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.

But in 1941, he suffered a "debilitating" stroke, leaving his 21-year-old son, Charles Jr., to assume the management of the family businesses - work that was interrupted by his service in World War II. 

In 1946, Charles Murphy Jr. and his three sisters merged their various individual and family interests to form their own partnership, C.H. Murphy & Co.

"Actually, my father would have preferred to have gone off on his own," Martha Murphy said during the September 2008 bench trial. "But at the bequest [sic] of his father, he began to manage the pooled interests."

The Murphys had about $15 million worth of combined assets, Martha Murphy testified.

"Within a short while, my father decided he needed to avail himself of the larger capital markets, so they took the company public and pretty much the rest is history," she said.

By 1964, the company had changed its name to Murphy Oil Corp., and Charles Murphy served as president until 1972 and as its CEO until 1984.

"Business is what Pop does," Martha Murphy said. "He had very few hobbies and when he took on ... an endeavor, he just did it wholeheartedly. It wasn't in his nature to be passive."

In addition to running Murphy Oil, Charles Murphy Jr. also added to the land holdings of his father. The land assets, which became Deltic Timber Corp., a subsidiary of Murphy Oil, expanded to more than 400,000 acres of farm and timberland. (Deltic Timber was spun off as a separate publicly traded company in 1996.)

The Murphy family also held an interest in First United Bancshares Inc. of El Dorado, which was acquired by BancorpSouth Inc. of Tupelo, Miss., in 2000.

Charles Murphy Jr.'s investment philosophy was "to put all of your eggs in one basket and then very carefully tend your basket," Martha Murphy said. "He felt enormous responsibility to the assets he'd been given. He felt an obligation to make those assets grow and be absolutely as productive as possible.

"I think he had a natural instinct, and then an instinct that he honed, to concentrate his activities and his interests," she said. "He was very much focused on oil and gas, timber and banking."

Madison Murphy also testified that his father was a visionary.

"Charles was a big-picture guy," he said. "He had the ability to see over the horizon and think strategically. He tried to surround himself with what he considered the best people and give them sufficient rope and scope to get their job done.

"He was not a detail guy," Madison Murphy said. "Administrative details were not his forte in the least."

 

Children's Gifts

Over the years, Charles Murphy Jr. showered his four children - Michael, now 62, Martha, 58, Charles "Chip" III, 57, and Madison, 52 - and his grandchildren with gifts that included shares of stock in each of the three companies he developed. He considered the stock in Murphy Oil, Deltic and First United Bancshares to be the core family assets, Madison Murphy said during the trial.

"They were industries and businesses that he ... had operated either in management or board capacities," Madison Murphy said. "We viewed those as long-term holdings."

In the 1980s and 1990s, Charles Murphy Jr. began to relinquish control of his companies to the next generation of the family.

Madison succeeded his father as chairman of the board of Murphy Oil, and he also served on the boards of Deltic and First United. Claiborne Deming, Charles Murphy Jr.'s nephew, became Murphy Oil's CEO in 1994 and held that job until the end of 2008. David Wood is currently Murphy's CEO.

Charles Murphy Jr. had hoped that his children would keep the family's "legacy assets" and grow them by participating in the management of his companies, Porter said in a brief filed in the case.

Martha and Madison didn't touch the shares of stock their father had given them, but that wasn't the case for their brothers.

"Because they had other interests, Mike and Chip had invaded trust principal, pledged trust assets as collateral for debts, and more than once requested partial dissolution of their interests in a trust that held, among other assets, Murphy Oil, Deltic, and First United stock," Porter wrote in his brief. "Mike and Chip also sold or pledged as collateral for debts much of the stock they had been gifted, and Mr. Murphy assisted them financially with several business ventures."

But diluting the family assets didn't sit well with Charles Murphy Jr.

"It was a huge distress to my father," Madison Murphy said during the 2008 trial. "So much so that he backstopped some of [Chip's] loan [sic] by being a guarantor of them, infused capital into a number of his businesses, failed businesses."

Madison Murphy said that he thought that, without their father's help, Chip Murphy could have filed for bankruptcy. But their father "came into my office one day pretty distraught and said that nobody named Charles Murphy is going to declare bankruptcy if he could help it," Madison Murphy testified.

Chip Murphy didn't return a message left at his Little Rock office, and Mike Murphy couldn't be reached for comment.

Charles Murphy's reaction to the legacy asset shares being reduced was "vehement and negative," Martha Murphy testified.

"Given [Charles Murphy Jr.'s] business background, he understood the value of centralized management," she said. "So he wanted to protect the family assets, which were in individual holdings, and he wanted to centralize the management.

"He was very concerned that they not be subject to creditors," Martha Murphy said.

"He was concerned about the prospect of divorce. We had had a divorce where unfortunately a good deal of stock went out of family hands," she said, referring to Chip Murphy's divorce.

She said Charles Murphy Jr. also wanted to have future family members represented on the boards of the companies he built.

The Murphy companies don't have the kind of dual-class stock structure, A and B shares, that have allowed other founders' families to retain corporate control, which is the case with Dillard's Inc. of Little Rock and Tyson Foods Inc. of Springdale.

 

Creating the Partnership

After the sudden death of Charles Murphy Jr.'s wife in 1997, he stepped up the formation of the partnership. He wanted to maintain the Murphy stock in his various companies and talked it over with Madison and Martha.

"We understood, the three of us, how vitally important it was to have a seat at the table of each of these companies," Martha Murphy said.

The plan called for the creation of Charles H. Murphy Jr. Family Limited Partnership to hold the shares of stock in the various Murphy entities. Charles Murphy Jr. contributed to the partnership assets worth $89 million, about 40 percent of his total assets at the time.

He also created a limited liability company, Murphy Family Management LLC, to manage the partnership. The three members of the LLC were Charles Murphy Jr., who owned 49 percent, and Madison and Martha, who each owned 25.5 percent, a split that required at least two shareholders to agree to any action. Charles Murphy Jr. contributed assets valued at $1 million, while Madison and Martha each contributed assets of about $500,000. The LLC is among the assets of the partnership.

Outside of the partnership, Charles Murphy Jr. still held about $130 million in assets, which were used for his living expenses.

And Charles Murphy Jr. was pleased with the partnership.

The partnership "best met the needs and goals and aspirations that we had," Madison Murphy said. "Charles and we all were concerned about keeping this voting block of Murphy, Deltic and First United in one place. ... We also wanted centralized management and professional management; this vehicle did that. It also allowed Pop to continue a pattern of making exclusion gifts and other gifts to his family members, but yet retaining the voting control."

In Deltic Timber alone, Charles Murphy Jr.'s family and extended family members own about 25 percent of the outstanding stock. That family tree spans four generations and includes more than 100 people. 

"This was one of the things that was really a driver for Charles was ... keeping the voting in one place, not fractionalizing the assets," Madison Murphy said.

Under Madison and Martha's management of the partnership, the value of the assets grew from $91 million in 1998 to $400 million in 2008, Madison Murphy said.

 

Chest Pains

In 2001, after suffering chest pains, Charles Murphy Jr. scheduled an appointment with a cardiologist. The doctor discovered Murphy's coronary arteries were blocked but the condition could be controlled with medication and a slowing down of his lifestyle.

Charles Murphy Jr. didn't want to stop traveling so he opted instead for quintuple bypass surgery. After the surgery, he developed a staph infection and died on March 20, 2002. He was 82.

His estate calculated its tax bills at $29.8 million to the IRS and $16.3 million to the state of Arkansas. After those were paid, the IRS sent another bill in 2006 in an attempt to collect an additional $41.8 million on the theory that Charles Murphy Jr.'s assets allegedly had been undervalued.

The IRS later argued that the creation of the partnership was not for "a legitimate non-tax purpose because Mr. Murphy knew of the tax advantages associated with the partnership's creation," Judge Barnes said in his findings of fact document.

Porter, the estate's attorney, said the creation of the partnership was valid and the estate did nothing wrong establishing it. Madison Murphy still is the managing member of the LLC that controls the partnership.

"The IRS does not generally like family limited partnerships," he said. "And the bottom line is they're sanctioned by Congress in the tax code."

Barnes agreed with the Murphy estate's position. On June 14, Barnes ordered that the IRS pay the estate $58.4 million plus interest starting from June 30.

Porter said last week that the IRS still could decide not to go through with the appeal.

Madison Murphy said during the trial that he thought the dispute could have been settled without going to court but the IRS wouldn't listen to him or representatives of his family.

"We've operated this [partnership] successfully for 10 years and it satisfied the goals of my family and my father," he said. "And to be very frank with you, I take deep and abiding umbrage in it. They are impugning my integrity. They are impugning the character of my father and our intent, and they've distorted it. And I'll stop there."

 

Murphy Family Relationships

Charles Murphy Jr.'s extended family still is involved the businesses he helped create:

• R. Madison Murphy, Charles Murphy Jr.'s youngest son, served as chairman of the board of Murphy Oil Corp. from 1994 until 2002 and currently sits on the boards of Murphy Oil, Deltic Timber Corp. and BancorpSouth Inc. of Tupelo, Miss., which acquired First United Bancshares Inc. of El Dorado in 2000.

• Claiborne P. Deming, Charles Murphy Jr.'s nephew, was president and CEO of Murphy Oil from 1994 until 2008 and remains a member of its board of directors.

• William C. Nolan Jr., a nephew of Charles Murphy Jr., serves on the boards of Murphy Oil and Deltic Timber.  

The Rev. Christoph Keller III, a nephew of Charles Murphy Jr., serves on the board of Deltic Timber.

• Caroline G. Theus, a niece of Charles Murphy Jr., serves as a director of Murphy Oil.

• R. Hunter Pierson Jr., who is married to Charles Murphy's niece, is on the board of Deltic Timber.

See also: Farm Used to Teach Business to the Next Generation of Murphys 

 

 

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