United States v. Davenport ( 2007 )

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED JULY 2, 2007 April 9, 2007
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
No. 06-40466
UNITED STATES OF AMERICA
Plaintiff - Appellant
v.
BIRNIE DAVENPORT, ET AL
Defendants
GORDON E DAVENPORT
Defendant - Appellee
--------------------
Appeal from the United States District Court
for the Southern District of Texas, Galveston
--------------------
Before KING, GARZA, and PRADO, Circuit Judges.
KING, Circuit Judge:
In an action to determine the federal tax liability of the
estate of Birnie Davenport, the tax court held that the estate
was liable for the unpaid gift tax on inter-vivos gifts of stock
made by Birnie Davenport to her two nephews, Gordon Davenport and
Charles Botefuhr, and her niece, Patricia Vestal. Because the
estate did not pay the tax, the government now seeks to collect
it from Gordon Davenport under the provisions of the Internal
Revenue Code imposing liability for an unpaid gift tax on the
transferee of the gift. The district court held that Gordon
Davenport was not bound by the doctrine of res judicata to
certain key determinations made by the tax court. Because we
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agree with the government that this case involves the same
nucleus of operative facts as the proceeding in the tax court,
and that as a result res judicata applies, the district court’s
judgment is REVERSED.
I. FACTUAL AND PROCEDURAL BACKGROUND
Birnie and Elizabeth Davenport, who were sisters, lived
together much of their adult lives. Over many years, the two
sisters commingled all of their earnings and assets. Pursuant to
a long-standing oral agreement between the two, Elizabeth
Davenport held legal title to the assets, but the sisters shared
equally in the profits and losses of their investments. They
considered all of their assets to be jointly owned, and their
income tax returns filed over many years reflected this belief.
Each of the sisters filed a separate income tax return in which
she reported her earnings from her job and an equal share of
profits and losses from the joint investments. The IRS accepted
this split of investment income and expenses throughout numerous
audits between 1965 and 1979.
The sisters’ investments included stock in Hondo Drilling
Company. At the time of Elizabeth Davenport’s death in 1979, the
sisters owned 3220 shares of Hondo stock. The sisters had two
nephews, Gordon Davenport and Charles Botefuhr, and one niece,
Patricia Vestal. Gordon Davenport, Botefuhr, and Vestal were
appointed co-executors of Elizabeth Davenport’s estate.1
In July 1980, slightly more than six months after her
1
Botefuhr resigned his position after a dispute
concerning how to report assets held in Elizabeth Davenport’s
name.
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sister’s death, using two conveyance methods, Birnie Davenport
transferred half (1610 shares) of the Hondo stock to her niece
and nephews. First, she transferred 537 shares to Gordon
Davenport and 536 shares to Vestal through installment sale
agreements, with the stock being valued in the agreements at $804
per share.2 Birnie Davenport reported the installment sales on
her 1980 income tax return and indicated on that form that the
sales were to related parties.3 Second, Birnie Davenport
transferred 537 shares to Botefuhr as an outright gift. In a
signed “Family Agreement,” Botefuhr promised to file the
appropriate gift tax return that would report the gift made by
Birnie Davenport and to pay on her behalf the gift taxes
associated with his gift. Botefuhr did not fulfill this
responsibility. In July 1981, Hondo Drilling Company redeemed
Botefuhr’s shares at $2190 per share.4
2
This transaction also included seventy-five shares of
Union Supply Company stock. Because the Hondo stock accounted
for most of the transaction’s value, we will refer only to the
Hondo stock.
3
In 1982, Birnie Davenport forgave the remaining balance
on Gordon Davenport’s and Vestal’s promissory notes. Birnie
Davenport’s 1983 gift tax return reported forgiving the
promissory notes and reported and paid $71,911 in gift tax
liability.
4
During this time, the IRS investigated the estate tax
owed by Elizabeth Davenport. The investigation culminated late
in 1982. The report concluded that: (1) all of the property held
in Elizabeth Davenport’s name, including all of the Hondo stock,
should be included in her estate and (2) that Birnie Davenport’s
prior conveyances were ineffective. The estate settled the claim
at a valuation of $2,400 per share of Hondo stock so that the IRS
would abandon its claim that all of the property recorded in
Elizabeth Davenport’s name belonged only to her. Thus, the
settlement cleared up title concerns on Birnie Davenport’s half
of the property.
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Birnie Davenport died in 1991. Gordon Davenport, Vestal,
and Botefuhr were appointed as personal representatives of her
estate. While preparing Birnie Davenport’s estate tax return in
1991, Corrine Childs, the Davenport sisters’ long-time tax
attorney, learned that Botefuhr had not filed the 1980 gift tax
return or paid the taxes as promised. When Vestal and Gordon
Davenport filed the estate tax return, they filed a gift tax
return reporting the 1980 gift to Botefuhr at $804 per share.
The estate paid a gift tax of $95,322 with the return. Botefuhr
did not sign either the gift tax return or the estate tax return.
In 1992 the IRS initiated an audit of Birnie Davenport’s
estate tax return and 1980 gift tax return and ultimately
determined that Birnie Davenport’s gift of Hondo stock to
Botefuhr should have been valued at $2730 per share rather than
$804 per share. The large discrepancy in values created a
correspondingly large gift tax deficiency, which Birnie
Davenport’s estate contested in tax court. See Estate of
Davenport v. Comm’r, 74 T.C.M. (CCH) 405 (1997). One issue
before the tax court was whether Birnie Davenport made a
completed gift to Gordon Davenport, Vestal, and Botefuhr. Id. at
411. The tax court held that even though Birnie Davenport did
not have legal title at the time of the transfers, she did effect
inter vivos gifts to Gordon Davenport, Vestal, and Botefuhr of
the Hondo stock, which the tax court valued at $2000 per share.5
5
The tax court decided this value and incorporated by
reference the parties’ stipulation of fact which read:
38. For the purposes of this litigation, if
the Court finds that Birnie Davenport
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Id. at 407, 412. A second issue before the tax court was whether
the statute of limitations barred the government from recovering
the gift tax due. The tax court held that the statute of
limitations did not bar assessment of gift tax liability because
with respect to each of the transfers, the limitations period
started running on November 7, 1991, when Vestal and Gordon
Davenport filed Birnie Davenport’s 1980 gift tax return. Id. at
412. In accordance with its findings, the court calculated the
tax deficiency owed by the estate.6 The Tenth Circuit affirmed
the tax court’s decision. Estate of Davenport v. Comm’r, 184
F.3d 1176, 1188 (10th Cir. 1999) (holding that Birnie Davenport
“had a sufficient ownership interest in the Hondo stock . . . to
effect inter vivos transfers of [it]” and that Birnie Davenport
completed gifts during July 1980 to her two nephews and niece).
Despite the tax court’s decision, the estate did not pay the
taxes owed. Because the tax court lacks the authority to enforce
its judgments, the government filed the current action in the
Northern District of Oklahoma against the estate and all three
transferred Hondo stock to Patricia
Vestal, Gordon Davenport, and Charles
Botefuhr in the calendar quarter ending
September 30, 1980, the parties agree
that the fair market value of such Hondo
stock was $2,000.00 per share at the time
of the transfers.
6
The tax court determined that the estate’s deficiency in
unpaid gift taxes was $822,653, that the estate owed an
additional penalty of $205,663 for the failure to timely file the
1980 gift tax return, and that the estate owed interest on both
the unpaid gift taxes and the penalty. In 1998 the IRS assessed
that with penalties and interest, the estate’s tax bill amounted
to about $5.2 million.
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cousins to reduce to judgment the estate’s liability and the
donees’ liability as transferees pursuant to I.R.C. § 6324(b).
See United States v. Estate of Davenport, 159 F. Supp. 2d 1330,
1332 (N.D. Okla. 2001). The estate conceded liability. Id. The
government also sought individual liability against the three
cousins in their capacity as co-executors pursuant to 31 U.S.C.
§ 3713 for allegedly making improper distributions from the
estate before paying the federal tax liabilities. Id. The
district court dismissed the § 3713 claim pre-trial. Id.
Although Gordon Davenport and Botefuhr contested
jurisdiction, the district court overruled their motions to
dismiss for lack of personal jurisdiction. Id. at 1335. On
appeal, the Tenth Circuit held that the Oklahoma district court
did not have jurisdiction over Botefuhr and Gordon Davenport
after dismissing the § 3713 claim. United States v. Botefuhr,
309 F.3d 1263, 1274 (10th Cir. 2002).
The case was remanded to the Oklahoma district court, which
transferred Botefuhr’s case to the Western District of Texas and
Gordon Davenport’s case to the Southern District of Texas. The
case before this panel involves solely Gordon Davenport’s appeal.
The Southern District of Texas ruled on multiple motions for
summary judgment by Gordon Davenport and the government. First
it determined that the statute of limitations barred assessment
of the gift tax on the imputed gift arising from the July 1980
installment sale, but that the statute of limitations did not bar
assessment of the gift to Botefuhr. Second, it held that
although res judicata and collateral estoppel bound Gordon
No. 06-40466
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Davenport to the tax court’s finding that he was a donee, neither
doctrine established the value of the gift to him (the Hondo
stock) or the amount of his liability. Finally, the district
court held that the government failed to provide any evidence on
damages, an essential element of its claim, and it granted
summary judgment against the government. The government now
appeals.
II. DISCUSSION
The Internal Revenue Code imposes tax liability “on the
transfer of property by gift.” I.R.C. § 2501(a). The definition
of a gift includes transfers of property for “less than an
adequate and full consideration in money or money’s worth.”
I.R.C. § 2512. The donor, as the party who makes the gift, bears
the primary responsibility for paying the gift tax. See I.R.C.
§ 2502(c) (“The tax imposed by 2501 shall be paid by the
donor.”). When, as here, the donor dies before paying the gift
tax owed, the personal representative of the estate is
responsible for paying the tax out of the estate, as a debt
against the donor’s estate. Treas. Reg. § 25.2502-2. The donee
may also be held personally liable for the full amount of any
unpaid gift tax pursuant to 26 U.S.C. § 6324(b).7 Although the
donee’s liability is limited to the value of the gift he received
from the donor, he may be forced to pay more than the gift tax
attributable to his gift. § 6324(b); see also 14 EDWARD J. SMITH,
MERTENS LAW OF FEDERAL INCOME TAXATION § 53:42 (2004). Thus, Gordon
7
Section 6324(b) states: “If the tax is not paid when due,
the donee of any gift shall be personally liable for such tax to
the extent of the value of such gift.” I.R.C. § 6324(b).
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Davenport is liable for all the gift tax owed by the estate for
1980, up to the value of the gift he received.
The government seeks to collect unpaid gift taxes owed by
the Birnie Davenport estate from Gordon Davenport pursuant to the
transferee liability provision of I.R.C. § 6324(b). The
government argues that the tax court’s decision is res judicata
as to the liability of Gordon Davenport, and that accordingly,
Gordon Davenport may not relitigate the value of the Hondo stock
or whether the statute of limitations expired on the gifts to
Gordon Davenport, Vestal, and Botefuhr.
The term “res judicata” is often used to describe two
discrete preclusive doctrines: res judicata and collateral
estoppel.8 Baker v. Gen. Motors Corp., 522 U.S. 222, 233 n.5
(1998). These doctrines “relieve parties of the cost and
vexation of multiple lawsuits, conserve judicial resources, and,
by preventing inconsistent decisions, encourage reliance on
adjudication.” Allen v. McCurry, 449 U.S. 90, 94 (1980). Under
the doctrine of res judicata, “a final judgment on the merits
bars further claims by parties or their privies based on the same
cause of action.” Montana v. United States, 440 U.S. 147, 153
(1979). The bar prevents relitigation of all “issues that were
or could have been raised in [the previous] action.” Federated
Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981). In
contrast, under the doctrine of collateral estoppel, “the second
action is upon a different cause of action and the judgment in
8
Res judicata is also known as claim preclusion, and
collateral estoppel as issue preclusion.
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the prior suit precludes relitigation of issues actually
litigated and necessary to the outcome of the first action.”
Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 n.5 (1979).
This court reviews the res judicata effect of a prior
judgment de novo because it is a question of law.9 Test Masters
Educ. Servs., Inc. v. Singh, 428 F.3d 559, 571 (5th Cir. 2005).
For res judicata to apply, the following four-part test must be
satisfied: (1) the parties must be either “identical or in
privity; (2) the judgment in the prior action [must have been]
rendered by a court of competent jurisdiction; (3) the prior
action must have been concluded to a final judgment on the
merits; and (4) the same claim or cause of action [must have
been] involved in both actions.” In re Southmark Corp., 163 F.3d
925, 934 (5th Cir. 1999); see also 15 ELIZABETH K. BERMAN, MERTENS LAW
OF FEDERAL INCOME TAXATION § 60:32 (2000).
This court determines whether two suits involve the same
claim or cause of action by applying the transactional test of
the Restatement (Second) of Judgments, § 24. Petro-Hunt, L.L.C.
v. United States, 365 F.3d 385, 395 (5th Cir. 2004). Under the
transactional test, our inquiry focuses on whether the two cases
under consideration are based on “the same nucleus of operative
9
Gordon Davenport contends that the government
acknowledged before the district court that res judicata applies
only to the estate’s liability, and not his donee liability or
the valuation of the stock. A review of the government’s
response to Gordon Davenport’s second motion for summary judgment
and its cross-motion for partial summary judgment regarding
valuation indicates that the government argued, inter alia, that
res judicata bound Gordon Davenport to the tax court’s
determination of the gift tax due. The government did not waive
a res judicata argument.
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facts.” In re Southmark Corp., 163 F.3d at 934 (quoting In re
Baudoin, 981 F.2d 736, 743 (5th Cir. 1993)). The nucleus of
operative facts, rather than the type of relief requested,
substantive theories advanced, or types of rights asserted,
defines the claim. Agrilectric Power Partners, Ltd. v. Gen.
Elec. Co., 20 F.3d 663, 665 (5th Cir. 1994). If the cases are
based on the same nucleus of operative facts, the prior
judgment’s preclusive effect “extends to all rights the original
plaintiff had ‘with respect to all or any part of the
transaction, or series of connected transactions, out of which
the [original] action arose.’” Petro-Hunt, 365 F.3d at 395
(citing RESTATEMENT (SECOND) OF JUDGMENTS § 24(1)). Generally, “[t]he
tax liability of a particular tax for a particular taxable year”
is a single cause of action. 15 ELIZABETH K. BERMAN, MERTENS LAW OF
FEDERAL INCOME TAXATION § 60:33 (2000).
The first three elements of res judicata are not contested
by the parties. As transferee, Gordon Davenport was in privity
with a party to the tax court proceeding, Birnie Davenport’s
estate, the transferor. See Baptiste v. Comm’r, 29 F.3d 1533,
1539 (11th Cir. 1994) (“[I]t is well settled that a transferee is
in privity with his transferor for purposes of the Internal
Revenue Code.”); First Nat’l Bank of Chicago v. Comm’r, 112 F.2d
260, 262 (7th Cir. 1940)(same). Indeed, the tax liability of the
donor and donee are inseparable. A prior decision determining
the liability of the donor binds the donee. 14 EDWARD J. SMITH,
MERTENS LAW OF FEDERAL INCOME TAXATION § 53:6 (2004). And the tax
court, a court of competent jurisdiction, rendered final judgment
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on the merits.10
The parties differ as to whether the fourth element of res
judicata is satisfied: whether this case involves the same cause
of action as the tax court proceeding. The district court, in
its res judicata analysis, held that the tax court proceeding
involved different operative facts than this case. The district
court determined that the tax court case involved a deficiency
notice against the estate itself and involved distinct facts
relating to Birnie Davenport’s ownership interests, donative
intent, and the estate’s ultimate gift tax liability, but that
this case involves facts relating to donee liability and the
statute of limitations under § 6324(b). The government contends,
however, that the district court improperly focused on the facts
litigated, as would be proper under the doctrine of collateral
estoppel, rather than the operative facts of the case.
The district court’s focus was improper because it looked to
the legal theories advanced, forms of relief requested, and types
of rights asserted. See Agrilectric Power Partners, Ltd., 20
F.3d at 665. The operative facts in this case and the tax court
case are identical. Both cases are based on the same two
transactions and factual events: (1) the July 1980 installment
10
The final judgment element does not require contested
litigation. “An agreed judgment is entitled to full res judicata
effect.” United States v. Shanbaum, 10 F.3d 305, 313 (5th Cir.
1994) (holding that an agreed decision in the tax court prevented
the application of the innocent spouse rule in an action to
enforce the tax court judgment under res judicata); see also
Matter of W. Tex. Mktg Corp., 12 F.3d 497, 500-01 (5th Cir. 1994)
(stating that a settlement agreement between the IRS and the
taxpayer incorporated into a judgment must be given full res
judicata effect).
No. 06-40466
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sale of the Hondo stock from Birnie Davenport to Vestal and
Gordon Davenport and (2) the July 1980 gift of the Hondo stock to
Botefuhr. The tax court was required to decide the value of the
stock to calculate the tax owed by the estate. Accordingly,
under the transactional test the same cause of action is involved
in both cases, and the district court improperly focused on what
was actually litigated rather than the operative facts.
Our decision that the same cause of action is involved is
consistent with the decisions of the Eighth and Eleventh Circuits
that a transferee cannot relitigate the tax due after a prior
court had already determined the estate’s tax liability. See
Baptiste v. Comm’r, 29 F.3d 1533, 1539 (11th Cir. 1994); Baptiste
v. Comm’r, 29 F.3d 433, 436 (8th Cir. 1994). The Baptiste cases
involved two brothers; Gabriel, residing in Nebraska, and
Richard, residing in Florida. See id. Each brother received
$50,000 as a beneficiary of his father’s life insurance policy.
Baptiste, 29 F.3d at 434. The IRS determined that the estate
owed a deficiency in estate tax, and after the estate contested
that deficiency, the IRS and the estate agreed to the estate tax
owed. Id. The tax court entered a stipulated decision of the
tax due from the estate, but the estate never paid the tax,
prompting the government to attempt to collect the tax from the
Baptiste brothers as transferees.11 Id.
11
Although the Baptiste cases involved transferee
liability with regard to an unpaid estate tax, transferee
liability of estate tax functions the same as transferee
liability of gift tax. Section 6324(a) of the Internal Revenue
Code states that if the estate tax is not paid when due, then the
transferee “who receives, or has on the date of the decedent’s
death, property included in the gross estate . . . to the extent
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Although Gabriel Baptiste did not contest that he was
personally liable as a transferee under I.R.C. § 6324(a)(2), he
attempted to contest the amount of the underlying estate tax
liability in a separate proceeding in the tax court. The effort
was unsuccessful, the tax court holding that res judicata applied
to bar him from contesting the amount of the estate tax
liability. Id. at 435. On appeal, Gabriel Baptiste argued that
res judicata did not apply to bind him to the tax court’s
decision regarding the existence and amount of estate tax imposed
for purposes of determining his transferee liability pursuant to
§ 6324(a)(2). Id. The Eighth Circuit held that the causes of
action in the two cases were identical, that is “the transferor
and Gabriel[] [Baptiste’s] respective obligation to pay the
estate tax imposed on the transfer of the decedent’s estate.”
Id. at 436. Because the causes of action were identical, res
judicata bound Gabriel Baptiste to the tax court’s decision for
purposes of determining both the transferee’s obligation to pay
the estate tax and the amount of the transferee’s liability. Id.
The court reasoned that the donee’s liability was determined by
the amount of the estate’s tax. See id.
The Eleventh Circuit ruled similarly in the challenge
brought by Richard Baptiste. Baptiste, 29 F.3d at 1539. Richard
Baptiste wanted to relitigate the valuation of the property, but
the court of appeals denied him that opportunity. Id. The
Eleventh Circuit held that “[t]he fact that his purpose is to
of the value, at the time of the decedent’s death, of such
property, shall be personally liable for such tax.”
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decrease his personal liability, rather than in the interest of
the estate, is of no moment. The estate’s liability under
section 2002 and Baptiste’s liability under section 6324(a)(2)
both embrace the same determination–the amount of estate tax
imposed by chapter 11.” Id.
Gordon Davenport argues that his case can be distinguished
from the Eighth and Eleventh Circuits’ decisions because unlike
the Baptistes, who challenged the estate’s liability, he contests
the extent of his own transferee liability. He contends that
because the Baptiste brothers received cash, the extent of the
donee’s liability was fixed at the amount of the cash received
and that the value of cash cannot be questioned in the way that a
stock’s value can be. He argues that because the Baptiste
brothers could not relitigate the value of the cash (and thus the
extent of their liability), they attempted to relitigate the
underlying estate’s liability as a means of reducing their own
transferee liability.
This argument does not succeed because the value of the
Hondo stock was a fundamental part of calculating the tax due in
this case. The tax court’s determinations of the value of the
stock and the tax due are not separable. Once a court determines
the tax liability of the transferor, “the decision is res
judicata of the liability with regard to the transferee for the
same tax if transferee status can be established.” 14 EDWARD J.
SMITH, MERTENS LAW OF FEDERAL INCOME TAXATION § 53:31 (2004). The tax
court concluded Gordon Davenport was a transferee, and the Tenth
Circuit affirmed that decision.
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Gordon Davenport also argues that we should follow the lead
of the Tenth Circuit in Botefuhr, a case in which the facts were
identical to those in this case. In Botefuhr, the government
attempted to assert transferee liability against Vestal to
collect the tax owed by Birnie Davenport’s estate. 309 F.3d at
1275. The question before the Tenth Circuit was whether Vestal
was bound by the estate’s stipulation during the tax court
proceedings that the value of the Hondo stock was $2000 per
share. Id. at 1281. Vestal argued that the stipulation was
limited to the tax court proceeding and did not preclude
litigation of that issue in the subsequent proceeding. Id. The
Tenth Circuit acknowledged that confusion existed regarding
whether the preclusion issue should be analyzed under the
principles of collateral estoppel or res judicata. Id. at 1281-
82. It concluded that “this matter must be evaluated as an
assertion of [collateral estoppel], rather than [res judicata].
[Res judicata] is inapplicable to the situation here presented.”
Id. The Tenth Circuit offered no other insight into its
conclusion that res judicata did not apply.12
Although we have the utmost respect for the Tenth Circuit,
we decline to follow its decision in Botefuhr that res judicata
does not apply; instead, we side with the Eighth and Eleventh
Circuits in the Baptiste cases. As discussed above, each element
of res judicata has been satisfied in the instant case.
12
Under the doctrine of collateral estoppel, the Tenth
Circuit ultimately held that Vestal was not precluded from
relitigating the value of the Hondo stock because it had never
been litigated on the merits. United States v. Botefuhr, 309
F.3d 1263, 1283 (2002).
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Accordingly, the doctrine of res judicata applies to preclude
Gordon Davenport and the government from litigating matters
arising from the same nucleus of operative facts that were or
could have been raised in the previous proceeding. See Moitie,
452 U.S. at 398.
Finally, Gordon Davenport argues that the language of the
stipulation concerning the stock value was limited to the tax
court proceeding and in effect the government waived res judicata
with regard to that issue. His argument fails because the
language does not expressly waive res judicata or express any
intent regarding future proceedings. The stipulation merely
states the parties’ intent with regard to the proceeding in the
tax court: that the Hondo stock should be valued at $2000 per
share.
In conclusion, we hold that all elements of res judicata
have been satisfied. Accordingly, res judicata binds Gordon
Davenport to the value of the Hondo stock established in the tax
court proceeding. The doctrine also precludes him from
relitigating other issues that were or could have been litigated
in that suit, such as whether the statute of limitations barred
assessment of the gift tax on either the gift to Botefuhr or the
gifts involved in the installment sale transactions. Because we
hold that res judicata applies, we do not address the
government’s remaining arguments.
III. CONCLUSION
For the reasons discussed above, we REVERSE the district
court’s judgment and REMAND for further proceedings.