United States v. Davenport

Birnie and Elizabeth Davenport were sisters who lived together and comingled their financial assets. That is, the two sisters treated all their investments as equally owned by both of them and split all profits and losses equally on their individual tax returns during their lives. Shortly after Elizabeth’s death, Birnie transferred about 500 shares of stock in a drilling company to her nephew, Gordon Davenport (defendant), for about $800 per share. At around the same time, Birnie also made a gift of about 500 shares to her other nephew, Charles Botefuhr. When Birnie died, her estate calculated and paid its gift-tax liability for the transfer to Botefuhr at a value of $804 per share. On audit of Birnie’s estate, the Internal Revenue Service determined that the estate had undervalued the shares and assessed a deficiency. The estate challenged the deficiency in the United States Tax Court. The Tax Court determined that both Gordon and Botefuhr were transferees of stock properly valued at $2,000 per share and calculated a corresponding gift-tax deficiency against the estate. After the estate did not pay, the United States government (plaintiff) sued Gordon in district court, seeking to hold him liable for the tax as a gift donee. The government filed motions for summary judgment, arguing, among other things, that res judicata barred Gordon from contesting the value of the gift he received. The district court held that, because the Tax Court case focused on the value of Birnie’s estate’s gift-tax liability as a donor, res judicata did not preclude Gordon from contesting his liability as a donee. The government appealed.