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Candyce Martin 1999 Irrevocable Trust v. United States

United States Court of Appeals, Ninth Circuit

January 13, 2014

CANDYCE MARTIN 1999 IRREVOCABLE TRUST, a Partner other than the Tax Matters Partner; Constance Goodyear 1997 Irrevocable Trust, a Partner other than the Tax Matters Partner, Petitioners-Appellants,
UNITED STATES of America, Respondent-Appellee.

Argued and Submitted Oct. 16, 2013.

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Michael J. Desmond (argued), Law Offices of Michael J. Desmond, APC, Santa Barbara, CA; Ronald L. Buch, Jr. and

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Saul Mezei, Bingham McCutchen LLP, Washington, D.C., for Petitioners-Appellants.

Arthur T. Catterall (argued), Attorney, Kathryn Keneally, Assistant Attorney General, Tamara W. Ashford, Deputy Assistant Attorney General, Gilbert S. Rothenberg, and Jonathan S. Cohen, Attorneys, United States Department of Justice, Tax Division, Washington, D.C.; Melinda L. Haag, United States Attorney, and Tom Moore, Assistant United States Attorney, United States Attorneys' Office for the Northern District of California, San Francisco, CA, for Respondent-Appellee.

Appeal from the United States District Court for the Northern District of California, Phyllis J. Hamilton, District Judge, Presiding. D.C. Nos. 4:08-cv-05150-PJH, 4:08-cv-05151-PJH.

Before: SIDNEY R. THOMAS and M. MARGARET McKEOWN, Circuit Judges, and MARK W. BENNETT, District Judge.[*]


THOMAS, Circuit Judge:

In this appeal, we examine some of the tax consequences arising from the sale of the Chronicle Publishing Company and, specifically, whether the Internal Revenue Service's proposed adjustment of certain partnership tax items was time barred. Although the ultimate issue is relatively straightforward, both the back story and the legal framework are somewhat complex, requiring us to delve deep in the heart of taxes.


The storied Chronicle Publishing Company was founded in the mid-1800s in San Francisco by teenage brothers Charles and M.H. de Young with a borrowed $20 gold piece. Their first venture, the Daily Dramatic Chronicle, began with a small circulation, but its readership quickly tripled when it provided the only breaking news accounts of the assassination of Abraham Lincoln. It was rechristened as the Morning Chronicle and ultimately the San Francisco Chronicle. Within a few decades, it became the largest circulation newspaper on the West Coast.[1]

After the death of Charles de Young in 1880, M.H. de Young assumed control of the paper, incorporated it as the Chronicle Publishing Company (" Chronicle Publishing" ) in 1906, and ran the enterprise until his death in 1925. He left the newspaper assets in an irrevocable trust that would terminate on the death of all five of his children. From M.H. de Young's death until the early 1990s, a family member remained at the helm of the media empire. Over the course of time, Chronicle Publishing expanded its operations, acquiring a television station along with other properties and forming a book publishing company.

The Chronicle was not the only media game in town. Mining entrepreneur George Hearst acquired the rival San Francisco Examiner in 1880 and turned its management over to his son William Randolph Hearst seven years later, when the elder Hearst became a United States Senator. Over the next century, the Examiner and Chronicle engaged in a fierce competition for readers.[2] With both papers

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experiencing financial challenges in the early 1960s, the Examiner and the Chronicle entered into a joint operating and profit sharing agreement in 1965. The joint operating agreement also granted Hearst the right of first refusal if Chronicle Publishing were put up for sale. Reilly v. Hearst Corp., 107 F.Supp.2d 1192-99 (N.D.Cal.2000).

When M.H. de Young's last child died in 1988 and the irrevocable trust dissolved, Chronicle Publishing elected to be treated as a Delaware Subchapter S corporation. Companies generally take such actions to avoid the double taxation attendant to " C" corporations, where taxes are assessed on both corporations and shareholders. The Subchapter S corporate structure is often employed by small, family-held businesses. However, to discourage misuse of the Subchapter S vehicle, Congress provided that Subchapter S corporations would be subject to the normal double taxation if the corporation were sold within ten years of its creation. Estate of Litchfield v. Comm'r, 97 T.C.M. (CCH) 1079, at *2 (T.C.2009) (citing 26 U.S.C. ยง 1374).

In the late 1990s, amidst deteriorating family relationships and financial challenges, and after the ten-year Subchapter S waiting period expired, the de Young heirs decided to sell most of the assets of Chronicle Publishing to the rival Hearst Corporation and distribute the assets among the heirs according to their ownership percentages. The Chronicle was to continue as a morning paper, and the Examiner was sold to a third party.

In its discussions of the sale, Chronicle Publishing's Board of Directors realized the possibility of future liability arising from a variety of potential issues, such as environmental problems, contractual disputes, and the risk that Chronicle Publishing might lose its Subchapter S status. Thus, the Directors prepared a recontribution agreement, which provided that the shareholders would contribute on a pro rata basis if there were future Chronicle Publishing liabilities. Each shareholder was required to execute the recontribution agreement as a condition of receiving a distribution of proceeds from the Chronicle Publishing sale.

Our case involves one group of de Young heirs, specifically Conseulo Martin (M.H. de Young's granddaughter) and her five children (" the Martin heirs" ). The Martin heirs owned 16.67% of the shares of Chronicle Publishing, either outright or through fourteen family trusts (" the Martin Family Trusts" or " trusts" ). Some of the trusts had ...

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