In re Estate of Denman

• Decision Date: 23 November 2011
• Docket Number: No. 04–10–00830–CV.,04–10–00830–CV.
• Citation: 362 S.W.3d 134
• Parties: ESTATE OF Gilbert M. DENMAN Jr., Deceased.
• Court: Texas Court of Appeals

362 S.W.3d 134

ESTATE OF Gilbert M. DENMAN Jr., Deceased.

No. 04–10–00830–CV.

Court of Appeals of Texas, San Antonio.

Nov. 23, 2011.

Douglas W. Alexander, Amy Warr, Alexander Dubose & Townsend L.L.P., Austin, TX, for Appellant.

Howard P. Newton, Cox Smith Matthews Incorporated, Robert G. Newman, Fulbright & Jaworski L.L.P., James L. Drought, Drought, Drought & Bobbitt, L.L.P., San Antonio, TX, for Appellee.

Sitting: CATHERINE STONE, Chief Justice, PHYLIS J. SPEEDLIN, Justice, MARIALYN BARNARD, Justice.

OPINION

Opinion by: MARIALYN BARNARD, Justice.

This is an appeal from a probate court order granting a motion for summary judgment filed by appellees The Trust Company, Trinity University, and the San Antonio Museum of Art (collectively “The Trust Company”), and denying a motion for summary judgment filed by appellant Wendel Denman Thuss (“Thuss”). The controversy between the parties concerns whether Thuss is entitled to reimbursement or a “grossing up” from the Estate of Gilbert M. Denman Jr., Deceased, for certain taxes allocated and charged to a ranch he received as a bequest in Denman's will. The probate court, by granting summary judgment in favor of The Trust Company and denying Thuss's motion for summary judgment, found Thuss was not entitled to reimbursement or a grossing up. On appeal, Thuss raises five issues challenging the summary judgment order.

Background

This case appears in this court for the second time. In 2008, Thuss filed an appeal in this court following the probate court's determination that Denman's will did not contain a “specific reference” to the federal generation-skipping transfer (“GST”) tax with regard to the bequest of the El Capote Ranch to Thuss, and therefore, section 2603(b) of the Internal Revenue Code required the tax to be allocated and charged to the Ranch. Estate of Denman, 270 S.W.3d 639, 648 (Tex.App.-San Antonio 2008, pets. denied) (“ Denman I ”). However, in a footnote, this court noted that whether Thuss might have a viable state law claim for reimbursement for the amount of the taxes paid, assuming Denman's intent was that Thuss received the full value of the bequest, was not before the court. Id. at 646 n. 3. This footnote seems to have prompted the subsequent action, which led to this appeal.

In Denman I, this court provided a detailed rendition of the relevant background facts. Accordingly, rather than restating those facts, we have provided an excerpt from our previous opinion, and as necessary, have supplemented it with additional background information.

In 1988, Gilbert Denman ... executed a holographic will. Between 1991 and 2002, he executed four codicils to the Will. In Article XIII of the Will, [Denman] bequeathed one-half of the residuary of the estate to Trinity [University] and the other half to The Trust Company and [the independent coexecutor] as trustees of a trust (“the Trust”) created in the Will for the benefit of the [San Antonio] Museum [of Art]. In 2002, [Denman] executed Article IV of the codicil to the Will in which he bequeathed to Thuss, his third cousin, all of his real property in Guadalupe and Gonzales Counties as well as the animals and farm equipment thereon. This property is known as El Capote Ranch (“the Ranch”). The parties do not dispute that [Denman's] bequest to Thuss gave rise to the federal GST tax imposed by Chapter 13 of the Internal Revenue Code. See 26 U.S.C. § 2601.

[Denman] died on May 16, 2004, and the Will was admitted to probate in June of that year. In August 2005, The Trust Company and [the independent coexecutor] filed the estate's federal tax return. The return, which was signed by [the independent coexecutor] and a representative of The Trust Company, apportioned and charged payment of the GST tax to the Ranch bequeathed to Thuss. The amount of the GST tax as apportioned and charged in the tax return was $913,868.

Thuss disagreed with the position taken by The Trust Company and [the independent coexecutor] in the federal tax return. He contended Article XII of the Will, which provides for allocation of taxes, removed the GST tax burden from him as the transferee of the Ranch and placed it on the residuary estate. Because of Thuss's contention, The Trust Company and [the independent coexecutor], as coexecutors and co-trustees, filed a petition in the probate court seeking a declaratory judgment that the GST tax should be allocated and charged to the property transferred to Thuss. They argued section 2603(b) of the Internal Revenue Code mandates the tax on a generation-skipping transfer be charged to the property transferred unless otherwise directed by the governing instrument through a “specific reference to the tax imposed” under Chapter 13 and the Will did not contain the required specific reference. See id. § 2603(b). Thuss counterclaimed, asserting that because Article XII of the Will specifically referred to the [generation-skipping transfer] tax the transfer tax burden should fall on the residuary estate.

After The Trust Company and [the independent coexecutor] filed a motion for summary judgment, [the independent coexecutor] changed his position on the tax burden, deciding his grandson was correct and that [Denman's] intent as expressed in the Will was that the GST tax be imposed on the residuary estate. As a result, [the independent coexecutor] obtained new counsel and, solely in his capacity as coexecutor, filed amended petitions generally adopting Thuss's position. [footnote omitted]

The Trust Company, joined by Trinity [University], filed an amended motion for summary judgment, [the independent coexecutor] and Thuss filed a cross-motion for summary judgment, and the probate court heard argument on all the motions. The court rendered a final judgment on November 9, 2007, granting the motion for summary judgment filed by The Trust Company and Trinity [University] and denying the one filed by [the independent coexecutor] and Thuss. The probate court declared the Will did not direct the GST tax for the Ranch to be paid from the residuary estate so “the GST tax must thus be charged to such property,” i.e., the Ranch. The probate court impliedly found the Will did not contain a sufficiently specific reference to the GST tax to remove it from the statutory scheme of section 2603(b) of the Internal Revenue Code. Denman and Thuss appealed.

Id. at 641–42.

In Denman I, the parties agreed the devise of the Ranch to Thuss was a generation-skipping transfer as defined by section 2611 of the Internal Revenue Code. Id. at 645. They also agreed the transfer of the Ranch was subject to the GST tax. Id. (citing 26 U.S.C. § 2601). Later, after prompting at oral argument, Thuss conceded that federal law mandated the GST tax be charged to the Ranch unless the Will directed otherwise “by specific reference to the tax imposed by section 2603(b),” which provides that unless otherwise directed by the governing instrument by specific reference to the tax imposed, the tax imposed on a generation-skipping transfer must be charged to the transferred property. Id. (citing 26 U.S.C. § 2603(b)). The question on appeal was whether Article XII of Denman's will specifically referred to the GST tax as one of the taxes to be paid by the residuary estate. Denman, 270 S.W.3d at 645–46.

In Denman I, prior to his concession at oral argument, Thuss devoted much of his brief to arguing Denman's intent. Id. at 646. However, at oral argument, the parties agreed, as did we, that section 2603(b) controlled regardless of Denman's intent, holding Thuss's intent arguments were misplaced and the only relevant inquiry was whether Article XII of the will contained a specific reference to the GST tax as required by section 2603(b). Id. The presence or absence of the statutorily mandated specific reference would determine whether the GST tax was charged to the Ranch, i.e., to Thuss, or would be paid out of the residuary.

Article XII of Denman's will provided:

Any transfer, estate, inheritance, succession and other death taxes which shall become payable by reason of my death shall be apportioned as follows: Any taxes attributable to any property passing under my exercise of powers of appointment in paragraph X [and I believe there will be no taxes on this exercise of my powers of appointment as they were limited in the case of my grandmother's will and as I restricted and relinquished those powers under the gift and legacy by my grandfather prior to 1952 in order to make them nontaxable] shall be allocated on a pro rata basis to that legacy and shall be paid out of the property thereby transferred, any other such taxes shall be paid out of my residuary estate.

Id. at 645. After reviewing federal tax court cases, which we determined were controlling pursuant to the supreme court's decision in U.S. v. Ray Thomas Gravel Co., 380 S.W.2d 576, 580 (Tex.1964), we held Article XII of the will did not contain a sufficiently explicit reference to the GST tax. Accordingly, without a specific reference, section 2603(b) applied and mandated the GST tax be allocated and charged to the Ranch, which made Thuss liable for the tax payment out of his bequest. Id. at 648.

However, in our discussion of the inapplicability of the testator's intent, this court included a footnote which stated:

The issue of whether a devisee may have a viable claim under state law for reimbursement for the amount of taxes paid where the testator's clear intent was for the devisee to receive the full value of the bequest is not before us.

Id. at 646 n. 3. Approximately one month after our opinion issued, Thuss sent a letter to The Trust Company requesting reimbursement for any GST taxes charged to and paid from the bequest of the Ranch:

As a beneficiary subject to the Generation Skipping Transfer Tax under the Will of Gilbert M. Denman Jr. (“The Will”) and pursuant to the ruling of the 4th Court of Appeals, barring review by the Texas Supreme Court, property to be passed to me...