O'Neal v. U.S., No. 00-11663

• Decision Date: 26 July 2001
• Docket Number: No. 00-11663
• Citation: 258 F.3d 1265
• Parties: (11th Cir. 2001) ELIZABETH PARAMORE O'NEAL, Estate of, deceased, ELIZABETH O'NEAL SHANNON, Personal Representative, EMMET O'NEAL, II, Personal Representative, EMMET O'NEAL, III, Personal Representative, Plaintiffs, Counter-defendants, Appellants, v. UNITED STATES OF AMERICA, Defendant, Counter-claimant, Appellee
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1265

258 F.3d 1265 (11th Cir. 2001)

ELIZABETH PARAMORE O'NEAL, Estate of, deceased, ELIZABETH O'NEAL SHANNON, Personal Representative, EMMET O'NEAL, II, Personal Representative, EMMET O'NEAL, III, Personal Representative, Plaintiffs, Counter-defendants, Appellants, v. UNITED STATES OF AMERICA, Defendant, Counter-claimant, Appellee.

No. 00-11663

UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

July 26, 2001

Appeals from the United States District Court for the Northern District of Alabama.

Before BLACK, RONEY and HILL, Circuit Judges.

HILL, Circuit Judge:

This estate tax claim for refund case presents an issue of first impression in this circuit.¹ It also spotlights the distinct split among the circuits on this issue. Based upon our reading of Ithaca Trust Co. v. United States, 29 S.Ct. 291 (1929), we conclude that the value of the deduction claimed by the estate as a claim against the estate under Section 2053(a)(3) of the Internal Revenue Code must be valued as of the date of the decedent's death. 26 U.S.C. § 2053(a)(3). Events occurring after the decedent's death that alter the value must be disregarded.² Ithaca Trust, 29 S.Ct. at 291.

I. FACTUAL BACKGROUND

A. Reimbursement for Transferee Gift Tax Liability as a Claim Against the Estate Deduction under Section 2053(a)(3)

"In consequence of life's two certainties," the facts are undisputed. Commissioner v. Estate of Hubert, 117 S.Ct. 1124, 1127 (1997). They involve the complicated interplay between transferee gift taxes paid by the recipients of a gift and an estate tax deduction for their reimbursement by the estate of the decedent donor. A proper valuation of the transferee gift tax has a direct impact upon the amount of estate taxes ultimately owed by the estate.

Elizabeth Paramore O'Neal and her husband were minority shareholders in O'Neal Steel, Inc., a closely-held family corporation located in Alabama.³ Together they had two children, Emmet and Elizabeth (the children donees), and seven grandchildren (the grandchildren donees) (collectively the nine heirs).

In 1987, the O'Neals gifted all their stock to the nine heirs.⁴ On the day of the gift, the nine heirs entered into a consent and supplemental stock purchase agreement, in which each of them agreed to contribute on a pro rata basis toward the payment of transferee (or donee) gift tax liability, if any. Emmet held the shares in escrow until the agreement was signed by all. Approximately nine months after the gifts were made, Mr. O'Neal died.

Mrs. O'Neal's gift tax returns were timely filed. She paid $810,000 in gift taxes.⁵ This amount was calculated based upon the stock values set forth in a 1951 company buy-sell agreement, as amended in 1976. The buy-sell agreement created an option in other members of the O'Neal family to buy stock in the family company at set prices. Class A non-voting stock was valued at $54.00 per share. Class B voting stock was valued at $61.00 per share. The O'Neals did not have sufficient share ownership to change the option prices, as this required the consent of 75% of the shareholders.

The government did not begin an audit of either Mr. or Mrs. O'Neal's gift tax returns until July 1990, nine months prior to the expiration of the three-year statute of limitations for assessing gift tax liability against them personally. During the audit, the agent requested much information. Much was supplied, well in advance of the statutory deadline.⁶ At no point prior to the deadline did the government assert that either Mr. or Mrs. O'Neal had failed to pay the appropriate amount of gift tax owing with respect to the 1987 gifts. Neither did the government request an extension of time in order to assess any additional gift tax due. When the statute of limitations expired, the government was barred from collecting any additional gift tax from either Mr. O'Neal's estate or Mrs. O'Neal.

Nevertheless, the audit continued. In September 1991, the examining agent requested that an expert valuation study be performed on the 1987 value of the Class A and Class B stocks. Two months later, the nine heirs were advised that the government intended to assert transferee gift tax liability against them based upon its pending revaluation of the family company stock. Two months after that, the government valuation report issued. The government appraiser stated in his report that, in his opinion, on the date of the gifts, the value of the Class A nonvoting stock was $375.00 per share, and the value of the Class B voting stock was $415.00 per share, a seven-fold increase in each class.

Two days before the statute of limitations to assert transferee gift tax liability against the nine heirs was to expire, the government issued statutory notices of deficiency asserting that Mrs. O'Neal owed an additional $9,407,226 in gift taxes on the 1987 gifts, for which the nine heirs were liable. Similar notices were issued on Mr. O'Neal's gifts.⁷ At this point, Mrs. O'Neal was still living.

The grandchildren donees made partial transferee gift tax payments totaling $4,244,994. They then filed for a redetermination of transferee gift tax liability in tax court, contesting the government revaluation of stock and the government's right to assert transferee gift tax liability against them. In April 1994, the tax court found the grandchildren donees liable, although it did not determine the dollar amount of liability at that time.⁸

The children donees made partial transferee gift tax payments totaling $15,770. Instead of filing in tax court, the children donees first filed claims for refund with the government that were quickly disallowed thirteen days later. Thereafter, they filed claim for refund actions in Alabama federal district court, with assertions similar to those made by the grandchildren donees in tax court.⁹

Mrs. O'Neal died in July 1994. Her estate tax return was timely filed in April 1995. It reflected a negative taxable estate and no estate tax due.¹⁰ The negative taxable estate resulted from the Section 2053(a)(3) deduction of $9,407,226 taken on Schedule K for "claims for reimbursement of transfer gift tax liability by donees of 1987 gifts." The amount of the deduction claimed by the estate was calculated using the government's per share stock values.¹¹

Shortly after it was filed, Mrs. O'Neal's estate tax return was selected for audit. The most notable challenge by the government was to the amount of the Schedule K deduction.

In April 1995, more than nine months after Mrs. O'Neal's death and more than a year after the action had been filed, the grandchildren donees and the government settled their tax court litigation. Pursuant to the terms of the settlement, the parties agreed that the Class A stock was to be finally valued at $77 per share (instead of $375) and that the Class B stock was to be finally valued at $82 per share (instead of $415).¹²

A joint stipulation was submitted to the tax court. Both sides agreed that the grandchildren donees had a total transferee gift tax liability of $487,814, plus interest. The tax court then entered final decisions in the seven consolidated grandchildren donee cases. The district court followed suit in the pending children donee cases. Thereafter, the probate court entered an order holding that the claims of the nine heirs were now valid and enforceable, and the nine heirs received $563,314 in reimbursement monies from the estate.

The estate then filed an amended estate tax return reducing the Section 2053(a)(3) deduction for claims against the estate on Schedule K from $9,407,226 to $563,314. This changed the amount of estate tax due dramatically. Once a negative figure, Mrs. O'Neal's taxable estate swelled to $4,302,539, generating $1,883,762 in estate taxes that were paid by the estate with the amended return. The estate then filed a claim for refund action in district court on the Section 2053(a)(3) issue.¹³ The government asserted three counterclaims pertinent to this appeal.¹⁴ See Parts I.B - I.D. infra.

B. Attorneys' Fees Paid Prior to Death by Holder of Power of Attorney as an Asset of the Estate under Section 2031(a)

Mrs. O'Neal's son Emmet, acting as attorney-in-fact for his mother during her life, paid $114,022 to the Chamberlain, Hrdlicka law firm. This payment was made with Mrs. O'Neal's funds. Count One of the government's counterclaim asserts that Emmet did not have the authority to use his mother's assets and that these fees benefitted certain of her donees and not Mrs. O'Neal. As a result the government contends that Mrs. O'Neal's estate possesses a claim against Emmet to recover these unauthorized transfers, and that her gross estate should be increased by the same amount.

In support of its motion for summary judgment, the government submitted Mrs. O'Neal's four-page durable power of attorney to the district court. Its authorization powers are very broad.¹⁵ However the power expressly prohibits the use of Mrs. O'Neal's property to pay other debts.¹⁶ The estate contends that the language contained in the power itself proves that Emmet possessed the authority to act on his mother's behalf.

During discovery, the government asked that the estate produce copies of legal fee invoices. The estate declined on the basis of attorney-client privilege.

In strictly construing the power, the district court found that, without a proper accounting, there was insufficient evidence to prove that the monies were used to pay Mrs. O'Neal's debts and not those of her son Emmet.

C. Attorneys' Fees Paid after Death as an Administrative Expense Deduction under Section 2053(a)(2)

Count Three of the government's counterclaim contends that $74,485 in attorneys' fees paid to the Chamberlain, Hrdlicka law firm after Mrs. O'Neal's death were not incurred for the benefit of the estate and therefore were not properly deductible as administrative expenses under Section 2035(a)(2). In response, the estate submitted two affidavits of a...