United States v. Marshall

Decision Date10 November 2014
Docket NumberNo. 12–20804.,12–20804.
Citation771 F.3d 854
PartiesUNITED STATES of America, Plaintiff–Appellee, v. Elaine T. MARSHALL, Individually, as Executrix of the Estate of E. Pierce Marshall, as Trustee of the E. Pierce Marshall, Jr. Trust and as Trustee of the Preston Marshall Trust; Finley L. Hilliard, Individually, as former executor of the Estate of James Howard Marshall, II and as former Trustee of the Eleanor Pierce (Marshall) Stevens Living Trust; E. Pierce Marshall, Jr., Individually, and as Executor of the Estate of Eleanor Pierce Stevens; Preston Marshall, Co–Trustee of the Eleanor Pierce (Marshall) Stevens Living Trust, Defendants–Appellants.
CourtU.S. Court of Appeals — Fifth Circuit


Affirmed in part, and reversed and rendered in part.

Priscilla R. Owen, Circuit Judge, filed opinion concurring in part and dissenting in part. Ivan Clay Dale, Tamara W. Ashford, Esq., Deputy Assistant Attorney General Jonathan S. Cohen Gilbert Steven Rothenberg, Esq., Deputy Assistant Attorney General U.S. Department of Justice, Washington, DC, Andrew L. Sobotka U.S. Department of Justice Dallas, TX, for PlaintiffAppellee.

William R. Cousins, III, Stephen A. Beck, Robert Don Collier, Esq., Brian J. Spiegel, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P., Emily A. Parker, Esq., Eric Gordon Reis, Scott Patrick Stolley, Thompson & Knight, L.L.P., Dallas, TX, Don Jackson, Ware, Jackson, Lee & Chambers, L.L.P., Russell Hardin, Jr., Rusty Hardin & Associates, L.L.P., John William Porter, Jeffrey D. Watters, Baker Botts, L.L.P., Houston, TX, for DefendantsAppellants.

Appeals from the United States District Court for the Southern District of Texas.

Before REAVLEY, PRADO, and OWEN, Circuit Judges.EDWARD C. PRADO, Circuit Judge:

In 1995, J. Howard Marshall, II (J. Howard) made what the IRS later determined was an indirect gift of Marshall Petroleum, Inc. (“MPI”) stock to MPI's other shareholders: (1) Eleanor Pierce (Marshall) Stevens (“Stevens”), J. Howard's former wife, who was the beneficiary of a trust that was funded by MPI stock; (2) E. Pierce Marshall (E. Pierce), J. Howard's son; (3) Elaine T. Marshall (Elaine), E. Pierce's wife; (4) the Preston Marshall Trust (“Preston Trust”), which had been formed for the benefit of J. Howard's grandson, Preston Marshall; and (5) the E. Pierce Marshall, Jr. Trust (E. Pierce Jr. Trust”), which had been formed for the benefit of J. Howard's grandson, E. Pierce Marshall, Jr. At the time that he made this indirect gift, J. Howard did not pay gift taxes. He passed away shortly after making this gift.

After several years of negotiation over J. Howard's tax liability for this indirect gift, the IRS and J. Howard's Estate entered into a stipulation that determined the value and recipients of the indirect gifts. J. Howard's Estate still did not pay the gift tax, and, pursuant to I.R.C. § 6324(b), the IRS tried to collect the unpaid gift tax from the donees. E. Pierce's Estate 1 paid approximately $45 million toward the unpaid gift tax for the benefit of donees E. Pierce, Elaine, the Preston Trust, and the E. Pierce Jr. Trust. Stevens's Estate 2 has not paid any gift tax because the Estate disputes that Stevens was a beneficiary of the 1995 gift.

In 2010, the Government brought suit against the donees, seeking to recover the unpaid gift taxes and to collect interest from the beneficiaries. The Government also sought to recover from two individuals—E. Pierce Marshall, Jr. (E. Pierce Jr.) and Finley L. Hilliard (Hilliard)—who, as representatives of various estates and trusts, allegedly paid other debts before paying those owed to the Government. In a series of orders issued in 2012, the district court found: (1) the donees' debt under § 6324(b) was a liability independent from that of the donor's unpaid gift tax, and the donees had incurred interest on that independent liability; (2) Stevens was a donee of J. Howard's indirect gift; (3) Hilliard and E. Pierce Jr. were individually liable for several of the debts they paid as executors and trustees before they paid the debt owed to the Government.

On appeal, the Appellants argue the district court erred in each of those rulings. We affirm in part and reverse and render in part.


A. Legal Background

The Internal Revenue Code imposes a tax on a “transfer of property by gift.” I.R.C. § 2501(a)(1). Subject to a few exceptions not presented in this case, this gift tax applies “whether the gift is direct or indirect,” and includes transfers of property (like stock) when the transfer was “not made for an adequate and full consideration.” I.R.C. § 2511(a); see Treas. Reg. § 25.2511–1(h). When the gift tax is not paid when it is due, the Internal Revenue Code imposes interest on the amount of underpayment. I.R.C. § 6601(a).

“The donor, as the party who makes the gift, bears the primary responsibility for paying the gift tax.” United States v. Davenport, 484 F.3d 321, 325 (5th Cir.2007) (citing I.R.C. § 2502(c)). If the donor fails to pay the gift tax when it becomes due, the Internal Revenue Code provides the donee becomes “personally liable for such tax to the extent of the value of such gift.” I.R.C. § 6324(b). The term tax includes interest and penalties, and so the donee can be held liable for the interest and penalties for which the donor is liable. See Treas. Reg. § 301.6201–1(a); 14 Mertens Law of Federal Income Taxation § 53:41 (2014). Donee liability is several, meaning that the donee can be held liable for the full amount of the gift tax that the donor owes, “regardless of what portion [of the gift the particular donee] may have received of the total amount distributed,” subject to the cap in § 6324(b). 14 Mertens Law of Federal Income Taxation § 53:42.

The Government has two means of collecting an unpaid gift tax: (1) it can bring a court proceeding against the donee, and (2) it can initiate a procedure under I.R.C. § 6901. See I.R.C. §§ 6901, 7402. Section 6901 specifies that donee liability is “subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.” I.R.C. § 6901(a).

B. Factual Background1. The gift

In 1995, J. Howard sold his stock in MPI back to the company. Because he sold the stock back for a price below its fair market value, this sale increased the value of the stock of the remaining stockholders. At the time of the sale, there were five other individuals and trusts that held MPI stock, including E. Pierce, Elaine, the Preston Trust, and the E. Pierce Jr. Trust.

The fifth stockholder of MPI stock at the time was a Grantor Retained Income Trust (“GRIT”), which paid income to Stevens. As part of her divorce settlement with J. Howard, Stevens received shares of MPI stock. In 1984, Stevens transferred all of her shares of MPI to the Eleanor Pierce (Marshall) Stevens Living Trust (“Living Trust”), and a few years later, the Living Trust split those shares into four trusts. Slightly more than half of the shares were transferred into three Charitable Remainder Annuity Trusts (“CRATs”), and the remaining shares were put into the GRIT. The GRIT was designed to pay income to Stevens for ten years and then terminate, with E. Pierce as the remainder beneficiary. When the MPI shares were transferred to the three CRATs and the GRIT, the shares were cancelled and then reissued in the name of the four trusts.3

2. The donor and gift tax

The IRS audited J. Howard's 1992 through 1995 gift taxes. The IRS determined that J. Howard had made an indirect gift to the MPI shareholders when he sold his stock back for below market value and sent notice of deficiency. J. Howard's Estate 4 challenged the deficiencies. After years of back-and-forth negotiation, in 2002 J. Howard's Estate and the IRS entered into a stipulation (“the Stipulation”) regarding J. Howard's Estate's tax liability. The Stipulation provided that, in 1995, J. Howard made indirect gifts to the following people in the following amounts: (1) E. Pierce—$43,768,091, (2) Stevens—$35,939,316, (3) Elaine—$1,104,165, (4) the Preston Trust—$1,104,165, and (5) the E. Pierce Jr. Trust—$1,104,165. In 2008, the United States Tax Court issued decisions (2008 Tax Court decisions) finding, inter alia, deficiencies in J. Howard's 1995 gift taxes. J. Howard's Estate never paid the assessed taxes.

3. The donees and gift tax

When Stevens passed away in 2007, E. Pierce Jr. became the executor of her estate, and Hilliard was the trustee for the Living Trust. E. Pierce Jr. and Hilliard were both aware that Stevens's Estate and the Living Trust could be held liable for the unpaid gift tax. Before paying anything toward the unpaid gift tax, E. Pierce Jr. made distributions of personal property from Stevens's Estate, and he also paid rent on Stevens's apartment for one year. Hilliard used funds from the Living Trust to pay accounting and legal fees for charitable organizations other than the Living Trust. Hilliard and E. Pierce Jr. also filed joint tax returns for the Living Trust and Stevens's Estate and permanently set aside $1,119,127 of the Living Trust's funds for charitable purposes.

In 2008, the IRS assessed gift tax liability for the unpaid donor gift tax against the donees pursuant to I.R.C. § 6324(b). In May and June 2010, E. Pierce's Estate paid the IRS an amount equal to the value of the gift received for E. Pierce, Elaine, the E. Pierce Jr. Trust, and the Preston Trust. Steven's Estate, on the other hand, has not paid the IRS anything towards the unpaid gift tax.

C. Procedural Background1. Government's lawsuit

On August 6, 2010, the Government sued the E. Pierce Estate, Elaine, the E. Pierce Jr. Trust, the Preston Trust, and Stevens's Estate as donees of J. Howard's 1995 indirect gift. The Government also brought claims against both E. Pierce Jr. and Hilliard under 31 U.S.C. § 3713, the Federal Priority Statute, alleging that they had made distributions from Stevens's Estate...

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