December 3, 2012
Authored by: Kathy Sherby and Stephanie Moll
Contrary to the old saying, on occasion it does pay to look a gift horse in the mouth. That is the lesson learned by the donees in United States v. MacIntyre, 109 AFTR 2d 2012-XXXX, (6/7/2012), one of a number of cases brought by the government involving a 1995 sale by J. Howard Marshall II of stock in Marshall Petroleum, Inc. back to the company shortly before his death. The issue in this case is not about who is liable for the unpaid gift tax as that issue was decided in other cases discussed below and referred to as MacIntyre I and MacIntyre II. Since this case seemed to be the third strike against the donees of this indirect gift, this case is referred to as “MacIntyre III”.
The initial gift tax case was brought by the government against the Estate of J. Howard Marshall II – whose last wife was known as Anna Nicole Smith which lends some prurient interest to this case – assessing a gift tax liability for the sale transaction, which the government asserted was below fair market value resulting in an indirect gift to the company shareholders, among whom were Elaine T. Marshall (also known as Elaine Pierce Stevens), the first wife of J. Howard Marshall II, the Eleanor Pierce Stevens Grantor Retained Income Trust (“GRIT”), E. Pierce Marshall, the younger son of J. Howard Marshall II, the E. Pierce Marshall, Jr. Trust and the Preston Marshall Trust (referred to in the opinion as the “EPM Donees”). A judgment was entered by the Tax Court against the Estate of J. Howard Marshall II setting the value of the gift and thus the amount of the gift tax liability, but the Estate never paid the gift tax.
Not to be deterred, the government looked for others (other than the Marshall Estate) from whom to collect the gift tax. In 2008, the government asserted transferee liability against the EPM Donees. Since Elaine Pierce (Marshall) Stevens (“Stevens”) had died in 2007, the government sought to impose the transferee liability on her estate and on her revocable trust. The government successfully imposed transferee liability against the estate and trust of Stevens as the successor in interest of the settlor and income beneficiary of the GRIT that owned some of the stock of Marshall Petroleum, Inc. United States v. MacIntyre, *** F. Supp. 2d *** [2012-1 U.S. Tax Cas. (CCH) ¶60,642] (S.D. Tex. 2012) (“MacIntyre I”).
Shortly after Stevens died, the government informed her executor and the trustee of her revocable trust that they would be asserting transferee liability against Stevens as donee in respect of the stock owned by the GRIT. Both her executor and her trustee disputed the imposition of transferee liability against Stevens and did not believe that the government would be successful. After the decision in MacIntyre I, the government then sought to impose personal liability on Stevens’ executor and trustee, under the Federal Priority Statute, 31 U.S.C. § 3713, for the distributions they made from her estate and trust, of her tangible personal property and proceeds from the sale of her car, the payment of accounting and legal fees of certain charitable beneficiaries, the rent payments on Stevens’ apartment, and the amount permanently set aside for these charities. The Federal District Court in United States v. MacIntyre, 109 AFTR 2d ¶ 2012-919 (SD TX 6/25/2012) (“MacIntyre II”) held that it did not matter what the executor and trustee believed as to Stevens’ transferee liability, they knew of the government’s intention of imposing transferee liability on Stevens and her estate and trust, and they were personally liable to the extent of the distributions they made to or for the benefit of the beneficiaries.
In MacIntyre III, the final case in this trilogy of cases, the EPM Donees of the Marshall indirect gift paid the gift tax and the interest associated with Marshall’s gift tax liability to the extent of the value of the indirect gift determined to have been made by Marshall on the sale of the Marshall Petroleum, Inc. stock to the company. However, they asserted that they were not liable beyond the value of the gift under Section 6324(b) of the Code for interest independently imposed on them, pursuant to Section 6601 of the Code, resulting from their transferee liability.
The government asserted that the liability of the EPM Donees consisted of two separate and distinct liabilities, the gift tax liability of the Marshall Estate and the transferee liability imposed under Section 6324(b) of the Code, and that only the gift tax liability of the Marshall Estate is capped at the value of the gift. The EPM Donees argued that all of their liability was subject to the cap set out in Section 6324(b).
The Court noted that this issue had not yet been decided by the Fifth Circuit. The Court then reviewed the decisions from the other circuits on this issue, noting that there is a split in the circuits, with the Eleventh Circuit in Baptiste v. Commissioner, 29 F.3d 1533 (11th Cir. 1994) agreeing with the government that a separate liability is created under § 6324 that is not subject to the limitation cap, and the Third Circuit in Poinier v. Commissioner, 858 F.2d 917 (3rd Cir. 1988) finding that there was no specific code provision imposing an independent liability on transferees that could independently be subject to interest. The Court found the reasoning of both cases persuasive, but adopted the holding of the Baptiste case. The Court agreed with the Eleventh Circuit that the Tax Code created a separate and distinct liability for the donee when it imposed liability on the donee for the tax triggered by the donor’s gift, and that §§ 6901 and 6324 of the Code created two separate mechanisms for collecting that separate donee liability. The Court then stated that it is “equitable to cap the donee’s responsibility for the actions of another, but if he chooses not to pay his own liability that is a different matter.”
The moral of the story? He who delays the payment of his transferee liability (consisting of the transferor’s tax liability, and interest and penalties thereon), does so at his own peril with the potential result of the payment of more to the government than the value of the gift received.