U.S. v. Davenport, CIV.A G-03-923.
| Decision Date | 18 June 2004 |
| Docket Number | No. CIV.A G-03-923.,CIV.A G-03-923. |
| Court | U.S. District Court — Southern District of Texas |
| Parties | UNITED STATES of America, Plaintiff, v. Gordon E. DAVENPORT, Defendant. |
Ralph F. Shilling, Jr., Dept of Justice, Dallas, TX, Martin M. Shoemaker, U S Dept of Justice, Washington, DC, for Plaintiff.
Gordon E. Davenport, Jr., Davenport Law Firm, Alvin, TX, James L. Kincaid, Crowe & Dunlevy, Tulsa, OK, for Defendant.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND GRANTING IN PART AND DENYING IN PART THE GOVERNMENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT
When Gordon E. Davenport and his cousins received large blocks of Hondo Drilling Company stock from their financially savvy aunt, they got more than they bargained for. Confusion regarding ownership of the stock, proper valuation of the shares, and one cousin's failure to comply with the terms of a family agreement regarding payment of gift taxes, have resulted in years of litigation and the prospect of staggering financial liability to the Federal Government. The United States of America ("the United States" or "the Government") filed this lawsuit to recover unpaid gift taxes arising out of the transfer of stock from Birnie Davenport, now deceased, to her nephews, Defendant Gordon E. Davenport ("Davenport" or "Defendant") and Charles E. Botefuhr ("Botefuhr"), and her niece Patricia L. Vestal ("Vestal"). Now before the Court come Defendant's Motion for Summary Judgment, which asserts that the Government's claims are barred by limitations, and the Government's Response and Cross Motion for Partial Summary Judgment, which seeks a determination that the Government's claims were timely asserted. For the reasons stated below, Defendant's Motion is hereby respectfully GRANTED IN PART AND DENIED IN PART, and the Government's Motion for Partial Summary Judgment is hereby GRANTED IN PART AND DENIED IN PART.
Birnie Davenport and her older sister, Elizabeth, lived together most of their adult lives. Title to their house was held in both of their names, and they shared equally in construction and maintenance costs. Neither woman ever married, and both had long and successful careers in the oil and gas industry. Elizabeth served as an assistant to senior corporate executives, and Birnie was a legal secretary. Over the years, the two sisters commingled their earnings into a joint account and purchased assets together. Pursuant to an oral agreement between the sisters, legal title to their shared assets was in Elizabeth's name; however, they considered all investments to be jointly owned. One of their better investments was the purchase of stock in Hondo Drilling Company, a small drilling company located in New Mexico and West Texas, and Union Supply, a related supply company. The two sisters executed wills containing identical provisions. When the first sister died, her estate would go into a testamentary trust for the benefit of the surviving sister. Upon the death of the second sister, the testamentary trust and the survivor's estate would be divided in two ways. All Hondo Drilling and Union Supply stock was to be divided into three equal shares among Davenport, Botefuhr, and Vestal. The balance of the estate was to be divided among these three cousins and two other cousins, giving a one-fifth share to each. Elizabeth Davenport died on December 2, 1979. In early 1980, her will was admitted to probate. Davenport, Botefuhr, and Vestal were appointed co-executors.
In 1980, Birnie Davenport transferred her ownership interest in 1,610 shares of stock in Hondo Drilling Co., Inc. to Defendant, Botefuhr, and Vestal. Birnie Davenport divided the stock roughly equally among the cousins, but she effected the transfers in two ways. With Davenport and Vestal, Birnie Davenport entered into sales agreements, selling 536 shares of Hondo stock to Vestal and 537 shares to Davenport.1 The sales agreements valued the stock at $804 per share, which was the redemption price set by the directors of Hondo Drilling for the fiscal year 1980. As consideration for the stock, Davenport and Vestal each paid Birnie Davenport $1,000, and they executed promissory notes agreeing to pay Birnie Davenport $449,175.50 and $448,353.50, respectively, in twenty annual installments beginning in July of 1986. The sales agreements also called for annual interest on the unpaid principal.
In her 1980 Federal Income Tax Return, filed in 1981, Birnie Davenport reported these stock sales, using Form 6252 to detail the installment provisions, the subject-matter, and the fact that the sales were to related parties. See Form 6252, Computation of Installment Sale Income, Birnie Davenport 1980 Federal Income Tax Return, Government's Exh. 1. Less than two years after the parties entered into the sales agreements, and over four years before Davenport and Vestal were due to commence payment, Birnie Davenport forgave the balances on the notes. In March of 1983, Birnie Davenport filed a 1982 United States Gift Tax Return reporting the forgiveness of the notes, and she paid gift taxes on these gifts. See Government's Exh. 4, Stipulation of Facts, paras. 32-36.2
Unlike Davenport and Vestal, Botefuhr received his 537 shares of Hondo stock as an outright gift from Birnie Davenport in 1980. In late 1980, Botefuhr, Vestal, and Defendant signed an agreement ("the Family Agreement"), in which Botefuhr agreed to file any required gift tax returns for Birnie Davenport and also to pay any gift taxes resulting from his share of the Hondo stock.
In November 1982, the Internal Revenue Service ("IRS") sent a deficiency notice to the Estate of Elizabeth Davenport. The IRS had determined that all of the sisters' 3220 shares of Hondo stock belonged to Elizabeth Davenport's estate. In 1983, the Estate of Elizabeth Davenport petitioned the United States Tax Court to challenge this determination. The parties settled this litigation in May 1984, agreeing that half of the Hondo stock was owned by Elizabeth Davenport and that half was owned by Birnie Davenport.
Birnie Davenport died in February 1991. Defendant, Vestal, and Botefuhr were appointed personal representatives of Birnie Davenport's Estate ("the Estate"). At the time of her death, no gift tax return had been filed reflecting the 1980 gift of Hondo stock to Botefuhr. On November 7, 1991, the Estate filed a gift tax return for 1980 reporting the transfer of Hondo stock from Birnie Davenport to Botefuhr. The Estate valued the Hondo stock at $804 per share, resulting in a total tax liability of $95,322, which the Estate paid. After examining the return, the IRS determined that the Estate had understated the value of the gift to Botefuhr. The IRS also determined that Birnie Davenport had sold shares of Hondo stock to Defendant and Vestal in 1980 at a discounted rate, resulting in additional taxable gifts to them. On September 20, 1994, the IRS issued a notice of deficiency to the Estate, asserting a gift tax deficiency of $1,422,154, as well as an addition to tax of $355,538.50 for failure to file a timely gift tax return. See Estate of Davenport v. Commissioner, 184 F.3d 1176, 1181 (10th Cir.1999).
The Estate petitioned the Tax Court for a redetermination of the deficiency. On November 7, 1997, the Tax Court determined that there was a federal gift tax deficiency of $822,653 due from the Estate for the calendar year 1980 as well as an addition to tax of $205,663 for failure to file a timely gift tax return. See id. The Tenth Circuit affirmed the Tax Court's Decision on July 13, 1999, concluding that Birnie Davenport made taxable gifts to Defendant, Vestal, and Botefuhr during the third quarter of 1980. See id. at 1188. On March 2, 1998, the IRS made an assessment against the Estate for the deficiency, together with penalties and interest, and sent a notice and demand for payment to the Estate. The Estate did not pay the tax.
On February 2, 2000, the Government filed its complaint in this case in the United States District Court for the Northern District of Oklahoma. In the complaint, the Government sought (1) to reduce to judgment the liability of the Estate for the amounts due on the gift tax assessment; (2) to reduce to judgment the personal liability for unpaid gift taxes imposed upon Defendant, Vestal, and Botefuhr by 26 U.S.C. § 6324(b); and (3) judgments against the individual defendants, under 31 U.S.C. § 3713, as representatives of the Estate who had depleted its assets without satisfying the outstanding gift tax liability. The District Court asserted personal jurisdiction over Davenport and Botefuhr, both Texas residents, because they served as personal representatives of the Estate. After both Parties filed motions for summary judgment, the defendants conceded the issue of the Estate's liability, and the Government conceded the issue of the defendants' liability as representatives of the Estate. The District Court held that sections 6501 and 6502 of the Internal Revenue Code supplied the limitations period for personal liability claims against transferees under § 6324(b); therefore, the Government's claim was timely. See United States v. Estate of Davenport, 159 F.Supp.2d 1330 (N.D.Okla.2001) (citing United States v. DeGroft, 539 F.Supp. 42, 44 (D.Md.1981)). The Tenth Circuit reversed the District Court's ruling on personal jurisdiction over Botefuhr and Davenport but affirmed the statute of limitations issue, holding that the limitations period established by § 6502(a) governs individual liability claims under § 6324(b) and that the Government's claim was timely against Vestal. See United States v. Botefuhr, 309 F.3d 1263 (10th Cir.2002). The Tenth Circuit remanded for determination of the value of the Hondo stock on the date of the gift.
On remand, the District Court transferred the Government's action against Defendant Gordon E. Davenport to this Court. On March 5, 2004...
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...position that the transfer was, in fact, a loan. See 26 U.S.C. §§ 2501(a), 2502(c), 6019; see also, e.g., United States v. Davenport, 327 F. Supp. 2d 725, 729 (S.D. Tex. 2004) ("Under the Internal Revenue Code, a transfer of property by gift in any calendar year is subject to tax for that c......