Estate of Davenport v. Comm'r of Internal Revenue

• Decision Date: 13 July 1999
• Docket Number: No. 98-9005,98-9005
• Citation: 184 F.3d 1176
• Parties: (10th Cir. 1999) ESTATE OF BIRNIE M. DAVENPORT, Deceased, PATRICIA L. VESTAL, Personal Representative, Petitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1176

184 F.3d 1176 (10th Cir. 1999)

ESTATE OF BIRNIE M. DAVENPORT, Deceased, PATRICIA L. VESTAL, Personal Representative, Petitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee.

No. 98-9005

UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

July 13, 1999

APPEAL FROM THE UNITED STATES TAX COURT (T.C. No. 22900-94 & 23011-94)

[Copyrighted Material Omitted] Thomas G. Potts of James, Potts & Wulfers, Inc., Tulsa, Oklahoma, for Petitioner-Appellant.

Laurie Snyder (Loretta C. Argrett, Assistant Attorney General, and Ann B. Durney with her on the brief), Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellee.

Before BALDOCK, McKAY, and BRORBY, Circuit Judges.

McKAY, Circuit Judge.

Petitioner-Appellant, the Estate of Birnie M. Davenport as represented by Patricia L. Vestal, appeals from a decision of the United States Tax Court finding the Estate liable for a federal gift tax deficiency in the amount of $822,653.00 and a penalty in the amount of $205,663.00. This dispute involves a gift tax deficiency notice for the third quarter of 1980 issued by the Commissioner of Internal Revenue with respect to three alleged inter vivos gifts of stock in Hondo Drilling Company, Inc. The Tax Court determined that, during the third quarter of 1980, the decedent, Birnie M. Davenport, completed taxable gifts of a total of 1,610 shares of Hondo stock to her niece and two nephews--Ms. Vestal, Gordon E. Davenport, and Charles E. Botefuhr. In this appeal, Petitioner argues that Birnie did not complete inter vivos gifts of the stock during 1980 because, under Oklahoma law, she did not have a sufficient ownership interest in the stock to do so. Petitioner also claims that even if Birnie had an ownership interest in the stock sufficient to effect inter vivos transfers of it, she did not complete the gifts in the third quarter of 1980. That is, because Birnie neither gave the stock certificates to her niece and nephews nor transferred title to the stock into their names, she did not sufficiently deliver the stock to her niece and two nephews to complete the alleged inter vivos gifts.

I.

Birnie M. Davenport and her sister, Elizabeth G. Davenport, shared a home for most of their adult lives. In approximately 1954, Birnie and Elizabeth entered into an oral agreement pursuant to which they shared and commingled their assets and earnings. Under the agreement, Elizabeth held legal title to the sisters' shared assets and earnings, but the sisters nonetheless considered their assets and earnings to be jointly owned. The sisters also maintained joint checking and savings accounts, and they shared equally in the construction and maintenance costs associated with their home. Included in the sisters' assets were 3,220 shares of Hondo stock. The distribution of the Hondo stock called for in the sisters' wills, which contained mirror provisions, was consistent with their joint ownership agreement. In short, even though Birnie may not have held legal title to the Hondo stock, her ownership of the stock was presumed in her will, which provided for the distribution of 1,610 shares of the stock in equal parts to Ms. Vestal, Mr. Davenport, and Mr. Botefuhr.

During the period of the oral agreement, Elizabeth and Birnie filed federal and state income tax returns in which they reported their wage earnings separately. However, the sisters reported one-half of their collective earnings, losses, and deductions associated with their investments on Elizabeth's returns and one-half on Birnie's returns. Corinne Childs, who prepared Elizabeth's and Birnie's tax returns beginning in 1965, believed that the sisters owned their assets jointly and treated their assets in accordance with that belief in their tax returns. Between 1965 and 1979, several of Birnie's and Elizabeth's federal income tax returns were audited. In each case, the Internal Revenue Service accepted the sisters' explanation of their joint ownership arrangement and accepted the reporting of fifty percent of their earnings, losses, and deductions on each sister's tax return.

Elizabeth died on December 2, 1979, and Ms. Vestal, Mr. Davenport, and Mr. Botefuhr were appointed as coexecutors of Elizabeth's estate.¹ Ultimately, the executors filed federal and state estate tax returns which reported one-half of the stock and bonds subject to the oral agreement in Elizabeth's gross estate, even though the assets were titled solely in Elizabeth's name. Included in Elizabeth's gross estate were 1,610 shares of Hondo stock, valued at $804 per share. Pursuant to the sisters' oral agreement, the executors of Elizabeth's estate considered the remaining 1,610 shares of Hondo stock as belonging to Birnie.

After examining the federal estate tax return for Elizabeth's estate, the IRS issued a notice of deficiency. The IRS asserted that all of the assets held in Elizabeth's name should have been included in her gross estate, including the 3,220 shares of Hondo stock purportedly owned jointly by Birnie and Elizabeth. It also claimed that the Hondo stock should have been valued at $3,019 per share. Ms. Vestal and Mr. Davenport petitioned the Tax Court on behalf of Elizabeth's Estate, and the parties subsequently settled without a trial. Pursuant to the settlement, the IRS conceded that the sisters owned their assets jointly and that 1,610 of the sisters' 3,220 shares of Hondo stock would be included in Elizabeth's gross estate at a value of $2,400 per share. The Tax Court entered an agreed decision in recognition of the settlement on May 24, 1984.

Meanwhile, on February 14, 1983, the District Court of Tulsa County, Oklahoma, issued an order in response to a petition filed by Ms. Vestal and Mr. Davenport requesting "instructions pertaining to the [i]nventory of certain real and personal properties of [Elizabeth's] [e]state." Appellant's App. at 187. The court determined that although Elizabeth was the record owner of the sisters' joint assets, including the 3,220 shares of Hondo stock, she "owned only an undivided fifty percent (50%) interest in said properties and held an undivided fifty percent (50%) interest in said properties for Birnie." Id. In accordance with this determination, the court ordered the coexecutors of Elizabeth's estate to assign and convey record title to an undivided fifty percent of the subject property to Birnie.

In 1980, Birnie decided to transfer what she believed to be her 1,610 shares of Hondo stock to her niece and two nephews--Ms. Vestal, Mr. Davenport, and Mr. Botefuhr--in roughly equal portions. Consequently, Birnie entered into two sales agreements dated July 2, 1980, with Ms. Vestal and Mr. Davenport, which Birnie executed on September 26, 1980. Pursuant to the sales agreements, Birnie sold 536 and 537 shares of Hondo stock to Ms. Vestal and Mr. Davenport, respectively, at a discount price of $804 per share.² As consideration for the stock, Ms. Vestal and Mr. Davenport agreed to pay $448,353.50 and $449,175.50, respectively, in twenty annual installment payments commencing July 2, 1986. In addition, Ms. Vestal and Mr. Davenport agreed to pay six percent interest annually on the unpaid principal.

Under the sales agreements, Birnie represented and covenanted that she was the sole owner of, and had the right to sell, the stock. She also purported to convey good and marketable title to the shares of stock along with the right to receive dividends paid on the stock after the date of the agreements. In addition, Birnie represented that "simultaneously[] with the execution of this agreement, [she] directed a written order to Hondo Drilling Company . . . to pay all such dividends" to Ms. Vestal and Mr. Davenport. Id. at 161, 171. Apparently in recognition of the fact that Birnie did not hold legal title to the stock, the sales agreements also indicated that Birnie could not "effect the transfer" of the Hondo stock until Elizabeth's estate was settled. Id. at 162, 172. However, to expedite the transfer, the agreements provided that "Seller has simultaneously, with the execution of this agreement, delivered to the Buyer stock powers signed in blank by Seller." Id.

Pursuant to the sales agreements and the corresponding installment notes, Ms. Vestal and Mr. Davenport each made down payments of $1,000. They also made three interest payments to Birnie of around $13,500 per payment. On March 5, 1982, however, Birnie forgave the indebtedness owed to her under the installment notes. Birnie filed a federal gift tax return on March 31, 1983, reflecting the forgiveness of the amounts due under the installment notes.

Rather than executing a sales agreement with Mr. Botefuhr, Birnie executed a deed of gift purporting to transfer 537 shares of Hondo stock to him on July 7, 1980. The deed of gift was recorded in Tulsa County, Oklahoma, on the same date. On November 28, 1980, Ms. Vestal, Mr. Davenport, and Mr. Botefuhr executed an agreement pursuant to which Mr. Botefuhr agreed to file any required gift tax returns and pay any gift taxes due with respect to the Hondo stock he received from Birnie. Because of Mr. Botefuhr's agreement to pay the gift taxes, Ms. Childs testified that she did not think that Birnie was required to file a gift tax return with respect to her transfer of 537 shares of Hondo stock to Mr. Botefuhr. In spite of this agreement, Mr. Botefuhr never filed a gift tax return with respect to the Hondo stock, and he testified at trial that he did not think he needed to do so until the Hondo stock "was determined to be Birnie's." Id. at 350.

After Elizabeth's death but before July 1980, Birnie received dividend payments on 1,610 shares of Hondo stock directly from Elizabeth's estate. In fact, Birnie reported $48,300 in Hondo dividends on her 1980 income tax return. After July 1980, Ms. Vestal, Mr. Davenport, and Mr. Botefuhr each received dividend payments on the shares of Hondo stock they received from Birnie....