Court Opinion

ID: 5122974
Source: CourtListenerOpinion
Date Created: 2021-11-03 18:00:34.905964+00
Date Added: 2024-06-11T08:22:30.915833
License: Public Domain

Case: 20-61068        Document: 00516079584        Page: 1     Date Filed: 11/03/2021

            United States Court of Appeals
                 for the Fifth Circuit                                  United States Court of Appeals
                                                                                 Fifth Circuit

                                                                               FILED
                                                                        November 3, 2021
                                    No. 20-61068                          Lyle W. Cayce
                                                                               Clerk

   Mary P. Nelson; James C. Nelson,

                                                          Petitioners—Appellants,

                                        versus

   Commissioner of Internal Revenue,

                                                             Respondent—Appellee.

                           Appeal from a Decision of the
                             United States Tax Court
                       Tax Court Nos. 27321-13 and 27313-13

   Before King, Smith, and Haynes, Circuit Judges.
   King, Circuit Judge:
          Mary P. Nelson and James C. Nelson appeal from the Tax Court’s
   denial of their petition for a redetermination of a deficiency of gift tax issued
   by the Commissioner of Internal Revenue for the tax years 2008 and 2009.
   For the following reasons, we AFFIRM.
                 I.    FACTS & PROCEDURAL HISTORY
          Mary P. Nelson (“Mary Pat”) and James Nelson, a married couple
   with four daughters, sought to plan their estate. To that end, they formed a
   limited partnership, Longspar Partners, Ltd. (“Longspar”), in 2008. Mary
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   Pat and James named themselves general partners of Longspar, each with a
   0.5% general partner interest. The limited partners were Mary Pat and
   various trusts and accounts that had been established for the Nelsons’
   daughters. The majority of Longspar’s assets were shares of stock in Warren
   Equipment Company, a holding company for several businesses founded by
   Mary Pat’s father.
          As part of their estate plan, Mary Pat and James also formed a trust in
   2008. Mary Pat was the settlor, James was the trustee, and James and the
   Nelsons’ daughters were the beneficiaries. In late 2008 and early 2009, Mary
   Pat transferred her limited partner interests in Longspar to the trust in two
   separate transactions—a gift and then a sale. The transfer agreement for the
   gift stated that:
          [Mary Pat] desires to make a gift and to assign to [the trust] her
          right, title, and interest in a limited partner interest having a
          fair market value of TWO MILLION NINETY-SIX
          THOUSAND             AND         NO/100THS           DOLLARS
          ($2,096,000.00) as of December 31, 2008 (the “Limited
          Partner Interest”), as determined by a qualified appraiser
          within ninety (90) days of the effective date of this Assignment.
   The transfer agreement for the sale used largely similar language, transferring
   “a limited partner interest having a fair market value of . . . $20,000,000”
   and providing for a determination by appraisal within 180 days.
          As called for by the transfer documents, Mary Pat and James (through
   their attorney) contracted with an accountant to appraise the value of a 1%
   limited partnership interest in Longspar. On September 1, 2009 (outside of
   the time period required by each transfer document), the accountant
   provided a report valuing a 1% limited partner interest in Longspar at
   $341,000. The Nelsons’ attorney then used the fair market value as

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   determined by the accountant to convert the dollar values in the transfer
   agreements to percentages of limited partner interests—6.14% for the gift and
   58.65% for the sale. Those percentages were then listed on Longspar’s
   records, included in Longspar’s amended partnership agreement, and listed
   on the Nelsons’ Form 709 gift tax returns. 1
           The IRS then audited the Nelsons’ tax returns. In anticipation of a
   settlement that would have included a higher valuation of the Longspar
   interests, the Nelsons amended the relevant records and reallocated previous
   distributions to match that valuation. However, when no settlement was
   actually reached, the Commissioner issued Notices of Deficiency listing
   $611,708 in gift tax owed for 2008 and $6,123,168 for 2009. The Nelsons
   challenged the deficiencies in the Tax Court. They argued that their initial
   valuation was correct and, even if it was not, that they had sought to transfer
   specific dollar amounts through a formula clause and that the amount of
   interests transferred should be reallocated should the valuation change.
           The Tax Court rejected both arguments. It first found that the proper
   valuation of a 1% limited partner interest in Longspar was $411,235, not
   $341,000. The court also found that the language in the transfer documents
   was not a valid formula clause that could support reallocation. Instead, Mary
   Pat had transferred the percentage of interests that the appraiser had
   determined to have the values stated in the transfer documents; those
   percentages were fixed once the appraisal was completed. Accordingly, the
   Tax Court held that Mary Pat and James each owed $87,942 in gift tax for
   2008 and $920,340 in gift tax for 2009. The Nelsons timely appeal the

           1
             Consistent with its treatment as a sale, the Nelsons did not list the second transfer
   on their gift tax return.

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   court’s finding that the transfers consisted of percentage interests, rather
   than fixed dollar amounts.
                      II.    STANDARD OF REVIEW
          “An appellate court reviews a trial court’s conclusions of law de novo
   and draws its own conclusions in place of those of the trial court.” Succession
   of McCord v. Comm’r, 461 F.3d 614, 623 (5th Cir. 2006). The same standard
   of review also applies to “a question of fact, such as valuation” that “requires
   legal conclusions” and “determination of the nature of the property rights
   transferred” that are “question[s] of state law.” Id.
                            III.     DISCUSSION
          We are asked to determine whether the two transfer documents
   transferred specific percentages of limited partner interests or the amount of
   interests that equal fixed dollar amounts. The latter theory would allow the
   percentage of interests transferred to be reallocated should the valuation
   change, as was the case here. The former would render the percentage of
   interests transferred fixed even in the face of a changed valuation.
          When determining the amount of gift tax, if any, that applies to a
   transfer, the nature of that transfer is ascertained by looking to the transfer
   document and its language, rather than subsequent events. Succession of
   McCord, 461 F.3d at 626-27; Est. of Petter v. Comm’r, T.C. Memo. 2009-280,
   2009 Tax Ct. Memo LEXIS 285, at *36 (citing Ithaca Tr. Co. v. United States,
   279 U.S. 151, 155 (1929)), aff’d, 653 F.3d 1012 (9th Cir. 2011). The language
   that the Nelsons used in the gift instrument stated that they were
   transferring:
          [Mary Pat’s] right, title, and interest in a limited partner
          interest having a fair market value of TWO MILLION
          NINETY-SIX THOUSAND AND NO/100THS DOLLARS

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           ($2,096,000.00) as of December 31, 2008 (the “Limited
           Partner Interest”), as determined by a qualified appraiser within
           ninety (90) days of the effective date of this Assignment.
   This additional (i.e., emphasized) language expressly qualifies the definition
   of “fair market value” for the purposes of determining the interests
   transferred. By its plain meaning, the language of this gift document and the
   nearly identical sales document transfers those interests that the qualified
   appraiser determined to have the stated fair market value—no more and no
   less.
           The specific qualification added by the Nelsons separates their
   agreement from the formula clauses considered in other cases. Most formula-
   clause cases featured transfer instruments that defined the interests
   transferred as the fair market value as determined for federal-gift or estate-
   tax purposes. See Est. of Petter v. Comm’r, 653 F.3d 1012, 1015-16 (9th Cir.
   2011); Est. of Christiansen v. Comm’r, 586 F.3d 1061, 1062 (8th Cir. 2009);
   Wandry v. Comm’r, T.C. Memo. 2012-88, 2012 Tax Ct. Memo LEXIS 89, at
   *4-5, nonacq., 2012-46 I.R.B. 543 (Nov. 13, 2012). Those that did not defined
   fair market value through reference to the “willing-buyer/willing-seller” test
   that is used to define fair market value in the relevant Treasury regulation.
   Succession of McCord, 461 F.3d at 619 (citing 26 C.F.R. § 25.2512-1 (2005));
   Hendrix v. Comm’r, T.C. Memo. 2011-133, 2011 Tax Ct. Memo LEXIS 130,
   at *8. The Nelsons defined their transfer differently; they qualified it as the
   fair market value that was determined by the appraiser. Once the appraiser
   had determined the fair market value of a 1% limited partner interest in
   Longspar, and the stated dollar values were converted to percentages based
   on that appraisal, those percentages were locked, and remained so even after
   the valuation changed.

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           Additionally, this case is not like Succession of McCord, where the
   definition of fair market value was unqualified. See McCord v. Comm’r, 120
   T.C. 358, 419 (2003) (Foley, J., concurring in part and dissenting in part),
   rev’d sub nom. Succession of McCord, 461 F.3d at 614. 2 Instead, the transfer
   agreement specifically qualified fair market value by reference to the
   appraiser, rather than to a final determination or to gift tax principles.
   Following the Nelsons’ reading of the clause would give effect only to the
   first part (referencing fair market value) and not the second (referencing a
   qualified appraiser). Such a reading does not comport with the plain meaning
   of the language used.
           Moreover, the transfer documents in every other formula-clause case
   contained crucial language that the Nelsons’ instruments lacked: specific
   language describing what should happen to any additional shares that were
   transferred should the valuation be successfully challenged. Some cases
   provided for excess interests to go to charity. See Est. of Petter, 653 F.3d at
   1016; Succession of McCord, 461 F.3d at 619; Hendrix, 2011 Tax Ct. Memo.
   LEXIS 130, at *8. Another case involved an instrument that stated that “the
   number of gifted Units shall be adjusted . . . so that the value of the number
   of Units gifted to each person equals the amount set forth above.” Wandry,
   2012 Tax Ct. Memo LEXIS 89, at *6. The Nelsons’ agreements contain no
   such language. Nothing in the agreements compels the trust to return excess
   units, or do anything with excess units, should the valuation change. The fact
   that the trust did return excess units is irrelevant; that fact is the type of
   “subsequent occurrence[]” that this court has said was “off limits” when
   determining the value of a gift. Succession of McCord, 461 F.3d at 626.

           2
             While this court overturned the Tax Court’s decision in McCord, we extensively
   cited Judge Foley’s partial concurrence and dissent with approval. See Succession of McCord,
   461 F.3d at 627-28.

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          As the government well-analogized, if a farmer agrees to sell the
   number of cows worth $1,000 as determined by an appraiser, and the
   appraiser determines that five cows equals that stated value, then the sale is
   for five cows. If a later appraisal determined that each cow was worth more,
   and that two extra cows had been included in the sale, nothing in the
   agreement would allow the farmer to take the cows back. The parties would
   be held to what they agreed—a transfer of the number of cows determined
   by the appraiser to equal $1,000. So too here. No language in the transfer
   agreements allows the Nelsons to reopen their previously closed transaction
   and reallocate the limited partner interests based on a change in valuation.
          While the formula-clause cases might give the appearance of
   reopening a transaction in just such a fashion, that is not the case. A gift is
   considered complete, and thus subject to the gift tax, when “the donor has
   so parted with dominion and control as to leave in him no power to change
   its disposition, whether for his own benefit or the benefit of another.” 26
   C.F.R. § 25.2511-2(b) (2021). For tax purposes, the “value . . . at the date of
   the gift shall be considered the amount of the gift.” 26 U.S.C § 2512(a). With
   a formula clause, the transaction is still closed even if a reallocation occurs.
   That reallocation simply works to ensure that a specified recipient
   “receive[s] those units [he or she was] already entitled to receive.” Est. of
   Petter, 653 F.3d at 1019. Similarly, the value of the gift existed and could be
   determined at the time of the transfer. “The number of . . . units”
   transferred is “capable of mathematical determination from the outset, once
   the fair market value [is] known.” Id. The reallocation clauses thus allow for
   the proper number of units to be transferred based on the final, correct
   determination of valuation.
          The Nelsons did not include such a clause. Instead, the trust has
   already received everything it was entitled to—the number of units matching
   the stated value as determined by a qualified appraiser. Both parties agree

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   with the Tax Court’s conclusion that the gift was complete, and that Mary
   Pat parted with dominion and control, on the date listed in each transfer
   agreement. On those dates, Mary Pat irrevocably transferred the number of
   units the appraiser determined equaled the stated values. No clause in the
   transfer documents calls for a reallocation to ensure the trust received a
   different amount of interests if the final, proper valuation was different than
   the appraiser’s valuation. The percentage of interests was transferred on the
   listed dates, even if those percentages were indefinite until the appraisal was
   completed. Cf. Robinette v. Helvering, 318 U.S. 184, 187 (1943) (holding that
   a gift was complete even in the face of “indefiniteness of the eventual
   recipient”). The gift tax is assessed as of the date of the transfer and on the
   value of those percentages, whatever that value may be. Simply put, while the
   Nelsons may have been attempting to draft a formula clause, they did not do
   so.
          The interpretation of the transfer documents is not changed by
   looking to any objective facts outside of the language the Nelsons used. First
   and foremost, under Texas law, “extrinsic evidence may only be used to aid
   the understanding of an unambiguous contract’s language, not change it or
   ‘create ambiguity.’ ” URI, Inc. v. Kleberg Cnty., 543 S.W.3d 755, 757 (Tex.
   2018) (quoting Cmty. Health Sys. Pro. Servs. Corp. v. Hansen, 525 S.W.3d 671,
   688 (Tex. 2017)). “If a written contract is so worded that it can be given a
   definite or certain legal meaning when so considered and as applied to the
   matter in dispute, then it is not ambiguous.” Id. at 765.
          Here, the transfer agreements are not ambiguous; the meaning of the
   language prescribing that an appraiser will determine the percentage of
   interests to be transferred is definite and certain. “An ambiguity does not
   arise simply because the parties advance conflicting interpretations of the
   contract[;]” “for an ambiguity to exist, both interpretations must be
   reasonable.” Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940

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   S.W.2d 587, 589 (Tex. 1996). Given the clarity of the language of the
   contracts as written, the Nelsons’ interpretation is not reasonable as a matter
   of law; as stated earlier, that interpretation would read out the reference to
   the appraisal in its entirety. “Surrounding facts and circumstances can
   inform the meaning of the language but cannot be used to augment, alter, or
   contradict the terms of an unambiguous contract.” URI, 543 S.W.3d at 758
   (citation omitted). The Nelsons’ reading, based on their subjective intent,
   would go beyond elucidating contractual language to changing and overriding
   it. Texas contract law does not allow for that.
          Even if the contracts are ambiguous, there are no objective facts or
   circumstances surrounding the transfer that counsel a different result. Under
   federal gift tax law, “the application of the tax is based on the objective facts
   of the transfer and the circumstances under which it is made, rather than on
   the subjective motives of the donor.” 26 C.F.R. § 25.2511-1(g)(1) (2021).
   Texas contract law commands the same. URI, 543 S.W.3d at 767 (“[T]he
   parol evidence rule prohibits extrinsic evidence of subjective intent that alters
   a contract’s terms. . . .”). The evidence the Nelsons point to all concerns
   their subjective intent; we cannot look to what the Nelsons had in their minds
   when drafting the contracts. Rather than subjective intent, it is “objective
   manifestations of intent [that] control, not ‘what one side or the other alleges
   they intended to say but did not.’ ” Id. at 763-64 (citation omitted) (quoting
   Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118,
   127 (Tex. 2010)). Objective considerations include the “surrounding
   circumstances that inform, rather than vary from or contradict, the contract
   text.” Hous. Expl. Co. v. Wellington Underwriting Agencies, Ltd., 352 S.W.3d
   462, 469 (Tex. 2011).
          The only objective circumstance the Nelsons can point to in support
   of their reading is the setting of the transfer, as part of the Nelsons’ estate
   planning that aimed to protect their assets while also avoiding as much tax

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   liability as possible. See URI, 543 S.W.3d at 768 (“Setting can be critical to
   understanding contract language, as we found in cases involving the lawyer-
   client relationship and construction of an arbitration agreement.” (citations
   omitted)); Hous. Expl. Co., 352 S.W.3d at 469 (stating that objective
   circumstances include “the commercial or other setting in which the
   contract was negotiated” (quoting 11 Richard A. Lord, Williston
   on Contracts § 32.7 (4th ed. 1999))). Consideration of the estate-plan
   context still hews too closely to consideration of the Nelsons’ subjective
   intent to alter the understanding of the contractual language. For an
   arbitration agreement or a contract between a lawyer and a client, one can tell
   the setting from fully objective facts—normally, by looking at the plain text
   of the agreement. For the Nelsons’ transfers, however, consideration of the
   estate-plan setting still requires determining what was in their minds at the
   time of the transfers. One would still need to determine that, in transferring
   assets from Mary Pat to the trust, the Nelsons had the subjective intent of
   minimizing their tax liability. While that might be fairly obvious, it still
   requires consideration of subjective intent, rather than objective facts. This
   goes beyond the scope of the parol evidence rule under Texas law.
          Further, the fact that the language differs from other, similar contracts
   in the same setting is significant. This is not a case where we would be reading
   the contracts in line with numerous other, similar contracts that are regular
   parts of a given industry or setting, such as arbitration. To support the
   Nelsons’ reading, we would be required to disregard significant differences
   between these contracts and the transfer documents used in similar cases.
   That would be an improper use of facts and circumstances surrounding the
   contract. Cf. Hous. Expl. Co., 352 S.W.3d at 469-72 (holding that deletions
   from a form contract should be considered when judging the parties’ intent
   for the agreement). The fact that the transfers involved a family trust and

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   family assets and were made in the setting of estate planning should not be
   used to interpret the Nelsons’ intent.
           The Nelsons also point to the fact that the appraisal was not
   completed within the allotted times specified in the agreements. That fact
   does not change the result. The delay in the appraisal does not demonstrate
   anything about the nature of the transfers; it only means that the trust would
   potentially have had a claim against Mary Pat (since the language of the
   agreement was violated) and that both the trust and Mary Pat might have had
   a claim against the appraiser (depending on the nature of their agreement
   with him). However, the transfers were still completed on the dates listed in
   the transfer documents and in accordance with the language used. And the
   lack of concern demonstrated for the tardy appraisal is yet another indicium
   of subjective intent which similarly cannot be considered under Texas’s parol
   evidence rule.
           The transfer documents clearly and unambiguously state that Mary
   Pat was gifting and selling the percentage of limited partner interests that an
   appraiser determined to have a fair market value equal to a stated dollar
   amount. The transfer agreements must be interpreted as written. The
   Nelsons therefore transferred what the plain language of their transfer
   instruments stated—$2,096,000 and $20,000,000 of limited partner
   interests in Longspar as determined by a qualified appraiser to be 6.14% and
   58.65% of such interests. Thus, when the Tax Court found the fair market
   values of those percentages to actually be $2,524,983 and $24,118,933,
   respectively, the Nelsons were left with a gift tax deficiency. 3 Therefore, the

           3
             The gift tax deficiency on the sale results from the excess value of the interests
   transferred that were not the subject of due consideration from the $20,000,000
   promissory note issued by the trust; gifts include “sales, exchanges, and other dispositions
   of property for a consideration to the extent that the value of the property transferred by

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   Tax Court was correct in determining that Mary Pat and James Nelson each
   owes $87,942 in gift tax for 2008 and $920,340 in gift tax for 2009.
                                IV.      CONCLUSION
           For the foregoing reasons, the judgment of the Tax Court is
   AFFIRMED.

   the donor exceeds the value . . . of the consideration given therefor.” 26 C.F.R. § 25.2512-
   8 (2021).

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