Heyen v. US, 88-1574-C.

• Decision Date: 28 February 1990
• Docket Number: No. 88-1574-C.,88-1574-C.
• Citation: 731 F. Supp. 1488
• Parties: Mary Ann HEYEN, Executrix of the Estate of Jennie Owen, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Kansas

731 F. Supp. 1488

Mary Ann HEYEN, Executrix of the Estate of Jennie Owen, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.

No. 88-1574-C.

United States District Court, D. Kansas.

February 28, 1990.

John T. Suter, Hutchinson, Kan., for plaintiff.

Mary Dee Martoche, Office of Sp. Litigation, Tax Div., Dept. of Justice, Washington, D.C., and Robin Fowler, Asst. U.S. Atty., Wichita, Kan., for defendant.

MEMORANDUM AND ORDER

CROW, District Judge.

The case comes before the court on the plaintiff's motion for judgment notwithstanding the verdict (JNOV), or, in the alternative, for new trial. On February 2, 1990, the jury returned a verdict in favor of defendant on plaintiff's refund claim and on defendant's claim for fraudulent underpayment of gift taxes. Plaintiff contends the jury verdict must be set aside because jury instructions 16 and 17 were erroneous, the verdict is contrary to the evidence, and defendant's counsel made a prejudicial misstatement of the facts in closing argument. Defendant opposes plaintiff's motions.

On a motion for JNOV, the trial judge reviews all the evidence drawing all reasonable inferences in favor of the party opposing the motion. Downie v. Abex Corp., 741 F.2d 1235, 1238 (10th Cir.1984). It is not the court's role to reweigh the evidence, assess the credibility of witnesses, or substitute its judgment for that of the jury. Lucas v. Dover Corp., Norris Div., 857 F.2d 1397, 1400 (10th Cir.1988). A JNOV is cautiously and sparingly granted when the court is certain the evidence "conclusively favors one party such that reasonable men would not arrive at a contrary verdict." Western Plains Service Corp. v. Ponderosa Development Corp., 769 F.2d 654, 656 (10th Cir.1985).

A motion for new trial is decided upon the trial court's exercise of informed and broad discretion. Ryder v. City of Topeka, 814 F.2d 1412, 1424 (10th Cir.1987). Courts do not lightly overturn jury verdicts in recognition of the sanctity attached to the verdict. Mid-West Underground Storage, Inc. v. Porter, 717 F.2d 493, 502 (10th Cir.1983). The motion should be granted when the court believes the verdict is against the weight of the evidence, prejudicial error has occurred, or substantial justice has not been done. Holmes v. Wack, 464 F.2d 86, 88-89 (10th Cir.1971). To be prejudicial, the court's rulings must be shown by the movant to have been erroneous and to have affected a substantial right of the movant. Beacham v. Lee-Norse, 714 F.2d 1010, 1014 (10th Cir.1983); White v. Conoco, Inc., 710 F.2d 1442, 1443 (10th Cir.1983).

Relying primarily upon Treasury Regulation § 25.2511-1(g)(1), plaintiff confidently labels certain portions of jury instructions 16 and 17 as "blatant misstatements of law which do not apply to gift tax situations." (Dk. 31 at 14). In her present motion, as well as throughout the trial, plaintiff has contended the "regulations clearly say that the motive of the donor is not to be considered" in gift tax situations. (Dk. 31 at 5). Plaintiff also offers as support of her position the case of Commissioner v. Wemyss, 324 U.S. 303, 65 S.Ct. 652, 89 L.Ed. 958 (1945). In Wemyss, the Supreme Court explained the intent of Congress to use the term "gifts" in its broadest meaning and to dispense with the common-law requirement of proving the elusive element of donative intent. 324 U.S. at 306, 65 S.Ct. at 654. The Supreme Court agreed with the Tax Court that the taxpayer's transfer of stock in consideration for her marriage was not an arm's length transaction made in the ordinary course of business. Id. at 307, 65 S.Ct. at 654. The Court also observed Congress' desire to recognize certain limited and well-defined exclusions to the gift tax:

To reinforce the evident desire of Congress to hit all the protean arrangements which the wit of man can devise that are not business transactions within the meaning of ordinary speech, the Treasury Regulations make clear that no genuine business transaction comes within the purport of the gift tax by excluding "a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent)." Treasury Regulations 79 (1936 ed) Art 8.

324 U.S. at 306, 65 S.Ct. at 654 (emphasis supplied). This court firmly believes that the plaintiff misunderstands the regulation and the Wemyss decision, and that both of the authorities fully support the court's instructions.

Starting with the language of the regulation itself, it states, in pertinent part:

Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. The application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.

26 C.F.R. § 25.2511-1(g)(1). Contrary to plaintiff's argued interpretation, the regulation does not bar or preclude the consideration of the transferor's donative intent. It merely allows for an application of the gift tax to a gratuitous transfer without specific proof of donative intent. In effect, the regulation presumes a donative intent for purposes of gift tax application whenever a property interest is voluntarily transferred in exchange for nothing or for something less than the adequate and full consideration of the property interest.

The reasonableness of this interpretation of the regulation is strengthened by looking to other regulatory language concerning one of the transactions excluded from the gift tax. As stated in § 25.2511-1(g)(1), the gift tax does not apply to "ordinary business transactions described in § 25.2512-8." This exception is defined and explained as "a sale, exchange or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth." 26 C.F.R. § 25.2512-8. Simply put, proof of any donative intent will defeat the gift tax exclusion for ordinary business transactions. It is clear that the regulations themselves do not forbid the consideration of donative intent, and, in fact, they expressly recognize it as a factor relevant when the objective circumstances of a transaction otherwise indicate a nontaxable transfer. See Carson v. C.I.R., 641 F.2d 864, 866 (10th Cir.1981).

Congress imposed the gift tax to protect and supplement the estate tax and income tax. Dickman v. Commissioner, 465 U.S. 330, 338, 104 S.Ct. 1086, 1091, 79 L.Ed.2d 343 (1984). Before the Wemyss decision, courts had restricted the federal gift tax to transfers motivated by donative intent, an element of common-law gifts. Annotation, Gift Tax, 89 L.Ed. 679, 682 (1945). In furtherance of "the evident desire of Congress to hit with the gift tax all the protean arrangements which the wit of man can devise," the Supreme Court lifted the restriction of donative intent from the definition of a gift. Wemyss, 324 U.S. at 306-08, 65 S.Ct. at 654-55. As a result, the gift tax was not limited to transfers meeting the definition of a common-law gift, but it was to encompass those transfers within the broader, objective definition of a gift. See Fehrs v. United States, 620 F.2d 255, 260, 223 Ct.Cl. 488 (1980).

Since the Wemyss decision, courts have still looked to donative intent, when evident, in determining whether a gift was made. In Kincaid v. United States, 682 F.2d 1220 (5th Cir.1982), the Government appealed a jury verdict that the taxpayer's transfer of her ranch to a closely held corporation in exchange for 34% of the voting stock of the corporation was a nontaxable exchange performed in the ordinary course of business. The taxpayer and her two sons formed the corporation to own and operate the ranch. The Fifth Circuit reversed the district court's denial of the Government's motion for JNOV concluding that "no businesswoman would have entered into this transaction." 682 F.2d at 1225. Confronted with an intra-family transfer, the Fifth Circuit resorted to the general rule that: "when, as here, the `moving impulse for the ... transaction was a desire to pass the family fortune on to others, it is impossible to conceive of this as even approaching a transaction in the ordinary course of business.'" 682 F.2d at 1225 (quoting Robinette v. Helvering, 318 U.S. 184, 187-88, 63 S.Ct. 540, 542, 87 L.Ed. 700 (1943)). The Fifth Circuit was convinced the taxpayer only had a donative purpose for accepting less value in return for what she transferred. 682 F.2d at 1226.

In the decision of Fehrs v. United States, the Court of Claims affirmed and adopted the trial court's decision that the taxpayers' transfers of shares in return for annuities were a gift, and not a ordinary business transaction, to the extent of the disparity in value between the interests transferred and received. 620 F.2d at 259-60. The court recognized that the breadth of the gift definition "is plainly sufficient to encompass ... those transfers which accord with the common law concept of gift." 620 F.2d at 260. As in Kincaid, an intra-family transfer was involved triggering a special scrutiny of the transaction. It was concluded:

A close look at the transaction is, therefore, unavoidable; the disparities in value that we ultimately come to, when taken together with the plaintiffs' full control over both ends of the transaction, are inconsistent with any form of property transfer save that of a gift. To put it another way, since the visible aspects of the transaction do not negate the existence of donative intent, there exists no ground upon which to conclude that the transaction was prompted solely by business considerations.

620 F.2d at 260 (emphasis supplied).

Finally, the court directs the plaintiff to the decision of Diedrich v. Commissioner, 457 U.S. 191, 102 S.Ct. 2414, 72 L.Ed.2d 777 (198...