X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:Birnie and Elizabeth Davenport were sisters and lived together much of their adult lives. Over many years, the two sisters commingled all of their earnings and assets. They considered all of their assets to be jointly owned and their income tax returns filed over many years reflected this belief. Each of the sisters filed a separate income tax return in which she reported her earnings from her job and an equal share of profits and losses from the joint investments. The IRS accepted this split of investment income and expenses throughout numerous audits between 1965 and 1979. The sisters’ investments included stock in Hondo Drilling Co. At the time of Elizabeth’s death in 1979, the sisters owned 3,220 shares of Hondo stock. The sisters had two nephews, Gordon Davenport and Charles Botefuhr, and one niece, Patricia Vestal. Gordon, Botefuhr and Vestal were appointed co-executors of Elizabeth’s estate. In July 1980, about six months after her sister’s death, Birnie transferred half (1,610 shares) of the Hondo stock to her niece and nephews using two conveyance methods. First, she transferred 537 shares to Gordon and 536 shares to Vestal through installment sale agreements, with the stock being valued in the agreements at $804 per share. Birnie reported the installment sales on her 1980 income tax return and indicated on that form that the sales were to related parties. Second, Birnie transferred 537 shares to Botefuhr as an outright gift. In a signed “Family Agreement,” Botefuhr promised to file the appropriate gift tax return that would report the gift made by Birnie and to pay on her behalf the gift taxes associated with his gift. Botefuhr did not fulfill this responsibility. In July 1981, Hondo Drilling Co. redeemed Botefuhr’s shares at $2,190 per share. Birnie died in 1991. Gordon, Vestal and Botefuhr were appointed as personal representatives of her estate. While preparing Birnie’s estate tax return in 1991, Corrine Childs, the Davenport sisters’ long-time tax attorney, learned that Botefuhr had not filed the 1980 gift tax return or paid the taxes as promised. When Vestal and Gordon filed the estate tax return, they filed a gift tax return reporting the 1980 gift to Botefuhr at $804 per share. The estate paid a gift tax of $95,322 with the return. Botefuhr did not sign either the gift tax return or the estate tax return. In 1992 the IRS audited Birnie’s estate tax return and 1980 gift tax return and ultimately determined that Birnie’s gift of Hondo stock to Botefuhr should have been valued at $2,730 per share rather than $804 per share. The large discrepancy in values created a correspondingly large gift tax deficiency, which Birnie’s estate contested in tax court. One issue before the tax court was whether Birnie made a completed gift to Gordon, Vestal and Botefuhr. The tax court held that even though Birnie did not have legal title at the time of the transfers, she did effect inter vivos gifts to Gordon, Vestal and Botefuhr of the Hondo stock, which the tax court valued at $2,000 per share. A second issue before the tax court was whether the statute of limitations barred the government from recovering the gift tax due. The tax court held that the statute of limitations did not bar assessment of gift tax liability, because with respect to each of the transfers the limitations period started running on Nov. 7, 1991, when Vestal and Gordon filed Birnie’s 1980 gift tax return. In accordance with its findings, the court calculated the tax deficiency owed by the estate. The 10th U.S. Circuit Court of Appeals affirmed the tax court’s decision. Despite the tax court’s decision, the estate did not pay the taxes owed. Because the tax court lacks the authority to enforce its judgments, the government filed the current action in Northern District of Oklahoma against the estate and all three cousins to reduce to judgment the estate’s liability and the donees’ liability as transferees pursuant to I.R.C. �6324(b). The estate conceded liability. The government also sought individual liability against the three cousins in their capacity as co-executors pursuant to 31 U.S.C. �3713 for allegedly making improper distributions from the estate before paying the federal tax liabilities. The district court dismissed the �3713 claim pretrial. Although Gordon and Botefuhr contested jurisdiction, the district court overruled their motions to dismiss for lack of personal jurisdiction. On appeal, the 10th Circuit held that the Oklahoma district court did not have jurisdiction over Botefuhr and Gordon after dismissing the � 3713 claim. The case was remanded to the Oklahoma district court, which transferred Botefuhr’s case to Western District of Texas and Gordon’s case to Southern District of Texas. The Southern District of Texas ruled on multiple motions for summary judgment by Gordon and the government. First it determined that the statute of limitations barred assessment of the gift tax on the imputed gift arising from the July 1980 installment sale, but that the statute of limitations did not bar assessment of the gift to Botefuhr. Second, it held that although res judicata and collateral estoppel bound Gordon to the tax court’s finding that he was a donee, neither doctrine established the value of the gift to him (the Hondo stock) or the amount of his liability. Finally, the district court held that the government failed to provide any evidence on damages, an essential element of its claim, and it granted summary judgment against the government. The government appealed. HOLDING:Reversed and remanded. Internal Revenue Code �2501(a) imposes tax liability “on the transfer of property by gift. The donor, as the party who makes the gift, bears the primary responsibility for paying the gift tax. But when the donor dies before paying the gift tax owed, the personal representative of the estate is responsible for paying the tax out of the estate, as a debt against the donor’s estate. In addition, the donee may be held personally liable for the full amount of any unpaid gift tax pursuant to 26 U.S.C. �6324(b). Furthermore, the court stated, although the donee’s liability is limited to the value of the gift he received from the donor, a donee may be forced to pay more than the gift tax attributable to his gift. Thus, the court found that Gordon is liable for all the gift tax owed by the estate for 1980, up to the value of the gift he received. Gordon sought to relitigate the value of the Hondo stock and the issue of whether the statute of limitations expired on the gifts to Gordon, Vestal and Botefuhr. But the government claimed that the doctrine of res judicata prevented him from doing so. For res judicata to apply, the following four-part test must be satisfied: 1. the parties must be either “identical or in privity; 2. the judgment in the prior action must have been rendered by a court of competent jurisdiction; 3. the prior action must have been concluded to a final judgment on the merits; and 4. the same claim or cause of action must have been involved in both actions. Once a court determines the tax liability of the transferor, the court stated, the decision is res judicata of the liability with regard to the transferee for the same tax if transferee status can be established. The tax court concluded Gordon was a transferee, and the 10th Circuit affirmed that decision. Both parties agreed that the first three prongs were satisfied, and the court found that the fourth prong was met, because both the tax court action and the action against Gordon in federal court dealt with the same transactions and factual events. Accordingly, the court held that the doctrine of res judicata applied to preclude Gordon and the government from litigating matters arising from the same nucleus of operative facts raised in the previous proceeding. Thus, the court found that res judicata bound Gordon to the value of the Hondo stock established in the tax court proceeding. The doctrine also precluded him from relitigating the issue of whether the statute of limitations barred assessment of the gift tax on either the gift to Botefuhr or the gifts involved in the installment sale transactions. OPINION:King, C.J.; King, Garza and Prado, J.J.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.