Estate of True v. C.I.R.

Decision Date02 December 2004
Docket NumberNo. 02-9012.,No. 02-9011.,No. 02-9010.,02-9010.,02-9011.,02-9012.
Citation390 F.3d 1210
PartiesESTATE OF H.A. TRUE, Jr., Deceased, H.A. True III Personal Representative; Jean D. True, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
CourtU.S. Court of Appeals — Tenth Circuit

Buford P. Berry (Mary A. McNulty and Katherine Quigley, Thompson & Knight L.L.P., and Ronald M. Morris, Casper, WY, with him on the briefs), Thompson & Knight L.L.P., Dallas, TX, for Petitioners-Appellants.

Joan I. Oppenheimer, Attorney, Tax Division, Department of Justice (Eileen J. O'Connor, Assistant Attorney General, and Jonathan S. Cohen, Attorney, Tax Division, Department of Justice, with her on the briefs), Washington, DC, for Respondent-Appellee.

Before SEYMOUR, Circuit Judge, PORFILIO, Senior Circuit Judge, and MURPHY, Circuit Judge.

SEYMOUR, Circuit Judge.

This appeal arises out of the consolidation of three separate tax deficiency notices issued by the Commissioner of Internal Revenue (I.R.S.) against the estate of H.A. True, Jr., deceased, H.A. True III, personal representative, and Jean D. True (collectively, taxpayers), regarding the transfer of interests in six different family businesses subject to longstanding buy-sell agreements. Taxpayers filed timely petitions in tax court challenging the I.R.S.'s estate and gift tax deficiency determinations. After a week-long trial, the tax court issued an extensive 336 page Memorandum Findings of Fact and Opinion, see Estate of True v. C.I.R., 82 T.C.M. (CCH) 27, 2001 WL 761280 (2001), in which it rejected taxpayers' contention that the formula price and other restrictive terms in the buy-sell agreements controlled the value of the transferred business interests for estate and gift tax purposes. The court also imposed penalties against taxpayers for undervaluing the interests on their tax returns. Taxpayers appeal, and we affirm.

I

H.A. True, Jr. (Dave True or Dave), was born on June 12, 1915, and married Jean Durland (Jean True or Jean) in 1938. They remained married until Dave's death on June 4, 1994. During their marriage they had four children: Tamma True Hatten (Tamma), H.A. True III (Hank), Diemer D. True (Diemer), and David L. True (David).

Dave was a successful entrepreneur and established a number of companies involved in oil and gas exploration, marketing, and transportation. The companies relevant to this appeal include True Oil Company, Belle Fourche Pipeline Company, Eighty-Eight Oil Company, and Black Hills Trucking Company. These companies often worked in concert, providing services to one another and assisting in one another's efforts. Companies which generated a substantial amount of revenue often provided the funds to support companies which were not as profitable. Dave also established ranching operations. These included the True Ranches, Inc., "a vertically integrated cattle operation, running herds of cows and their offspring from conception through finishing ready for slaughter," Estate of True, 82 T.C.M. (CCH) at 36, and White Stallion Ranch, Inc., which operated as a guest ranch.1

Due to an unsatisfactory work experience early in his career, Dave developed a business philosophy which was guided by four basic principles. He did not want to own a business with anyone but his own family members, every business owner or partner should be actively engaged in the business, buy-sell agreements were necessary to avoid conflicts among owners and to establish clear exit strategies, and outside debt would be incurred only as a last resort. Each True company was governed by buy-sell agreements which embodied these business principles. The agreements dictated that an owner or partner could not transfer or encumber his or her interests in the business, and each owner or his or her spouse had to work in the business. Failure to work in the business, any attempt to transfer an interest in the business, death, and disability were each treated as if the holder of the interest had notified the other owners of his or her intent to withdraw from ownership. Upon the occurrence of such an event, the other owners were required to purchase the departing owner's interests at a formula price listed in the buy-sell agreement.

The formula prices in the buy-sell agreements were derived from a calculation of the tax book value for the various True companies. The companies characteristically kept their business records according to tax book values rather than following generally accepted accounting principles (GAAP). The companies used the tax book accounting method for a variety of reasons. Under this method, the companies could take greater advantage of certain tax deductions and accelerated rates of depreciation granted to the oil and ranching industries. Likewise, because the Trues intended to keep their businesses strictly within the family, they determined there was no need to have their financial records exhibit the value of their companies as if placed on the public market. By using a tax value accounting method, however, the book values for the True companies tended to be much lower than what would be calculated under GAAP and did not always represent the fair market value of the businesses had they been liquidated. Because of the varying tax incentives granted to the oil, gas, and ranching industries, which allow for increased rates of depreciation and deductions, the tax value accounting method occasionally even resulted in a negative book value figure for some of the True companies.

As Dave and Jean True established new businesses or gained full control over businesses in which they formerly shared interests with non-family members, they entered into buy-sell agreements with one another. Characteristically, Dave possessed a larger percentage of shares or interest in the businesses than did Jean. Dave and Jean also took steps to ensure their children's involvement in the family businesses. As high school students, the True children participated in the businesses by attending the True companies' annual supervisor meetings and semiannual family business meetings. Likewise, throughout junior high school, high school, and college, the True sons had jobs on the family's ranches and in the oil businesses.

In 1971, each child acquired a one percent interest in Belle Fourche Pipeline, which they purchased from the corporation at tax book value. At this time, the children were between twenty-one and thirty-one years of age. Dave and Jean did not report the transfers on a gift tax return because the children's acquisition of the Belle Fourche Pipeline stock had been structured as a sale rather than a gift. In 1973, Dave and Jean also gave each child an eight percent interest in True Oil and True Drilling.2 Dave and Jean both reported the 1973 gifts to their children on their gift tax returns for that year, valuing the gifts in terms of their tax book values.3

The I.R.S. determined gift tax deficiencies against Dave and Jean for both the 1971 and 1973 transfers, asserting that the transfers involved "unreported gifts equal to the difference between the fair market value of the transferred interests and the amount paid for the interests or the amount reported as gifts." Aplt. br. at 9. The Trues paid the deficiencies and brought two refund suits in federal district court. See True v. United States, 547 F.Supp. 201 (D.Wyo.1982) (1973 gift tax case); True v. United States, No. C79-131K (D.Wyo. Oct. 1, 1980) (1971 gift tax case). In both cases, the district court sustained the Trues' argument that the fair market value of the transferred interests was the reported tax book value.4

Dave and Jean also consistently made annual gifts to their children and their spouses. These gifts tended to consist of "cash or ownership interests in various True companies valued at the maximum allowable amount that would not trigger gift tax." Estate of True, 82 T.C.M. (CCH) at 37. However, the gifts were never received as cash in hand. Rather, cash gifts were deposited into business bank accounts assigned to each recipient. The funds were then "invested in the True companies, either by purchasing ownership interests or by making interest-bearing loans, or both." Id.

Over the years, the children acquired interests in other True companies, including Eighty-Eight Oil, Black Hills Trucking, True Ranches, and White Stallion Ranch. In obtaining these interests, the children became partners or shareholders in the companies, entered into buy-sell agreements for each, and fulfilled the terms of the agreements by active participation in the businesses. The True children, or their spouses, owned equal percentages of interest in the companies, regardless of the extent of their individual involvement in each. Hank eventually became responsible for managing Belle Fourche Pipeline, Eighty-Eight Oil, and the True family environmental cleanup company. Diemer managed Black Hills Trucking, as well as another True business. David became manager of True Ranches and True Drilling. Tamma briefly worked for the family businesses as a personnel coordinator, and her husband, Donald Hatten, also worked for the True businesses for about ten years.

In 1984, Tamma and her husband withdrew from the True companies to open a ranch operation wholly independent from the True businesses. In accordance with the buy-sell agreements, Tamma's parents and brothers bought out her interests in the companies at tax book value. The combined purchase price Tamma accrued for these interests equaled over $8.5 million. This amount was offset, however, by two of the True companies' negative book values amounting to nearly $1.7 million at the time of the sale. After the sale, the rest of the family amended their various buy-sell agreements to reflect that Tamma and her husband were no longer owners or participants in the family businesses. Likewise, Dave and Jean ceased making annual gifts...

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