The Gift that Keeps on Taking–Does Section 6324(b) Limit Gift Tax to the Value of the Gift or Can the IRS Take More?

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AP,Webber Photography / AP

AP,Webber Photography / AP

In November, in US v. Marshall, the Fifth Circuit added to the split in circuits regarding the extent of a transferee’s liability for gift tax- specifically, whether the total amount of tax due can surpass the amount of the gift because of interest. The case likely will garner some attention, surprisingly not for the tax procedure issue, but because the underlying gift was made by J. Howard Marshall.  Mr. Marshall was an oilman, who made a fair portion of his fortune by partnering up (in the business sense) with the Koch bros. Later in life, he famously partnered up with Anna Nicole Smith (in the marriage sense).  Although that marriage only lasted fourteen months, it resulted in litigation lasting substantially longer– but the former Playmate and somewhat tragic figure was not involved in this litigation.  The indirect gift in question occurred in 1995 before their nuptials, and was made to various other relatives and trusts held for the benefit of his relatives.

The procedural issue of interest in Marshall deals with a donee’s liability for transfer taxes due on a gift “to the extent of the value of such gift” under Section 6324(b), and if that amount can surpass the value of the original gift because of interest.  The Courts have disagreed.

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The Facts

Perhaps not as splashy as a story about a buxom blond, but still interesting, Mr. Marshall sold his shares in Marshall Petroleum Inc.  (MPI) back to MPI in 1995.  Years later, it was determined that the sale was well below the fair market value of the stock, which indirectly increased the value of the stock for the remaining shareholders.  Those other shareholders were E. Pierce Marshall (his son), Eleanor Pierce Stevens (ex-wife), Elaine T. Marshall (daughter-in-law), the Preston Marshall Trust (trust fbo a grandson), and the E. Pierce Marshall, Jr. Trust (trust fbo a grandson).  Because everything is bigger in Texas, an agreed settlement with the IRS found that the indirect gift to all beneficiaries in 1995 totaled around $83MM, for which no gift tax had been paid.  There are a lot of tangential issues in the case, but for purposes of this write up, some of the donees paid around $45MM to the IRS, representing the amount of the gifts each received.  The IRS, unhappy with a host of issues, filed suit, alleging in one count that the government was entitled to charge interest on the amounts due from the donees, which was not capped at the amount of the gift – meaning the donees needed to cough up another Texas’ sized heaping of cash to get the feds of their backs.  The donees, already lamenting the lightness in their wallets, disagreed.

The Law

Under Section 6324(b), the Service can impose a tax lien for gift tax due on the donor’s assets, but also the donee, making the donee secondarily liable for the transfer tax.  Section 6324(b)  states:

[U]nless the gift tax…is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made.  If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift.

The argument boils down to the donees believing the final sentence above makes the donee liable for the donor’s tax debt, but only “to the extent of the value of such gift”.  The government, however, argued that Section 6324(b) creates a separate tax liability for the donee, which it can then impose interest on under Section 6511.

The donees advanced various arguments in favor of their position, but the primary argument was that Section 6324(b) is clear on its face in imposing a single liability for the donor’s tax and interest, which is capped at the value of the gift- no separate liability in the donee.    This was the position taken by the Third Circuit in Poinier v. Comm’r, where the Court held that no separate liability was created, but instead “merely a new procedure by which the Government may collect taxes.”  To the Third Circuit, “tax” included interest, but that also was limited to the value of the gift. Following the Third Circuit holding, the government attempted to bring Poinier before SCOTUS, but cert was denied. The Eighth Circuit, in Baptiste, held in line with Poinier.

The government’s position was that the language was not that plain and did not actually resolve the issue.  It argued that Section 6324(b) had to be read in conjunction with Section 6901 and Section 6601.  Section 6601 is the Code Section imposing interest in general, while Section 6901 provides that, “liabilities shall…be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred…[including][t]he liability, at law or in equity, of a transferee of property…of a donor in the case of…[gift tax].”  The Court sided with the government’s contention that when reading Section 6324(b) with Section 6901 there were two separate liabilities, and the donees’ were responsible for interest on its liability.  The Eleventh Circuit has also agreed with this line of reasoning (also a Baptiste).

Although the language may not be completely clear, it strikes me that most tax practitioners reading Section 6324 would view the language as limiting the potential amount outstanding that the donee could have to pay, and would view this more as a collection mechanism (similar to what the Third Circuit stated about Section 6324).  Congress is fairly good at creating liabilities clearly.

I also did not fully understand how the limitation under Section 6324(b) relating to the donor’s liability is meaningful under the Court’s holding.   The tax due on the gift would only be able to reach the value of the gift because of the addition of interest.  The Court noted that Congress had repealed the specific prohibition on interest being paid on interest, and enacted compounding interest, finding Congress was not against the double imposition of interest.  In reading the opinion, it seemed to me the Court was saying interest could be charged twice on the same amount (which is different than compound interest)—once on the donor’s debt up until the value of the gift, and then concurrently on the donee’s liability (which  based on this reading of creating a liability would start when the tax was due and unpaid also).  That would create an interest rate for some period of double the stated rate (significantly higher than corporate rates and the overpayment rate, which was statutorily brought in line with the underpayment rate for individuals).  I can’t imagine that is correct, and perhaps is contrary to other statutes.  If that is not what the Court intended, but the interest can run on the donee from the date of the return, I do not know how the limitation to the value of the gift would have meaning, unless interest can only start running on the donee’s liability after it stops running on the donor’s liability.  I’m not aware of a statutory provision indicating as much, and the Court did not indicate that.  Perhaps I am missing something here.

The donees also argued that reading Section 6901 and Section 6324 together in this way was inappropriate, because the Service did not rely on Section 6901 to collect the tax, and instead used a direct judgment under Section 7402 based on the amount outstanding under Section 6324(b).  The donees argued that Section 6901 requires assessment and collection in the normal fashion, which creates procedural safeguards, including notice and review.  The Service elected not to bother with those procedures.  In my mind, this is compelling.  Section 6901 may create rights for the Service, but it does so by also requiring the burdens of assessment and collection.  Section 6324(b) has no such requirement of assessment.  The Court was not persuaded, and held that it was not inappropriate and that Section 6901 could still provide guidance on the liability created under Section 6901.

Although I disagree with the holding, it is possible to massage the statute to create the Court’s result.  It seems significantly easier though to come to the result that the language limits the amount due by the value of the gift.

Perhaps SCOTUS will be more willing to review this matter now that the 5th has weighed in.

Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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