United States v. Johnson
| Decision Date | 29 July 2013 |
| Docket Number | Case No. 2:11-CV-00087 |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. MARY CAROL S. JOHNSON; JAMES W. SMITH; MARIAN S. BARNWELL; BILLIE ANN S. DEVINE; and EVE H. SMITH, Defendants. |
| Court | U.S. District Court — District of Utah |
AMENDED MEMORANDUM
DECISION AND ORDER
The United States has brought this action against Defendants for the collection of an estate tax deficiency owed by the estate of Anna S. Smith. Defendants have moved to dismiss the case pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that the Government has failed to state a claim upon which relief can be granted. (Dkt. No. 31.) For the reasons discussed below, the court grants in part and denies in part Defendants' motion to dismiss.1
Anna S. Smith ("Decedent") died testate on September 2, 1991. She was survived by her children Mary Carol S. Johnson ("Johnson"), James W. Smith ("Smith"), Marian S, Barnwell ("Barnwell"), and Billie Ann S. Devine ("Devine"). The surviving children are the Decedent'sHeirs and Defendants in this action.2 Prior to her death, the Decedent executed a Last Will and Testament and established the Anna Smith Family Trust (the "Trust"). Johnson and Smith are named as the personal representatives of the Decedent's Estate and are also the trustees of the Trust (hereinafter the "Personal Representatives" or "Trustees").
The Will directed the Personal Representatives to ensure that the Decedent's "debts, last illness, and funeral and burial expenses be paid as soon after [her] death as reasonably convenient." Will, ¶ II . While the Will did not expressly direct the Personal Representatives to pay any federal estate tax levied against the Estate, it stated that "claims against [the] estate" may be settled and discharged in the "absolute discretion of [the] Personal Representatives." Id. The Will finally directed that the "rest and residue" of the Estate be delivered to the Trustees to be added to the principal of the Trust and administered in accordance with the provisions of the trust agreement. Id. ¶ V.
Id. (emphasis added). After these distributions had been made, the Trustees were to divide a third of the remaining trust corpus (not to exceed $1,000,000) into four equal parts to be distributed to four family limited partnerships one of which had been established for each of the Heirs. Id. at 4. Finally, the Trustees were directed to distribute the remaining principal and undistributed income of the trust equally to the Heirs. Id. at 4-5. The Heirs also received benefits valued at nearly $370,000 from several life insurance policies belonging to the Decedent.
In accordance with the Trust Agreement, the Trustees filed a federal estate tax return with the Internal Revenue Service ("IRS") on June 1, 1992. The return valued the Decedent's gross estate at $15,958,765, with a federal estate tax liability of $6,631,448. See United States Estate Tax Return (Dkt. No. 32, Ex. C). The bulk of the Estate consisted of 9,994 shares of stock in State Line Hotel, Inc. (the "Hotel") valued at $11,508,400. When the return was filed, the Trustees elected to defer payment of a portion of the federal estate tax liability.3 The deferred tax liability was to be paid in ten annual installments beginning on June 2, 1997 and ending on June 2, 2006. After receiving the estate tax return, the IRS properly assessed the Estate for unpaid estate taxes on July 13, 1992.
On December 31, 1992, the Trustees and Heirs executed an agreement (the "Distribution Agreement") distributing all the remaining trust assets to the Heirs. See Agreement (Dkt. No.32, Ex. G). With regard to the outstanding federal estate tax liability, the Distribution Agreement states as follows:
6. 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.
On May 30, 1995 the IRS issued a Notice of Deficiency against the Estate, determining that the Hotel shares were worth $15,000,000 at the time of the Decedent's death. The adjusted valuation resulted in an alleged additional estate tax of $2,444,367. The Estate contested the Notice of Deficiency, and a settlement was ultimately reached where the Estate agreed to pay additional federal estate taxes in the amount of $240,381. Thus, the total federal estate tax was $6,871,829.
In January 2002, the Hotel filed for Chapter 11 bankruptcy in the state of Nevada, and shortly thereafter, the court approved the sale of all the Hotel's assets to a third party free and clear of all liens, claims, and encumbrances. The Heirs received no value for their Hotel shares, but each received $126,000 annually for signing a two-year non-compete agreement. The Heirs also have each reported losses in excess of $1,000,000 in connection with their ownership of the Hotel stock, which have been used to offset taxable income.
In 2003, the Estate defaulted on its federal estate tax liability, after having paid $5,000,000 of the total amount due. In 2005, the IRS sent a notice and demand for payment ofthe tax liability to the Estate and the Personal Representatives. Despite this notice and demand, the Personal Representatives have failed to fully pay the assessments made against the Estate. The IRS has made efforts to collect the taxes due through levies against the Estate, the Trust, and Defendants but has failed to yield any collections. The action currently before the court is a further attempt by the Government to collect the outstanding tax liability against the Estate.
When evaluating a motion to dismiss under Rule 12(b)(6), the court "must accept all the well-pleaded allegations of the complaint as true and must construe them in the light most favorable to the plaintiff." David v. City & County of Denver, 101 F.3d 1344, 1352 (10th Cir. 1996) (quotations and citations omitted). The court need not, however, consider allegations which are conclusory, or that "do not allege the factual basis" for the claim. Brown v. Zavaras, 63 F.3d 967, 972 (10th Cir. 1995); see also Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991) (). Moreover, the court is not bound by a complaint's legal conclusions, deductions, and opinions couched as facts. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations omitted).
Although all reasonable inferences must be drawn in the non-moving party's favor, a complaint will only survive a motion to dismiss if it contains "'enough facts to state a claim to relief that is plausible on its face.'" Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (quoting Twombly, 550 U.S. at 570). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)(citations omitted). Under this standard, a claim need not be probable, but there must be facts showing more than a "sheer possibility" of wrongdoing. Id.
The Government claims that each Heir is liable for the Estate tax pursuant to 26 U.S.C. § 6324(a)(2). Section 6324(a)(2) imputes personal liability for federal estate taxes to certain individuals who receive property from an estate at the time of a decedent's death. The first sentence of section 6324(a)(2) states:
(2) Liability of transferees and others. If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee . . . , surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate . . . to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax.
26 U.S.C. § 6324(a)(2) (2010) (emphasis added). The section lists six distinct categories of individuals who may be personally liable. The categories that have relevance in this case are "transferee," "trustee," and "beneficiary." For ease of reference, when the court collectively refers to these categories, the court will refer to them as a "Distributee" or "Distributees."
The Trustees admit they fall within the scope of section 6324(a)(2). Likewise, the Heirs admit that as beneficiaries of the Decedent's life insurance proceeds, they also fall within the scope of section 6324(a)(2) to the extent of the value of the insurance proceeds. The Heirs deny, however, that they became Distributees when property from the trust corpus was distributed to them. They therefore deny all...
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