Keller v. United States

• Decision Date: 25 September 2012
• Docket Number: No. 10–41311.,10–41311.
• Citation: 697 F.3d 238
• Parties: Thomas Lane KELLER, Co–Independent Executor of the Estate of Maude Williams, Deceased; Ann Harithas, Co–Independent Executor of the Estate of Maude Williams, Deceased; Steven Craig Anderson, Co–Independent Executor of the Estate of Maude Williams, Deceased, Plaintiffs–Appellees, v. UNITED STATES of America, Defendant–Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

697 F.3d 238

Thomas Lane KELLER, Co–Independent Executor of the Estate of Maude Williams, Deceased; Ann Harithas, Co–Independent Executor of the Estate of Maude Williams, Deceased; Steven Craig Anderson, Co–Independent Executor of the Estate of Maude Williams, Deceased, Plaintiffs–Appellees,

v.UNITED STATES of America, Defendant–Appellant.

No. 10–41311.

United States Court of Appeals,Fifth Circuit.

Sept. 25, 2012.

William R. Cousins, III (argued), Robert Don Collier, Todd Allen Kraft, Kathryn Walker Lyles, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P., Dallas, TX, for Plaintiffs–Appellees.

Ellen Page DelSole, Trial Atty. (argued), Tamara W. Ashford, Dep. Asst. Atty. Gen., Jonathan S. Cohen, U.S. Dept. of Justice, Tax Div., App. Sec., Gilbert Steven Rothenberg, Dep. Asst. Atty. Gen., U.S. Dept. of Justice, Washington, DC, for Defendant–Appellant.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, and PRADO and SOUTHWICK, Circuit Judges.

EDITH H. JONES, Chief Judge:

Maude Williams passed away in May 2000, leaving behind both a substantial fortune and incomplete estate-planning documents. Originally believing this omission precluded transfer of the relevant estate property to a limited partnership, her Estate paid over $147 million in federal taxes. The Estate later discovered Texas state authorities supporting that Williams sufficiently capitalized the limited partnership before her death, entitling the Estate to a substantial refund. In this refund suit, the Estate claimed a further substantial deduction for interest on the initial payment, which it retroactively characterized as a loan from the limited partnership to the Estate for payment of estate taxes. The district court upheld both of the Estate's contentions. We AFFIRM.

BACKGROUND

The following findings emerge from a four-day bench trial. Maude Williams was married to Roger Williams. The couple lived in Victoria, Texas, and had two children and six grandchildren. Following their daughter's divorce, the Williamses set about extensive estate planning to preserve family assets.

The Williamses first settled the RPW/MOW Family Trust (the “Family Trust”) in 1998—a revocable trust into which the couple placed approximately $300 million of cash, certificates of deposit, and bonds. The trust agreement provided that on either spouse's death, the Family Trust would terminate, split into two shares (Share A and Share M), and fund two respective trusts (Trust A and Trust M). The agreement further provided that on the surviving spouse's death, Trust A and Trust M would terminate to fund six family trusts for the Williamses' grandchildren.

After Roger's death in 1999, Maude became the trustee of both the shares and the trusts and began exploring further options for protecting her family's assets, including establishing a family limited partnership (“FLP”). She consulted with the family's longtime CPA, Rayford Keller, and his son, Lane Keller, and ultimately decided to establish a FLP. The FLP was to consist of two limited partners—Trust A and Trust M, settled from the Family Trust—and a general partner, a limited liability company formed alongside the partnership. The limited partner trusts were each to hold 49.95 percent limited partnership interests, while the new general partner LLC was to hold a 0.1 percent general partnership interest. Maude would initially own all shares of the LLC.

Trusts A and M were to fund the FLP. The Kellers organized a spreadsheet in September 1999 listing specific assets to be transferred to the FLP. Maude reviewed this spreadsheet in 1999, but neither signed it nor memorialized her agreement with the Kellers' plans in writing. Based on her implicit approval, Lane formalized these plans in January 2000 in a flowchart and a series of notes indicating how various trust accounts would fund the FLP principally with “Community Property” bonds and cash amounting to $250 million.

Maude was diagnosed with cancer that March and hospitalized several times in May. Her FLP advisers reduced Maude's FLP estate plans to a partnership agreement and LLC incorporation documents, which Lane took to Maude in her hospital room. In a meeting lasting two hours, Lane carefully went over with Maude the details of these documents. The court found that she was able to understand their legal ramifications. She signed the constitutive agreements multiple times, as required, and Lane notarized her signatures.

Article VIII of the partnership agreement, entitled “Capital Contributions,” provided that “[e]ach partner shall contribute to the Partnership, as his initial Capital Contribution, the property described in Schedule A as part of the Agreement.” Lane left Schedule A blank; he testified at trial that he left the schedule blank because he did not have the firm market value of the bonds on hand. While the Kellers' extensive notes and spreadsheet indicated Maude's expected capital contribution to the FLP, the specific contributions meant for the blanks on Schedule A could not be discerned from anything else in the partnership agreement.

Several extrinsic sources, however, corroborate that Maude intended her initial capital contribution. Rayford made handwritten notes on May 10 stating: “Mrs. W. put in $300M, $250M of which will be invested in MOW/RPW, LTD,” the official name of the FLP. The notes also said to “[t]ransfer $250MM from RPW/MOW FT (Community) to Ltd.” Lane also drafted a check from one of the Family Trust accounts for Maude's initial capitalization of the LLC that day, which Maude never signed. Maude's advisers filed the Articles of Organization of the LLC and registered the limited partnership with the Texas Secretary of State on May 11. The Secretary of State issued both a Certificate of Organization and a Certificate of Limited Partnership. Lane intended to complete the outstanding requirements to finalize and fund the LLC and FLP within a week.

Maude passed away on May 15. Her advisers initially believed they failed to fully create and fund the FLP before Maude's death and ceased attempts to activate the FLP and LLC. The Estate paid over $147 million in estate taxes in February 2001. Lane reconsidered this position in May 2001 after he attended a continuing legal education seminar; he resumed activity with the FLP, including formally transferring the Community Property bonds to the FLP. The Kellers realized that having successfully established the FLP meant the Estate had lacked liquid assets to issue a $147 million tax payment. Consequently, the Estate's advisers retroactively restructured this transaction as a $114 million loan from the FLP, effective February 2001. The Estate issued a promissory note to the FLP at the applicable federal interest rate effective February 2001.

The Estate filed a claim for a refund with the IRS in November 2001 on two grounds: (1) the Estate's initial fair-market value assessment of Maude's assets failed to discount appropriately the value of the partnership interests, thereby leading to an initial overpayment; and (2) the Estate accrued interest on its loan from the FLP to pay estate taxes, entitling the Estate to a deduction. After six months passed without IRS action, the Estate filed a complaint in the district court on the same grounds.

The district court heard the case in a four-day bench trial. The Estate argued that under Texas law, Maude's intent to transfer bonds into the partnership transformed those bonds into partnership property, notwithstanding her failure to complete the partnership documents. This transfer, the Estate argued, necessarily rendered the tax payment a loan from the FLP, entitling the Estate to an interest deduction as an actual and necessary expense of administrating the estate. The Government raised several objections to the Estate's arguments, including that Maude failed to create the FLP at all; that Texas law required Maude to have committed her transfer of assets to the partnership in writing; and that any purported loan between the Estate and partnership was a sham transaction.

The court's findings of fact include that Maude intended the Community Property bonds to be partnership property on the execution of the partnership formation documents. Further, Maude's intent bound all of the relevant entities—the LLC as the general partner and Trusts A and M as limited partners. The court also found that the FLP was created for a limited, non-tax-related purpose, and that Trusts A and M received full and adequate consideration in the partnership interests they received in exchange for contributing Community Property bonds.

The district court rejected the Government's arguments. Reviewing Texas law, the court held that Maude's intent to transfer the bonds to the FLP was sufficient to transfer the bonds regardless of record title or the absence of a writing confirming that transfer. Moreover, because the bonds sold to satisfy estate taxes were in fact FLP property, the transfer from the FLP to the Estate was “actually and necessarily incurred” in the administration of the estate, entitling the Estate to a corresponding deduction for the interest on the loan. The district court therefore granted the Estate a refund of $115,375,591.

STANDARD OF REVIEW

The Government appeals, re-urging legal issues but not challenging the court's factfinding. We review the district court's legal conclusions de novo. Bemont Invs. L.L.C. v. United States, 679 F.3d 339, 343 (5th Cir.2012).

DISCUSSION

The Internal Revenue Code imposes an estate tax on a decedent's “taxable estate”—the value of the gross estate less applicable deductions. I.R.C. § 2051. The gross estate's value “shall be determined by including ... the value at the time of his [the decedent's] death all property” of any kind. I.R.C. § 2031(a) (emphasis added). We first resolve the Government's challenge to the discounted valuation of Maude's estate before...