UNITED STATES OF AMERICA, Plaintiff - Appellant / Cross-Appellee,
MARY CAROL S. JOHNSON; JAMES W. SMITH, Defendants - Appellees / Cross-Appellants, and MARIAN S. BARNWELL; BILLIE ANN S. DEVINE; EVE H. SMITH, Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF UTAH (D.C. NO. 2:11-CV-00087-CW)
A. Carpenter, Attorney, Tax Division, Department of Justice
(John W. Huber, United States Attorney, Of Counsel; Richard
E. Zuckerman, Principal Deputy Assistant Attorney General;
Arthur T. Catterall, Attorney, Tax Division, Department of
Justice, with him on the briefs), Washington, D.C., for
R. Barton, Prince, Yeates & Geldzahler (James A. Boevers,
Prince, Yeates & Geldzahler; David E. Sloan and Jennifer
A. Whitlock, Sloan & Sloan, P.C., with him on the
briefs), Salt Lake City, Utah, for
TYMKOVICH, Chief Judge, MURPHY and HARTZ, Circuit Judges.
MURPHY, CIRCUIT JUDGE.
three consolidated appeals currently before this court
involve an action brought by the Government to collect unpaid
federal estate taxes. In Appeal No. 17-4083, the Government
appeals from the district court's determination that its
state-law contract claim was time-barred because it was
subject to a Utah state six-year state statute of
limitations. Exercising jurisdiction under 28 U.S.C. §
1291, we conclude the state-law claim is governed by the
ten-year statute of limitations set out in 26 U.S.C. §
6502(a) because the Government is proceeding in its sovereign
No. 17-4093 is a cross-appeal from the district court's
ruling that the Government's transferee-liability claim,
brought pursuant to 16 U.S.C. § 6324(a)(2), was timely.
Exercising jurisdiction under 28 U.S.C. § 1291, we
conclude the transferee-liability claim was timely filed
because the limitations period applicable to the §
6324(a)(2) transferees is the same as the limitations period
applicable to the estate.
Appeal No. 18-4036, the Government appeals from the district
court's order awarding attorney's fees to Appellees.
Exercising jurisdiction under 28 U.S.C. § 1291, we
conclude Appellees are not entitled to attorney's fees
because the Government's position in this litigation was
substantially justified. See 26 U.S.C. §
issues raised in these consolidated appeals arise from the
Government's attempt to collect unpaid estate taxes that
were assessed against the estate of Hazel Anna S. Smith (the
"Estate"). During her lifetime, Ms. Smith (the
"Decedent") created The Anna Smith Family Trust
(the "Trust") and funded it with shares of stock in
State Line Hotel, Inc. (the "Hotel"). The Hotel was
a closely held corporation and the holder of a Nevada gaming
license. At the time of her death, the Decedent was the sole
trustee of the Trust. Two of her children, Mary Carol S.
Johnson and James W. Smith, were named as successor trustees.
The Decedent also executed a will naming Johnson and Smith as
personal representatives of her estate. The Decedent died on
September 2, 1991. Her will directed that the "rest and
residue" of her estate be added to the principal of the
Trust to be administered by the successor trustees.
with the terms of the trust agreement, the successor trustees
filed a federal estate tax return with the Internal Revenue
Service ("IRS") on June 1, 1992. The return
calculated the Estate's federal estate tax liability as
$6, 631, 448. Of that total, only $4 million was paid to
the IRS at the time the return was filed. The successor
trustees made a valid election pursuant to 26 U.S.C. §
6166(a), deferring payment of the balance of the federal
estate tax liability, because the Hotel stock accounted for
more than thirty-five percent of the Decedent's adjusted
gross estate. The ten annual installment payments would begin
on June 2, 1997 and end on June 2, 2006. The IRS assessed the
Estate for the unpaid estate taxes on July 13, 1992.
the assessed estate taxes remained unpaid, the successor
trustees distributed Hotel stock from the Trust to the trust
beneficiaries on December 31, 1992. This distribution was
motivated by Nevada restrictions on casino ownership by a
trust. Cognizant of the outstanding federal estate tax
liability, however, the successor trustees and the trust
beneficiaries executed an agreement (the "Distribution
Agreement") that contained the following provision:
Liability for Taxes. Each of the BENEFICIARIES acknowledges
that the assets distributed to him or her will accomplish a
complete distribution of the assets of the Trust. A portion
of the total federal estate tax upon the Estate of Anna Smith
is being deferred and is the equal obligation of the
BENEFICIARIES to pay as the same becomes due. Likewise, if,
upon audit, additional federal estate taxes or Utah
inheritance taxes are found to be owing, the responsibility
for any such additional taxes, interest or penalties will be
borne equally by the BENEFICIARIES.
beneficiaries identified in the Distribution Agreement were
the Decedent's children: Johnson, Smith, Marian S.
Barnwell, and Billie Ann S. Devine.
Hotel filed for Chapter 11 bankruptcy in January 2002.
Beginning with the annual installment payment due on June 2,
2002, the Estate ceased making payments of the deferred
federal estate taxes. The IRS declared the installment
agreement to be in default as of December 18, 2003. In June
2005, the IRS learned of the existence of the Distribution
2011, the Government filed a complaint naming the
Decedent's children-Johnson, Smith, Barnwell, and
Devine-as defendants and seeking recovery of $1, 569, 851 in
unpaid federal estate taxes. The Government's original
complaint raised multiple claims for relief, one of which is
relevant to Appellees' cross-appeal. In the relevant
claim, the Government alleged all four of the Decedent's
children were liable for the Estate's unpaid federal
estate taxes to the extent they received property included in
the gross estate (the "§ 6324(a)(2) claim").
See 26 U.S.C. § 6324(a)(2). Appellees'
motion to dismiss the § 6324(a)(2) claim was granted in
part and denied in part. The district court determined that
the Government's § 6324(a)(2) claim was not
time-barred, but that it could only be asserted as to the
life insurance proceeds received by Appellees. Because
Appellees conceded liability as to the life insurance
proceeds, the district court entered judgment in favor of the
Government on the § 6324(a)(2) claim but only to the
extent of those distributions.
Government moved to file an amended complaint in August
2012. In its amended complaint, the Government
sought to enforce rights as a third-party beneficiary of the
Distribution Agreement (the "third-party beneficiary
claim"). The district court granted judgment in favor of
Appellees on the claim, concluding it was untimely under Utah
law and rejecting the Government's argument that the
timeliness of the claim was governed by federal law.