United States v. Johnson, 032919 FED10, 17-4083

Docket Nº:17-4083, 17-4093, 18-4036
Opinion Judge:MURPHY, CIRCUIT JUDGE.
Party Name:UNITED STATES OF AMERICA, Plaintiff - Appellant / Cross-Appellee, v. MARY CAROL S. JOHNSON; JAMES W. SMITH, Defendants - Appellees / Cross-Appellants, and MARIAN S. BARNWELL; BILLIE ANN S. DEVINE; EVE H. SMITH, Defendants.
Attorney:Clint A. Carpenter, Attorney, Tax Division, Department of Justice (John W. Huber, United States Attorney, Of Counsel; Richard E. Zuckerman, Principal Deputy Assistant Attorney General; Arthur T. Catterall, Attorney, Tax Division, Department of Justice, with him on the briefs), Washington, D.C., f...
Judge Panel:Before TYMKOVICH, Chief Judge, MURPHY and HARTZ, Circuit Judges.
Case Date:March 29, 2019
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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UNITED STATES OF AMERICA, Plaintiff - Appellant / Cross-Appellee,

v.

MARY CAROL S. JOHNSON; JAMES W. SMITH, Defendants - Appellees / Cross-Appellants,

and

MARIAN S. BARNWELL; BILLIE ANN S. DEVINE; EVE H. SMITH, Defendants.

Nos. 17-4083, 17-4093, 18-4036

United States Court of Appeals, Tenth Circuit

March 29, 2019

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH (D.C. NO. 2:11-CV-00087-CW)

Clint A. Carpenter, Attorney, Tax Division, Department of Justice (John W. Huber, United States Attorney, Of Counsel; Richard E. Zuckerman, Principal Deputy Assistant Attorney General; Arthur T. Catterall, Attorney, Tax Division, Department of Justice, with him on the briefs), Washington, D.C., for Plaintiff-Appellant/Cross-Appellee.

Thomas R. Barton, Prince, Yeates & Geldzahler (James A. Boevers, Prince, Yeates & Geldzahler; David E. Sloan and Jennifer A. Whitlock, Sloan & Sloan, P.C., with him on the briefs), Salt Lake City, Utah, for Defendants-Appellees/Cross-Appellants.

Before TYMKOVICH, Chief Judge, MURPHY and HARTZ, Circuit Judges.

MURPHY, CIRCUIT JUDGE.

I.

Introduction

The three consolidated appeals currently before this court involve an action brought by the Government to collect unpaid federal estate taxes. In Appeal No. 17-4083, the Government appeals from the district court's determination that its state-law contract claim was time-barred because it was subject to a Utah state six-year state statute of limitations. Exercising jurisdiction under 28 U.S.C. § 1291, we conclude the state-law claim is governed by the ten-year statute of limitations set out in 26 U.S.C. § 6502(a) because the Government is proceeding in its sovereign capacity.

Appeal No. 17-4093 is a cross-appeal from the district court's ruling that the Government's transferee-liability claim, brought pursuant to 16 U.S.C. § 6324(a)(2), was timely. Exercising jurisdiction under 28 U.S.C. § 1291, we conclude the transferee-liability claim was timely filed because the limitations period applicable to the § 6324(a)(2) transferees is the same as the limitations period applicable to the estate.

In Appeal No. 18-4036, the Government appeals from the district court's order awarding attorney's fees to Appellees. Exercising jurisdiction under 28 U.S.C. § 1291, we conclude Appellees are not entitled to attorney's fees because the Government's position in this litigation was substantially justified. See 26 U.S.C. § 7430(c)(4)(B).

II.

Background

The issues raised in these consolidated appeals arise from the Government's attempt to collect unpaid estate taxes that were assessed against the estate of Hazel Anna S. Smith (the "Estate").1 During her lifetime, Ms. Smith (the "Decedent") created The Anna Smith Family Trust (the "Trust") and funded it with shares of stock in State Line Hotel, Inc. (the "Hotel"). The Hotel was a closely held corporation and the holder of a Nevada gaming license. At the time of her death, the Decedent was the sole trustee of the Trust. Two of her children, Mary Carol S. Johnson and James W. Smith, were named as successor trustees. The Decedent also executed a will naming Johnson and Smith as personal representatives of her estate. The Decedent died on September 2, 1991. Her will directed that the "rest and residue" of her estate be added to the principal of the Trust to be administered by the successor trustees.

Consistent with the terms of the trust agreement, the successor trustees filed a federal estate tax return with the Internal Revenue Service ("IRS") on June 1, 1992. The return calculated the Estate's federal estate tax liability as $6, 631, 448.2 Of that total, only $4 million was paid to the IRS at the time the return was filed. The successor trustees made a valid election pursuant to 26 U.S.C. § 6166(a), deferring payment of the balance of the federal estate tax liability, because the Hotel stock accounted for more than thirty-five percent of the Decedent's adjusted gross estate. The ten annual installment payments would begin on June 2, 1997 and end on June 2, 2006. The IRS assessed the Estate for the unpaid estate taxes on July 13, 1992.

Although the assessed estate taxes remained unpaid, the successor trustees distributed Hotel stock from the Trust to the trust beneficiaries on December 31, 1992. This distribution was motivated by Nevada restrictions on casino ownership by a trust. Cognizant of the outstanding federal estate tax liability, however, the successor trustees and the trust beneficiaries executed an agreement (the "Distribution Agreement") that contained the following provision: Liability for Taxes. Each of the BENEFICIARIES acknowledges that the assets distributed to him or her will accomplish a complete distribution of the assets of the Trust. A portion of the total federal estate tax upon the Estate of Anna Smith is being deferred and is the equal obligation of the BENEFICIARIES to pay as the same becomes due. Likewise, if, upon audit, additional federal estate taxes or Utah inheritance taxes are found to be owing, the responsibility for any such additional taxes, interest or penalties will be borne equally by the BENEFICIARIES.

The beneficiaries identified in the Distribution Agreement were the Decedent's children: Johnson, Smith, Marian S. Barnwell, and Billie Ann S. Devine.

The Hotel filed for Chapter 11 bankruptcy in January 2002. Beginning with the annual installment payment due on June 2, 2002, the Estate ceased making payments of the deferred federal estate taxes. The IRS declared the installment agreement to be in default as of December 18, 2003. In June 2005, the IRS learned of the existence of the Distribution Agreement.

In 2011, the Government filed a complaint naming the Decedent's children-Johnson, Smith, Barnwell, and Devine-as defendants and seeking recovery of $1, 569, 851 in unpaid federal estate taxes.3 The Government's original complaint raised multiple claims for relief, one of which is relevant to Appellees' cross-appeal. In the relevant claim, the Government alleged all four of the Decedent's children were liable for the Estate's unpaid federal estate taxes to the extent they received property included in the gross estate (the "§ 6324(a)(2) claim"). See 26 U.S.C. § 6324(a)(2). Appellees' motion to dismiss the § 6324(a)(2) claim was granted in part and denied in part. The district court determined that the Government's § 6324(a)(2) claim was not time-barred, but that it could only be asserted as to the life insurance proceeds received by Appellees. Because Appellees conceded liability as to the life insurance proceeds, the district court entered judgment in favor of the Government on the § 6324(a)(2) claim but only to the extent of those distributions.

The Government moved to file an amended complaint in August 2012.4 In its amended complaint, the Government sought to enforce rights as a third-party beneficiary of the Distribution Agreement (the "third-party beneficiary claim"). The district court granted judgment in favor of Appellees on the claim, concluding it was untimely under Utah law and rejecting the Government's argument that the timeliness of the claim was governed by federal law.

III. Discussion

A. Timeliness of the Third-Party Beneficiary Claim

In Appeal No. 17-4083, the Government appeals the judgment entered in favor of Appellees on its state-law claim as a third-party beneficiary of the Distribution Agreement. The Government moved for summary judgment on this claim in March 2015, arguing it was the intended beneficiary of the Distribution Agreement because the Decedent's children agreed therein to pay any estate taxes as they became due and payable. See Tracy Collins Bank & Trust v. Dickamore, 652 P.2d 1314, 1315 (Utah 1982) ("Where it appears from the promise or the contracting situation that the parties intended that a third party receive a benefit, then the third party may enforce his rights in the courts and is deemed a donee beneficiary."). In their written opposition to the Government's motion, Appellees conceded the Government is a third-party beneficiary of the Distribution Agreement but argued the claim was untimely because it was not filed within the six-year Utah statute of limitations applicable to contract claims. See Utah Code Ann. § 78B-2-309(2).

The district court agreed with Appellees and dismissed the Government's third-party beneficiary claim as time-barred. The court rejected the Government's argument that the timeliness of the claim is governed by the ten-year federal statute of limitations applicable to an action brought to collect assessed taxes. See 26 U.S.C. § 6502(a). We review statute of limitations questions de novo. United States v. Anderson, 319 F.3d 1218, 1219 (10th Cir. 2003).

The sole question before this court is whether the six-year...

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