Estate of Streightoff v. Comm'r of Internal Revenue

954 F.3d 713

ESTATE OF Frank D. STREIGHTOFF, Deceased, Elizabeth Doan Streightoff, Executor, Petitioner - Appellant

v.COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee

No. 19-60244

United States Court of Appeals, Fifth Circuit.

FILED March 31, 2020

Harold A. Chamberlain, Spring, TX, Michael Christopher Riddle, The Woodlands, TX, for Petitioner-Appellant.

Julie Ciamporcero Avetta, Ellen Page DelSole, Esq., Trial Attorney, David A. Hubbert, Gilbert Steven Rothenberg, Esq., Senior Attorney, U.S. Department of Justice, Tax Division, Appellate Section, William M. Paul, Internal Revenue Service, Washington, DC, for Respondent-Appellee.

Before HIGGINBOTHAM, STEWART, and ENGELHARDT, Circuit Judges.

CARL E. STEWART, Circuit Judge:

Respondent–Appellee the Commissioner of Internal Revenue issued Petitioner–Appellant Estate of Frank D. Streightoff (the "Estate") a notice of deficiency for the Estate’s 2012 tax return. The Commissioner determined that the Estate had a $491,750.00 tax liability which differed from the Estate’s tax return valuation. The Estate petitioned the U.S. tax court to challenge the deficiency. Following a bench trial, the tax court sustained the Commissioner’s determinations in a written order. We affirm the tax court’s decision.

I.

The parties have stipulated to this set of facts. Frank D. Streightoff (the "decedent") died testate on May 6, 2011. His daughter, Elizabeth Doan Streightoff ("Elizabeth"), serves as the executor of the decedent’s Estate.

A.Estate Planning

The decedent made the following estate plans on October 1, 2008:

SILP and the Partnership Agreement

Streightoff Investments, LP ("SILP"), a Texas limited liability partnership, was formed. SILP is funded using the decedent’s assets.

The decedent held an 88.99% limited partner ownership interest in SILP. The decedent’s daughters each held a 1.54% limited partner ownership interest. His sons and former daughter-in-law each held a 0.77% limited partner ownership interest. SILP’s sole General Partner is Streightoff Management, which holds a 1.00% limited partnership ownership interest. Elizabeth is the Managing Member of Streightoff Management.

In relevant part, the SILP Partnership Agreement ("SILP Agreement") states:

9.2 Permitted Transfers.... [A]n Interest Holder may at any time [t]ransfer his Interests to (a) any member of transferor’s Family, (b) the transferor’s executor, administrator, trustee or personal representative to whom such interests are transferred at death or involuntarily by operation of law, or (c) [to any purchaser, but subject to the right of first refusal held by the persons listed in section 9.4]

...

9.7 Admissions of Interest Holders as Partners. A transferee of an Interest may be admitted to the Partnership as a Substituted Limited Partner only upon satisfaction of the conditions set forth below:

(a) Each General Partner consents to such admission which consent may be granted or withheld in the sole and absolute discretion of each General Partner;

(b) The Interests with respect to which the transferee is being admitted were acquired by means of a Permitted Transfer ....

...

12.6 Governing Law. Any matter which may arise hereunder which is no therein specifically provided for shall be determined in accordance with and governed by the Laws of the State of Texas including the Texas Uniform Partnership Act ....

The Revocable Trust and SILP Assignment

The decedent established the Frank D. Streightoff Revocable Living Trust ("Revocable Trust"). Elizabeth was the trustee of the Revocable Trust. While the decedent was the grantor and held the power to modify (e.g. amend, alter, revoke, or terminate) the trust, he did not change the Revocable Trust. The decedent was also the beneficiary of the Revocable Trust and remained the beneficiary upon his death.

On the same day the trust and partnership were created, the decedent assigned his 88.99% SILP interest to the Revocable Trust. The Revocable Trust was the assignee. The Assignment of Interest to the Revocable Trust (the "Assignment") was executed via his power of attorney, Elizabeth. She also signed (1) the approval of the transfer as Streightoff Management’s Managing Member, SILP’s General Partner; and (2) for the assignee, as the trustee for the Revocable Trust. The Assignment states "Assignor’s interest ... together with all and singular the rights and appurtenances thereto in anywise belonging, unto the said Assignee, its beneficiaries and assigns forever." The parties have stipulated that this was a Permitted Transfer under Section 9.2.

The Assignment expressly noted that "by signing this Assignment of Interest, [the assignor and assignee] hereby agree[ ] to abide by all the terms and provisions in that certain Limited Partnership Agreement of [SILP]."

B.The Estate’s Tax Return and Notice of Deficiency

The Estate filed its tax return on May 6, 2012, with a taxable estate of $4,801,662.00, which included the SILP interest stake and the other assets in the Revocable Trust. The Estate listed the 88.99% interest stake as an assignee interest with a purported value of $4,588,000.00 as of the alternate valuation date.¹ The valuation reflected claimed discounts for lack of marketability, lack of control, and lack of liquidity. The tax return ultimately reported to overpaying taxes by $153,593.00.

On January 9, 2015, the Commissioner issued a Notice of Deficiency to the Estate, stating "notice is hereby given that ... [the] estate tax liability of [the Estate] discloses a deficiency of $491,750.00." Attached to the notice was Form 890 (Waiver Form), Letter 937 (addressed to the Power of Attorney), Form 1273 (Report of Estate Tax Examination Changes), Form 6180 (Line Adjustments to Estate Tax), and a Form 886-A (Explanation of Items). In the Form 886-A, the Commissioner stated that the fair market value of the Estate’s 88.99% interest in SILP was corrected and increased to $5,993,000.00 as compared to the original tax return valuing the interest at $4,588,000.00. The Commissioner concluded that the net asset value should only be discounted for a lack of marketability.

C.Trial and Tax Court Ruling

The Estate petitioned the tax court to challenge the Commissioner’s determinations. The Estate moved for summary judgment, claiming that the notice was subject to provisions of the Administrative Procedures Act ("APA"). 5 U.S.C. § 702. The tax court denied the motion and held that the APA did not apply to proceedings related to the redetermination of a deficiency.

The petition proceeded to a bench trial where the tax valuation experts, Juliana Vicelja for the Commissioner and Oliver Warnke and Alan Harp for the Estate, were the only witnesses. The tax court issued an opinion upholding the Commissioner’s findings. See Estate of Frank D. Streightoff v. Comm’r. of Internal Revenue , T.C. Memo. 2018-178, 2018 WL 5305054 (2018). It concluded that the Notice of Deficiency complied with the Internal Revenue Code ("IRC") § 7522(a). Id. at *5. It also determined that the Revocable Trust held a limited partner interest in SILP at the alternate valuation date because the Agreement validly assigned the 88.99% SILP interest as a limited partnership both in substance and form. Id. at *6-8. In turn, as the beneficiary of the Revocable Trust, the decedent’s Estate included a limited partnership interest in SILP. The Estate timely appealed these findings.

II.

We have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1). Similar to district court decisions, when reviewing tax court decisions, "[f]indings of fact are reviewed for clear error and issues of law are reviewed de novo." Green v. Comm’r , 507 F.3d 857, 866 (5th Cir. 2007) ; see also Chemtech Royalty Assocs., L.P. v. United States , 766 F.3d 453, 460 (5th Cir. 2014) (The "characterization of a transaction for tax purposes is a question of law subject to de novo review, but the particular facts from which that characterization is made are reviewed for clear error.") (quoting Southgate Master Fund, L.L.C. ex rel. Montgomery Capital Advisors, LLC v. United States , 659 F.3d 466, 480 (5th Cir. 2011) ). "Under the clearly erroneous standard, we will uphold a finding so long as it is plausible in light of the record as a whole, [citation] or so long as [we have] not been left with the definite and firm conviction that a mistake has been made." Chemtech , 766 F.3d at 460 (quoting United States v. Ekanem , 555 F.3d 172, 175 (5th Cir. 2009) and Streber v. Comm’r , 138 F.3d 216, 219 (5th Cir. 1998) ).

III.

The Estate challenges the tax court’s decision on two primary grounds. First, it contends that in using a substance over form rationale to conclude that the Estate held a limited partnership interest, the tax court opinion stands contrary to Texas Partnership law and violated a doctrine set forth in Sec. & Exch. Comm’n v. Chenery Corp. (the " Chenery doctrine"), 332 U.S. 194, 196, 67 S.Ct. 1760, 91 L.Ed. 1995 (1947). Second, the Estate asserts that the notice fails to comply with section 7522(a) of the IRC or the APA.

A.The Transferred Interest Under the Assignment

The Estate’s first argument relates to the tax court’s characterization of the SILP interest as a limited partnership interest.

To evaluate an estate for tax purposes, a tax court relies on state law to discern the type of assets held within the estate. Maloney Gaming Mgmt., L.L.C. v. St. Tammany Parish , 456 F. App'x 336, 342 (5th Cir. 2011) (citing Drye v. United States , 528 U.S. 49, 58, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999) ). Texas is the governing jurisdiction, as provided in Section 12.6 of the SILP Agreement. Regarding partnership interests, Texas law counsels that we "look to the Texas Uniform Partnership Act for guidance only when the partnership agreement is silent." Park Cities Corp. v. Byrd , 534 S.W.2d 668, 672 (Tex. 1976) (emphasis added); cf. TEX. BUS. ORG. CODE § 153.251(b) (outlining governing provisions for partnership assignments which are applicable unless "otherwise provided by the...