stevens transferred all of her shares of MPI to the Eleanor Pierce (Marshall) Stevens Living Trust (" Living Trust" ), and a few years later, the Living Trust split those shares into four trusts. Slightly more than half of the shares were transferred into three Charitable Remainder Annuity Trusts (" CRATs" ), and the remaining shares were put into the GRIT. The GRIT was designed to pay income to Stevens for ten years and then terminate, with E. Pierce as the remainder beneficiary. When the MPI shares were transferred to the three CRATs and the GRIT, the shares were cancelled and then reissued in the name of the four trusts.
2. The donor and gift tax
The IRS audited J. Howard's 1992 through 1995 gift taxes. The IRS determined that J. Howard had made an indirect gift to the MPI shareholders when he sold his stock back for below market value and sent notice of deficiency. J. Howard's Estate challenged the deficiencies. After years of back-and-forth negotiation, in 2002 J. Howard's Estate and the IRS entered
into a stipulation (" the Stipulation" ) regarding J. Howard's Estate's tax liability. The Stipulation provided that, in 1995, J. Howard made indirect gifts to the following people in the following amounts: (1) E. Pierce--$43,768,091, (2) Stevens--$35,939,316, (3) Elaine--$1,104,165, (4) the Preston Trust--$1,104,165, and (5) the E. Pierce Jr. Trust--$1,104,165. In 2008, the United States Tax Court issued decisions (" 2008 Tax Court decisions" ) finding, inter alia, deficiencies in J. Howard's 1995 gift taxes. J. Howard's Estate never paid the assessed taxes.
3. The donees and gift tax
When Stevens passed away in 2007, E. Pierce Jr. became the executor of her estate, and Hilliard was the trustee for the Living Trust. E. Pierce Jr. and Hilliard were both aware that Stevens's Estate and the Living Trust could be held liable for the unpaid gift tax. Before paying anything toward the unpaid gift tax, E. Pierce Jr. made distributions of personal property from Stevens's Estate, and he also paid rent on Stevens's apartment for one year. Hilliard used funds from the Living Trust to pay accounting and legal fees for charitable organizations other than the Living Trust. Hilliard and E. Pierce Jr. also filed joint tax returns for the Living Trust and Stevens's Estate and permanently set aside $1,119,127 of the Living Trust's funds for charitable purposes.
In 2008, the IRS assessed gift tax liability for the unpaid donor gift tax against the donees pursuant to I.R.C. § 6324(b). In May and June 2010, E. Pierce's Estate paid the IRS an amount equal to the value of the gift received for E. Pierce, Elaine, the E. Pierce Jr. Trust, and the Preston Trust. Steven's Estate, on the other hand, has not paid the IRS anything towards the unpaid gift tax.
C. Procedural Background
1. Government's lawsuit
On August 6, 2010, the Government sued the E. Pierce Estate, Elaine, the E. Pierce Jr. Trust, the Preston Trust, and Stevens's Estate as donees of J. Howard's 1995 indirect gift. The Government also brought claims against both E. Pierce Jr. and Hilliard under 31 U.S.C. § 3713, the Federal Priority Statute, alleging that they had made distributions from Stevens's Estate and the Living Trust before paying debts owed to the Government. The Appellants filed motions for summary judgment, and the Government filed cross-motions for summary judgment against each of the Appellants.
2. March 28, 2012 Order
Stevens moved for summary judgment, arguing that she was not the donee of J. Howard's 1995 gift because she did not personally own any MPI stock at the time of the gift. She argued that the GRIT was the donee of the gift and, therefore, liable for any gift tax. In the alternative, she argued that the remainder beneficiary (E. Pierce), not the income beneficiary (Stevens), was the donee of the gift. Finally, she argued that Kansas law applied and that, under Kansas law, the increased value of the MPI stock would be allocated to the corpus (and thus would inure to the remainder beneficiary) instead of the income. The Government filed a cross-motion for summary judgment, arguing that the Stipulation and the 2008 Tax Court decisions barred Stevens from " litigating the fact of the gifts, the identity of the donees, and the amount of the gifts."
In the March 28, 2012 Order, the district court held that Stevens was the donee of J. Howard's 1995 gift. The court looked to Helvering v. Hutchings, 312 U.S. 393, 61 S.Ct. 653, 85 L.Ed. 909, 1941-1 C.B. 438 (1941), where the Supreme Court held that gifts to a trust
were gifts to the trust beneficiaries and that the trust beneficiaries were eligible for a gift tax exclusion under I.R.C. § 2503(b). Based on that holding, the district court saw no reason why the definition of donee for purposes of the gift tax exclusion would be different than the definition of donee for the purposes of donee gift tax liability.
The district court also rejected Stevens's argument that the remainder beneficiary should be considered the donee for purposes of gift tax liability. Citing Ryerson v. United States, 312 U.S. 405, 61 S.Ct. 656, 85 L.Ed. 917, 1941 C.B. 443 (1941) and United States v. Pelzer, 312 U.S. 399, 61 S.Ct. 659, 85 L.Ed. 913, 92 Ct.Cl. 624 (1941), the district court noted that " the donee for the purposes of a gift tax exclusion must hold a present interest in and right of enjoyment of the gift," and found that Stevens as the income beneficiary, not the remainder beneficiary, had the present interest and right of enjoyment of the gift when it was made. Finally, the court found that the Kansas definition of income and principal would only apply if the trust document was ambiguous. Because the trust document was unambiguous and because Stevens met the definition of a donee under Helvering, Stevens was the donee of J. Howard's 1995 gift.
3. June 7, 2012 Order
The Government also filed a motion for partial summary judgment for donee liability against Elaine in her individual capacity, as executrix of E. Pierce's Estate, as trustee of the Preston Trust, and as trustee of the E. Pierce Jr. Trust. The Government argued that it could " charge interest pursuant to I.R.C. § § 6601 and 6621 on the unpaid donee liability created by § 6324(b)." The Government claimed that there were two separate obligations: the obligation of the donor and the obligation of the donee. Section 6324(b), according to the Government, only limited the obligation of the donor, and so the donee's liability for the unpaid gift tax was not capped under § 6324(b). Elaine filed a cross-motion for summary judgment, arguing that the plain language of § 6324(b) capped all donee liability at the value of the gift received, and so the donees could not incur unlimited interest on any separate donee liability.
The district court agreed with the Government and found that (1) the donees had an independent liability under § 6324(b) that was not capped at the value of the gift and (2) this independent liability was subject to interest under § 6601. The court noted that the Fifth Circuit had not yet spoken on the issues this case raised. Thus, it looked to three circuit court opinions that had addressed the issue: Baptiste v. Commissioner ( Baptiste 11 ), 29 F.3d 1533 (11th Cir. 1994), Baptiste v. Commissioner ( Baptiste 8 ), 29 F.3d 433 (8th Cir. 1994), and Poinier v. Commissioner, 858 F.2d 917 (3d Cir. 1988).
The district court explained several reasons for its finding. First, the district court disagreed that the language of § 6324(b) unambiguously limited all donee liability. Second, the court found that " [j]ust as there are two parties to a gift--the donor and the donee, there are two different possible deficiencies--that of the donor and that of the donee." While the donor's obligation falls under chapter 12 liability, the donee has liability under I.R.C. § 6601 for interest for use of the government's money. The district court found that " [d]onee liability is not a tax" and could not be collected as such; instead, the Government had to obtain a personal judgment against a donee or make an assessment under § 6901. The donor's gift tax and the donee's liability were both subject to interest under
§ § 6601 and 6602, which, the court reasoned, made sense: " The interest is charged based on the failure of the donee to pay, not the donor. It was equitable to cap the donee's responsibility for the actions of another, but if he chooses not to pay his own liability that is a different matter." Additionally, he district court declined to follow the Third Circuit's reasoning in Poinier because " the Third Circuit's strongest argument--that § 6601(f) expressly forbids paying interest on interest--is no longer valid" because Congress removed that provision. Finally, Baptiste 11 persuaded the district court, because, under Fifth Circuit precedent discussing § 311 (the predecessor to § 6901), this Court had " allowed the assessment of interest on a transferee's liability." Thus, the district court found that the donees were liable to the Government for interest on their independent liability for the unpaid gift tax.
4. June 25, 2012 Order
Finally, the Government moved for summary judgment against E. Pierce Jr. and Hilliard for violations of 31 U.S.C. § 3713, the Federal Priority Statute, and against E. Pierce Jr. for breach of state law fiduciary duties. The court granted the motion and found E. Pierce Jr. and Hilliard (1) individually liable for money they had distributed from Stevens's Estate and the Living Trust, respectively, in violation of 31 U.S.C. § 3713 and (2) jointly liable for money they set aside for charitable purposes in violation of the government's priority under § 3713.
The main issue before the district court was whether E. Pierce Jr. and Hilliard had knowledge of the Government's claim against Stevens's Estate. The district court explained that " the knowledge requirement is not actual knowledge" and that the requirement could be satisfied with a showing that E. Pierce Jr. and Hilliard had " 'notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim.'" The court noted that both E. Pierce Jr. and Hilliard admitted they were told that the Government might assert a claim for the unpaid gift tax against Stevens's Estate.
After determining that E. Pierce Jr. and Hilliard met the test in 31 U.S.C. § 3713 for individual liability, the court then set out to calculate their liability. It found that " the government has priority over debts of the decedent but not of the estate," and then applied Texas law to determine which category the debts E. Pierce Jr. and Hilliard paid fell into. The court found E. Pierce Jr. individually liable for distributing Stevens's personal property and for causing the Living Trust to pay rent on Stevens's apartment. The court found Hilliard individually liable for paying accounting and legal services out of the Living Trust for other charitable organizations. The district court also found Hilliard and E. Pierce Jr. jointly liable for the $1,119,127 they had set aside in the Living Trust for charitable purposes, for which they claimed charitable deductions. Finally, the district court concluded that E. Pierce Jr.'s personal liability under § 3713 was " coterminous" with his failure to pay taxes on behalf of Stevens's Estate in the order and manner they were due, and thus, he had breached his fiduciary duties under state law.
All Appellants timely appealed.
The district court had jurisdiction under I.R.C. § § 7402 and 7403 and 28 U.S.C. § § 1340 and 1345. This court has jurisdiction pursuant to 28 U.S.C. § 1291.
III. STANDARD OF REVIEW
This Court reviews a grant of summary judgment de novo. Kimbell v. United States, 371 F.3d 257, 260 (5th Cir. 2004). Summary judgment is proper " if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). " Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The dispute is genuine " if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.
All Appellants argue that the district court erred in finding that the donees incurred an independent interest liability as a result of the donor's unpaid gift tax. Stevens also argues that the district court was incorrect in finding that she was a donee. Finally, Hilliard and E. Pierce Jr. claim that the district court erred when it held them responsible, as fiduciaries and individually, for distributions they made from the Living Trust and Stevens's Estate. We address each issue in turn.
A. Independent Donee Unpaid Gift Tax Liability and Interest
Under the Internal Revenue Code, the federal government can establish a ...