Tax Fight Reveals Murphy's Philosophy on Wealth

by Mark Friedman  on Monday, Sep. 27, 2010 12:00 am  

More than 1,200 pages of court transcripts from the legal battle over a $41.8 million tax bill to the estate of Charles Murphy Jr. offer a peek into the family circle - and into the estate planning philosophy - of the Arkansas business legend who died in 2002.

The tax bill stemmed from a 1997 partnership Murphy created to protect family shares of stock in the El Dorado companies he built: Murphy Oil Corp., Deltic Timber Corp. and First United Bancshares Inc. The partnership was created in the 1990s, after Murphy became upset when he learned that two of his children had pledged their trust assets, which held shares of stock from Murphy's businesses, as collateral for debts. One of the children had to hand over "a great deal" of Murphy Oil stock as part of a divorce settlement, according to the court records in the case.   

So Murphy used $90 million of his assets to create a family partnership to preserve those stock holdings for future generations.

That partnership, the Charles H. Murphy Jr. Family Investments Limited Partnership, and the Murphy Family Management LLC, which managed it, came under scrutiny of the Internal Revenue Service after Murphy's death. The IRS questioned the value of his assets and said the family's estimate of $146 million was too low. The IRS said it should have been $209.2 million and sent the estate the deficiency bill for nearly $42 million in 2006.

Murphy's children, R. Madison Murphy and Martha Murphy, as executors of the estate, grudgingly paid the bill, then filed suit in U.S. District Court in 2007 to get back the disputed portion.

Finally, in 2009, in U.S. District Court in El Dorado, Judge Harry F. Barnes agreed with the Murphys. In June of this year, he awarded the family a $58.4 million tax refund, which includes costs associated with the legal battle.

But the check isn't yet in the Murphys' hands. On Aug. 14, the government filed a notice of appeal and is scheduled to have its brief to the 8th Circuit Court of Appeals in St. Louis by Oct. 5.

"I was frankly surprised that they did [appeal] because the court's findings of fact were very strong and clear," said the estate's attorney, John Porter of Houston. "It's been a long process for the Murphy family. And we certainly hoped it was over when the court issued its opinion. But we'll see."

The attorney for the U.S. Department of Justice, Gregory Van Hoey, declined to comment.

The reams of court documents, however, say plenty about the history, philosophy and management style of Charles Murphy Jr., who was one of the first four inductees into the University of Arkansas Business Hall of Fame in 1999.


Building a Legacy

Just after the turn of the 20th century, Charles Murphy Sr. arrived in El Dorado and became involved in the banking, timber and oil and gas industries, according to Judge Barnes' 49-page findings and conclusions released last October. In 1937, Charles Murphy Sr. and his wife pooled family interests and formed Charles H. Murphy & Co.



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