SMITH, ESTATE OF RAY C. (1998)(O)(INH)
Topic Code: I128Inheritance Tax Exemptions Document Reference: 98700224
BEFORE THE IOWA DEPARTMENT OF REVENUE AND FINANCEHOOVER STATE OFFICE BUILDINGDES MOINES, IOWA IN THE MATTER OF *ESTATE OF RAY C. SMITH * PROPOSED DECISIONc/o Charlotte R. FentonRural Route 1, Box 158 *Moulton *INHERITANCE TAX DOCKET NO. 97-70-2-0035 STATEMENT OF THE CASECharlotte R. Fenton, the administrator of the Estate of Ray C. Smith (Protester), filed an amended inheritance tax return seeking a refund of inheritance tax paid. The Iowa Department of Revenue and Finance (Department) denied the refund in a letter dated January 24, 1997. The protest was filed on February 10, 1997. An answer was filed on April 29, 1997. The matter was submitted on a stipulated record. The issue is whether the Iowa inheritance tax for the Ray C. Smith estate should be calculated on the basis that Mrs. Fenton was entitled to inherit all of the estate assets or on the basis of the settlement which divided the assets between Mrs. Fenton and Delsie Hobbs' estate. The stipulated exhibits are as follows:
| 1-A | Probate inventory for the estate of Ray C. Smith filed in Appanoose County |
| 2-B | Iowa inheritance tax return form IA706 dated 5/12/94 |
| 3-C | Inheritance tax clearance dated 8/24/94 showing tax paid in the amount of $38,574.94 |
| 4-D | Settlement agreement filed in the Ray C. Smith estate in Appanoose County |
| 5-E | Amended Iowa inheritance tax return form IA706 dated 4/24/96 |
| 6-F | Letter from attorney James G. Milani to Ms. Peggy Brown, examiner, dated October 11, 1996, including an amended inheritance tax return seeking a refund in the amount of $3,915.20 |
| 7-G | A stipulation in the estate of Ray C. Smith filed in the District Court of Iowa for Appanoose County |
| 8-H | Order approving final report with provision for compliance report in the Estate of Ray C. Smith in the District Court of Iowa for Appanoose County |
| 9-I | Amendment B (property distributed to Delsie Hobbs as sister of decedent) Ray C. Smith estate |
| 10-J | Letter from Peggy Brown, examiner, to Osborne and Milani attorneys dated January 24, 1997 |
STIPULATED FACTS 1. Decedent, Ray C. Smith, died intestate on January 15, 1994. Charlotte R. Fenton, a/k/a Charlotte Ray Morlan, was appointed by the District Court as Administrator of the Ray C. Smith Estate, as the daughter and only heir of the decedent. 2. On March 9, 1994, the Administrator filed a probate inventory. Exh. 1-A 3. On June 14, 1994, the Administrator filed an Iowa inheritance tax return, dated May 12, 1994, and paid the tax amount shown on the return. Attached to the return was a copy of the probate inventory. Exh. 2-B 4. On August 24, 1994, the Department issued an inheritance tax clearance for the Estate of Ray C. Smith. Exh. 3-C 5. Delsie Hobbs was Ray C. Smith's sister at the time of Mr. Smith's death. Ms. Hobbs contested Ms. Fenton's claim of being the decedent's daughter and only heir. Ms. Fenton was born during a time period when her mother was married to someone other than the decedent. Ms. Hobbs claimed a presumption that Ms. Fenton would be the child of the man to whom her mother was married rather than the child of Mr. Smith. Ms. Hobbs brought an action to remove Ms. Fenton as Administrator. Ms. Fenton vigorously resisted this action. 6. Ms. Hobbs subsequently died and the Executor of Ms. Hobbs' estate continued to press the claim that Ms. Fenton was not Mr. Smith's daughter. Ms. Fenton continued to vigorously resist this claim. The executor of Ms. Hobbs' estate pressed the claim in objections to the Administrator's Final Report, and Ms. Fenton vigorously resisted such claim. 7. The objections to the Final Report were set for hearing in the District Court on March 5, 1996. On March 4, 1996, counsel for the executor of Ms. Hobbs' estate and for Ms. Fenton entered into a settlement agreement. Exh. 4-D 8. On April 30, 1996, the Administrator filed an amended Iowa inheritance tax return, dated April 24, 1996, with "Exhibit A" attached thereto. Exh. 5-E 9. On October 14, 1996, the Department received a letter, dated October 11, 1996, with attachments, from counsel for the Administrator. Exh. 6-F 10. On November 12, 1996, counsel for the Delsie Hobbs estate and the Ray C. Smith estate filed a "Stipulation" in the District Court. Exh. 7-G 11. On December 2, 1996, the District Court's Order Approving Final Report With Provision For Compliance Report was filed in the District Court. Exh. 8-H 12. On January 24, 1997, the Department denied the Protester's refund claim of $3,915.20. Exh. 10-J 13. As a result of the settlement between Ray C. Smith estate and the Delsie Hobbs estate, one-fourth of the assets listed in Schedules B, C, and F of Exhibit 1-A were kept by Ms. Fenton and three-fourths of such assets were transferred by Ms. Fenton to the executor of the Delsie Hobbs estate. In terms of the amount of the Ray C. Smith gross estate, the settlement resulted in $512,591.86 of gross estate to Ms. Fenton and $91,042.15 of gross estate of the estate of Delsie Hobbs. 14. The dispute between Ms. Hobbs and her estate and Ms. Fenton was not contrived. The dispute was vigorously contested by the parties. There was extensive discovery conducted by the parties. Many motions were filed and hearings occurred. The disputed issue was genuine and was not raised for the purpose of avoiding Iowa inheritance tax. 15. The only issue in the instant contested case proceeding is whether the Iowa inheritance tax for the Ray C. Smith estate should be calculated on the basis that Ms. Fenton was entitled to inherit all of the estate assets or on the basis of the settlement for the division of assets between Ms. Fenton and the Delsie Hobbs estate. 16. The parties, by informed mutual consent, waived the contested case provisions of Iowa Code chapter 17A to the extent of the matters included in the stipulation.CONCLUSIONS OF LAW After the death of Ray C. Smith, Charlotte R. Fenton was appointed administrator of his estate. She filed a probate inventory which identified her as the daughter of the decedent and only heir of the decedent. The Iowa inheritance tax return was completed showing her to receive all of the assets of the estate and the tax was paid accordingly. The Department issued its clearance on that basis. Delsie Hobbs, sister to Ray C. Smith, filed an objection to the estate claiming that Charlotte R. Fenton should not be the administrator and was not the heir of Ray C. Smith. Delsie Hobbs asserted that Charlotte R. Fenton's mother was married to a man other than Ray C. Smith at the time of Charlotte's birth. During the pendency of the legal proceedings, Delsie Hobbs died and is succeeded in the litigation by her executor. The dispute by its very nature, and as stipulated to, was not contrived. The dispute was vigorously contested by the parties with extensive discovery and pre-trial motions and hearings. The disputed issue was genuine and was not raised for purposes of avoiding Iowa inheritance tax. The parties arrived at a settlement agreement. The settlement agreement was done prior to fully litigating the issues; therefore, there was no judicial determination of the rights of the parties. Settlement agreements are preferred by the Courts. The Probate Court approved the settlement in the Iowa District Court for Appanoose County. Presumably the distributions have been made to the parties according to the terms of the settlement agreement. If the Department would accept the amended tax return which sets forth the tax based on what the parties received according to the terms of the settlement, there would be no protest case. This is the position advanced by the Protester. The Department contends that it cannot legally apply the taxes based on the distribution from the settlement agreement. Ray C. Smith died intestate. Therefore, his estate passed under the Iowa inheritance statutes. These can be found in the probate code and specifically at Iowa Code section 633.219. Iowa Code section 633.219 provides as follows: 633.219 Share of others than surviving spouse.
The part of the intestate estate not passing to the surviving spouse, or if there is no surviving spouse, the entire net estate passes as follows:
1. To the issue of the decedent per stirpes.
2. If there is no surviving issue, to parents of the decedent equally; and if either parent is dead, the portion that would have gone to such deceased parent shall go to the survivor.
3. If there is no person to take under either subsection 1 or 2 of this section, the estate shall be divided and set aside into two equal shares. One share shall be distributed to the issue of the decedent's mother per stirpes and one share shall be distributed to the issue of the decedent's father per stirpes. If there are no surviving issue of one deceased parent, the entire estate passes to the issue of the other deceased parent in accordance with this subsection. ...
Ray C. Smith died without a surviving spouse. Charlotte R. Fenton, as the surviving child of the decedent would inherit the entire estate. If it was established that Charlotte R. Fenton was not the decedent's child, then Delsie Hobbs would inherit the entire estate as the decedent's surviving sister. The Department is an agency of the executive branch of the state government. It is authorized to act only in accordance with the statutes. Iowa Code chapter 450 sets forth the inheritance tax laws. The authority for imposition of the inheritance tax law can be found at Iowa Code section 450.3 which states as follows: 450.3 Property included. The tax hereby imposed shall be collected upon the net market value and shall go into the general fund of the state to be determined as herein provided, of any property passing as follows:
1. By will or under the statutes of inheritance of this or any other state or country.
It can be seen that the inheritance tax code section can be tied into the operation of the probate code. The Department relies extensively and heavily on the decision set forth in Matter of Estate of Blevin, 236 N.W.2d 366 (Iowa 1975). Amy C. Blevin had a will which left some modest bequests to friends and relatives and then bequeathed to two charities the majority of her estate. In November of 1969, she tore up that will. When she died in 1971, she left three heirs at law. The charities claimed that the decedent did not possess the mental capacity to revoke her will. The heirs and the charities arrived at a settlement agreement. The Department sought to tax the entire estate, and the charities contended that they were entitled to an exemption from inheritance tax. After discussing the revenue statutes and a probate statute, the Court held the following:
In summary, the estate of said decedent (1) passed instanter upon death to her heirs at law and (2) they, in turn, as was their lawful right, assigned to the two instantly involved charities an aggregate 50% share of the estate by way of compromise and settlement. Id at 371.
In 1909, the Iowa Supreme Court had a case where George Wells prepared a will which left all of his estate to his wife. His wife predeceased him by 12 years leaving a sister (Mrs. Comstock) and two children by another deceased sister. George Wells prepared a second will leaving $50,000 to his deceased wife's sister and the remainder of his estate to his heirs. A will contest ensued and was settled. The Supreme Court was asked to decide who was responsible for the inheritance tax for each of the shares in the settlement. The Court again went back to the rights of the parties at the moment of death of the decedent. In its analysis, the Court held that the will had been admitted to probate, it had never been disproven; therefore, at the moment of death, the $50,000 specific bequest was the right of Mrs. Comstock (the sister) and the remainder of the assets passed to his heirs subject to administration. The Court concluded that the settlement agreement was then a payment by the heirs buying their peace from property they had a vested right to the moment the decedent died. In re Estate of Wells, 142 Iowa 255, 120 N.W. 713 (1909). From these cases, the Department concludes that Charlotte R. Fenton was the surviving daughter of the decedent. There has never been any judicial findings to dispute her claimed relationship. Therefore, under the inheritance tax statutes, she had her property rights vest the moment Ray C. Smith died. Any settlement agreement was a payment for her to buy her peace from the property which she had inherited. The Department concludes that the inheritance tax return as first filed and paid was correct. The Protester contends that the Supreme Court opened the door for a change with regard to contested case settlements in inheritance tax matters. Charles Wayne Van Duzer executed a will in 1971. In 1973, he executed an irrevocable inter-vivos trust and transferred his property to the trust. He married in 1974 and died in 1977 leaving a net probate estate of $2,605. The trust had a value of approximately $575,000. The decedent's surviving spouse elected to take against the will and commenced an action to set aside the trust. She was paid $106,500 in a settlement. The Supreme Court indicated it could distinguish the present case from Wells and Blevin. The Supreme Court set forth the distinction as follows: In the present case, the claim was made by the person who was the decedent's surviving spouse and, as such, entitled to a distributive share by reason of her election to take against the will. Her claim was against the executor and the gravamen thereof concerned the amount of such statutory share. Matter of Estate of Van Duzer, 369 N.W.2d 407, 410 (1985)
The Court went on to find that as the surviving spouse she was entitled to the spousal exemption and tax rate status under the inheritance tax code. The Protester concludes that the Supreme Court in Van Duzer was allowing the inheritance tax to be based on the settlement agreement. The Protester is in error in concluding that the Supreme Court was recognizing the funds as coming to the surviving spouse through the settlement agreement. Rather, the Supreme Court was recognizing the rights that a surviving spouse has to the property of the decedent. The legislature has enacted the probate code sections 633.236 through 633.246 for the protection of a surviving spouse. These are the rights of the surviving spouse to take against a will. In Van Duzer, the Supreme Court had three major issues which they addressed. They did not do a lengthy analysis of the decision with regard to the taxation of the surviving spouse's share. It may be inferred that the Van Duzer case was a hard case which makes bad law. The Supreme Court did state that "to the extent the claims of the surviving spouse had merit," and then addressed to the duties involving the executor of the estate and the trustee of the trust. The Supreme Court was recognizing the superior position of a surviving spouse having the right to take property against a will. This taking by a surviving spouse is a statutory right. This statutory right would still fall within the authority of property passing under statutes of inheritance which would subject it to taxation under Code section 450.3. When the spouse elects to take property against the will, the surviving spouse is entitled to the exemptions and tax rate accorded to a surviving spouse taking property under a will. There is no holding in Van Duzer that the Supreme Court is recognizing the settlement agreement as the basis for taxation. Ray C. Smith did not leave a surviving spouse. Ray C. Smith did not have a will admitted to probate. He, therefore, died intestate. The property in his estate passed by the laws as set forth in division IV of the probate code. Charlotte R. Fenton claimed to be the daughter of the decedent. Without an adjudication finding that she was not the daughter of the decedent, she was in a superior position according to Iowa Code section 633.219 to inherit the property of Ray C. Smith. It would only have been through a showing that Charlotte R. Fenton was not the daughter of the decedent that Delsie Hobbs, as the sister of Ray C. Smith, would be entitled to inherit under that same code section. The Department is bound by this analysis. DECISION The Iowa inheritance tax return as originally filed showing the property all passing to the decedent's daughter Charlotte R. Fenton was correct. The tax has been paid in accordance with that determination. The Department was correct in denying the refund from the amended inheritance tax return. No affidavit has been filed under 701 IAC 7.9 seeking the deletion of identifying details, if any. Pursuant to Iowa Code section 17A.15(3), this proposed decision becomes the final order of the Iowa Department of Revenue and Finance without further proceedings unless there is an appeal to, or review on motion of, the Director of the Department within 30 days of the date of this proposed decision. Issued at Des Moines, Iowa, this 20th day of February, 1998. IOWA DEPARTMENT OF REVENUE AND FINANCE BY Philip S. Deats Administrative Law Judge