## Facts

- Birnie and Elizabeth Davenport were sisters who lived together for many years and commingled their earnings and assets.
- Under a long-standing oral agreement, Elizabeth held legal title to the sisters’ assets, but the sisters treated the assets and investment results as equally owned and split profits and losses on their separate income-tax returns.
- The IRS accepted that reporting approach through multiple audits over the years before Elizabeth’s death.
- The sisters’ investments included stock in Hondo Drilling Company; at Elizabeth’s death in 1979, the sisters together held 3,220 shares.
- In 1980, shortly after Elizabeth died, Birnie transferred a large block of Hondo shares to family members, including her nephew Gordon Davenport.
- Birnie transferred roughly 500 shares to Gordon under an installment “sale” arrangement that valued the shares at about $804 per share.
- Around the same time, Birnie made an outright gift of roughly 500 shares to another nephew, Charles Botefuhr.
- After Birnie died, her estate reported gift-tax liability for the Botefuhr transfer using a per-share value of about $804 and paid gift tax based on that valuation.
- On audit, the IRS concluded the reported value was too low, assessed a gift-tax deficiency, and the estate challenged the deficiency in the United States Tax Court.
- The Tax Court determined that the Hondo shares were properly valued at $2,000 per share for gift-tax purposes and found that Gordon and Botefuhr were transferees of the stock.
- The estate did not pay the resulting deficiency.
- The United States then sued Gordon in federal district court under 26 U.S.C. § 6324(b), seeking to collect the unpaid gift tax from him as a donee, up to the value of the gift he received.
- The government moved for summary judgment, arguing that res judicata barred Gordon from contesting the Tax Court’s valuation and related determinations.
- The district court rejected the government’s res judicata argument, reasoning that the Tax Court case addressed the donor/estate’s liability, while the district court case sought to impose liability on the donee.
- The United States appealed.

## Issues

1. Whether the Tax Court’s final judgment determining the donor’s gift-tax liability for the transfer of stock to Gordon Davenport is res judicata in a later action against Gordon under 26 U.S.C. § 6324(b), so that he cannot relitigate valuation and related transfer determinations.

## Decision

- The Fifth Circuit reversed the district court and remanded.
- The court held that the government’s § 6324(b) suit and the earlier Tax Court case arose from the same nucleus of operative facts: Birnie’s transfers of Hondo stock, the nature of those transfers, and the correct fair market value of the shares at the time of transfer.
- The court rejected the view that the change from an estate (donor) deficiency case to a donee collection suit created a different claim for claim-preclusion purposes where the later suit sought to enforce the same gift-tax obligation already determined.
- The court concluded that the Tax Court’s final decision fixing the value of the shares and determining transferee status could not be collaterally attacked by Gordon in the later § 6324(b) proceeding.
- The court directed the district court to apply res judicata consistent with the appellate ruling.

## Legal Principles

- A final judgment on the merits bars later litigation of claims that arise from the same nucleus of operative facts, even if the later case proceeds under a different remedial statute or theory.
- Res judicata prevents a party (or one sufficiently connected to the prior adjudication) from relitigating determinations necessary to the earlier judgment when the later suit would function as a collateral attack on that judgment.
- Donee liability under 26 U.S.C. § 6324(b) is tied to the donor’s unpaid gift-tax obligation and is limited to the value of the gift; when a court has already finally determined the amount of gift tax attributable to the transfer, that determination may bind the donee in a later collection suit.

## Conclusion

The Fifth Circuit held that the Tax Court’s final judgment determining Birnie Davenport’s gift-tax deficiency for transfers of Hondo stock—including the $2,000 per-share valuation and related findings—barred Gordon Davenport from relitigating those matters in the government’s later § 6324(b) action to collect the unpaid tax from him as a donee, and it reversed and remanded for proceedings consistent with claim preclusion.


United States v. Davenport, 484 F.3d 321 (2007)