Texas Estate Practitioner Calls ‘Marshall' Decision Bothersome

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Aug. 31 — A federal appeals court decision holding a trust beneficiary liable for tax on an indirect gift from billionaire J. Howard Marshall only to the extent of the value of the gift was still not a desirable outcome.

Kathleen Ford Bay, a partner in the estate planning practice at Lippincott Phelan Veidt PLLC in Austin, Texas, told Bloomberg BNA Aug. 31 that the decision in United States v. Marshall, 2015 BL 267385, 5th Cir., No. 12-20804, 8/19/15, is a warning to anyone who is receiving a large gift.

On Aug. 20, the U.S. Court of Appeals for the Fifth Circuit withdrew its 2014 holding that the gift recipients were liable for the full amount of the gift tax plus all penalties and accrued interest and replaced it with a ruling limiting the liability to the amount of the gift (162 DTR K-1, 8/21/15).

Bay said, “The second decision is a little bit better, but still bothersome because those held liable were individuals and beneficiaries. One would have thought the trustee of the trust that received the gift would be liable but not the beneficiary.”

Possibly Unintentional

The indirect gift resulted when Marshall sold his stock in Marshall Petroleum Inc. back to the company at below-market value. The sale resulted in an increase in value for shares in the closely held company owned by trusts of which his former wife, children and grandchildren were beneficiaries.

The increased value was determined by the Internal Revenue Service to be an indirect gift. Marshall died not long after making the gift.

Bay said the transaction probably wasn't an intentional estate planning tool. “If it was done on purpose, it was very sophisticated and very careful. It wouldn't be on my list of things to discuss with a client,” she said.

The trust benefiting Marshall's former wife, Eleanor Pierce Stevens, was a grantor retained income trust (GRIT), and Stevens was only an income beneficiary. Bay questioned the fairness of finding Stevens' estate liable, saying kathleen“as an income beneficiary—depending on the trust instrument—she may not have had the power to do anything regarding the gift.”

Judicial Oddities

Judges Edward C. Prado, Priscilla R. Owen and Thomas M. Reavley made up the panel that heard the case and issued both opinions. Prado maintained in the original majority opinion and his dissent to the second opinion that tax code Section 6324 didn't limit the liability of donees.

Owen dissented from the first majority opinion, saying the liability was limited to the amount of the gift, and joined in the second majority opinion. She apparently persuaded Reavley to change his mind. Bay said it was the first tax case in the Fifth Circuit where she had seen that happen.

On. Aug. 26, the Fifth Circuit declined to rehear or reconsider the case en banc. “The IRS is probably satisfied because of the chilling effect—especially with respect to indirect gifts. If you don't use fair market value, you could end up with a transferee being responsible,” Bay said.

To contact the reporter on this story: Erin McManus in Washington at emcmanus@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com