United States v. Johnson

• Decision Date: 01 December 2016
• Docket Number: Case No. 2:11–cv–00087
• Parties: UNITED STATES of America, Plaintiffs. 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

224 F.Supp.3d 1220

UNITED STATES of America, Plaintiffs.

v.Mary Carol S. JOHNSON; James W. Smith; Marian S. Barnwell; Billie Ann S. Devine; and Eve H. Smith, Defendants.

Case No. 2:11–cv–00087

United States District Court, D. Utah, Central Division.

Signed December 1, 2016

John K. Mangum, US Attorney's Office, Salt Lake City, UT, Richard A. Schwartz, Virginia Cronan Lowe, US Department of Justice, Washington, DC, for Plaintiffs.

Thomas R. Barton, Prince Yeates & Geldzahler, Salt Lake City, UT, for Defendants.

MEMORANDUM DECISION AND ORDER

Clark Waddoups, United States District Judge

This is a tax case filed by the United States to collect unpaid federal estate taxes owed by the Estate of Hazel Anna S. Smith ("Estate"). This matter is before the court on the plaintiff's Second Motion for Summary Judgment (Dkt. No. 117), defendants' Motion for Reconsideration of the court's prior order granting partial summary judgment in favor of the government (Dkt. No. 119), and defendants' Motion for Summary Judgment (Dkt. No. 122).

FACTUAL BACKGROUND

The defendants in this action include the four children of Anna S. Smith (the "Decedent"), namely Mary Carol S. Johnson, James W. Smith, Marian S. Barnwell, and Billie Ann S. Devine. During the course of this litigation, Marian S. Barnwell and Billie Ann S. Devine passed away, and their estates have not been substituted as defendants. Eve H. Smith, who was named as a fifth defendant, is the wife of James W. Smith. In its prior order in this case, the court dismissed Mrs. Smith as a party to the litigation. (Am. Mem. Decision and Order, Dkt. No. 75.)

During her lifetime, Decedent and two of her children, defendants Mary Carol S. Johnson ("Johnson") and James W. Smith ("Smith"), executed a trust agreement dated February 8, 1982 for the creation of The Anna Smith Family Trust (the "Trust"), in which Decedent, Johnson and Smith were named as co-trustees. The Trust was funded on February 9, 1982 by 11,466 shares of stock in State Line Hotel, Inc. ("Hotel"). The Hotel was the holder of a Nevada gaming license. Nearly one year later, on February 1, 1990, Decedent, Johnson and Smith executed an amended trust agreement, which removed Smith and Johnson as co-trustees and left Decedent as the sole trustee of Trust.

On May 1, 1990, Decedent executed the Second Amended Trust Agreement ("Trust Agreement") as both grantor and sole trustee, which was the agreement in effect at the time of Decedent's death on September 2, 1991. It is undisputed that the Decedent had an unlimited power to modify, alter, amend, revoke, or terminate the trust at any time during her life. It is also undisputed that the Decedent, as grantor, had the right to withdraw principal and income from the Trust as she directed during her lifetime, and that no Trust beneficiaries had an enforceable right to any distributions from the Trust during Decedent's life. The Trust Agreement named Johnson and Smith as successor trustees. Johnson and Smith were also named in the Decedent's will as personal representatives of Decedent's Estate. Neither Decedent's Estate nor the Trust have been named as defendants in this lawsuit.

Upon Decedent's death, her 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; Dkt. No. 32, Ex. A.) It further directed the personal representatives that "claims against [the] estate" may be settled and discharged in the "absolute discretion of [the] Personal Representatives," although it did not expressly direct the personal representatives to pay any federal estate tax levied against the Estate. (Id. ) The "rest and residue" of the Estate was to be delivered to the successor trustees and added by them to the principal of the Trust to be administered as directed by the trustees. (Id. at ¶ IV.)

The Trust Agreement provided for the successor trustees to make specific distributions, as soon as possible after the Decedent's death, from the principal of the Trust to individuals who are not parties to this suit. (Trust Agreement, 2; Dkt. No. 32, Ex. B.) The successor trustees were then directed to

pay any and all debts and obligations of the GRANTOR, the last illness, funeral, and burial expenses of the GRANTOR and any State and Federal income, inheritance and estate taxes which may then be owing or which may become due and owing as a result of the GRANTOR's death.

(Id. ) (Emphasis added.) After these expenses were paid by the successor trustees, one third of the remaining Trust corpus (not to exceed $1,000,000) was to be divided into four equal parts to be distributed to one of the four family limited partnerships that had been established for each of the heirs. (Id. at 4.) Finally, the remaining principal and undistributed income of the Trust was to be distributed equally between the heirs by the successor trustees. (Id. at 4–5.) The heirs also received benefits valued at $369,878 from several life insurance policies belonging to the Decedent. (Dkt. No. 86–3, p. 8.)

As directed by the Trust Agreement, the successor trustees filed a federal estate tax return with the Internal Revenue Service ("IRS") on June 1, 1992. The Decedent's gross estate was valued on the return at $15,958,765, resulting in a federal estate tax liability of $6,631,448, of which $4,000,000 was paid at the time of filing. (See United States Estate Tax Return, Dkt. No. 86–3.) The majority of the Decedent's gross estate consisted of 9,994 shares of stock in the Hotel, valued by a valuation expert on the return at $11,508,400. Because the Hotel was a closely held business and its value constituted more than thirty-five percent of the Decedent's adjusted gross estate, the successor trustees validly elected to defer payment of the remainder of the federal estate tax liability pursuant to 26 U.S.C. § 6166(a). Consistent with Section 6166, the election provided that the remaining balance of the tax liability would be deferred for five years, at which time the successor trustees would pay it in ten annual installments beginning on June 2, 1997 and ending on June 2, 2006. (See Election, Dkt. No. 32–5.) After receiving the estate tax return, the IRS properly assessed the Estate for unpaid estate taxes on July 13, 1992.

It is undisputed that Nevada gambling law limited the ability of a Trust to own stock in a casino. The Trust and the successor trustees had received special permission for ownership in the Hotel that was set to expire in January 1993. (Ltr. from Nevada Gaming Ctrl. Bd. dated July 23, 1992; Dkt. No. 139, p. 220.) The parties do not dispute that because the application process to gain permanent approval for such ownership was extensive, expensive, and ultimately uncertain, the successor trustees decided to distribute the Hotel stock from the Trust to the beneficiaries. Accordingly, on December 31, 1992, the successor trustees and the heirs executed an agreement (the "Distribution Agreement") distributing the remaining Trust assets to the heirs. (See Agreement; Dkt. No. 32, Ex. G.) The Distribution Agreement indicated the following regarding the outstanding estate tax liability:

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.

(Id. ) On December 28, 1992, a few days prior to signing this agreement, the Estate paid the IRS an additional $1,000,000 on the deferred tax owed. Defendants assert, and the government has provided no contrary evidence, that at the time the Distribution Agreement was signed, their combined net worth was approximately $21.1 million, whereas the estate tax liability at that time was approximately $1.46 million. From the date the Distribution Agreement was signed until 2001, it is undisputed that additional payments on the deferred tax totaling $1,399,221.87 were made to the IRS by the Hotel on behalf of the defendants, who held the majority of the ownership of the Hotel from 1992 to 2001.

On May 30, 1995, approximately two years prior to the start date of the Section 6166(a) deferred tax installment payments, the IRS issued a Notice of Deficiency against the Estate. The IRS claimed that the 9,994 shares of Hotel stock were worth $15,500,000 rather than $11,508,400 at the time of Decedent's death. (See Notice of Deficiency; Dkt. No. 32, Ex. E.) According to the IRS, this 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. The IRS assessed the Estate for the second time pursuant to that settlement on December 30, 1996.

On May 27, 1997, about a week prior to the due date of the first estate tax installment payment, Colleen Girard, an agent from the IRS, sent a letter to Johnson in her capacity as executor of the Estate, informing her "of an alternative to your continued personal liability for the unpaid estate tax ... deferred under 26 U.S.C. Section 6166." One of the alternatives offered was for Johnson "to furnish a Special Lien for Estate Tax Deferred Under Section 6166, as described in 26 U.S.C. Section 6324A." (Ltr. from Colleen Girard dated May 27, 1997; Dkt. No. 122–2, pp. 3–4.) Accordingly, on August 4, 1997, after obtaining additional information from the IRS about the information required to submit the Section 6324A special lien, Johnson and Smith, through counsel, provided the...