Estate of Frank D. Streightoff v. CIR ( 2020 )

Case: 19-60244 Document: 00515365530 Page: 1 Date Filed: 03/31/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 31, 2020
No. 19-60244
Lyle W. Cayce
Clerk
ESTATE OF FRANK D. STREIGHTOFF, DECEASED, Elizabeth Doan
Streightoff, Executor,
Petitioner - Appellant
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent - Appellee
Appeal from the Decision
of the United States Tax Court
Before HIGGINBOTHAM, STEWART, and ENGELHARDT, Circuit Judges.
CARL E. STEWART, Circuit Judge:
Respondent–Appellee the Commissioner of Internal Revenue issued
Petitioner–Appellant Estate of Frank D. Streightoff (the “Estate”) a notice of
deficiency for the Estate’s 2012 tax return. The Commissioner determined that
the Estate had a $491,750.00 tax liability which differed from the Estate’s tax
return valuation. The Estate petitioned the U.S. tax court to challenge the
deficiency. Following a bench trial, the tax court sustained the Commissioner’s
determinations in a written order. We affirm the tax court’s decision.
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I.
The parties have stipulated to this set of facts. Frank D. Streightoff (the
“decedent”) died testate on May 6, 2011. His daughter, Elizabeth Doan
Streightoff (“Elizabeth”), serves as the executor of the decedent’s Estate.
A.
Estate Planning
The decedent made the following estate plans on October 1, 2008:
SILP and the Partnership Agreement
Streightoff Investments, LP (“SILP”), a Texas limited liability
partnership, was formed. SILP is funded using the decedent’s assets.
The decedent held an 88.99% limited partner ownership interest in
SILP. The decedent’s daughters each held a 1.54% limited partner ownership
interest. His sons and former daughter-in-law each held a 0.77% limited
partner ownership interest. SILP’s sole General Partner is Streightoff
Management, which holds a 1.00% limited partnership ownership interest.
Elizabeth is the Managing Member of Streightoff Management.
In relevant part, the SILP Partnership Agreement (“SILP Agreement”)
states:
9.2 Permitted Transfers. . . . [A]n Interest Holder may at any time
[t]ransfer his Interests to (a) any member of transferor’s Family, (b) the
transferor’s executor, administrator, trustee or personal representative
to whom such interests are transferred at death or involuntarily by
operation of law, or (c) [to any purchaser, but subject to the right of first
refusal held by the persons listed in section 9.4]
...
9.7 Admissions of Interest Holders as Partners. A transferee of an
Interest may be admitted to the Partnership as a Substituted Limited
Partner only upon satisfaction of the conditions set forth below:
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(a) Each General Partner consents to such admission which consent may
be granted or withheld in the sole and absolute discretion of each
General Partner;
(b) The Interests with respect to which the transferee is being admitted
were acquired by means of a Permitted Transfer . . . .
...
12.6 Governing Law. Any matter which may arise hereunder which is
no therein specifically provided for shall be determined in accordance
with and governed by the Laws of the State of Texas including the Texas
Uniform Partnership Act . . . .
The Revocable Trust and SILP Assignment
The decedent established the Frank D. Streightoff Revocable Living
Trust (“Revocable Trust”). Elizabeth was the trustee of the Revocable Trust.
While the decedent was the grantor and held the power to modify (e.g. amend,
alter, revoke, or terminate) the trust, he did not change the Revocable Trust.
The decedent was also the beneficiary of the Revocable Trust and remained the
beneficiary upon his death.
On the same day the trust and partnership were created, the decedent
assigned his 88.99% SILP interest to the Revocable Trust. The Revocable
Trust was the assignee. The Assignment of Interest to the Revocable Trust
(the “Assignment”) was executed via his power of attorney, Elizabeth. She also
signed (1) the approval of the transfer as Streightoff Management’s Managing
Member, SILP’s General Partner; and (2) for the assignee, as the trustee for
the Revocable Trust. The Assignment states “Assignor’s interest . . . together
with all and singular the rights and appurtenances thereto in anywise
belonging, unto the said Assignee, its beneficiaries and assigns forever.” The
parties have stipulated that this was a Permitted Transfer under Section 9.2.
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The Assignment expressly noted that “by signing this Assignment of
Interest, [the assignor and assignee] hereby agree[] to abide by all the terms
and provisions in that certain Limited Partnership Agreement of [SILP].”
B.
The Estate’s Tax Return and Notice of Deficiency
The Estate filed its tax return on May 6, 2012 , with a taxable estate of
$4,801,662.00, which included the SILP interest stake and the other assets in
the Revocable Trust. The Estate listed the 88.99% interest stake as an
assignee interest with a purported value of $4,588,000.00 as of the alternate
valuation date. 1 The valuation reflected claimed discounts for lack of
marketability, lack of control, and lack of liquidity. The tax return ultimately
reported to overpaying taxes by $153,593.00.
On January 9, 2015, the Commissioner issued a Notice of Deficiency to
the Estate, stating “notice is hereby given that . . . [the] estate tax liability of
[the Estate] discloses a deficiency of $491,750.00.” Attached to the notice was
Form 890 (Waiver Form), Letter 937 (addressed to the Power of Attorney),
Form 1273 (Report of Estate Tax Examination Changes), Form 6180 (Line
Adjustments to Estate Tax), and a Form 886-A (Explanation of Items). In the
Form 886-A, the Commissioner stated that the fair market value of the Estate’s
88.99% interest in SILP was corrected and increased to $5,993,000.00 as
compared to the original tax return valuing the interest at $4,588,000.00. The
Commissioner concluded that the net asset value should only be discounted for
a lack of marketability.
C.
1 Assets that are included in the gross estate are generally included at their
fair market value at the time of decedent’s death. See Internal Revenue Code §§
2031–2044. However, if the executor elects (as the case here), the value of the estate
can be measured at an alternate valuation date.
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Trial and Tax Court Ruling
The Estate petitioned the tax court to challenge the Commissioner’s
determinations. The Estate moved for summary judgment, claiming that the
notice was subject to provisions of the Administrative Procedures Act (“APA”).
5 U.S.C. § 702. The tax court denied the motion and held that the APA did not
apply to proceedings related to the redetermination of a deficiency.
The petition proceeded to a bench trial where the tax valuation experts,
Juliana Vicelja for the Commissioner and Oliver Warnke and Alan Harp for
the Estate, were the only witnesses. The tax court issued an opinion upholding
the Commissioner’s findings. See Estate of Frank D. Streightoff v. Comm’r. of
Internal Revenue, T.C. Memo. 2018-178, 2018 WL 5305054 (2018). It
concluded that the Notice of Deficiency complied with the Internal Revenue
Code (“IRC”) § 7522(a). Id. at *5. It also determined that the Revocable Trust
held a limited partner interest in SILP at the alternate valuation date because
the Agreement validly assigned the 88.99% SILP interest as a limited
partnership both in substance and form. Id. at *6−8. In turn, as the
beneficiary of the Revocable Trust, the decedent’s Estate included a limited
partnership interest in SILP. The Estate timely appealed these findings.
II.
We have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1). Similar to
district court decisions, when reviewing tax court decisions, “[f]indings of fact
are reviewed for clear error and issues of law are reviewed de novo.” Green v.
Comm’r, 507 F.3d 857, 866 (5th Cir. 2007); see also Chemtech Royalty Assocs.,
L.P. v. United States, 766 F.3d 453, 460 (5th Cir. 2014) (The “characterization
of a transaction for tax purposes is a question of law subject to de novo review,
but the particular facts from which that characterization is made are reviewed
for clear error.”) (quoting Southgate Master Fund, L.L.C. ex rel. Montgomery
Capital Advisors, LLC v. United States, 659 F.3d 466, 480 (5th Cir. 2011)).
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“Under the clearly erroneous standard, we will uphold a finding so long as it is
plausible in light of the record as a whole, [citation] or so long as [we have] not
been left with the definite and firm conviction that a mistake has been made.”
Chemtech, 766 F.3d at 460 (quoting United States v. Ekanem, 555 F.3d 172,
175 (5th Cir. 2009) and Streber v. Comm’r, 138 F.3d 216, 219 (5th Cir. 1998)).
III.
The Estate challenges the tax court’s decision on two primary grounds.
First, it contends that in using a substance over form rationale to conclude that
the Estate held a limited partnership interest, the tax court opinion stands
contrary to Texas Partnership law and violated a doctrine set forth in Sec. &
Exch. Comm’n v. Chenery Corp. (the “Chenery doctrine”), 332 U.S. 194, 196
(1947). Second, the Estate asserts that the notice fails to comply with section
7522(a) of the IRC or the APA.
A.
The Transferred Interest Under the Assignment
The Estate’s first argument relates to the tax court’s characterization of
the SILP interest as a limited partnership interest.
To evaluate an estate for tax purposes, a tax court relies on state law to
discern the type of assets held within the estate. Maloney Gaming Mgmt.,
L.L.C. v. St. Tammany Parish, 456 F. App’x 336, 342 (5th Cir. 2011) (citing
Drye v. United States, 528 U.S. 49, 58 (1999)). Texas is the governing
jurisdiction, as provided in Section 12.6 of the SILP Agreement. Regarding
partnership interests, Texas law counsels that we “look to the Texas Uniform
Partnership Act for guidance only when the partnership agreement is silent.”
Park Cities Corp. v. Byrd, 534 S.W.2d 668, 672 (Tex. 1976) (emphasis added);
cf. TEX. BUS. ORG. CODE § 153.251(b) (outlining governing provisions for
partnership assignments which are applicable unless “otherwise provided by
the partnership agreement”). Section 12.6 of the Agreement echoes Texas law,
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and provides for Texas as the governing jurisdiction for all matters if that
matter is not specifically provided for in the SILP Agreement. See, supra,
Sect.I.A. Thus, to resolve the nature of the interest assigned to the Estate, we
look to the SILP Agreement (as it governs the Assignment), and because the
Agreement is not silent to the issue at hand, it is unnecessary to consult Texas
law for clarity.
The parties stipulate that the Assignment was a Permitted Transfer
under Section 9.2. This provision permits limited partners to transfer their
interest to a member of the limited partner’s family. The decedent is the
transferor under the Assignment. While this transfer assigns interest to the
Revocable trust, the decedent is effectively assigning the interest to himself, a
member of his family. Indeed, in creating the Revocable Trust, the decedent
(i.e. the settlor) designated himself as the beneficiary, per Trust Articles 3.01
and 5.02. Cf. Shurley v. Tex. Comm. Bank—Austin, N.A. (In re Shurley), 115
F.3d 333, 338 (5th Cir. 1997) (stating that under Texas law, a settlor will not
escape his creditors by “setting up a . . . trust and naming himself as
beneficiary”). 2 Thus, the Assignment comports with Section 9.2 as a Permitted
Transfer.
Substituted Limited Partner. Section 9.7 provides the requirements for
attaining the legal status of a Substituted Limited Partner as a transferee or
assignee. Accord TEX. BUS. ORG. CODE § 153.253(1) (stating that an assignee
“may become a limited partner if and to the extent that . . . (1) the partnership
agreement provides . . .”). To be admitted as a Substituted Limited Partner,
Subsection (b) of Section 9.7 mandates that the transferred interest be
2 U.S. v. Estabrook, 78 F. Supp. 2d 558, 560 (N.D. Tex. 1999) (stating that creditors
may reach trust assets where the defendants created a revocable trust where they are the
“co-trustees, settlors, and beneficiaries of the trusts”).
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acquired via Permitted Transfer under 9.2. 3 As stipulated by the parties, this
is a Permitted Transfer; thus, Section 9.7(b), is satisfied.
The parties diverge on Section 9.7(a)—which requires that the transferee
obtain consent from Streightoff Management, SILP’s General Partner. Section
9.7 does not qualify the type of consent necessary for this provision, e.g.
written. The SILP Agreement uses consent and approval interchangeably, and
the words are only distinguished with the qualifier “written.” 4,5 Given such
qualifying language is absent in Section 9.7(a), Streightoff Management’s
managing member, Elizabeth, has unilateral discretion to admit this
Assignment interest as a Substituted Limited Partner.
According to the Estate, the Section 9.7 conditions were not met because
there is an absence of Streightoff Management’s consent to admit a transferee
or assignee as a Substituted Limited Partner. Instead, it maintains that the
Assignment conveyed the decedent’s 88.99% limited partnership interest as an
unadmitted assignee interest under Section 9.6—which states that the
assignee will receive the assignor’s allocations and distributions but will not
have access or right to any SILP information or accounting. The
Commissioner’s position is that the Assignment’s broad language transferred
the decedent’s full partnership rights to the Revocable Trust. And when
Elizabeth signed and approved the Assignment, she consented to the transfer
3 Section 9.7 contains three additional enumerated conditions under ((c)-(e)) that
require the transferee to furnish all documents and instruments requested by Streightoff
Management and pay all costs in connection with being admitted into SILP. These
subsections are not germane to our discussion.
4 Sections 1.5, 3.2, 3.3, 7.2, 7.5, 12.1 require written approval or consent, and Sections
7.9, 9.7(a), 9.4(d) simply require approval or consent.
5Black’s Law Dictionary defines “consent” as “Agreement, approval, or permission as
to some act or purpose.” Consent, BLACK’S LAW DICTIONARY (3d pocket ed. 2001) (emphasis
added).
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of decedent’s 88.99% interest as a Substituted Limited Partner interest. We
agree with the Commissioner.
Although the document is labeled “Assignment of Interest,” the
unambiguous language of the Assignment purports to convey more than an
assignee interest. Kerr v. Comm’r. of Internal Revenue, 113 T.C. 449, 467
(1999) (holding that although the documents refer to the trustees as assignees,
the description of the assigned interests contained a limited partner interest),
aff’d, 292 F.3d 490 (5th Cir. 2002). The Assignment states that the decedent
assigns “all and singular the rights and appurtenances thereto in anywise
belonging.” There is no limiting or restrictive language. It is difficult to
reconcile the Estate’s characterization of the Assignment given the document’s
language. For the Estate to claim that the Assignment only transferred an
unadmitted assignee interest—which is limited to allocations and
distributions (per Section 9.6)—would be contrary to the Assignment’s explicit
terms. Cf. Kerr, 113 T.C. 467.
As to consent, Elizabeth signed the Assignment under the following
legend: “APPROVED BY”. In giving written approval, Elizabeth’s signature
was binding on SILP. See TEX. BUS. ORG. CODE § 101.254(b) (stating, in the
context of an L.L.C., “[a]n act committed by [such an agent of the company] for
the purpose of apparently carrying out the ordinary course of business of the
company, including the execution of an instrument, document, mortgage, or
conveyance in the name of the company, binds the company”). Her signature
represents that SILP recognized that this Permitted Transfer was conveying
“all and singular . . . [SILP] rights and appurtenances” of the decedent. This
encompassed his 88.99% limited partnership interest.
The Estate avers that the Assignment’s written approval was to
effectuate the transfer under Section 7.2 of the agreement, which requires
written approval for assignments of interest. However, the parties have
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already stipulated that this is a Permitted Transfer under Section 9.2, and
Section 9.2 Permitted Transfers need not adhere to Section 7.2’s conditions. In
other words, because this transfer was permitted under Section 9.2, no
signature was required under Section 7.2. But even assuming the purpose of
the signature was to satisfy Section 7.2, that does not foreclose the possibility
that Elizabeth’s signature also satisfied Section 9.7(a). Indeed, the Agreement
does not specify the type of consent necessary under 9.7(a). The signature itself
also makes no attempt to disclaim the portion of the Assignment purporting to
convey the entirety of decedent’s limited partner interest or otherwise confine
the written approval to any particular section of the SILP Agreement.
Therefore, in the execution of this conveyance of the decedent’s limited
partnership interest, Streightoff Management consented to the substitution of
a limited partnership interest to the Revocable Trust via the Assignment.
Economic Substance. From an economic reality standpoint, we also agree
with the tax court’s alternative substance over form rationale. Estate of
Streightoff, 2018 WL 5305054, at *7 (“[R]egardless of whether an assignee or
a limited partnership interest had been transferred, there would have been no
substantial difference before and after the transfer to the revocable trust.”).
Assuming we were to accept the Estate’s argument that the Assignment
conveyed an unadmitted assignee interest as a matter of form, the substance
of the transaction will nonetheless prevail. The substance over form doctrine
permits a court to determine a transaction’s characterization according to its
“underlying substance of the transaction rather than its legal form.” Southgate
Master Fund, 659 F.3d at 480. Here, looking beyond the formalities of this
intrafamily transfer, the Assignment lacks economic substance outside of tax
avoidance. Griffin v. United States, 42 F. Supp. 2d 700, 703 (W.D. Tex. 1998)
(“[E]ven if a transaction falls within the literal requirements of the tax statute,
the transaction will be disregarded . . . if it has no business purpose or economic
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effect other than the creation of tax deductions, or if its only purpose is tax
avoidance.”). While SILP limited partners appear to enjoy several managerial
and oversight powers that unadmitted assignees do not 6, there were no
practical differences after the Assignment was executed. Other than
Elizabeth, there is no record of SILP’s limited partners, the decedent’s
children, exercising their partnership rights or responsibilities. For example,
this partnership held no meetings or votes, nor was there any attempt to
remove Streightoff Management as SILP’s general partner. Without genuine
nontax circumstances present, the Assignment is the functional equivalent of
a transfer of limited partnership interest. See Kerr, 113 T.C. 467 (Under
similar facts, the court held that “[t]he objective economic realities underlying
the transfers” support that “there were no significant differences . . . between
the rights of limited partners and assignees.”); see also Streightoff, 2018 WL
5305054, at *7.
Finally, the Estate’s Chenery argument also fails. “[A] reviewing court,
in dealing with a determination or judgment which an administrative agency
alone is authorized to make, must judge the propriety of such action solely by
6 Whether that interest is deemed an unadmitted assignee or limited partnership
interest is significant in terms of degree of control of SILP.
As an 88.99% unadmitted assignee interest, you would be afforded no rights as to
SILP’s accounting, record inspections, and affairs (per Section 9.6).
On the other hand, a limited partner that owns a 75% or more limited partnership
interest (like we have here under the Assignment) can do the following: (1) with written
notice, remove the General Partner, Streightoff Management which can terminate the
Partnership (Article V); (2) reconstitute the Partnership and elect a successor General
Partner (Section 1.5); and approve the admission of additional limited partners (see Section
3.3). Moreover, Section 1.5(b) provides that before withdrawing from SILP, the General
Partner, Streightoff Management, must obtain written consent from 75% of the “Percentage
of Ownership then held by all the Limited Partners.” Lastly, Section 1.5(a) provides that
90% of the partnership interests can terminate SILP by written agreement. In turn, with an
88.99% limited partnership interest, one would only need an additional limited partner’s
agreement to terminate the Partnership.
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the grounds invoked by the agency.” See Chenery, 332 U.S. at 196. Such a
decision is not implicated here because the tax court is redetermining the tax
deficiency notice de novo. See Dobson v. Comm’r, 320 U.S. 489, 501 (1943).
Because the tax court is not critiquing the Commissioner’s deficiency
determination, there is no agency decision to review, and Chenery is therefore
inapplicable.
This interpretation complies with the SILP Agreement and does not
offend Texas partnership law. See TEX. BUS. ORG. CODE § 153.251(b); Park
Cities, 534 S.W.2d at 672. We therefore AFFIRM the tax court’s ruling that
the Estate holds a substituted limited partnership interest in SILP. 7
B.
Notice of Deficiency
The Estate contends that the Notice of Deficiency fails to comply with
the statutory requirement under 26 U.S.C. § 6212(a).
IRC section 6212(a) provides that, “[i]f the Secretary [of the Treasury]
determines that there is a deficiency in respect of any tax imposed by [certain
provisions of the Internal Revenue Code,] he is authorized to send notice of
such deficiency to the taxpayer.” The notice “shall describe the basis for, and
identify the amounts (if any) of, the tax due, interest, additional amounts,
additions to tax, and assessable penalties included in such notice.” 26 U.S.C.
§ 7522(a). The statute further provides that “[a]n inadequate description
under the preceding sentence shall not invalidate such notice.” Id.
7 The Estate also takes issue with the tax court’s valuation of the Estate’s fair market
value because the tax court failed to recognize the Estate’s assignee interest in SILP. Again,
this dispute turns on the SILP interest characterization, rather than a disagreement with
the tax court’s value computation. Because we affirm the tax court’s classification of the
SILP interest as a limited partnership interest, we also affirm the tax court’s estate
valuation.
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Here, the Notice of Deficiency issued to the Estate stated that a
deficiency in their income tax had been determined. Attached to it were forms
explaining the reasoning for the deficiency. The Form 886-A explicitly stated
that the fair market value of the SILP interest was increased. Because the fair
market value of the SILP interest increased, the taxable estate increased. This
is outlined in Form 6180 which determined that the Estate was valued at
$6,206,662.00, an increase of $1,405,000.00 over the original $4,801,662.00 tax
value. These adjustments, and others, are included in the report of tax
examination changes (Form 1273) that recalculated the tax penalty at
$491,750.00. Consequently, this Notice of Deficiency (including its
attachments) fulfills the statutory requirement under section 6212. Selgas v.
Comm’r, 475 F.3d 697, 700 (5th Cir. 2007) (“Like our sister circuits, we
conclude that a notice of deficiency is valid as long as it informs a taxpayer that
the IRS has determined that a deficiency exists and specifies the amount of the
deficiency.”). Even assuming arguendo that the notice description was
inadequate, we still cannot invalidate it on that basis because section 7522(a)
explicitly prohibits us from setting aside a notice for lacking the descriptive
element. See Selgas, 475 F.3d at 700; accord Pasternak v. Comm’r, 990 F.2d
893, 897 (6th Cir. 1993) (stating that “no particular form is required for a valid
notice of deficiency”); Olsen v. Helvering, 88 F.2d 650, 651 (2d Cir. 1937) (“[T]he
notice is only to advise the person who is to pay the deficiency that the
Commissioner means to assess him; anything that does this unequivocally is
good enough.”).
The Estate also argues that the APA is applicable when resolving
deficiency notice determinations. This argument incorrectly extends the reach
of the APA’s judicial review provisions to govern the review of all agency
actions.
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The APA entitles “[a] person suffering legal wrong because of agency
action, or adversely affected or aggrieved by agency action within the meaning
of a relevant statute,” to judicial review of the agency action. 5 U.S.C. § 702.
However, as the Fourth Circuit articulated, the “APA’s general procedures for
judicial review . . . were not intended by Congress to be superimposed on the
Internal Revenue Code’s specific procedures for de novo judicial review of the
merits of a Notice of Deficiency,” for “Congress did not intend for the APA ‘to
duplicate the previously established special statutory procedures relating to
specific agencies.”’ QinetiQ U.S. Holdings, Inc. & Subsidiaries v. Comm’r, 845
F.3d 555, 561 (4th Cir. 2017) (quoting Bowen v. Mass., 487 U.S. 879, 903
(1988)); see also Clapp v. Comm’r, 875 F.2d 1396, 1403 (9th Cir. 1989). When
“the APA was enacted,” a number of statutes already “defined the specific
procedure to be followed in reviewing a particular agency’s action,” including
procedures for specific courts to conduct review. Bowen, 487 U.S. at 903; see
Porter v. Comm’r, 130 T.C. 115, 121 (2008) (“When the APA was enacted in
1946, the law governing review of tax deficiencies was already well
established.”). As the Supreme Court explained in Dickinson v. Zurko, the
APA “grandfathered” existing statutory schemes providing specific procedures
for judicial review, as well as common-law standards of review clearly
“recognized by law.” 527 U.S. 150, 155 (1999). Congress made clear that the
APA’s judicial review proceedings were not intended to supplant existing
statutory schemes that set forth clear pre-existing procedures for review, like
the deficiency statute at issue here, section 7522(a). Cf. Dickinson, 527 U.S. at
154–55 (Congress required exclusions from the APA’s judicial review provision
to be “express[]” only in “subsequent statute[s]”) (italicized in original). Thus,
the Estate’s APA argument is without merit because “the APA does not
supersede specific statutory provisions for judicial review.” Porter, 130 T.C.
118.
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Accordingly, we AFFIRM the tax court’s ruling that this was a valid
Notice of Deficiency.
IV.
For the foregoing reasons, we AFFIRM the tax court’s judgment.