Opinion ID: 2828819
Heading Depth: 2
Heading Rank: 1

Heading: Stevens as Donee of J. Howard’s Indirect Gift

Text: 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.
10 Case: 12-20804 Document: 00513161978 Page: 11 Date Filed: 08/19/2015 No. 12-20804 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). 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 11 Case: 12-20804 Document: 00513161978 Page: 12 Date Filed: 08/19/2015 No. 12-20804 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 § 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, 12 Case: 12-20804 Document: 00513161978 Page: 13 Date Filed: 08/19/2015 No. 12-20804 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 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 relitigating the value of the gift she received.
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 13 Case: 12-20804 Document: 00513161978 Page: 14 Date Filed: 08/19/2015 No. 12-20804 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 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 14 Case: 12-20804 Document: 00513161978 Page: 15 Date Filed: 08/19/2015 No. 12-20804 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 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 doneetransferee liability for gift taxes payable on a nonshareholder’s transfer to the corporation.” Tilton, 88 T.C. at 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 15 Case: 12-20804 Document: 00513161978 Page: 16 Date Filed: 08/19/2015 No. 12-20804 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 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 16 Case: 12-20804 Document: 00513161978 Page: 17 Date Filed: 08/19/2015 No. 12-20804 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 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. 17 Case: 12-20804 Document: 00513161978 Page: 18 Date Filed: 08/19/2015 No. 12-20804 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 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 18 Case: 12-20804 Document: 00513161978 Page: 19 Date Filed: 08/19/2015 No. 12-20804 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 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 19 Case: 12-20804 Document: 00513161978 Page: 20 Date Filed: 08/19/2015 No. 12-20804 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 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 20 Case: 12-20804 Document: 00513161978 Page: 21 Date Filed: 08/19/2015 No. 12-20804 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 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 21 Case: 12-20804 Document: 00513161978 Page: 22 Date Filed: 08/19/2015 No. 12-20804 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 Stevens was a donee, res judicata bars her from arguing that J. Howard did not make a gift to her.