No. 12-20804

August 9, 2013

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IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

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UNITED 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, as Co-Trustee of the Eleanor Pierce (Marshall) Stevens Living Trust,

Defendants-Appellants.

Appeal from the United States District Court

for the Southern District of Texas, Houston Division

Hon. Gray H. Miller

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BRIEF OF AMICUS CURIAE ERIC RASMUSEN IN SUPPORT OF AFFIRMANCE

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ERIC RASMUSEN

Kelley School of Business,

Indiana University

1309 East 10th Street

Bloomington, Indiana 47405

Email: erasmuse@indiana.edu

Phone: (812) 855-3356

Fax: (812) 855-3354

TABLE OF CONTENTS

Table of Contents. ..................................................................................................2. Table of Authorities. ..............................................................................................3. Statement of Interest. .............................................................................................5. Statement Regarding Oral Argument. ...................................................................5. Statement of the Issue. ..........................................................................................7. Summary of the Argument. ...................................................................................9.

The Argument. .....................................................................................................10.

I. “Value” does not mean “amount”, so the 6324(b) limitation should

include accrued interest. .......................................................................10.

II. Three possible objections are easily answered. ....................................15.

A. There is no statutory definition of “value”. .....................................15.

B. The purpose of the word “value” in 26 U.S.C. § 6324(b) is to

limit the donee’s liability for unpaid taxes on gifts the donor

made to other donees, not to prevent the indefinite

accumulation of interest. .................................................................16.

C. Any references to “value” or “amount” that might happen to

be in the settlement between the IRS and the Howard

Marshall II Estate are irrelevant. .....................................................19.

III. This brief’s “present-value theory” simplifies the law, rather

than complicating it as the district court’s “instant-liability”

theory does. ....................................................................................... 20.

IV. Conclusion. .........................................................................................26.

Certificate of Service. ..........................................................................................27. Certificate of Compliance, Authorship and Funding. ......................................... 30.

TABLE OF AUTHORITIES

Cases

U.S. v. Rogers, 255 U.S. 163 (1921)......................................................................12.

Seaboard Air Line Ry. v. U. S., 261 U.S. 299 (1923) ............................................12.

Prager v. New Jersey Fidelity & Plate Glass Insurance, 245 N.Y. 1 (Cardozo, C.J., 1927)...............................................................................................................11.

U.S. v. Snook, 24 F.2d 844 (N.D. Georgia 1928)...................................................13.

Lowy v. Commissioner, 35 T.C. 393 (1960)...........................................................13.

Diedrich v. Commissioner, 457 U.S. 191 (1982)...................................................21.

Poinier v. Commissioner, 858 F.2d 917 (3d Cir. 1988) ..........................................8.

Baptiste v. Commissioner, 100 T.C. 252 (1993)...............................................16,24.

Baptiste v. Commissioner, 29 F.3d 433 (8th Cir. 1994)......................................8,16.

Baptiste v. Commissioner, 29 F.3d 1533 (11th Cir. 1994)........................8,10,16,19.

Carpenters District Council v. Dillard Department Stores, 15 F.3d 1275 (5th

Cir. 1994)..................... ....... .................................................................................13.

In re Texas General Petroleum, 52 F.3d 1330 (5th Cir. 1995)...............................13.

Kansas v. Colorado, 533 U.S. 1 (2001)..................................................................12.

Kansas v. Colorado, Special Master’s Third Report, 2000, http://www.supremecourt.gov/SpecMastRpt/ORG105-8-2000.pdf ......................12.

August v. August, Del. Ch., C.A. No. 3180-VCS, (February 20, 2009).................17.

U.S. v. MacIntyre, 2012 WL 2064977 (S.D. Tex. June 7, 2012) ..................7,10,19.

STATUTES

Internal Revenue Code (26 U.S.C.):

§ 382—“Limitation on net operating loss carryforwards and certain built-in

losses following ownership change”..... .........................................18.

§ 2502—“Rate of tax”.......................................... ..........................................15.

§ 6103—“Confidentiality and disclosure of returns and return

information”.

§ 6324—“Special liens for estate and gift taxes”.... ................................... passim.

§ 6601—“Interest on underpayment, nonpayment, or extensions of time for

payment, of tax”...................................................

§ 6651—“Failure to file tax return or to pay tax”..............................

§ 6663—“Imposition of fraud penalty”...........................

§ 6665—“Applicable rules”.......................................................................................

§ 6901—“Transferred assets”...........................................................

§ 7701—“Definitions”..................... .....................................................................18.

OTHER

Web

“Prime Rate: Historical Data,”

http://www.mortgagex.com/general/indexes/prime.asp .......................................17.

Kevin Brady, "Chancery Court Orders Restitution to Victim under Uniform Fraudulent Transfer Act," Delaware Corporate & Commercial Litigation Blog (February 28, 2009) ...............................................................................................17.

Briefs

The Brief of Defendant-Appellant Elaine Marshall.... .... .................................6,18.

The Brief of Defendant-Appellant Preston Marshall ................. ........6.

The Brief of Defendant-Appellants Finley Hillard and Pierce Marshall....... .....6.

The Brief of Amicus Curiae Tax Foundation & Law Professors........

The Brief of Plaintiff-Appellee United States of America........... .

STATEMENT OF INTEREST

I am an economics professor, a former director of the American Law and Economics Association who has written numerous articles for law reviews and economics journals since 1987. I have co-authored with law professors and judges and have spent sabbatical years as a visiting scholar at Yale and Harvard Law School. My vitae is available at http://www.rasmusen.org/vita.htm. I have no stake in the outcome of this case, but I see it as an example of how an economic approach to the concept of value can help courts organize thought more simply and correctly on how to resolve cases than the alternative intricacies of tax procedure.

I have contacted the counsel of all the parties to this suit by email and they have replied with no objection to submission of this brief.

STATEMENT REGARDING ORAL ARGUMENT

Amicus offers to participate in oral argument by telephone or videoconference should the Court decide that would be helpful.

STATEMENT OF THE ISSUE

Does the 26 U.S.C. § 6324(b) limitation on donee tax liability “to the value” of the gift mean “to the original amount of the gift”, or “to the value of the gift at the time of eventual tax payment”?

Specifically, if gift tax of X is owed on a gift of amount Y, but the donee does not pay until later when X plus interest exceeds Y, is the donee's liability limited to Y?

This brief is limited to one of several issues in the appeal, which is Issue 1 in Elaine Marshall's brief, Issue 3 in Preston Marshall's brief, and Issue 3 in the brief of Finley Hillard and Pierce Marshall.

Stylized Facts

I will use a simplified version of one of several disputes under appeal as a concrete example for the discussion of law. In 1995, J. Howard Marshall II made a gift to Elaine Marshall worth some $43 million at the time of transfer. He did not pay gift tax before he died. The IRS assessed gift tax against his estate, which agreed to a settlement but failed to pay what it promised. In 2008 the IRS assessed gift tax against donee Elaine Marshall of $74 million, which exceeded $43 million because of the interest accumulated since 1995. The IRS assessment was based on 26 U.S.C. § 6324(b), which says (italics and boldface added)

“Unless the gift tax imposed by chapter 12 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.”

In 2010, Elaine Marshall paid $43 million of the $74 million, arguing that though she agreed that late-payment interest could eat up the entire face value of the gift, she was “liable for such tax to the extent of the value of such gift” and the gift’s value was just $43 million. The IRS disagreed.

The U.S. District Court for the Southern District of Texas ruled in favor of the IRS, finding that “although the statute is clear about the cap on the amount of the donor’s liability transferred to the donee, it does not clearly address—if at all—the donee’s responsibilities after that point,” and “Section 6324(b) imposes an independent liability on the donee that is not capped by the liability limitation language in § 6324(b)”, U.S. v. MacIntyre, 2012 WL 2064977 (S.D. Tex. June 7, 2012). Elaine Marshall appealed to the 5th Circuit, which has not previously ruled on the point. The 11th Circuit would likely agree with the Southern District of Texas that that she must pay all $74 million; see Baptiste v. Commissioner, 29 F.3d 1533 (11th Cir. 1994). The 3rd and 8th Circuits would likely disagree; see Poinier v. Commissioner, 858 F.2d 917 (3d Cir. 1988) and Baptiste v. Commissioner, 29 F.3d 433 (8th Cir. 1994).

This statement of facts is simplified and leaves out most of the appellants’ cases. I present it to make my argument easier to understand than if I were to speak of a donor giving amount X to a donee in year T and incurring gift tax of Y that at an interest rate of Z accumulates to amount W in year T+S. Attach no importance to the specific numbers and interest rates.

SUMMARY OF THE ARGUMENT

The phrase “value of the gift” in 26 U.S.C. § 6324(b) means what it says––not “dollar amount of the gift at the time of donation”, but “what the gift is worth”. “Value” is not “face value”. Common and statutory law recognize this in many different contexts. The goal of § 6324(b) is to ensure that as much as possible of gift tax owed will be paid, subject to not making any donee worse off as a result of having received a gift. This “present-value theory” that distinguishes “value” from “historical value” is simpler than the “instant-liability theory” used by the Southern District of Texas and the 11th Circuit in U.S. v. MacIntyre, 2012 WL 2064977 (S.D. Tex. June 7, 2012) and Baptiste v. Commissioner, 29 F.3d 1533 (11th Cir. 1994) to achieve the same result: that § 6324(b) does not limit the amount of interest. It therefore runs less risk of generating unintended consequences.

Suppose a gift is “$43 million to be paid in 1995”. The value of the gift is $43 million if the dollars are indeed paid in 1995, but the value is $81 million if the dollars are paid in 2008 (V = 43*[1.05]13 if the interest rate is 5%). A dollar that someone can hold and invest starting in 1995 has greater value than a dollar he can hold and invest starting in 2008. By 2008, that 1995 dollar would have grown to $1.88 if the interest rate were 5%. As a result, if the donee is assessed for $74 million in taxes to be paid in 2008 dollars, the amount does not exceed the value of the 1995 gift. He should pay the entire $74 million.

THE ARGUMENT

I. “Value” does not mean “amount”, so the § 6324(b) limitation should include accrued interest.

Under the Tax Code, a donee is liable for gift tax the donor owes to the government (§ 6324--Special liens for estate and gift taxes). A taxpayer who is late also owes interest on the tax, a lateness penalty, and perhaps a fraud penalty (§6601—“Interest on underpayment, nonpayment, or extensions of time for payment, of tax”; § 6651—“Failure to file tax return or to pay tax”; § 6663—“Imposition of fraud penalty”). A donee, however, is only liable for tax “to the extent of the value of the gift” (§ 6324 again). The question before us is whether the donee is liable for all the interest on the gift if the sum of gift plus interest exceeds the historical value of the gift.

I will argue that the donee is indeed liable for the extra tax, but for a reason simpler than that articulated by the Southern District of Texas and the 11th Circuit in U.S. v. MacIntyre, 2012 WL 2064977 (S.D. Tex. June 7, 2012) and Baptiste v. Commissioner, 29 F.3d 1533 (11th Cir. 1994). The reason is that “value of the gift” means what it says––not “dollar amount of the gift at the time of donation”, but “what the gift is worth”. “Value” is not “historical value”. Suppose the gift is “$43 million to be paid in 1995”. The value of the gift is $43 million if the dollars are paid in 1995. The value of the gift is $81 million if the dollars are paid in 2008 (using a 5% interest rate). A dollar that someone can hold and invest starting in 1995 has a different value than a dollar he can hold and invest starting in 2008.

Consider a gift of $1,000 in 1995. If the interest rate is constant at 5% per year, the gift has the same value to the recipient as a gift of $1,050 in 1996

(V = $1,000*1.05). It also has the same value as a gift of amount $1,102.50 in 1997 (V = $(1000*1.05)*1.05), or $1,000*(1+.05)T-1995 in year T. By 2008, thirteen years would have passed and a gift of equivalent value would have to be of amount $1,886. Compound interest accumulates quickly.

If a father gives his eldest son $1,000 in 1995 and tells his younger son he'll give him $1,000 too, but he'll have to wait till 2008, the younger son will not think the two gifts have equal value. If a mother gives her eldest daughter $1,000 in 1995 and tells her younger daughter she'll get $1,500, but in 2010, the elder daughter will not complain and ask for $1,500 in 2010 too. The economist's concept of “present discounted value” is not just a theoretical abstraction, because the term of art is not different from the everyday use of the word “value”, just more precise. Every four-year-old knows that a cookie tomorrow is worth less than a cookie today.

Inflation can make the distinction between a dollar in 1995 and a dollar in 2008 particularly dramatic, but there would be a difference even if the inflation rate were zero. If inflation is 10% per year, then a dollar in 2008 will not buy as much, and hence has lower value. But even if inflation were 0%, the dollar in 1995 would be worth more, because it could earn interest between 1995 and 2008.

The law recognizes the principle that “value” does not mean “amount” in a multitude of contexts––tort, contract, takings, and elsewhere. The idea running throughout the common and statutory law is that the person wronged should be returned to the same position as if no wrong had occurred. The wrongdoer should pay the value of what was lost, and that value should not be limited by the dollar face value at the time of the wrong. As Justice Cardozo explained in Prager v. New Jersey Fidelity. & Plate Glass Insurance, 245 N.Y. 1 at 5 (1927):

“While the dispute as to value was going on, the defendant had the benefit of the money, and the plaintiff was without it. Interest must be added if we are to make the plaintiff whole (Van Rensselaer v. Jewett, supra).... The defendant could have limited its liability for interest by a common-law tender, or by a payment on account without prejudice to the plaintiff's right to recover the excess. If it chose to keep the money, it should pay for what it kept. ... Interest is now held to be an incident to “just compensation” where property has been taken in the exercise of the power of the government (U. S. v. Rogers, 255 U.S. 163; Seaboard Air Line Ry. Co. v. U. S., 261 U.S. 299). It is no less such an incident where liability has its origin in the obligation of a contract.”

Federal courts agree. In Kansas v. Colorado, 533 U.S. 1 (2001), interest accumulated over many years. The Kansas court said at 11, “We find no fault in the Special Master's analysis of either our prior cases or the equities of this matter” after the Special Master said interest should be imposed. Specifically, the Special Master quoted an excerpt from the testimony of Economics Nobel Laureate William Sharpe: (boldface added)

“It is essential to recognize the effect of time, either past or future, when determining the value of any asset or liability. Thus, in economic transactions, an amount owed in the past cannot be paid off today by paying the same nominal value that would have been owed had it been paid in the past. Rather, the past nominal amount must be increased to a higher present nominal amount in order to account for the earning power of the original value during the time that has passed. Likewise, an amount owing in the future must be discounted to a lower present value in order to account for the future earning power of the value in question over the future period.” Kansas v. Colorado, Special Master’s Third Report, 2000 at 90, http://www.supremecourt.gov/SpecMastRpt/ORG105-8-2000.pdf .

The Special Master’s Third Report and the Second Report in its appendix contain a multitude of citations attesting to the wide application of this principle.

Another example, of particular interest because of the conceptual link between gift taxes and fraudulent conveyances, is the 5th Circuit's opinion in In re Texas General Petroleum, 52 F. 3d 1330 at 1339 (5th Cir. 1995): (boldface added)

"Federal law governs the allowance of prejudgment interest when a cause of action arises from a federal statute. Carpenters Dist. Council v. Dillard Dep't Stores, Inc., 15 F.3d 1275, 1288 (5th Cir.1994). The standard of review for a trial court's award of prejudgment interest is abuse of discretion. Id.

Federal courts apply a two-step analysis to determine whether an award of prejudgment interest is within a court's discretion: (1) whether the federal act that creates the cause of action precludes such an award; and (2) whether such an award furthers the congressional policies of the federal act. Id. The Bankruptcy Code and particularly Sec. 548 are silent with regard to prejudgment interest. The stipulation also is silent with regard to interest. Furthermore, an award of prejudgment interest furthers the congressional policies of the Bankruptcy Code. Section 548 allows the estate to recover fraudulent transfers made within a year before the filing of the bankruptcy petition. The purpose of the Section is to make the estate whole. Prejudgment interest compensates the estate for the time it was without use of the transferred funds. We determine that the bankruptcy court did not abuse its discretion by awarding prejudgment interest."

Similarly, Tax Court said in Lowy v. Commissioner, 35 T.C. 393 at 395: (boldface added)

"While the courts seem to hold divergent views as to when interest begins to run against stockholders who are liable to creditors of a corporation, we are impressed with the decision in United States v. Snook, 24 Fed.(2d) 844, as being a fair and equitable rule to be applied in transferee cases. That decision, where the tax liability was greatly in excess of the amount received by the transferees in distribution, holds the transferee liable to the full extent of the amounts received by them with interest from "the fair average date of receiving" the sums distributed."

Courts recognize the time value of money because it is good policy. Compound interest penalizes delay by either side so long as the interest rate is chosen appropriately and the court assesses the underlying loss accurately. Compounding is fair. Otherwise a taxpayer who delays long enough will reach the cap and begin to keep 100% of the profits from investing his tax deficiency. Capping the tax using the gift’s amount instead of its value would allow the recipient here to keep $31 million in interest she has earned by paying tax late, the difference between $43 million and $74 million.

The purpose of the tax limitation here is to keep the recipient from being worse off as a result of receiving a gift. Congress wanted to avert the possibility that someone accepted a gift and then had to pay so much gift tax that he should have rejected it. A recipient who can keep the proceeds from years of investment of the gift is not worse off as a result of receiving the gift. And if he was so improvident as to spend the gift immediately rather than invest it, he should not be rewarded by having received in effect a zero-interest loan from the Internal Revenue Service from the time of the gift to the time they chase him down to pay the tax.

The goal of 26 U.S.C. § 6324(b) is to ensure that as much as possible of gift tax owed will be paid, subject to not making any donee worse off as a result of having received a gift. If the donor doesn’t pay, then the donee should pay rather than the loss falling on the government––that is, on other taxpayers, who will have to pay higher taxes eventually. It would be unfair to make the donee worse off as a result of the donor making a gift to him, so the statute limits the donee’s loss; at worst he is in the same place as if he hadn’t received any gift at all. The statute does that by limiting the donee payment to “the value of the gift”. If the donee were allowed to keep all of the interest he earns on the gift above a certain threshold, however, he would be better off as a result of the gift and the taxpayers would bear the cost of the donor’s tax delinquency.

II. Three possible objections are easily answered.

A. There is no statutory definition of “value”.

The interpretation of value in dollars as depending on when the dollars are paid is consistent with the Tax Code. There is no definition of “value” in 26 U.S.C. § 7701–“Definitions,” and I have not found one elsewhere in the Tax Code. The section on computing the gift tax says: (boldface added)

26 U.S.C. § 2502 - Rate of tax

(a) Computation of tax

The tax imposed by section 2501 for each calendar year shall be an amount equal to the excess of—

(1) a tentative tax, computed under section 2001(c), on the aggregate sum of the taxable gifts for such calendar year and for each of the preceding calendar periods, over

(2) a tentative tax, computed under such section, on the aggregate sum of the taxable gifts for each of the preceding calendar periods.

26 U.S.C. § 2502 says “the aggregate sum of the taxable gifts” rather than “the aggregate value of the taxable gifts”. This is at a least slight indication that the Code distinguishes “amount” and “value”.

B. The purpose of the word “value” in 26 U.S.C. § 6324(b) is to limit the donee’s liability for unpaid taxes on gifts the donor made to other donees, not to prevent the indefinite accumulation of interest.

One might ask why the statute has to say to limit the donee's liability to the value of the gift, if not to limit the amount of interest. The most important reason for the limit is that § 6324(b) makes the donee liable for the gift tax owed on all the donor's gifts for the following ten years, not just the donee’s gift. This is more fair than it sounds. If the donor escapes gift tax on his first gift, he has more left to give away to later donees, who are thereby beneficiaries of the tax evasion. A later donee is a beneficiary of the gift tax not being paid, however, only to the extent of his own gift’s value. Suppose the donor fails to pay $100,000 in gift tax in 1990 and as a result earns $5,000 interest and in 1991 can spend $3,000 on champagne and give $102,000 to a second donee. The second donee, who has gained from the tax evasion, ought to be liable up to the entire $102,000 gift, but not liable for the $3,000 spent on champagne.

Illustrating this point are the Baptiste v. Commissioner cases, 100 T.C. 252 (1993, en banc), 29 F.3d 433 (8th Cir. 1994), and 29 F.3d 1533 (11th Cir. 1994). I'll simplify the case into a hypothetical. A father gives $400,000 to his wife in Paraguay and $50,000 to his son in Indiana, leaving himself with nothing. He does not pay the $80,000 gift tax on the wife’s gift, but he does pay the $10,000 gift tax on the son’s gift. The wife takes her $400,000 to Paraguay and is unreachable. After five years pass, the IRS tells the son to pay $50,000 plus $13,800 in interest. Is this correct?

The father knew that any money he gave the son would eventually be lost to the tax collector to pay for the tax on the wife's gift. If no interest were charged, though, he would have succeeded in transferring $13,800 to his son. If inflation were high and the interest rate reached 1978’s 20% (see http://www.mortgage-x.com/general/indexes/prime.asp), five years of interest would be $74,800 and the father's tax dodge would allow him to convey over half the gift’s value to his son ($74,800 in year 5 dollars, which is worth $30,060 in year 0 dollars). If the son must repay the value of his gift measured in dollars investable at the time of the gift, on the other hand, the father cannot convey value to his son without it being seized for the wife's gift tax.

Compare this with fraudulent conveyance. Suppose the father owes the IRS $450,000 to begin with, but the gift tax rate is 0%. He gives $400,000 to his wife in Paraguay and $50,000 to his son in Indiana, leaving himself with no assets. The son is not liable for the wife's $400,000, but he must return not only the $50,000 he was given, but interest on it too. This is a general principle of the common law, as may be seen, for example, from the cites in August v. August, Del. Ch., C.A. No. 3180-VCS, (February 20, 2009), a case explained in Kevin Brady, Chancery Court Orders Restitution to Victim under Uniform Fraudulent Transfer Act, Delaware Corporate & Commercial Litigation Blog (February 28, 2009). Otherwise, there would be incentive for fraudulent conveyance. But why should the limit on donee payment of the gift tax be different from the limit on fraudulent conveyance refund?

The opinions in the three real-life Baptiste v. Commissioner cases are exceedingly tangled. The first is an en banc Tax Court decision which required the two Baptiste brothers (in one consolidated case) to pay interest beyond the nominal value of the gift, as I suggest should be done in my hypothetical. See Baptiste v. Commissioner, 100 T.C. 252 (1993). There were 20 judges en banc, and 4 opinions. The first 3 opinions were variants on the instant-liability theory that the brothers had become liable at the instant the original tax had gone unpaid, and so became liable after that for interest payments without limit. The three opinions that concurred with this result were signed by 12, 7, and 2 judges in various mixtures. Six judges dissented. The concurring judges differed on how to categorize the liability, but all reached the same conclusion. The dissenters took the view that “value” means “nominal amount.” (The tangle was confusing enough that the reporter seems to have tripped up; at the start of my Lexis file he lists only 14 judges as participating and he lists one judge, Colvin both as concurring and as the author of the dissent.)

The appeal went to two different circuits, the 8th for the Florida brother and the 11th for the Nebraska brother, and the two circuits split even with identical facts. See Baptiste v. Commissioner, 29 F.3d 433 (8th Cir. 1994) and Baptiste v. Commissioner, 29 F.3d 1533 (11th Cir. 1994). I relate this procedural path not because it is a cute jurisprudential example (well not just because of that) but because it is relevant to the present case: courts have a strong sense that the donee should pay 100% of the interest due, but the instant-liability theory is debatable and is complex enough to require intricate distinctions between kinds of liability. Interpreting “value” as “value”, on the other hand, makes the real impact of the liability clear, turning a complex liability issue into an administrative detail of whether the bill is paid in 1995 dollars, 2008 dollars, or even, in principal, 2008 rupees. This both simplifies and solves the court’s problem.

C. Any references to “value” or “amount” that might happen to be in the settlement between the IRS and the Howard Marshall II Estate are irrelevant

From the Opening Brief of Appellant Elaine Marshall, p. 7, it seems that the Stipulation of Settled Issues between the IRS and the Howard Marshall II Estate filed with the Tax Court on June 6, 2002 assigned a figure for the value of the gift to Elaine Marshall of $43,786,361. Perhaps the Stipulation used the word “value”; I have not read it. If so, the IRS misused “value” or used it in a different sense than in § 6324(b) and the use there is not relevant to the present case. It would not be surprising. The IRS has not been using the present-value theory. Even if it agrees with it now, it had not thought of it in 2002, and even if it had, the Stipulation was a case-specific compromise, not an agreement as to the true legal position. A stipulation today might be phrased differently. In any case, the word “value” can be used to mean different things in different contexts. That is why statutes so often include a statute-specific definition list. A reader of the Tax Code must realize that the meaning of a term in “26 U.S.C. § 382—“Limitation on net operating loss carryforwards and certain built-in losses following ownership change” is not necessarily the same as in 26 U.S.C. § 7701—“Definitions”.

III. This brief’s theory simplifies the law, rather than complicating it as the IRS theory does.

The present-value theory of why donee liability is not capped at the static gift amount is different from the “instant-liability theory” used to achieve the same result by the Southern District of Texas and the 11th Circuit. It runs less risk of generating unintended consequences and it avoids having to deal with the Supreme Court’s Diedrich opinion, discussed below.

Under the instant-liability theory, the donee becomes jointly liable with the donor for the tax at the instant it becomes due and the donor has not yet paid it. Joint liability has tricky incentive properties. It creates numerous possibilities for things to go wrong, an interwining tangle of procedural issues that can arise from partial payments, bankruptcies, indemnity contracts, estoppels, reorganizations, and bequests, as well as from the purposeful strategic use of all of these devices. The Tax Code is an apple cart easily upset. Instant liability might have unintended consequences, whereas recognizing the time value of money actually simplifies the incentives of everyone concerned.

An example of an unintended consequence of the instant-liability theory is its implication for tax penalties. The IRS is not asking that Elaine Marshall should pay penalties as well as interest, if I may rely on The Brief of the U.S.A., though it no doubtdid ask the Howard Marshall II Estate for them. It does argue that it the statute does impose penalties on her: that the donee’s liability includes the penalties on the donor as well as the value of the gift (though only if the sum is less than the § 6324(b) limit; see p. 34 of The Brief of the U.S.A.). That seems right, compelled, as the brief says on the same page, by 26 U.S.C. § 6665(a)(2)—“Applicable rules”, which defines “tax” to generally include penalties. What it also implies, though more peculiarly, and not argued in the brief, is that the instant-liability theory compels the conclusion that not only is the donor liable for lateness penalties, but so is every single donee. After all, not only was the Marshall Estate late in paying the tax for which it was liable, but at that same instant, under the instant-liability theory, each of the four defendants became liable for the sum of the unpaid gift taxes on all four gifts. The penalty for each donee would be 25% of the unpaid gift tax, so besides the gift tax itself, and interest on everything, the government could collect in aggregate 125% of the gift tax in penalties (§ 6651—“Failure to file tax return or to pay tax”). The donor and donee are jointly liable for the gift tax, so only 100% could be collected as tax, but they are individually liable for failure to file returns, so the fact that one of them pays a penalty would not reduce the penalty on the others. One might think of penalties as being in personam, as opposed to the gift tax being in rem. It seems absurd, however, that even a single one of the donees should be liable for a lateness penalty due to the donor’s nonpayment of gift tax. Should every recipient have to ask the donor when the gift tax will become due, and then inquire later as to whether the donor actually paid it, and then send his lawyers over to make sure the donor's lawyers did it right? Emily Post would have to add a special section for this kind of correspondence.

It might be argued that 26 U.S.C. § 6901—“Transferred assets” somehow rescues us from the penalty paradox by turning a tax liability into a general debt to the government, so that late payment has no penalty. I do not see how, though, and if it did, then the donees wouldn’t have to pay any penalties even if they deliberately delayed payment for years after the tax was assessed against them, an odd result.

26 U.S.C. § 6324(b) says, “If the tax is not paid when due, the donee of any gift shall be personally liable for such tax.” If someone is liable for a tax due on April 15 and doesn’t pay by that day, he immediately becomes subject to lateness penalties. The statute does not compel instant liability, however. It says that under a certain condition (the donor’s nonpayment of tax by the due date), “the donee of any gift shall be personally liable for such tax”. It does not say “the donee of any gift shall immediately be personally liable for such tax”. It doesn’t talk about timing at all, except that we can see the donee is not liable before the due date. (I cannot back this up with authority, but I will guess that the donor becomes “liable” for the tax at the time of the gift, which is before the tax’s due date, even though he does not have to pay the tax until the due date.)

Well, what timing is reasonable? Under the instant-liability theory, the donee becomes liable on the donor’s due date. Under 26 USC § 6601—“Interest on underpayment, nonpayment, or extensions of time for payment, of tax”, that liability date is also donee’s due date:

(5) Last date for payment not otherwise prescribed

In the case of taxes payable by stamp and in all other cases in which the last date for payment is not otherwise prescribed, the last date for payment shall be deemed to be the date the liability for tax arises (and in no event shall be later than the date notice and demand for the tax is made by the Secretary). 26 USC § 6601(a)(b)(5)

I have argued that instant liability is problematic. Given the silence of the statute on the question, what timing could a court say is reasonable for imposing penalties on the donee? I suggest that the donee becomes liable when the IRS tells him he will become liable and specifies a date far enough off that the taxpayer has reasonable notice. That was what the IRS sensibly did in this case, even while claiming the right (duty?) to impose penalties for nonpayment back in 1995. Why? Because commonsense fairness shudders at the instant-liability theory, which punishes a taxpayer for failure to pay a tax even when it’s impossible for him to discover his liability; e.g. if the donor will not tell him whether the gift tax has been paid yet and the IRS won’t either, citing 26 USC § 6103—“Confidentiality and disclosure of returns and return information”.

The present-value theory also avoids the complications of Diedrich v. Commissioner, 457 U.S. 191 (1982), which is explored in The Brief of Amicus Curiae Tax Foundation & Law Professors. Mr. and Mrs. Diedrich gave away stock with a tax basis of $51,073 on the condition that the donees pay the gift tax. Since gift tax was based on the market value, which was far higher than the basis, the gift tax was $62,992. The question at issue was whether the donees had paid a debt owed solely by the donors to the IRS. The court said they had. This makes sense is if that gift tax debt was primarily a tax liability of the donors, which contradicts the instant-liability theory.

I will not try to reconcile the instant-liability theory with Diedrich, but I will note that Diedrich was an ill-considered opinion. The exact holding was that the Diedrich’s had received debt payment income of $11,919 from the donees ($62,992 - $51,073), which after a 50% long-term capital gain reduction increased the Diedrichs’ taxable income by $5,959. Logically, it would seem that the Diedrichs, having had their entire gift tax of $62,992 paid by the donees, would have $62,992 in debt payment income, not $11,919, but the IRS only asked for $11,919 and the court did what the IRS asked, without clear explanation. Perhaps the IRS theory was that the Diedrichs had spent $51,073 on a deal to generate debt payment income of $62,992. In that case the instant-liability theory might survive: the Diedrichs had made a deal with the donors to pay gift tax the Diedrichs owed. Marshall has no tax-payment agreement, however, and in any case somebody else––the donees––could still be jointly liable for the gift tax. Also, Diedrich forces the distressing conclusion that if the donee pays a large enough amount of gift tax for the donor, the donee becomes liable for gift tax on his gift-tax-payment to the donor. The regress wouldn’t quite be infinite, because gift tax is not due for small enough gifts, but it would be humorous. In the present case, would the Marshall Estate have to be re-opened to accommodate the new debt-payment income? The present-value theory allows us to escape from Diedrich’s implications with relief.

Unless the present-value theory is adopted, the court will have to address difficult procedural issues even under the donee’s theory of this case. Suppose liability for tax does not attach at the instant of the gift. When, then, does it attach? Not necessarily in 2008. At whatever moment it does attach, the donee's liability for interest will start accumulating, even if the donor's liability that was transferred is capped at the gift amount. Thus, the court––or perhaps the trial court on remand––will have to decide whether donee liability attaches when the donor is notified by the IRS but fails to pay, or when the donor makes a settlement with the IRS and fails to pay, or when the IRS gives up on the donor and decides to ask the donee, or when the donee is actually notified by the IRS, or when a trial court makes a decision that the donee must pay. It will also have to deal with the questions of fact about when these dates occur. The present-value theory avoids the need to tackle the timing issue. The value of the gift as measured in 1995 dollars stays the same, even if the value measured in present-day dollars keeps increasing.

The law has good reason to make the donee secondarily liable, but not to relieve the government of the duty to bill the donor first, and not to impose penalties on the donee for not paying tax he had no reason to think was due.

IV. Conclusion.

Donee liability arising under 26 U.S.C. § 6324(b) is limited not to the amount of the gift, but to its value. The value is different measured in 2008 dollars than if the dollars are paid in 1995. Thus, appellant donees should pay interest on the original tax even if the interest exceeds the nominal amount of the original gift.

Respectfully submitted,

ERIC RASMUSEN,	pro se

Kelley School of Business	Phone: (812) 855-9219

Indiana University	Fax: (812) 855-3354

1309 East 10 Street	Email: erasmuse@indiana.edu

Bloomington, Indiana 47405

CERTIFICATE OF SERVICE

On August 9, 2013, copies of this brief were sent to the Court by Federal Express and were sent by email to the lead counsel for each party and other counsel whose emails are listed below. These emails also asked if the counsel desired paper copies and a pdf copy on CD sent by first-class U.S. mail, and they will be sent those copies on August 12, the deadline for submission of this brief, unless they reply that the emailed copies are sufficient.

Attorney for Plaintiff-Appellee United States of America

Ivan C. Dale

U.S. Department of Justice

Tax Division, Appellate Section

P.O. Box 502

Washington, D.C. 20044-0000

ivan.c.dale@usdoj.gov

Attorneys for Defendants-Appellants Finley L. Hilliard, E. Pierce Marshall, Jr.

Emily A. Parker

Eric Gorden Reis

Scott Patrick Stolley

Thompson & Knight, L.L.P.

1722 Routh Street, Suite 1500

Dallas, Texas 75201

emily.parker@tklaw.com

Attorneys for Defendant-Appellant Preston Marshall

John William Porter

Jeffrey D. Watters

Baker Botts, L.L.P.

910 Louisiana Street, Suite 3000

Houston, TX 77002

john.porter@bakerbotts.com

jeff.watters@bakerbotts.com

Counsel for Defendant-Appellant Elaine T. Marshall

William R. Cousins, III

Stephen A. Beck

Robert Don Collier

Brian J. Spiegel

Meadows, Collier, Reed, Cousins,

Crouch & Ungerman, L.L.P.

901 Main Street, Suite 3700

Dallas, TX 75202-0000

tcousins@meadowscollier.com

rcollier@meadowscollier.com

sbeck@meadowscollier.com

bspiegel@meadowscollier.com

Other Counsel

Andrew L. Sobotka

U.S. Department of Justice

717 N. Harwood Street

Suite 400

Dallas, TX 75201

michelle.c.johns@usdoj.gov

andrew.l.sobotka@usdoj.gov

Amici Curiae:

Johnson C. Smith University

Barber-Scotia College

Bennett College

Clinton Junior College

Wilberforce University

Suzanne Ross McDowell

STEPTOE & JOHNSON LLP

1330 Connecticut Ave., NW

Washington, D.C. 20036, smcdowell@steptoe.com

Bennett Evan Cooper

Douglas D. Janicik

STEPTOE & JOHNSON LLP

201 E. Washington Street, Suite 1600

Phoenix, Arizona 85004-2382 bcooper@steptoe.com

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CENTER FOR INDIVIDUAL FREEDOM,

NATIONAL TAXPAYERS UNION

EILEEN J. O’CONNOR

Pillsbury Winthrop Shaw Pittman LLP

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/s/ Eric Rasmusen

Eric Rasmusen

CERTIFICATE OF STYLISTIC COMPLIANCE, AUTHORSHIP AND FUNDING

1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B). It contains 7,113 words (the limit is 7,500) as counted by MS-Word and 31 pages, including the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

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/s/ Eric Rasmusen

Eric Rasmusen

Dated: August 9, 2013.