UNITED STATES of America, 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.
No. 12-20804.
United States Court of Appeals, Fifth Circuit.
Aug. 19, 2015.
William R. Cousins, III (argued), Stephen A. Beck, Robert Don Collier, Esq., Brian J. Spiegel, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P., Emily A. Parker, Esq. (argued), Eric Gordon Reis, Scott Patrick Stolley, Thompson & Knight, L.L.P., Dallas, TX, Don Jackson, Ware, Jackson, Lee, O’Neill, Smith & Barrow, L.L.P., Russell Hardin, Jr., Rusty Hardin & Associates, L.L.P., Scott Patrick Stolley, John William Porter (argued), Jeffrey D. Watters, Baker Botts, L.L.P., Houston, TX, for Defendants-Appellants.
Marcus J. Brooks, Austin, TX, Eileen Janette O’Connor, Esq., Attorney, Suzanne Ross McDowell, Esq., Washington, DC, Bennett Evan Cooper, Phoenix, AZ, Eric Rasmusen, Bloomington, IN, for Amicus Curiae.
Before REAVLEY, PRADO, and OWEN, Circuit Judges.
PRADO, Circuit Judge, delivered the opinion of the court in part, in which REAVLEY and OWEN, Circuit Judges, concur.
OWEN, Circuit Judge, delivered the opinion of the court in part, in which REAVLEY, Circuit Judge, concurs.
PRADO, Circuit Judge, filed an opinion dissenting in part.
PER CURIAM:
The petition for rehearing is DENIED. The opinion that issued on November 10,
EDWARD C. PRADO, Circuit Judge, writing for the court:
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”),2 J. Howard’s son; (3) Elaine T. Marshall (“Elaine”), E. Pierce’s wife; (4) the Preston Marshall Trust (“Preston 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
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
On appeal, the Appellants argue the district court erred in each of those rulings.
I. BACKGROUND
A. Legal Background
The Internal Revenue Code imposes a tax on a “transfer of property by gift.”
“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
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 procedure under
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.4
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 Estate5 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.
In 2008, the IRS sought to assess tax liability against the donees of the gifts, who are the present appellants (collectively, the Marshalls).8 The Marshalls recognize that they are liable for the gift tax under 26 U.S.C. § 6324(b) up to a point.9
To date, the Marshalls have paid to the IRS the amount of the value of the gifts received by each donee.10 However, the Government brought suit seeking to hold the Marshalls personally liable for almost $75 million beyond the value of the gifts consisting mostly of interest accrued on the unpaid tax liability from 1995.11 The Marshalls argued that § 6324(b) limits their personal liability to the value of the gifts they received.12 The district court agreed with the Government and granted summary judgment in its favor with respect to this issue. The court held that § 6324(b) does not limit a donee’s tax liability to the value of the gift received.13 The Marshalls appeal.
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.14
This is the sole basis under the Tax Code for the imposition of liability on a donee for gift taxes unpaid by the donor.
Other provisions in the Tax Code provide that any reference in the Code to a “tax,” with exceptions not applicable here, “shall be deemed also to refer to interest imposed by [section 6601] on such tax.”15 Accordingly, the word “tax”, as used in § 6324(b), includes interest imposed by § 6601 on unpaid gift tax. The Marshalls do not dispute this. The question is the meaning of the phrase in § 6324(b) which provides that “[i]f the tax is not paid when due, the donee of any gift shall be personally liable to the extent of the value of such gift.”16 The natural reading of this sentence is that a donee’s personal liability is capped at the amount of the gift.
The word “tax” is used three times in the text of § 6324(b), and the Government does not dispute that in each instance, the reference to “tax” includes interest. Section 6324(b) provides that “such tax” (meaning the gift tax and interest), “shall be a lien upon all gifts made during the period for which the return was filed,” and
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 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.
The Government asserts that our interpretation of § 6324(b) creates a “perverse incentive, due to the time-value of money, for donees to avoid paying their liability for as long as possible.”19 But donees do 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.20
The Government contends that the Marshalls’ liability for interest above and beyond the value of the gifts is supported by 26 U.S.C. §§ 6601 and 6901.21 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 to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.”22 The Supreme Court has explained, while addressing a predecessor to § 6901,23 that § 6901 is a procedural provision “merely ... by which the Government may collect taxes.”24 It does not create any substantive liability.25 Accordingly, the procedural method of collection authorized by § 6901 does not inform our determination of the extent of the Marshalls’ donee liability.
Section 6601(a) 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 prescribed
Our interpretation of § 6324(b) is in accord with the Third Circuit’s decision in Poinier v. Commissioner.30 The Third Circuit held that a donee’s liability under § 6324(b) is limited to the value of the gift to the donee.31 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.”32 The Eleventh Circuit, however, construing § 6324(a), pertaining to a transferee’s liability for estate tax, has disagreed with the Third and Eighth Circuits.33 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 § 6324.34 Only the Eleventh Circuit agreed, holding that “the obligation imposed by section 6324(a)(2) is a nontax liability.”35
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 the limit does not apply to the interest accruing on the donee’s personal liability under I.R.C. § 6324(b).”36 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,” refer-
(alteration omitted) (quoting United States v. Merriam, 263 U.S. 179, 188, 44 S.Ct. 69, 68 L.Ed. 240 (1923)); see also United Dominion Indus, v. United States, 532 U.S. 822, 839, 121 S.Ct. 1934, 150 L.Ed.2d 45 (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).III
The dissenting opinion would hold that §§ 6601 and 6901 displace the express liability cap in § 6324(b).39 The dissent acknowledges the Supreme Court’s interpretation of § 6901 and recognizes that “the donee’s personal liability that incurs interest must come from a statute other than § 6901.”40 But the dissent 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).41 The dissent says, “read together, these sections [6601 and 6901] explain that the donee’s personal, independent liability for the unpaid gift tax is subject to the interest provisions of § 6601.”42 But, as explained above, the Supreme Court has held that § 6901 does not create any substantive rights and is procedural only.
The dissent also unnecessarily engages in an analysis of the legislative history of § 6901.43 In addition to the fact that § 6901 creates no substantive liability, § 6324(b)’s limitation is clear on its face, and there is no reason to consider § 6901’s legislative history.44 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.”45
The dissent’s conclusions drawn from the legislative history of § 6901, a proce-
The dissent notes that after the Third Circuit decided Poinier,48 “Congress repealed § 6601(f)(2), and there is no longer a specific prohibition on collecting interest on the interest assessed under § 6601.”49 While the Poinier decision did discuss former § 6601(f)(2), that provision was not the sole basis for its holding.50 The Third Circuit held that the “limitation on donee liability is both consistent with the plain language of section 6324(b) and sensible.”51 The court also rejected the Government’s argument that a transferee has an independent liability for interest that is separate and distinct from the gift tax liability.52 The Third Circuit stated in Poinier:
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. That 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.53
Similarly, in the present case, the Government cannot point to a “specific code provision imposing ... an independent liability on a transferee” other than § 6324(b).
The dissent asserts that its interpretation of § 6324(b) “follows naturally” from this court’s holding in Patterson v. Sims.54 However, our decision in Patterson involved income tax liability, and there was no Tax Code provision that had a limitation similar to that contained in § 6324(b).55
Finally, the dissent states that its interpretation “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,’ ” quoting the Eleventh Circuit’s decision in Baptiste.56 But Congress has the power to displace “traditional rule[s],” and the plain language of § 6324(b) evinces an intent to limit donee liability “to the extent of the value of such gift.”57
(“[L]egislative history is itself often murky, ambiguous, and contradictory. Judicial investigation of legislative history has a tendency to become, to borrow Judge Leventhal‘s memorable phrase, an exercise in looking over a crowd and picking out your friends.” (internal quotation marks omitted)). (“[W]here a common-law principle is well established ... the courts may take it as a given that Congress has legislated with an
The judgment of this court is that the district court’s judgment is AFFIRMED in part, REVERSED in part, and this matter is REMANDED for any further proceedings in the district court that may be necessary, consistent with the panel majority opinions, as follows:
The district court’s judgment holding that Stevens was a donee of J. Howard’s 1995 indirect gift is AFFIRMED. The district court’s judgment holding that E. Pierce Jr. breached his fiduciary duties under state law is REVERSED, and we RENDER judgment in his favor on this issue. The district court’s judgment holding that the Marshall donees are personally liable for gift tax or interest in excess of the value of the gifts is REVERSED, and this case is REMANDED to the district court for any further proceedings that may be necessary.**
PRADO, Circuit Judge, dissenting in part:
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.
1. The plain language of § 6324(b)
The Appellants argue that the language of
expectation that the principle will apply except ‘when a statutory purpose to the contrary is evident.’ ” (quoting Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783, 72 S.Ct. 1011, 96 L.Ed. 1294 (1952))); see also Mohamad v. Palestinian Auth., 566 U.S. 449, 132 S.Ct. 1702, 1709, 182 L.Ed.2d 720 (2012) (“It is true that Congress is understood to legislate against a background of common-law adjudi- catory principles. But Congress plainly can override those principles, and ... the [statute’s] text evinces a clear intent [to displace the common law principle].” (citations and internal quotation marks omitted)).
** Judges Reavley and Owen concur fully in the judgment; Judge Prado concurs in all but the disposition of the issue regarding interest on unpaid gift tax.
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
I agree with the Government that the plain language of
While the Appellants are correct that the Third Circuit observed in Poinier that applying the
Finally, other courts that have considered this issue have read
2. Section 6901 and its implications for this case
The Appellants next argue that the district court erred in looking to Baptiste 11 and
The Government rejects the idea that
I would hold that the district court did not err in relying on
I also disagree 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
3. The correct interpretation of § 6324(b)
Finally, the Appellants claim that the district court misinterpreted
The Government responds that read together,
After carefully considering the arguments on each side, I would hold that the district court correctly interpreted
Though both the Appellants and the Government claim the legislative history supports their position, my 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. at 264-67 (Halpern, J., concurring), § 311 (the precursor to
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 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
I am 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
Finally, my reading 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
Moreover, my reading is consistent with the “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. at 259 (Ruwe, J., concurring) (“Were we to adopt petitioners’ view of the liability limitation ... we would be radically changing the concept of limited transferee liability....”). Finally, unlimited interest 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. at 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. 9.61
Thus, I would hold that the district court did not err in its interpretation of