Hackl v. C.I.R., 02-3093.
| Decision Date | 11 July 2003 |
| Docket Number | No. 02-3094.,No. 02-3093.,02-3093.,02-3094. |
| Citation | 335 F.3d 664 |
| Parties | Albert J. HACKL, Sr. and Christine M. Hackl, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
G. Daniel Kelley (argued), Barton T. Sprunger, Ice Miller, Indianapolis, IN, for Petitioner-Appellant.
Kenneth W. Rosenberg (argued), David E. Carmack, Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for Respondent-Appellee.
Before FLAUM, Chief Judge, and BAUER and EVANS, Circuit Judges.
Most post-retirement hobbies don't involve multi-million dollar companies or land retirees in hot water with the IRS, but those are the circumstances in this case. Albert J. (A.J.) and Christine M. Hackl began a tree-farming business after A.J.'s retirement and gave shares in the company to family members. The Hackls believed the transfers were excludable from the gift tax, but the IRS thought otherwise. The Tax Court agreed with the IRS, Hackl v. Comm'r, 118 T.C. 279, 2002 WL 467117 (2002), resulting in a gift tax deficiency of roughly $400,000 for the couple. The Hackls appeal.
Our story begins with A.J. Hackl's retirement and subsequent search for a hobby that would allow him to keep his hand in the business world, diversify his investments, and provide a long-term investment for his family. Tree-farming fit the bill and, in 1995, A.J. purchased two tree farms (worth around $4.5 million) and contributed them, as well as about $8 million in cash and securities, to Treeco, LLC, a limited liability company that he set up in Indiana (Treeco later changed names, but that doesn't matter for our purposes, so we'll refer to Treeco and its successors as simply Treeco).
A.J. and his wife, Christine, initially owned all of Treeco's stock (which included voting and nonvoting shares), with A.J. serving as the company's manager. Under Treeco's operating agreement, the manager served for life (or until resignation, removal, or incapacity), had the power to appoint a successor, and could also dissolve the company. In addition, the manager controlled any financial distributions, and members needed his approval to withdraw from the company or sell shares. If a member transferred his or her shares without consent, the transferee would receive the shares' economic rights but not any membership or voting rights. Voting members could run Treeco during any interim period between managers, approve any salaries or bonuses paid by the company, and remove a manager and elect a successor. With an 80-percent majority, voting members could amend the Articles of Organization and operating agreement and dissolve the company after A.J.'s tenure as manager. Both the voting and the nonvoting members had the right to access Treeco's books and records and to decide whether to continue Treeco following an event of dissolution (such as the death, resignation, removal, retirement, bankruptcy, or insanity of the manager). During A.J.'s watch, Treeco has operated at a loss and not made any distributions to its stockholders. While Treeco has yet to turn a profit, A.J. was named "Tree Farmer of the Year" in Putnam County, Florida, in 1999.
Shortly after Treeco's creation, A.J. and Christine began annual transfers of Treeco voting and nonvoting shares to their children, their children's spouses, and a trust set up for the couple's grandchildren. After January 1998, 51 percent of the company's voting shares were in the hands of the couple's children and their spouses. The Hackls attempted to shield the transfers from taxation by treating them as excludable gifts on their gift tax returns. While the Internal Revenue Code imposes a tax on gifts, 26 U.S.C. § 2501(a), a donor does not pay the tax on the first $10,000 of gifts, "other than gifts of future interests in property," made to any person during the calendar year, 26 U.S.C. § 2503(b)(1). Unfortunately for the Hackls, the IRS thought that the transfers were future interests and ineligible for the gift tax exclusion. The Hackls took the dispute to the Tax Court which, as we said, sided with the IRS.
The Hackls contend that the Tax Court was in error. Although we owe no special deference to the Tax Court on a legal question, when we consider the application of the legal principle to the facts we will reject the Tax Court decision only if it is clearly erroneous. See Seggerman Farms, Inc. v. Comm'r, 308 F.3d 803, 805 (7th Cir.2002) (quoting Whittle v. Comm'r, 994 F.2d 379, 381 (7th Cir.1993)). Deficiencies determined by the Commissioner are presumed to be correct, and the taxpayers bear the burden of proving otherwise. See Reynolds v. Comm'r, 296 F.3d 607, 612 (7th Cir.2002) (citing Pittman v. Comm'r, 100 F.3d 1308, 1313 (7th Cir. 1996)).
The crux of the Hackls' appeal is that the gift tax doesn't apply to a transfer if the donors give up all of their legal rights. In other words, the future interest exception to the gift tax exclusion only comes into play if the donee has gotten something less than the full bundle of legal property rights. Because the Hackls gave up all of their property rights to the shares, they think that the shares were excludable gifts within the plain meaning of § 2503(b)(1). The government, on the other hand, interprets the gift tax exclusion more narrowly. It argues that any transfer without a substantial present economic benefit is a future interest and ineligible for the gift tax exclusion.
The Hackls' initial argument is that § 2503(b)(1) automatically allows the gift tax exclusion for their transfers. The Hackls argue that their position reflects the plain — and only — meaning of "future interest" as used in the statute, and that the Tax Court's reliance on materials outside the statute (such as the Treasury regulation definition of future interest and case law) was not only unnecessary, it was wrong. We disagree. Calling any tax law "plain" is a hard row to hoe, and a number of cases ...
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