United States v. Finley Hilliard

Case: 12-20804 Document: 00512832333 Page: 1 Date Filed: 11/10/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 12-20804
FILED
November 10, 2014
Lyle W. Cayce
UNITED STATES OF AMERICA, Clerk
Plaintiff–Appellee
v.
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; FINLEY L. HILLIARD, Individually, as former
executor of the Estate of James Howard Marshall, II and as former Trustee of
the Eleanor Pierce (Marshall) Stevens Living Trust; E. PIERCE MARSHALL,
JR., Individually, and as Executor of the Estate of Eleanor Pierce Stevens;
PRESTON MARSHALL, Co-Trustee of the Eleanor Pierce (Marshall) Stevens
Living Trust,
Defendants–Appellants
Appeals from the United States District Court
for the Southern District of Texas
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
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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 1 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 2 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
1 E. Pierce passed away in 2006.
2 Stevens passed away in 2007.
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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.
I. BACKGROUND
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
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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. 3
3 In 1989, well before J. Howard sold all of his shares of MPI stock back to the
company, the three CRATs all sold their shares of MPI back to MPI. Thus, only the GRIT,
not the CRATs, had MPI stock at the time of J. Howard’s indirect gift, and so the CRATs are
not part of this suit.
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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 4 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.
4 J. Howard passed away in 1995.
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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
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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 (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 (1941) and United States v.
Pelzer, 312 U.S. 399 (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).”
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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 6620, which, the court reasoned,
made sense: “The interest is charged based on the failure of the donee to pay,
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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
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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.
II. JURISDICTION
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
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the governing law will properly preclude the entry of summary judgment.”
Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). The dispute is genuine
“if the evidence is such that a reasonable jury could return a verdict for the
nonmoving party.” Id.
IV. DISCUSSION
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 lien for unpaid gift tax:
Except as otherwise provided in subsection (c), unless the gift tax
imposed by chapter 12 is sooner paid in full or becomes
unenforceable by reason of lapse of time, such tax shall be a lien
upon all gifts made during the period for which the return was
filed, for 10 years from the date the gifts are made. 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). All Appellants argue that the district court erred when it
found both that this creates an independent liability on the part of the donee
to pay the unpaid gift tax and that the donee can be charged interest until the
gift tax is paid. First, they argue that the district court’s interpretation of
§ 6324(b) directly contradicts the plain language of the statute. Second, the
Appellants argue that the district court erred in applying I.R.C. § 6901;
specifically, they argue that because the Government did not assess transferee
liability under § 6901 but instead chose to seek a personal judgment against
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the donees, § 6901 is irrelevant in this case. Finally, they claim that even if §
6901 applies, the district court’s interpretation of § 6324(b) is incorrect for
several reasons. For the reasons that follow, we disagree with each of these
arguments and hold that interest accrues on donee’s liability for the unpaid
gift taxes and that interest is not limited to the extent of the value of the gift.
1. The plain language of § 6324(b)
The Appellants argue that the language of § 6324(b) is clear on its face:
“It imposes only a single liability on donees for the donor’s tax and interest.”
The statutory language includes no exceptions, and, considering the exceptions
written into other parts of the Internal Revenue Code, they point out that if
Congress had intended to provide an exception, it knew how to include one.
The Appellants also argue that both Poinier and Baptiste 8 held that the plain
language of § 6324(b) resolved this question, and they urge this Court to follow
those circuits.
The Government responds that there are two distinct liabilities at issue
in this case: the donor’s liability and the donee’s liability. The Government
argues that to understand the donee’s liability for the unpaid gift tax, the Court
must look beyond § 6324(b) and read it in conjunction with §§ 6601 and 6901.
According to the Government’s reading of the statutes, “§ 6901 provides that
the amount of a donee’s personal liability under . . . § 6324(b) is subject to the
same provisions as the gift tax that gave rise to such liability,” such as the
interest provisions in § 6601.
We agree with the Government that the plain language of § 6324(b) does
not resolve this issue. First, based on our reading of the plain language of the
statute, the liability limitation applies to the donor’s unpaid gift tax. See I.R.C.
§ 6324(b) (explaining that, when the donor’s gift tax is unpaid when due, a
donee is personally liable for “such tax to the extent of the value of the gift”
(emphasis added)). Section 6324(b), however, says nothing about any limit on
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the donee’s liability and the Government’s ability to assess interest when the
donee fails to fulfill his or her obligation to pay the donor’s unpaid gift tax.
Further, the district court was correct to read several other portions of the
Internal Revenue Code together in reaching its conclusion. Because statutes
dealing with the same subject should be read together and “harmonized, if
possible,” we should not resolve this question without looking beyond § 6324(b)
and attempting to harmonize it with other provisions of the Internal Revenue
Code. See Panama Canal Co. v. Anderson, 312 F.2d 98, 100 (5th Cir. 1963).
While the Appellants are correct that the Third Circuit observed in
Poinier that applying the § 6324(b) cap to limit the donee’s liability was
“consistent with the plain language of section 6324(b),” Poinier, 858 F.2d at
920, we disagree that the court resolved the case solely based on the plain
language of § 6324(b). The Third Circuit still conducted an extensive analysis
of the statute’s legislative history, compared the case to decisions from other
circuits, and examined the policy implications of its decision before reaching
its holding. See id. at 920–23. Thus, even the Poinier court did not rely solely
on the plain language of the statute in order to resolve the case.
Finally, other courts that have considered this issue have read § 6324(b)
and concluded that a donee incurs an independent liability that is subject to
unlimited interest until paid. See Baptiste 11, 29 F.3d at 1541–1543; Baptiste
v. Comm’r (Baptiste TC), 100 T.C. 252, 257 (1993). These divergent
interpretations of § 6324(b) suggest that § 6324(b) is not plain on its face in the
way that the Appellants claim. Thus, we conclude the plain language of the
statute does not resolve the case.
2. Section 6901 and its implications for this case
The Appellants next argue that the district court erred in looking to
Baptiste 11 and § 6901 to help resolve this case, because the Government chose
to collect the gift taxes from the donees through a personal action, not under
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§ 6901. They argue that collection under § 6901 includes certain procedural
safeguards, which they were deprived of when Government chose not to collect
through § 6901. Though the Appellants agree that the Government may use
whatever method it chooses to collect taxes, they claim the Government is
improperly attempting to use one method to collect taxes—a direct judgment
under § 7402—while taking advantage of § 6901.
The Government rejects the idea that § 6901 is irrelevant to this case
simply because it chose to collect the unpaid tax through a direct judgment
instead of using the § 6901 procedures. The Government claims § 6901 shows
Congress intended for the IRS to be able to collect interest on the donee’s
unpaid, personal liability under § 6324(b). According to the Government, this
congressional intent should guide our decision, regardless of whether the
Government collects the tax under § 7402 or § 6901. Finally, the Government
disputes the Appellants’ allegation that they were denied procedural
safeguards available under § 6901 because (1) the Appellants were allowed to
have their donee liabilities determined without having to first pay the tax, and
(2) the outcome in the district court was the same as it would have been in tax
court because of the tax court’s decision in Baptiste TC.
We conclude the district court did not err in relying on § 6901 to help
interpret § 6324(b), even though the Government chose to attempt to collect
from the Appellants through a personal action, not under § 6901. The Internal
Revenue Code gives district courts jurisdiction to render judgments to enforce
internal revenue laws, and the statute specifies that the remedies are “in
addition to and not exclusive of any and all other remedies of the United
States.” I.R.C. § 7402(a). Further, nothing in § 6901—which says that
transferee liability is “subject to the same provisions and limitations as in the
case of the taxes with respect to which the liabilities were incurred”—imposes
that liability only when the Government collects under § 6901. Cf. United
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States v. Russell, 461 F.2d 605, 606 (10th Cir. 1972) (holding that “the
collection procedures contained in § 6901 are not exclusive and mandatory, but
are cumulative and alternative to the other methods of tax collection
recognized and used prior to the enactment of § 6901 and its statutory
predecessors”); see also United States v. Geniviva, 16 F.3d 522, 525 (3d Cir.
1994) (holding that “an individual assessment under [§ 6901] is not a
prerequisite to an action to impose transferee liability under [§ 6324(a)(2)]”). 5
This Court also disagrees that Baptiste 11 is as easily distinguishable as
the Appellants argue, merely because the Government used a different means
of collecting the unpaid gift tax in this case. The holding in Baptiste 11—that
§ 6324(b) imposes an independent liability on a donee that is subject to
unlimited interest—does not rely on the fact that the Government was
collecting the tax under § 6901. 29 F.3d at 1541. The Eleventh Circuit’s
holding also does not rely on the fact that the donees had access to § 6901’s
procedural safeguards, which the Appellants claim they were denied in the
instant case. Rather, the Eleventh Circuit read the statutes together with the
interest provision in § 6601 to determine the nature and extent of the donee’s
obligation, id., and there is nothing in the Eleventh Circuit’s reasoning that
would apply only when the Government collected from a donee under § 6901.
Finally, we note that it would be possible to hold that under § 6324(b)
the donees have a personal liability, which accrues interest that is not limited
by § 6324(b), even without relying on § 6901. In Baptiste TC, the majority of
the Tax Court reached this conclusion without ever mentioning § 6901. See
100 T.C. 252–57. One of the concurring opinions in the same decision also
5 I.R.C. § 6324(a)(2) imposes personal liability on transferees for unpaid estate taxes.
Because the gift tax and estate tax provisions are in pari materia and should be construed
together, see Estate of Sanford v. Comm’r, 308 U.S. 39, 44 (1939), we look to cases construing
estate tax transferee liability to help us in resolving this case.
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concluded that the transferees’ personal liability to pay the gift tax was subject
to unlimited interest without relying on § 6901. See id. at 258–60 (Ruwe, J.,
concurring).
3. The correct interpretation of § 6324(b)
Finally, the Appellants claim that the district court misinterpreted
§ 6324(b) in several ways. First, they argue that § 6901 is only a procedural
statute that does not create substantive liability, see Comm’r v. Stern, 357 U.S.
39, 42–44 (1958), so the donee’s personal liability that incurs interest must
come from a statute other than § 6901. Next, the Appellants claim that the
district court’s interpretation of § 6324(b) was improper because it allows the
Government to collect double interest, something Congress did not intend. The
Appellants then look to legislative history, which they argue shows no intent
to impose unlimited interest on transferees. Finally, they again argue that the
plain language of § 6324(b) is clear, and, as such, policy considerations cannot
sway this Court’s holding.
The Government responds that read together, §§ 6324(b), 6601, and 6901
impose interest on the donee’s liability from the date that the donor’s gift tax
becomes overdue. The Government also disagrees that the legislative history
favors the Appellants’ arguments and instead claims that the legislative
history actually shows congressional intent to “expand the Government’s right
to interest.” Finally, the Government claims that general taxation principles
and other policy considerations compel the result the district court reached in
this case.
After carefully considering the arguments on each side, we hold that the
district court correctly interpreted § 6324(b). While the Appellants are correct
that Stern says § 6901 does not create substantive liability, see Stern, 357 U.S.
at 42–44, our holding does not run afoul of that rule. The substantive liability
in this case comes from § 6324(b), and § 6901 and § 6601 help explain the
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nature of that obligation. Section 6901 explains that transferee liability
imposed under § 6324(b) is “subject to the same provisions” as the underlying
gift tax. I.R.C. § 6901(a). One of those provisions that the underlying gift tax
is subject to is § 6601, which imposes interest when the tax is unpaid. I.R.C.
§ 6601. Thus, read together, these sections explain that the donee’s personal,
independent liability for the unpaid gift tax is subject to the interest provisions
of § 6601. 6
Though both the Appellants and the Government claim the legislative
history supports their position, our reading of the legislative history comports
with the Government’s view. As Judge Halpern explained in his concurring
opinion in Baptiste TC, see 100 T.C. 264–67 (Halpern, J., concurring), § 311
(the precursor to § 6901) in the 1939 Code provided that the Government could
apply the interest provisions to transferee liability; when Congress enacted
§ 6901 in 1954, it removed the interest provision but gave no other indication
that it intended to depart from § 311 under the 1939 Code. Id. at 264–66.
Judge Halpern offered two alternative explanations for the differences
between the 1939 and 1954 Internal Revenue Code:
First, Congress may have intended to continue the general rule
that respondent would be entitled to appropriate interest on
transferee liability (as if it were tax liability), but determined that
interest more appropriately should be payable from (generally) the
time of the transfer rather than the time of notice and demand.
Second, Congress may have intended to abandon the general rule
that respondent was entitled to interest on transferee liability as
on tax liability.
Congress made no announcement of a drastic change, in this
regard, from the 1939 scheme, and I therefore conclude that
6 The dissent characterizes this as “circular reasoning.” Post at 44. Circular reasoning
occurs only if the conclusion to be proven is included in the premises. Here the premises
follow from case law principles of statutory interpretation and they do not mention, let alone
include, the ultimate conclusion that the statutory text does not resolve the issue sub judice.
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whichever interpretation of section 6901 is most consistent with
the preceding scheme is the better. As suggested above, I believe
Congress would have considered the fundamental characteristic of
the 1939 scheme to be that transferee liability is treated like tax
liability for the purpose of [the Government’s] entitlement to
appropriate interest thereon.
Id. at 266–67. Thus, Judge Halpern concluded, “section 6901 entitles [the
Government] to interest on the transferee liability, as if it were tax liability,
under section 6601.” Id. at 267. Like the Eleventh Circuit, we find this
interpretation of the legislative history persuasive and use it to inform our
decision that the Government may collect unlimited interest on a donee’s
personal liability for any unpaid gift tax. See Baptiste 11, 29 F.3d at 1542 n.7.
We are also unpersuaded by concerns about double collection of interest
that the Appellants urged before this Court and that influenced the Third
Circuit’s decision in Poinier. The Appellants claim that the district court’s
interpretation allows a double interest charge because the donee must pay both
the interest that the donor would have been charged on the unpaid gift tax and
the interest on the donee’s own independent liability for paying the gift tax.
The Poinier court’s double interest concerns were motivated by an older version
of the Internal Revenue Code, which provided in I.R.C. § 6601(f)(2) that “[n]o
interest under this section shall be imposed on the interest provided by this
section.” See Poinier, 858 F.2d at 921–22. But Congress repealed § 6601(f)(2),
and there is no longer a specific prohibition on collecting interest on the
interest assessed under § 6601. The Internal Revenue Code also now
specifically allows for compound interest. See I.R.C. § 6622. Contrary to the
Appellants’ position, it appears that Congress is not concerned with the
possibility of collecting interest on interest, and so that consideration does not
influence our decision.
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Finally, our decision here is consistent with Fifth Circuit precedent and
best serves the principles and policies this Court and others have recognized
in interpreting the Internal Revenue Code. We have previously observed that
it is unlikely that Congress intended that the accrual of interest be treated
differently in tax underpayment and tax overpayment cases. See Dresser
Indus., Inc. v. United States, 238 F.3d 603, 616 (5th Cir. 2001). If the
Appellants had overpaid the amount they owed in gift taxes, the Government
would have been required to pay back the overpayment with interest. See
I.R.C. § 6611. Holding the Appellants liable for unlimited interest on their
personal liability for the unpaid gift tax treats interest for overpayment and
underpayment the same. Further, when we considered former §§ 294 and 311
(the predecessors to §§ 6601 and 6901), this Court held that the Government
could collect interest on the transferee’s liability for the transferor’s unpaid
taxes, see Patterson v. Sims, 281 F.2d 577, 578–79, 581 (5th Cir. 1960), and our
decision today follows naturally from that holding. 7
Moreover, our conclusion today is consistent with “the traditional rule
that one who possesses funds of the government must pay interest for the
period that person enjoys the benefit of [the] same.” See Baptiste 11, 29 F.3d
at 1542; Baptiste TC, 100 T.C. 259 (Ruwe, J., concurring) (“Were we to adopt
petitioners’ view of the liability limitation . . . we would be radically changing
7 Patterson concerned “the extent of the liability for interest of a transferee of property
of a delinquent income taxpayer,” 281 F.2d at 578, unlike this case which concerns the
liability for interest of a donee of a gift of a donor who was delinquent in paying gift tax. Of
course, the existence and extent of income tax transferee liability is determined under state
law, see Stern, 357 U.S. at 44–45, unlike gift tax transferee liability which is determined
under federal law. But, state law did not determine our decision in Patterson; rather, we
concluded that once the IRS sent the transferee a notice of deficiency, the question of
transferee liability—and the interest chargeable thereon—became a question of federal law.
Patterson, 281 F.2d at 580 (“State law is therefore not a determinant of transferee liability
subsequent to the notice of the transferee assessment under Section 311. Rather, Section
294(b), Internal Revenue Code 1939, furnishes the applicable rule.”). So Patterson provides
useful guidance even though it dealt with unpaid income taxes, not gift taxes.
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the concept of limited transferee liability . . . .”). Finally, our decision
encourages transferees to fulfill their obligation to pay any unpaid gift taxes
in a timely manner, rather than “reward[ing] those who delay in paying their
obligations.” Baptiste TC, 100 T.C. 259 (Ruwe, J., concurring). As the
Eleventh Circuit opined, “[t]o hold otherwise would create a system which
encourages transferees to retain assets of the estate, at the expense of the
government, for as long as possible with no adverse consequences.” Baptiste
11, 29 F.3d at 1542–43 n.9. 8 Thus, we conclude the district court did not err in
its interpretation of § 6324(b).
B. Stevens as Donee of J. Howard’s Indirect Gift
Stevens argues that the district court erred in finding that she was a
donee of J. Howard’s 1995 indirect gift. First, she claims that res judicata—
because of the Stipulation and the 2008 Tax Court decisions—does not bar her
from contesting her status as a donee or the amount of the gift. Second,
Stevens presents several alternative explanations for why she is not the donee.
We consider each of these in turn.
1. Whether res judicata applies
We must find four requirements satisfied in order for res judicata to
apply: “(1) the parties must be identical in both suits; (2) the prior judgment
must have been rendered by a court of competent jurisdiction; (3) there must
be a final judgment on the merits; and (4) the same cause of action must be
involved in both cases.” Meza v. Gen. Battery Corp., 908 F.2d 1262, 1265 (5th
Cir. 1990) (citations omitted).
8 The dissent is correct to note that “the sooner that a donee pays the gift tax, the less
interest that will be owed.” Post at 43. But it acknowledges that this is only true “until the
initial tax plus accrued interest equals the value of the gift to the donee.” Thus, once the sum
of the tax and accrued interest surpasses the value of the gift, as is the case here, the parties
have no incentive to pay what they owe.
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Stevens claims that several of those requirements are not satisfied, and
so the Stipulation and 2008 Tax Court decisions do not bind her. First, she
argues that the parties are not identical. While acknowledging the exception
to the identical party requirement if the non-party is a successor in interest to
the party’s interest in the property, see Meza, 908 F.2d at 1266–67, she claims
this exception cannot apply here because whether she is a successor in interest
to J. Howard (i.e., whether she was a donee) is the same issue she is contesting.
Stevens also claims that there was not a final judgment on the merits, because
“an agreed judgment does not have the same effect as a contested judgment.”
(citing Arizona v. California, 530 U.S. 392, 414–16 (2000)). The Government,
however, responds that our decision in United States v. Davenport, 484 F.3d
321 (5th Cir. 2007) controls. Because “[a] prior decision determining the
liability of the donor binds the donee,” Davenport, 484 F.3d at 327, the
Government claims that the Stipulation and 2008 Tax Court decisions bind
Stevens.
We agree with Stevens that, in order for Davenport (and res judicata) to
apply, we must first determine whether Stevens is a donee. In Davenport, this
Court considered whether res judicata bound a transferee, Gordon Davenport,
from whom the Government sought to recover unpaid gift tax (under § 6324(b)).
Id. at 322, 324. Before her death, Birnie Davenport transferred stock to her
niece and nephews, including Gordon. Id. at 323. After Birnie’s death, the IRS
audited her estate tax return and found that Birnie had undervalued the stock
she transferred, creating a large gift tax deficiency. Id. at 324. Birnie’s estate
challenged the alleged deficiency in tax court. Id. The tax court found that
Birnie had made inter vivos gifts to Gordon and her other nephew and niece,
and the court determined the value of the gift. Id. Her estate never paid the
gift tax, and the Government then sought to collect the unpaid gift tax from
Gordon pursuant to § 6324(b). Id. at 324–25 (explaining that liability under
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§ 6324(b) is several). The district court agreed with Gordon that res judicata
applied to the tax court’s finding that he was a donee but did not preclude him
from litigating the value of the gift or the amount of his liability. Id. at 325.
This Court reversed, holding that res judicata applied and that Gordon
could not contest his status as a donee, the value of his gift, or the amount of
his liability. Id. at 329. The Court noted that “[a]s transferee, Gordon
Davenport was in privity with a party to the tax court proceeding, Birnie
Davenport’s estate, the transferor.” Id. at 326 (citation omitted). “A prior
decision determining the liability of the donor binds the donee, . . . [a]nd the
tax court, a court of competent jurisdiction, rendered final judgment on the
merits.” Id. at 327 (citation omitted). The “same . . . transactions and factual
events” were present in both cases; both cases concerned Birnie’s gift. Id. The
Court also observed that its decision was consistent with the Eighth and
Eleventh Circuits’ decisions in the Baptiste cases. Id. at 327–28. In each
Baptiste case, the court reasoned that the estate’s liability, which the tax court
had already calculated, determined the donee’s liability under § 6324(b) and
held that the donees could not challenge the amount of the gift. Id. at 327.
Despite our holding in Davenport, res judicata does not attach until we
determine that Stevens is, in fact, a donee. “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.’” Id. at 328 (emphasis added) (quoting 14 Edward J. Smith,
Mertens Law of Federal Income Taxation § 53:31 (2004)). Thus, determining
transferee (or donee) status is the first step. Here, Stevens challenges her
status as a donee, and so the requirements for res judicata are not satisfied
until we determine that she was a donee.
If we determine that Stevens is a donee, see infra Part IV(B)(2), then
Davenport is clear that Stevens is bound by the tax court’s determination of
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the value of the gift. See id. (explaining that determining the value of the stock
was “a fundamental part of calculating the tax due” and that “[t]he tax court’s
determinations of the value of the stock and the tax due are not separable”).
Stevens’s argument that there was no final judgment on the merits because it
was an agreed, not a contested, judgment lack merit. Davenport clearly states
that “[t]he final judgment element does not require contested litigation.” Id.
at 327 n.10 (citing United States v. Shanbaum, 10 F.3d 305, 313 (5th Cir. 1994)
and In re W. Tex. Mktg. Corp., 12 F.3d 497, 500–01 (5th Cir. 1994)). Thus, res
judicata does not bar Stevens from arguing that she is not a donee. But, if we
determine that Stevens is a donee, then res judicata applies and bars her from
religitating the value of the gift she received.
2. Whether Stevens was the donee
Stevens next claims that she is not the donee for several reasons. First,
she argues that the GRIT was not even the donee of J. Howard’s gift because
it did not receive a present interest in property when J. Howard sold his MPI
stock back to MPI. Second, she argues that the trust was the donee and so the
trustee is the proper party to be held liable under § 6324(b). In the alternative,
Stevens claims that the remainder beneficiary is the donee, or, at the very
least, partly responsible for any donee liability. Finally, Stevens argues that
even if the trust, the trustee, and the remainder beneficiaries are not the
donees, the Government still has failed to prove that J. Howard made a gift to
her because J. Howard’s sale of MPI was “an arm’s length transaction in the
ordinary course of business” and free from donative intent.
i. Present interest in property from J. Howard’s indirect gift
Stevens argues that, when J. Howard made his indirect gift, the GRIT
did not receive a present interest in property because the GRIT, a minority
shareholder, could not access the increased value of the shares. Because the
shareholder has no individual control over the gift of increased value in his
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shares, Stevens claims that there is a “postponement of enjoyment” that makes
the gift a gift of future interests. Citing Tilton v. Commissioner, 88 T.C. 590
(1987), she asserts that, until the district court’s opinion in this case, “[n]o
court appears to have held a shareholder liable as a transferee for the unpaid
gift taxes incurred on a transfer to the corporation.” Stevens urges this Court
to look to Fidelity Trust Company v. Commissioner, 141 F.2d 54 (3d Cir. 1944),
where, according to Stevens, the Third Circuit considered a situation similar
to this one and held that the life insurance beneficiaries were not liable for
unpaid gift taxes under § 6324(b) because the gift was of a future interest.
The Government responds that Stevens received a present interest.
Pointing to Treasury Regulation § 25.2511-1(h)(1) and Kincaid v. United
States, 682 F.2d 1220, 1224 (5th Cir. 1982), the Government also claims that
“[i]t is well-settled that a transfer of property to a corporation for less than
adequate consideration is to be treated as a gift to the shareholders to the
extent of their proportionate interests in the corporation.” The Government
also rejects Stevens’s reliance on Fidelity Trust and argues that it is
distinguishable from this case.
We hold that J. Howard’s indirect gift was a transfer of a present
interest. It is clear under our holding in Kincaid and the Treasury Regulations
that a shareholder’s transfer of property to a corporation for less than full
consideration is generally considered a gift to the individual shareholders. See
Kincaid, 682 F.2d at 1223–25 (applying Treas. Reg. § 25.2511-1(h)(1) and
concluding that, when Kincaid transferred property to a corporation she
formed with her two sons, she made a gift to her sons as shareholders of the
corporation’s stock); Treas. Reg. § 25.2511-1(h)(1) (“A transfer of property by B
to a corporation generally represents gifts by B to the other individual
shareholders of the corporation to the extent of their proportionate interests in
the corporation.”). That is exactly what happened here, and there is nothing
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in the Treasury Regulations or Kincaid to suggest that the rule is somehow
different for a minority shareholder.
We also disagree with Stevens that Tilton should lead us to a different
result. First, Tilton does not state exactly what Stevens claims; instead, the
tax court said “[w]e have been unable to locate, and respondent has not cited,
any case in which a shareholder of a corporation was charged with donee-
transferee liability for gift taxes payable on a nonshareholder’s transfer to the
corporation.” Tilton, 88 T.C. 599 (emphasis added). J. Howard was a
shareholder when he made the transfer that resulted in the indirect gift, so the
statement in Tilton is inapplicable to the situation in the instant case. In
addition, the tax court did not say that transferee liability could never occur in
the situation at play in Tilton; it simply found that the Government had failed
to prove that the transfer resulted in any indirect gift because there was no
evidence the transfer increased the value of the stock. Id. (“Even assuming,
without deciding, that an indirect donee-shareholder under section 2511(a)
may be charged with transferee liability as a result of a gratuitous transfer to
a corporation by a nonshareholder . . . .”). Thus, Tilton does not support holding
that the GRIT—and by extension, Stevens—did not receive a present interest.
Further, the Third Circuit’s reasoning in Fidelity Trust does not
persuade us to agree with Stevens. In Fidelity Trust, the settlor of several life
insurance policies had transferred the policies to a trust. 141 F.2d at 55. The
terms of the trust required the trustee to pay out the money from the policies
after the settlor died, and it laid out several alternate scenarios for paying the
beneficiaries, depending on which beneficiaries were still alive at the time the
settlor died. Id. The Government tried to argue that beneficiaries of the life
insurance policies were donees and attempted to collect gift tax from them. Id.
at 55–56. The Third Circuit rejected that argument and held that the trust
was the donee. Id. at 57. The court characterized the interests of the
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beneficiaries as “future interests” because “the beneficiaries who will
ultimately receive the income and the corpus [were] not [then] determinable.”
Id. at 56. The settlor had not yet died, so it was unclear who would survive
him and unclear what they would take. Id. The situation here is a very
different one: J. Howard made the indirect gift, and there is no uncertainty
regarding the identity of the other five shareholders who benefited from that
gift. In fact, Stevens herself admits that she received additional distributions
after JHM’s gift. Thus, we conclude J. Howard’s gift transferred a present
interest.
ii. The donee of J. Howards’ gift
Stevens next argues that the trustee is the donee of J. Howard’s gift. She
claims that the district court erred in relying on Helvering, which determined
who was a donee for purposes of the gift tax exclusion under § 2503. Stevens
argues that § 2503 and § 6324(b) have different purposes and use different
language: § 6324(b) is a collection statute and uses the terms “donee” and
“property comprised of the gift,” while § 2503 confers a benefit on the taxpayer
and talks about “person” and “interests in property.” She also argues that,
instead of looking to Helvering, the panel should look to case law that
interprets who is a donee in cases involving estate tax transfer liability under
§ 6324(a)(2). According to Stevens, courts have held that trustees—not
beneficiaries of trusts—are transferees for purposes of determining transferee
liability for the estate tax. Finally, Stevens argues that this court should follow
Fidelity Trust, which rejected the construction the Government urges here of
§ 6324(b)’s predecessor statute and held that the trust was the beneficiary of
the gift.
In the alternative, Stevens argues that the remainder beneficiary was
the donee of the gift, or at least shares some responsibility for the gift tax lien.
She claims that the GRIT only paid distributions equal to the estimated
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quarterly tax liability she owed due to MPI’s pass-through taxation, and so the
only increase in value she saw was the increased distributions in order to pay
higher taxes. Stevens then argues that the remainder beneficiary should share
some of the responsibility for the unpaid gift tax because, when the trust
terminated, the remainder beneficiary received what remained of the principal
and, thus, actually received the increased value from J. Howard’s gift. She
further argues that the district court misconstrued Ryerson and Pelzer. Even
if those two cases and Helvering say that the income beneficiary is a donee for
purposes of unpaid gift tax, she contends she should only be held liable for the
benefit that she actually received (that is, any increased dividends she was
paid because of the higher value of the MPI stock in the GRIT).
The Government, citing Treasury Regulation § 25.2503-2(a) and
Helvering, 312 U.S. at 396–98, responds that “[t]he law is well settled that, for
gift tax purposes, trust beneficiaries holding a beneficial interest in trust
property are treated as the donees of gratuitous transfers of property or wealth
to the trust.” While the Government agrees that there is case law stating that
the estate tax and gift tax are in pari materia, the Government disagrees that
principle is controlling here the statute imposing a lien for estate taxes differs
from the statute imposing a lien for gift taxes. Even if the statutes on liens for
estate and gift taxes should be construed together, that does not mean that we
should ignore the clear differences in the language of the two statutes.
We hold that Stevens, as trust beneficiary, was the donee of J. Howard’s
gift. When determining who qualifies as a donee under § 6324(b), we know
that statutory language “cannot be construed in a vacuum. It is a fundamental
canon of statutory construction that the words of a statute must be read in
their context and with a view to their place in the overall statutory scheme.”
Roberts v. Sea–Land Servs., Inc, 132 S. Ct. 1350, 1357 (2012) (quoting Davis v.
Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989)) (internal quotation marks
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omitted). “Where possible, statutes must be read in harmony with one another
so as to give meaning to each provision.” United States v. Caldera–Herrara,
930 F.2d 409 (5th Cir. 1991).
The Supreme Court’s decision in Helvering helps guide our decision
because it determined who qualified as a donee in another part of the same
statutory scheme. In Helvering, the Supreme Count considered if, when a
donor made a gift to a trust, the trustee was the only donee—and so the donor
could only claim one gift tax exclusion—or if instead each beneficiary of the
trust was a donee—and so the donor could claim as many gift tax exclusions
as there were beneficiaries. 312 U.S. at 396–98. The Supreme Court held that
“the beneficiary of the trust to whose benefit the surrender inures . . . is the
‘person’ or ‘individual’ to whom the gift is made.” Id. at 396. “One does not
speak of making a gift to a trust rather than to his children who are its
beneficiaries.” Id. Applying the “natural sense” of the words, the Supreme
Court held that, when a donor makes a gift to a trust, the beneficiary of the
trust is the donee and the donor can claim as many exclusions as beneficiaries.
Id. at 396–97.
Helvering determined who the donee was for purposes of the gift tax
exclusion under the statute that was the predecessor to § 2504, and in the
current Internal Revenue Code, § 2504 is part of chapter 12. I.R.C. § 2504.
Chapter 12 is the proper place to look to understand whether Stevens is a
donee: chapter 12 governs gift taxes, the issue we are deciding, and both
§§ 6324(b) 6901 refer back to chapter 12 when defining transferee liability for
unpaid gift taxes. See I.R.C. § 6324(b) (imposing personal liability on a
transferee for unpaid gift tax “unless the gift tax imposed by chapter 12 is
sooner paid in full or becomes unenforceable”); I.R.C. § 6901(a)(1)(A) (“The
liability, at law or in equity of a transferee of property . . . of a donor in the case
of a tax imposed by chapter 12”). Thus, all of the statutes that help us to
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understand the nature of the transferee’s obligation for unpaid gift taxes do so
by reference to chapter 12. Helvering tells us that the beneficiary of the trust
is the donee for purposes of the gift tax under chapter 12. 312 U.S. at 396.
(“[I]t would seem to follow that the beneficiary of the trust to whose benefit the
surrender inures . . . is the ‘person’ or ‘individual’ to whom the gift is made.”).
Applying Helvering’s determination that the trust’s beneficiary was the donee
to the instant case, we conclude that Stevens, as beneficiary of the trust, was
the donee of J. Howard’s gift.
Admittedly, as Stevens points out, §§ 2503 and 6324(b) do not use the
same words. Thus, the canon of statutory construction that “assumes that
‘identical words used in different parts of the same act are intended to have
the same meaning’” might not apply because the words are not, strictly
speaking, identical. See Sorenson v. Sec’y of Treasury, 475 U.S. 851, 860 (1986)
(quoting Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87 (1934)).
However, our reasoning does not rely on §§ 2503 and 6324(b) using the same
words. Instead, we rely on the fact that whenever the Internal Revenue Code
defines the transferee’s liability for unpaid gift taxes, it refers to chapter 12.
Our conclusion simply applies a consistent definition of the person who is the
donee under chapter 12 throughout the Code.
Further, although the statutes on gift taxes and estate taxes are meant
to be construed in light of each other, that guiding principle does not require
us to agree with Stevens’s argument. Though our Court has not addressed the
specific issue, Stevens is correct that some other courts have interpreted the
estate taxes lien provision of the Internal Revenue Code, § 6324(a), and held
that trust beneficiaries do not have personal liability for unpaid estate tax. See
Higley v. Comm’r, 69 F.2d 160, 163 (8th Cir. 1934) (“It is very natural to
presume that Congress deemed payment of the tax sufficiently secured by a
lien on the property and by imposing a personal liability on the trustee without
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going further and placing this real hardship on beneficiaries who would often
be hopelessly unable to bear it.” (emphasis added)); Englert v. Comm’r, 32 T.C.
1008, 1015–16 (1959) (finding that a trust beneficiary was not personally liable
for unpaid estate taxes because the trustee, not the beneficiary, held the
property in question). But, there is an important difference between
§§ 6324(a)(2) and 6324(b). The liens for estate tax statute, § 6324(a)(2),
explicitly imposes personal liability on trustees, but the word “trustee” is
conspicuously missing from the liens for gift tax statute, § 6324(b). Given the
clear differences in the plain language of these statutes, we are not persuaded
to follow the courts who have interpreted the statute imposing a lien for estate
taxes on the trustee, not the beneficiary of the trust.
We also hold that the remainder beneficiary does not share responsibility
for the unpaid gift tax. First, those arguments appear to be another way of
arguing about the amount of the gift Stevens received. And as we discussed
above, see supra Part IV(B)(1), if Stevens was a donee, she cannot relitigate
the amount of the gift because of the Stipulation and the 2008 Tax Court
decisions. Second, despite her argument to the contrary, there is evidence that
Stevens received a present benefit because the distributions from the trust
increased after J. Howard made his gift. Finally, neither Ryerson nor Pelzer
compel a different result. Although the Supreme Court held that the interests
at issue in Ryerson and Pelzer were future interests (and, therefore, not eligible
for a gift tax exclusion), the interests at issue in those cases are different from
the interest Stevens received. In both Ryerson and Pelzer, the gifts were put
in trusts that were not to be distributed to the beneficiaries until a certain
period of time passed, the beneficiaries reached a certain age, or the
beneficiaries survived a certain individual. Ryerson, 312 U.S. at 409; Pelzer,
312 U.S. at 402. Unlike Stevens, who was already receiving distributions from
the GRIT and who earned higher payouts because of J. Howard’s gift, the trust
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beneficiaries in Ryerson and Pelzer truly received no present benefit from the
gift to the trust. Ryerson, 312 U.S. at 409; Pelzer, 312 U.S. at 402. Thus, we
conclude that the remainder beneficiary is not required to share payment of
the gift tax.
iii. Ordinary course of business exception
Finally, Stevens claims that, even if the income beneficiary of a trust is
a donee for gift tax purposes, the ordinary course of business exception applies
because the Government did not prove that there was donative intent. She
argues that, in other cases involving indirect gifts, the ordinary course of
business exception did not apply because, given the close family relationship
between the donor and the shareholders, courts were able to infer donative
intent. Here, however, at the time the gift was made, J. Howard and Stevens
had been divorced for more than thirty-five years and each had remarried (J.
Howard was married to his third wife at the time of the indirect gift). Thus,
according to Stevens, the Government failed to prove that there was a close
family relationship and that this was a gift.
We disagree. Under the ordinary course of business exception, “a sale,
exchange, or other transfer of property made in the ordinary course of business
(a transaction which is bona fide, at arm’s length, and free from any donative
intent), will be considered as made for an adequate and full consideration in
money or money’s worth.” See Treas. Reg. § 25.2512-8. But, courts look to the
donor’s intent to determine whether a gift has been made, and the term gift is
used in a very broad sense when talking about the gift tax. Comm’r v. Wemyss,
324 U.S. 303, 306–07 (“If we are to isolate as an independently reviewable
question of law the view of the Tax Court that money consideration must
benefit the donor to relieve a transfer by him from being a gift, we think the
Tax Court was correct.”). Here, the Stipulations and 2008 Tax Court decisions
are clear that J. Howard made a gift to Stevens. So because we determine that
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Stevens was a donee, res judicata bars her from arguing that J. Howard did
not make a gift to her.
C. The Federal Priority Statute
The Federal Priority Statute provides that:
(a)(1) A claim of the United States Government shall be paid first
when—
(A) a person indebted to the Government is insolvent and—
(i) the debtor without enough property to pay all debts makes
a voluntary assignment of property;
(ii) property of the debtor, if absent, is attached; or
(iii) an act of bankruptcy is committed; or
(B) the estate of a deceased debtor, in the custody of the executor
or administrator, is not enough to pay all debts of the debtor.
...
(b) A representative of a person or an estate (except a trustee
acting under title 11) paying any part of a debt of the person or
estate before paying a claim of the Government is liable to the
extent of the payment for unpaid claims of the Government.
31 U.S.C. § 3713.
Hilliard and E. Pierce Jr. argue that the district court committed several
errors in holding them liable for distributions from the Living Trust and
Stevens’s Estate in violation of the Federal Priority Statute. First, they argue
that the Government did not prove that they knew about Stevens’s potential
liability for the unpaid gift tax, and, therefore, they cannot be found to have
violated the Federal Priority Statute. Next, they argue there was insufficient
evidence for the district court to find them personally liable for: (1) the
charitable set-aside; (2) the distribution of personal property and apartment
rent from Stevens’s Estate; or (3) the payment of legal and accounting fees from
the Living Trust. Last, E. Pierce Jr. claims the district court erred in finding
that he breached his fiduciary duty under Texas law.
1. E. Pierce Jr. and Hilliard’s knowledge of Stevens’s gift tax liability
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E. Pierce Jr. and Hilliard argue that the Government failed to show that
they knew about the potential liability to the Government. They acknowledge
that, under United States v. Renda, 709 F.3d 472, 484–85 (5th Cir. 2013),
erroneous legal advice as to the validity of a claim is not an excuse under the
Federal Priority Statute. But, they argue that Renda only applies when the
claim has actually been made, and therefore does not apply here where they
allegedly had knowledge of the potential claim while the Government delayed
in making the claim. They also point to Little v. Commissioner, 113 T.C. 474
(1999) to argue that advice of legal counsel is a defense under the Federal
Priority Statute with regard to potential claims. The Government flatly rejects
any argument about E. Pierce Jr.’s and Hilliard’s lack of knowledge because
they both admitted during depositions that they knew of the potential donee
gift tax liability to the Government in excess of $35 million.
Liability under the Federal Priority Statute requires that (1) a fiduciary
(2) distributed the estate’s assets before paying a claim of the Government and
(3) knew or should have known of the Government’s claim. See Renda, 709
F.3d at 480–81. The only dispute in this case is whether E. Pierce Jr. and
Hilliard met the knowledge requirement. Actual knowledge is not required;
“[t]he knowledge requirement of [31 U.S.C. § 3713] may be satisfied by either
actual knowledge of the liability or notice of such facts as would put a
reasonably prudent person on inquiry as to the existence of the unpaid claim
of the United States.” Leigh v. Comm’r, 72 T.C. 1105, 1110 (1979) (citations
omitted).
We hold that Hilliard and E. Pierce Jr. knew of the potential liability to
the Government, and thus, the Federal Priority Statute applies. In Renda, this
Court held that “a representative’s actual knowledge of a federal claim is
sufficient, notwithstanding that representative’s reliance on the erroneous
advice of counsel as to how to address the claim.” Renda, 709 F.3d at 484. We
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are unpersuaded by E. Pierce Jr.’s and Hilliard’s reliance on Little to
distinguish their case from Renda based only on the fact that the Government
had not made an actual claim against Stevens’s Estate when they received the
erroneous legal advice. This Court has already declined to follow Little to the
extent that its analysis of the effect of erroneous legal advice “is inconsistent
with the weight of authority on this issue.” Renda, 709 F.3d at 484 n.15. The
same considerations that, in Renda, led us to refuse to read an exception due
to erroneous legal advice into the Federal Priority Statute apply with equal
force here: (1) “the statute does not provide for an attorney-reliance exception,”
and (2) “a contrary interpretation would create an exception to the Priority
Statute that might swallow the rule.” Id. at 485. Thus, because erroneous
legal advice as to the validity of a claim is not an excuse for violating the
Federal Priority Statute and E. Pierce Jr. and Hilliard both admitted in
depositions that they had knowledge of the potential claims against Stevens’s
Estate, we hold that the Federal Priority Statute applies.
2. E. Pierce Jr. and Hilliard’s personally liability
E. Pierce Jr. and Hilliard argue that the district court erred in granting
the Government’s motion for summary judgment in two ways. First, they
claim E. Pierce Jr. should not have been held personally liable for the I.R.C.
§ 642(c) charitable set-aside. Second, they argue that the evidence was
insufficient to support the claims against them related to (1) distribution of
personal property from Stevens’s Estate, (2) rent payments on Stevens’s
apartment, and (3) legal and accounting fees paid from the Living Trust to
other charitable organizations.
i. Personal liability for the charitable set-aside
E. Pierce Jr. points out that, under Treasury Regulation § 1.642(c)-2(d),
funds permanently set aside for a charitable purpose are subject to invasion.
So if the Government disallows the set-aside, he argues, the funds will be
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available to pay the Government. Thus, he should not be personally liable for
the charitable set-aside. The Government responds that by arguing that the
charitable set-aside funds are subject to invasion, E. Pierce Jr. and Hilliard are
trying to have things both ways. The Government says that, when the
Government tried to disallow the charitable set-aside, E. Pierce Jr. filed a
petition in tax court challenging the disallowance. In response, E. Pierce Jr.
claims that it is not inconsistent to challenge the attempt to disallow the
charitable set-aside. He argues that his position in the petition before the tax
court was that the money will be spent on charity because, after he succeeds
in the case before the panel (and is not required to pay that money to the
Government), the money will go to charity.
We hold that the district court did not err in finding E. Pierce Jr. and
Hilliard jointly liable for the charitable set-aside. First, although E. Pierce Jr.
claims that the Government can disallow the charitable set-aside, it is far from
clear that is the case. In fact, the Government has tried and failed to disallow
the charitable deduction in this case. Further, the Federal Priority Statute
does not appear to limit liability even if we assume that the distribution can
be returned. See 31 U.S.C. § 3713(b) (“A representative of a person or an estate
. . . paying any part of a debt of the person or estate before paying a claim of
the Government is liable to the extent of the payment for unpaid claims of the
Government.”). Thus, Hilliard and E. Pierce Jr. are liable under the Federal
Priority Statute for the amount of the charitable set-aside.
ii. Sufficiency of the evidence
E. Pierce Jr. argues that the Government did not present enough
evidence to hold him personally liable for distributing personal property from
Stevens’s Estate. He claims that the district court wrongly discredited his
statement that had he not sold the personal property, Stevens’s Estate would
have been charged to store it. E. Pierce Jr. further claims the Government
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proffered insufficient evidence for the district court to find him liable for
disbursing funds from Stevens’s Estate to pay for rent on her vacant
apartment. According to E. Pierce Jr., the Government failed to prove
conclusively that his payments on the apartment exceeded an amount that was
reasonable and necessary. Finally, Hilliard argues the evidence did not
support holding him personally liable for the accounting and legal fees he paid
to other charitable organizations from the Living Trust, as trustee. Hilliard
claims he did not cause any damage in paying the fees because Stevens told
him to pay them, he could have reclaimed the fees under Louisiana law, and
all the funds that were disbursed have already been repaid.
Turning first to E. Pierce Jr.’s liability for selling personal property from
Stevens’s Estate, we hold that the district court did not err in finding him
personally liable. E. Pierce Jr.’s primary argument—that he had to sell the
property in order to avoid having to make expenditures to store it—does not
change his liability under § 3713. As the district court correctly observed, “the
proceeds from the sale of [Stevens’s] car did not require storage . . . [and] could
have been held in [Stevens’s] Estate’s account.” E. Pierce Jr. was not found
liable under the Federal Priority Statute merely because he sold the personal
property; instead, he was found liable for distributing the personal property to
others before paying the debt to the Government. Thus, we hold E. Pierce Jr.
is individually liable for the value of the personal property he distributed from
Stevens’s Estate.
We turn next to E. Pierce Jr.’s claims regarding his liability for the rent
he paid on Stevens’s vacant apartment, and we again hold that the district
court did not err in finding him personally liable for those payments. Before
the district court, E. Pierce Jr. argued that he paid the rent to allow a “Quaker-
style memorial service in [Stevens’s] home.” The district court accepted that
argument as true, as it should have. Texas law limits the amount of funeral
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expenses that can be characterized as debts of the estate—and, as such,
payable before paying the Government—to $15,000. See Tex. Est. Code Ann.
§ 355.103. 9 The district court found that E. Pierce Jr. was not liable for the
first $15,000 that he spent on rent for the funeral service but that he was liable
for the amount he spent above the $15,000 allowed under Texas law. See id.
We find no error in the district court’s analysis, and so we hold E. Pierce Jr. is
personally liable for the amount above the $15,000 allowed under Texas law
that he, as executor, caused Stevens’s Estate to pay in rent on Stevens’s
apartment.
Finally, we hold that Hilliard is personally liable for the amount he
caused the Living Trust to pay for accounting and legal services on behalf of
other charitable organizations. Texas law allows accounting and legal fees to
be classified as expenses of the estate (and therefore payable before debts to
the Government) if they were “incurred in preserving, safekeeping, and
managing the estate.’” See Tex. Est. Code Ann. § 355.103 (emphasis added).
Hilliard does not dispute that he paid accounting and legal fees that were the
benefit of other organizations, not for the management of the estate. In spite
of Hilliard’s arguments that he should not be held liable because the funds
could be reclaimed, we have not found, nor does Hilliard cite, any law to show
that this impacts his liability under the Federal Priority Statute. See also
supra Part IV(C)(2)(i). Thus, the district court did not err in holding Hilliard
personally liable for paying the accounting and legal fees.
3. E. Pierce Jr.’s fiduciary duty
9On January 1, 2014, the Texas Probate Code was repealed and the Texas Estates
Code became effective. The district court relied on former Texas Probate Code § 322 in
making its decision. Texas Estates Code § 355.103 includes the portions of Texas Probate
Code § 322 on which the district court relied. Thus, the repeal of the Texas Probate Code and
the enactment of the Texas Estates Code does not impact our decision to affirm the district
court.
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Finally, E. Pierce Jr. argues that the district court erred in finding he
breached his fiduciary duty under state law. He claims that under Texas law,
advice of counsel is a factor to be considered in determining whether there was
a breach of fiduciary duty. See Griffin v. Box, No. 94-10348, 1996 WL 255296,
at *11 (5th Cir. May 2, 1996) (unpublished) (“Under Texas law, advice of
counsel is a factor to be considered in determining whether a breach of
fiduciary duty has occurred.” (citation omitted)); see also Gearhart Indus., Inc.
v. Smith Int’l, Inc., 741 F.2d 707, 722–23 (5th Cir. 1984) (directors’ reliance on
professional advice supported judgment that directors did not breach fiduciary
duty). Further, he claims that under Texas law, an executor does not owe a
fiduciary duty to an estate’s creditors, including the Government. The
Government argues that Texas case law supports holding that E. Pierce Jr.
owed a fiduciary duty to the estate’s creditors as executor, but the Government
did not respond to his claim that advice of legal counsel can be a defense for
breach of fiduciary duty under Texas law.
We hold that E. Pierce Jr. did not breach his fiduciary duty under state
law because he did not owe a fiduciary duty to Stevens’s Estate’s creditors.
Texas case law appears to conflict regarding whether an executor owes a
fiduciary duty to an estate’s creditors. Compare FCLT Loans, L.P. v. Estate of
Bracher, 93 S.W.3d 469, 481–82 (Tex. App.—Houston [14th Dist.] 2002, no
pet.) (“However, no such formal recognition [of a fiduciary duty as a matter of
law] exists for the relationship between an independent executor and the
estate’s creditors.”) with Ertel v. O’Brien, 852 S.W.2d 17, 20–21 (Tex. App.—
Waco 1993, writ denied) (describing the relationship between the executor and
a creditor as fiduciary). It appears that the Supreme Court of Texas has not
addressed this issue, and so we must make an “Erie guess” and “determine as
best [we] can” what the Supreme Court of Texas would decide. See Howe v.
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Scottsdale Ins. Co., 204 F.3d 624, 627 (5th Cir. 2000) (citations and internal
quotation marks omitted).
We hold that the district court erred in finding E. Pierce Jr. breached his
fiduciary duty under Texas law. Bracher provides useful guidance in
reconciling this seemingly contradictory Texas case law. As the Bracher court
explained, the two Texas intermediate appellate court cases that suggested an
executor owes a fiduciary duty to an estate’s creditor, Ertel and Ex parte Buller,
834 S.W.2d 622 (Tex. App.—Beaumont 1992, orig. proceeding [pet. denied]),
are distinguishable from a situation like the one presented in the instant case.
See Bracher, 93 S.W.3d at 481. In the Bracher court’s view, Ertel held that an
executor had a statutory duty to pay a claim against the estate and was “held
to the same fiduciary standards as a trustee”; but, the Ertel court did not
provide any “analysis or explanation why an independent executor’s fiduciary
duty to the estate should be expanded to include a duty to the estate’s
creditors.” See id. at 481 (discussing Ertel). And the cases on which Buller
based its holding do not discuss whether an independent executor, like E.
Pierce Jr., owes a fiduciary duty to the estate’s creditors. See id. (discussing
Buller). So, we agree with Bracher’s view that “under [Texas’s] statutory
scheme,” it seems unlikely that “an independent executor automatically holds
the estate assets in trust for the benefit of the estate creditors.” See id. Thus,
because we conclude that E. Pierce Jr. did not owe Stevens’s Estate’s creditors
a fiduciary duty under Texas law, we hold that E. Pierce Jr. did not breach his
state law fiduciary duties.
V. CONCLUSION
For the foregoing reasons, we REVERSE the district court’s judgment
that E. Pierce Jr. breached his fiduciary duties under state law, and we
RENDER judgment in his favor on this point. As to all other issues, we
AFFIRM.
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PRISCILLA R. OWEN, Circuit Judge, concurring in part, dissenting in part:
I agree with the Third Circuit’s resolution of the question of whether a
donee’s liability for the donor’s unpaid gift tax and interest on that tax is
limited under 26 U.S.C. § 6324(b) to the value of the gift to the donee. 1 The
Third Circuit gave effect to the express limiting language in § 6324(b). The
Eighth Circuit likewise limited a transferee’s liability for unpaid estate tax and
interest based on language in § 6324(a)(2) that is similar to the limiting
language in § 6324(b). 2 Three amicus briefs, representing numerous entities,
urged our court to follow the Third and Eighth Circuit courts’ approach. 3 Much
of the reasoning in those amicus briefs is persuasive. Because the panel’s
majority opinion incorrectly construes the limiting language of § 6324(b) and
the effect of other Tax Code sections on that limitation, I respectfully dissent.
I otherwise concur in the resolution of the issues presented in this appeal.
I
The Appellees in this case, to whom I will refer collectively as “the
Marshalls,” recognize, with exceptions not material to the question of the
proper construction of § 6324(b), that they received gifts from the JHM Living
Trust. They also recognize that they are liable for the gift tax that was not
paid by the JHM Living Trust and interest on that unpaid gift tax up to a point.
That point, the Marshalls contend, is “the extent of the value of such gift,” as
1 Poinier v. Comm’r, 858 F.2d 917, 920 (3d Cir. 1988).
2 Baptiste v. Comm’r, 29 F.3d 433, 437-38 (8th Cir. 1994).
3 See Brief of National Black Chamber of Commerce, Sixty Plus Association, National
Garage, Taxpayers Protection Alliance, Center for Individual Freedom, and National
Taxpayers Union as Amici Curiae Supporting Appellants and Reversal; Brief of Johnson C.
Smith University, Barber-Scotia College, Bennett College, Clinton Junior College, and
Wilberforce University as Amici Curiae in Support of Defendants-Appellants and Reversal;
and Brief of Tax Foundation & Law Professors as Amici Curiae in Support of Appellants and
Urging Reversal.
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specified in § 6324(b). 4 The Government seeks to hold the Marshalls personally
liable for almost $75 million over and above the value of the gifts that were
made to them. Most of that $75 million is interest. The gift tax owed and some
of the interest the Government seeks, was, for the most part, paid in 2010. The
district court held that the language in § 6324(b) that limits a donee’s personal
liability “to the extent of the value of such gift” did not limit the Marshalls’
liability. The panel’s majority opinion affirms the district court’s judgment in
this regard.
II
The Tax Code provides in § 6324(b) for a lien to secure the payment of
gift taxes. This section says, in pertinent part:
(b) Lien for gift tax.—Except as otherwise provided in subsection
(c) [not applicable in this case], unless the gift tax imposed by
chapter 12 is sooner paid in full or becomes unenforceable by
reason of lapse of time, such tax shall be a lien upon all gifts made
during the period for which the return was filed, for 10 years from
the date the gifts are made. 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. . . . 5
This is the sole basis under the Tax Code for the imposition of liability
on a donee for gift taxes unpaid by the donor. There is no other basis for a
donee’s liability for unpaid gift tax, and the panel’s majority opinion does not
conclude otherwise.
Other provisions in the Tax Code provide that interest on a “tax,” with
exceptions not applicable here, “shall be deemed also to refer to interest
imposed by this section [6601] on such tax.” 6 As indicated, the Marshalls do
4 26 U.S.C. § 6324(b).
5 Id.
6 Id. § 6601(e)(1).
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not dispute that they are liable for the gift tax as well as the interest that the
donor did not pay on the gift tax, but only “to the extent of the value of such
gift.” 7 The language of § 6324(b) clearly supports their position. It provides
that “such tax,” which would include the gift tax and interest, “shall be a lien
upon all gifts made during the period for which the return was filed,” and “[i]f
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.” 8 Accordingly, if “the tax,”
meaning the gift tax plus interest, is not paid, the donee of any gift is
personally liable for “such tax,” again meaning the gift tax and interest, but
only “to the extent of the value of such gift.” 9 The donee’s personal liability is
for “such tax,” and that personal liability is limited to the value of the gift to
the donee.
In spite of the clear language of § 6324(b), the panel’s majority opinion
concludes that “[s]ection 6324(b), however, says nothing about any limit on the
donee’s liability and the Government’s ability to assess interest when the
donee fails to fulfill his or her obligation to pay the donor’s unpaid gift tax.” 10
But if, as all concede, the words “personally liable for such tax” in § 6324(b)
include liability for interest, then the words “to the extent of the value of such
gift” are a limit on the amount of interest that can be collected. As an example,
if a gift of $10,000 was made, and the unpaid tax on that gift was $5,000, “such
tax” would refer to the $5,000 tax and interest that began accruing as of the
time the gift tax was unpaid. Let us assume that at the time that the
Government demanded that the donee pay the gift tax, interest in the amount
7 Id. § 6324(b).
8 Id.
9 Id.
10 Ante at 12-13.
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of $1,000 had accrued. The donee would be liable for the $5,000 plus $1,000 of
interest. Let us further assume that the donee did not pay until interest in the
amount of $4,000 had accrued. The Government could collect this interest
when the donee failed to fulfill his or her obligation to pay, but only “to the
extent of the value of such gift.” Since $9,000 is less than the $10,000 value of
the gift, the donee would be personally liable for the interest. But once the
interest reached $5,000, the donee would not be personally liable for further
interest because § 6324(b) limits the donee’s personal liability to $10,000 in
this example.
Contrary to the reasoning of the panel’s majority opinion, 11 a donee does
have an incentive to pay the gift tax in order to stop the accrual of interest.
The sooner that a donee pays the gift tax, the less interest that will be owed,
at least until the initial tax plus accrued interest equals the value of the gift to
the donee. However, once the combined amount of the gift tax unpaid on the
due date and accrued interest equals the value of the gift to the donee, the
donee’s liability is capped at “the value of [the] gift” to the donee. 12 Section
6324(b) undoubtedly addresses a “limit on the donee’s liability and the
Government’s ability to assess interest when the donee fails to fulfill his or her
obligation to pay the donor’s unpaid gift tax” and the majority opinion is
mistaken in concluding otherwise. 13
Nothing in § 6901(a) affects the limitation of liability in § 6324(b).
Section 6901(a) provides that the amounts of a donee’s liability relating to gift
taxes are to “be assessed, paid, and collected in the same manner and subject
11 Ante at 20 (reasoning that “our decision encourages transferees to fulfill their
obligation to pay any unpaid gift taxes in a timely manner”).
12 26 U.S.C. § 6324(b).
13 Ante at 12-13.
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to the same provisions and limitations as in the case of the taxes with respect
to which the liabilities were incurred . . . .” 14 The United States Supreme Court
has held that § 6901 is a procedural provision and does not create any
substantive liability. 15 The panel’s majority opinion acknowledges the
Supreme Court’s interpretation of § 6901(a) and recognizes that “the donee’s
personal liability that incurs interest must come from a statute other than
§ 6901.” 16 But the majority opinion then engages in circular reasoning,
concluding that because “[s]ection 6901 explains that transferee liability
imposed under § 6324(b) is ‘subject to the same provisions’ as the underlying
gift tax,” all interest imposed by § 6601 is owed by a donee, notwithstanding
the express limitation in § 6324(b). 17 The majority opinion says, “read
together, these sections [6901 and 6601] explain that the donee’s personal,
independent liability for the unpaid gift tax is subject to the interest provisions
of § 6601.” If, as the Supreme Court has held, § 6901 does not create any
substantive rights and is procedural only, then § 6901 should play no part in
determining the extent of a donee’s personal liability created by § 6324(b). We
should consider only § 6324(b) to determine whether the generally applicable
Tax Code provision regarding accrual of interest on unpaid taxes, which is
§ 6601, overrides the express limitation in § 6324(b).
The first paragraph of § 6601, which is subsection (a), is denominated
the “[g]eneral rule” and provides that if a tax is not paid on or before the last
date for payment, then interest must be paid on that amount from the last date
14 26 U.S.C. § 6901(a).
15 Comm’r v. Stern, 357 U.S. 39, 42-44 (1958) (“The courts have repeatedly recognized
that [§ 6901’s predecessor statute] neither creates nor defines a substantive liability but
provides merely a new procedure by which the Government may collect taxes.”).
16 Ante at 16.
17 Ante at 17.
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prescribed for payment until the date paid. 18 It is hornbook law that a more
specific statute, such as § 6324(b), governs over a more general statute, such
as § 6601. It is also a “longstanding canon of construction” that if “‘the words
of a tax statute are doubtful, the doubt must be resolved against the
government and in favor of the taxpayer.’” 19 There is certainly room for doubt
that a donee is liable for the full amount of interest that accrues on an unpaid
gift tax, regardless of the value of the gift to the donee, in light of the express
limitation in § 6324(b).
The Third Circuit has held that a donee’s liability under § 6324(b) is
limited to the value of the gift to the donee. 20 Similarly, the Eighth Circuit has
held that “a transferee’s personal liability [for unpaid estate tax], is limited [by
§ 6324(a)(2)] ‘to the extent of the value at the time of decedent’s death’ of the
property actually transferred.” 21 A third circuit court, the Eleventh Circuit,
construing § 6324(a), pertaining to a transferee’s liability for estate tax, has
disagreed with the Third and Eighth Circuits. 22 The Commissioner argued in
each of those three cases that the liability of a donee for gift tax, or a transferee
for estate tax, and accrued interest is not a gift tax or an estate tax but instead
is purely a personal liability under § 6324. Only the Eleventh Circuit agreed
18 26 U.S.C. § 6601(a).
19 Exxon Mobil Corp. & Affiliated Cos. v. Comm’r, 689 F.3d 191, 199-200 (2d Cir. 2012)
(quoting United States v. Merriam, 263 U.S. 179, 188 (1923)); see also United Dominion
Indus., Inc. v. United States, 532 U.S. 822, 839 (2001) (Thomas, J., concurring) (noting the
“traditional canon” of construing revenue laws against the drafter); id. at 839 n.1 (Stevens,
J., dissenting) (acknowledging this canon).
20 Poinier v. Comm’r, 858 F.2d 917, 920 (3d Cir. 1988).
21 Baptiste v. Comm’r, 29 F.3d 433, 437 (8th Cir. 1994) (quoting 26 U.S.C. § 6324(a)(2)).
22 Baptiste v. Comm’r, 29 F.3d 1533 (11th Cir. 1994).
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with the Government, holding that “the obligation imposed by section
6324(a)(2) is a nontax liability.” 23
The Government similarly argues in the present case that “the limitation
imposed by I.R.C. § 6324(b) applies only to interest that accrued on the
underlying gift tax liability; that limit does not apply to the interest accruing
on the donee’s personal liability under I.R.C. § 6324(b).” The dichotomy that
the Government draws between a donee’s liability for gift tax and that donee’s
personal liability is patently contradicted by the text of § 6324(b). A donee’s
personal liability under § 6324(b) is anchored solely to, and is referable only to,
the unpaid gift tax and interest thereon. The donee’s personal liability is
plainly denominated as liability for gift tax. Section 6324(b) says that “such
tax,” unmistakably referring to “the gift tax imposed by chapter 12,” “shall be
a lien upon all gifts made” and that “[i]f the tax [clearly meaning the gift tax]
is not paid when due, the donee of any gift shall be personally liable for such
tax [here again, the gift tax imposed by chapter 12] to the extent of the value
of such gift.” 24 A donee is “personally liable” only for “such tax”—the gift tax
and accrued interest—“to the extent of the value of such gift.” The text could
not be plainer.
III
The panel’s majority opinion unnecessarily engages in an analysis of the
legislative history of § 6901. As discussed above, that Tax Code section does
not create any substantive liability. Nor does its text purport to override the
specific limitation of a transferee’s liability in § 6324(b). In any event, since
§ 6324(b)’s limitation is clear on its face, there is no reason to consider § 6901’s
23 Id. at 1541.
24 26 U.S.C. § 6324(b) (emphasis added).
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legislative history. 25 Reliance on legislative history is suspect even if a tax
statute is ambiguous because, as noted above, there is a “longstanding canon
of construction” that if “‘the words of a tax statute are doubtful, the doubt must
be resolved against the government and in favor of the taxpayer.’” 26
The conclusions drawn by the majority opinion from the legislative
history of § 6901, a procedural statute, are tenuous, at best. 27 Attempting to
divine congressional intent based on scraps of legislative history is more likely
to result in the effectuation of a court’s policy preferences than those of
Congress.
The panel’s majority opinion notes that after the Third Circuit decided
Poinier, 28 “Congress repealed § 6601(f)(2), and there is no longer a specific
prohibition on collecting interest on the interest assessed under § 6601.” 29
While the Third Circuit’s decision in Poinier did discuss former § 6601(f)(2),
that was not the sole basis for its holding. 30 The Third Circuit held that the
“limitation on donee liability is both consistent with the plain language of
section 6324(b) and sensible.” 31 The Third Circuit also rejected the
Government’s argument that a transferee has an independent liability for
25 See United States v. Woods, 134 S. Ct. 557, 567 n.5 (2013) (“Whether or not
legislative history is ever relevant, it need not be consulted when, as here, the statutory text
is unambiguous.”); Kornman & Assocs., Inc. v. United States, 527 F.3d 443, 451 (5th Cir.
2008) (“‘Only after application of the principles of statutory construction, including the
canons of construction, and after a conclusion that the statute is ambiguous may the court
turn to legislative history.’”) (quoting Carrieri v. Jobs.com, Inc., 393 F.3d 508, 518-19 (5th
Cir. 2004)).
26 Supra note 19.
27 See Ante at 17-18.
28 Poinier v. Comm’r, 858 F.2d 917 (3d Cir. 1988).
29 Ante at 18.
30 Poinier, 858 F.2d at 920-21.
31 Id. at 920.
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interest that is separate and distinct from the gift tax liability. 32 The Third
Circuit said:
The Commissioner's position, accepted by the Tax Court, is
that there is an entirely independent liability for interest, placed
directly on the transferee, which arises at the time of service of a
notice of transferee liability. This is not an easy argument to
articulate, for unlike the donee liability provision in section
6324(b), the Commissioner can point to no specific code provision
imposing such an independent liability on a transferee. 33
I agree with the Third Circuit.
The panel’s majority opinion also relies on this court’s decision in
Patterson v. Sims, 34 asserting that “our decision today follows naturally from
that holding.” 35 However, the decision in Patterson involved income tax
liability, and there was no Tax Code provision that had a limitation even
remotely similar to that contained in § 6324(b). 36
Finally, the panel’s majority opinion says that its decision “is consistent
with the ‘traditional rule that one who possesses funds of the government must
pay interest for the period that person enjoys the benefit of [the] same,’” citing
the Eleventh Circuit’s decision in Baptiste. 37 But “traditional rule[s]” cannot
override contrary statutory provisions.
* * *
Because § 6324(b) unambiguously limits a donee’s personal liability to
the value of the gift to the donee, I would reverse the district court on this
issue.
32 Id.
33 Id.
34 281 F.2d 577 (5th Cir. 1960).
35 Ante at 19.
36 Patterson, 281 F.2d at 578-79, 581.
37 Ante at 19 (citing Baptiste v. Comm’r, 29 F.3d 1533, 1542 (11th Cir. 1994)).
48