Schusterman v. U.S., 94-5106

• Decision Date: 22 August 1995
• Docket Number: No. 94-5106,94-5106
• Citation: 63 F.3d 986
• Parties: -6316, 95-2 USTC P 60,206 Charles SCHUSTERMAN and Lynn N. Schusterman, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 986

63 F.3d 986

76 A.F.T.R.2d 95-6316, 95-2 USTC P 60,206

Charles SCHUSTERMAN and Lynn N. Schusterman, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 94-5106.

United States Court of Appeals Tenth Circuit.

Aug. 22, 1995.

Richard A. Freling, Dallas, TX (Donald A. Glassberg of Levenfeld, Eisenberg, Janger, Glassberg & Halper, Chicago, IL, Theodore A. Sinars of Madden, Jiganti, Moore & Sinars, Chicago, IL, David G. Glickman of Hopkins & Sutter, Dallas, TX, with him on the brief), for plaintiffs-appellants.

Charles Bricken, Atty., Dept. of Justice, Washington, DC, (Loretta C. Argrett, Asst. Atty. Gen., Richard Farber, Atty., Stephen Charles Lewis, U.S. Atty., of counsel, Dept. of Justice, Washington, DC, with him on the brief), for defendant-appellee.

Before ANDERSON, BARRETT, and BALDOCK, Circuit Judges.

BALDOCK, Circuit Judge.

Plaintiffs Charles and Lynn N. Schusterman ("Taxpayers") filed this tax refund action against Defendant United States in the district court pursuant to 28 U.S.C. Sec. 1346(a)(1), contending the Internal Revenue Service ("IRS") erroneously assessed and collected gift taxes from them. On cross motions for summary judgment, the district court entered judgment in favor of the United States. Our jurisdiction over Taxpayers' appeal arises under 28 U.S.C. Sec. 1291.

On September 21, 1980, Taxpayers transferred 420 shares of Tilco, Inc. Class B common stock to five irrevocable trusts ("Trusts"). The Trustees of the Trusts executed promissory notes payable to Taxpayers in exchange for the Tilco stock, in the principal amount of $7,954,046.60, the undisputed fair market value of the stock. The promissory notes provided interest at six percent per annum. Taxpayers and the United States stipulated, however, that the prevailing market interest rate in September 1980 was eleven and one-half percent. Tax counsel advised Taxpayers to set the interest rate of the promissory notes at six percent--the safe harbor rate referenced in I.R.C. Sec. 483(c) and specified in Treas.Reg. Sec. 1.483-1(d)(1)(ii)(B)--in order to prevent the IRS from assessing gift taxes under I.R.C. Sec. 2512(b) on the amount by which the value of the stock exceeded the value of the notes, discounted to reflect the prevailing market interest rate.

Despite Taxpayers' efforts, the IRS notified them that they owed gift taxes. The IRS determined Taxpayers owed a deficiency in gift taxes arising from the stock transfer because the promissory notes that served as consideration for the transaction did not provide the prevailing market interest rate. The IRS informed Taxpayers that use of the safe harbor interest rate under Sec. 483 and Treas.Reg. Sec. 1483-1(d)(1)(ii)(B) did not preclude it from imposing gift taxes pursuant to I.R.C. Sec. 2512(b) on the amount by which the value of the stock exceeded the present value of the notes, discounted to reflect the market interest rate. The IRS concluded that Taxpayers had made a gift to the Trusts because the value of the stock exceeded the value of the promissory notes received in exchange. That is, the promissory notes Taxpayers received in consideration for the transfer bore six percent interest, five and one-half percent less than the prevailing eleven and one-half percent market rate. Thus, the IRS disregarded the six percent rate specified in the promissory notes, and applied an annual discount rate of eleven and one-half percent. Discounting the principal amount of the promissory notes by eleven and one-half percent reduced the present value of the promissory notes to $4,601,551 which is $3,352,489 less than the $7,954,046.60 value of the stock. Pursuant to I.R.C. Secs. 2501(a)(1), 2512(b), the IRS taxed the $3,352,489 difference between the present value of the promissory notes and the value of the stock as a gift by Taxpayers to the Trusts.

Taxpayers filed gift tax returns and paid gift taxes with interest in the sum of $1,157,127.72. Thereafter, Taxpayers filed claims for refund of the taxes and interest, plus statutory interest. Taxpayers argued their use of the six percent safe harbor interest rate in the notes under I.R.C. Sec. 483 prevented the IRS from determining the present discounted value of the promissory notes using the market interest rate of eleven and one-half percent and imposing gift taxes pursuant to I.R.C. Sec. 2512(b).

After the IRS denied their refund claim, Taxpayers filed a refund action in the district court pursuant to 28 U.S.C. Sec. 1346(a)(1) contending the IRS had erroneously assessed and collected gift taxes. Taxpayers and the United States stipulated "[i]f the court determines that the 6% rate used by Plaintiffs is inapplicable to the stock-transfer transaction, then the 11.5% rate used by the IRS is applicable." On cross motions for summary judgment, the district court ruled that I.R.C. Sec. 483 does not provide a safe harbor from the application of market interest rates for purposes of gift tax valuation. Consequently, the district court concluded that Taxpayers' use of the six percent I.R.C. Sec. 483 safe harbor interest rate in the promissory notes did not prevent the IRS from discounting the value of the notes by the prevailing market rate to determine the present value of the consideration received in exchange for the stock. The district court ruled that under I.R.C. Secs. 2501(a)(1), 2512(b) the IRS was authorized to determine the present discounted value of the promissory notes using the eleven and one-half percent prevailing market interest rate, and impose gift taxes on the $3,352,489 difference between the $7,954,046.60 value of the stock and the $4,601,551 discounted value of the promissory notes. In sum, the district court held that I.R.C. Sec. 483 "is irrelevant to a 26 U.S.C. Sec. 2512 valuation of gifts" and entered summary judgment in favor of the United States. This appeal followed.

On appeal, Taxpayers contend the district court erred by ruling that Sec. 483 is not relevant to a Sec. 2512 valuation of an installment sales contract for purposes of gift tax liability. Specifically, Taxpayers argue that their use of the six percent safe harbor rate under I.R.C. Sec. 483 prevents the IRS from using the prevailing market interest rate to determine the discounted present value of the promissory notes under Sec. 2512(b).

I.

Taxpayers' argument on appeal requires us to interpret I.R.C. Sec. 483 and I.R.C. Sec. 2512. In statutory interpretation we look to the plain language of the statute and give effect to its meaning. United States v. Ron Pair Enter., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989); Johns v. Stewart, 57 F.3d 1544, 1555-56 (10th Cir.1995). " 'Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive.' " Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 835, 110 S.Ct. 1570, 1575, 108 L.Ed.2d 842 (1990) (quoting Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980)). If the statute is clear, that is the end of our inquiry. United States v. Morgan, 922 F.2d 1495, 1496 (10th Cir.), cert. denied, 501 U.S. 1207, 111 S.Ct. 2803, 115 L.Ed.2d 976 (1991). We review the district court's interpretation of a federal statute de novo. Eastern Inv. Corp. v. United States, 49 F.3d 651, 657 (10th Cir.1995). We review the district court's entry of summary judgment de novo, applying the same legal standard used by the district court under Fed.R.Civ.P. 56(c). State of Utah v. Babbitt, 53 F.3d 1145, 1148 (10th Cir.1995).

A.

The version of I.R.C. Sec. 483 in effect when Taxpayers transferred the stock to the irrevocable trusts provided:

Sec. 483. INTEREST ON CERTAIN DEFERRED PAYMENTS.

(a) Amount Constituting Interest.--For purposes of this title, in the case of any contract for the sale or exchange of property there shall be treated as interest that part of a payment to which this section applies which bears the same ratio to the amount of such payment as the total unstated interest under such contract bears to the total of the payments to which this section applies which are due under such contract.

(b) Total Unstated Interest.--For purposes of this section, the term "total unstated interest" means, with respect to a contract for the sale or exchange of property, an amount equal to the excess of--

(1) the sum of the payments to which this section applies which are due under the contract, over

(2) the sum of the present values of such payments and the present values of any interest payments due under the contract.

For purposes of paragraph (2), the present value of a payment shall be determined, as of the date of the sale or exchange, by discounting such payment at the rate, and in the manner, provided in regulations prescribed by the Secretary....

(c) Payments to Which Section Applies.--

(1) In general.--Except as provided in subsection (f), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract--

(A) under which some or all of the payments are due more than one year after the date of such sale or exchange, and

(B) under which, using a rate provided by regulations prescribed by the Secretary for purposes of this subparagraph, there is a total unstated interest.

Any rate prescribed for determining whether there is total unstated interest for purposes of subparagraph (B) shall be at least one percentage point lower than the rate prescribed for purposes of subsection (b)(2).

26 U.S.C. Sec. 483 (1976 ed.). We may determine the clear intent of Congress in enacting I.R.C. Sec. 483 by explicating the individual sections which together comprise the whole. See Ron Pair Enter., Inc., 489 U.S. at 241, 109 S.Ct. at 1030.

Section 483(c) defines the scope of I.R.C. Sec. 483. Section...