Mark Tremel And Bruce Tremel, Minors, By Citizens First National Bank Of Storm Lake, Iowa, Their Conservator Vs. Iowa Department Of Revenue ( 2010 )

IN THE SUPREME COURT OF IOWA
No. 08–1718
Filed July 16, 2010
MARK TREMEL and BRUCE TREMEL, Minors,
By CITIZENS FIRST NATIONAL BANK of
Storm Lake, Iowa, their Conservator,
Appellants,
vs.
IOWA DEPARTMENT OF REVENUE,
Appellee.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Harrison County, G.C.
Abel, Judge.
The Iowa Department of Revenue seeks further review of the
decision of the court of appeals reversing the district court’s order on
judicial review affirming the final order of the Director of the Iowa
Department of Revenue denying the petitioners’ claims for a refund on
previously paid estate taxes, interest, and penalties. DECISION OF
COURT OF APPEALS VACATED; DISTRICT COURT JUDGMENT
AFFIRMED.
Steven J. Roy, Denise M. Mendt, and Bridget C. Shapansky of
Nyemaster, Goode, West, Hansell & O’Brien, P.C., Des Moines, for
appellants.
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Thomas J. Miller, Attorney General, and James D. Miller, Assistant
Attorney General, for appellee.
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BAKER, Justice.
The Iowa Department of Revenue (IDOR) seeks further review of
the decision of the court of appeals reversing the district court’s order on
judicial review affirming the final order of the Director of the IDOR
denying the petitioners’ claims for a refund on previously paid estate
taxes, interest, and penalties. The IDOR argues that the court of appeals
erred in interpreting Iowa Code section 451.12 in a manner that limits
the department’s ability to collect estate taxes only from property subject
to inheritance tax under Iowa Code chapter 450 and in awarding the
petitioners’ attorney fees. The petitioners counter that the district court
erred in determining the designated beneficiaries of a life insurance
policy that was not included in the probate estate were responsible for
the payment of the Iowa estate tax, and that they are entitled to litigation
costs since the department was not substantially justified in collecting
the estate tax from them. We find that Iowa Code section 450.12 permits
the IDOR to assess and collect the estate tax from the beneficiaries of a
life insurance policy, and therefore, we affirm the district court judgment
affirming the final order of the Director of the IDOR.
I. Background Facts and Proceedings.
Philip Tremel died intestate on September 22, 1998, leaving a
surviving spouse, Lynne Tremel, and two minor children, Mark and
Bruce Tremel. Lynne was appointed as the administrator of Philip’s
estate, and Citizens First National Bank of Storm Lake (Bank) was
appointed as conservator for Mark and Bruce. At the time the estate was
closed, it was insolvent, and no beneficiary received any property from
the estate. At the time of Philip’s death, he owned a life insurance policy
on his own life naming Lynne as the primary beneficiary of the policy and
Mark and Bruce as contingent beneficiaries. Lynne disclaimed her
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interest in the policy, and Mark and Bruce became entitled to
$516,130.15 in life insurance proceeds.
The estate filed its federal estate tax return, which showed the
estate owed $129,838.71 in federal estate taxes. This figure was then
adjusted down to $98,687.92 because of a federal credit for state death
taxes. The estate owed $31,150.79 for Iowa estate taxes. Neither the
federal nor Iowa estate taxes were paid by the administrator of the estate
because the estate had no assets after the payment of administrative
expenses.
The IDOR assessed Iowa estate tax against Mark and Bruce and
attempted to collect the tax through an administrative levy on funds held
by the Bank as conservator for the boys. The Bank entered into an
agreement with IDOR paying the department $50,153.05, which
represents $31,150.79 in Iowa estate tax and $19,002.26 in interest and
penalties. The Bank filed timely claims for a refund on behalf of Mark
and Bruce. IDOR denied the refund claims, and Mark and Bruce sought
administrative relief.
A hearing was held on the matter before an administrative law
judge (ALJ) who issued a proposed decision finding that the life
insurance proceeds were not part of the estate for inheritance tax
purposes, and that the collection tools and rights from the inheritance
tax chapter were not incorporated into the estate tax chapter and could
not be used to reach the life insurance proceeds. A second hearing was
held to determine whether Mark and Bruce were entitled to attorney fees.
The ALJ determined that the IDOR’s position was not substantially
justified and awarded Mark and Bruce reasonable attorney fees. The
IDOR appealed both decisions of the ALJ to the Director of the IDOR,
who issued a decision finding that the insurance proceeds are a part of
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the gross and net estate for estate tax purposes, and therefore, actions
may be brought against Mark and Bruce because they were the
beneficiaries of the insurance policy.
Mark and Bruce filed a petition for judicial review with the district
court which affirmed the decision of the Director. Mark and Bruce
appealed, and the appeal was routed to the court of appeals. The court
of appeals reversed the district court, concluding that “there is no
statutory language in chapter 451 clearly imposing liability for estate tax
on named beneficiaries of life insurance proceeds not part of the probate
estate.” The court ordered that the collected tax, plus penalties and
interest, be refunded to Mark and Bruce, and that they were entitled to
reasonable litigation costs.
The IDOR filed an application for further review with this court
which we accepted.
II. Scope of Review.
Both parties agree that the scope of our review is determined by
Iowa’s Administrative Procedure Act, Iowa Code chapter 17A, and
further agree that we are reviewing for correction of errors at law. We do
not believe that the issue is this simple. Although the result does not
change, we believe we must determine the appropriate scope of review.
Under the Iowa Administrative Procedure Act,
[a]n agency’s interpretation of law is given deference if
authority to interpret the law has “clearly been vested by a
provision of law in the discretion of the agency.” If the
interpretation is so vested in the agency, then the court may
reverse an agency’s interpretation only if it is “irrational,
illogical, or wholly unjustifiable.” If, however, the
interpretation of a provision of law is not vested in the
discretion of the agency, our review is for correction of errors
at law and we are free to substitute our interpretation of the
statute de novo.
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AOL LLC v. Iowa Dept. of Revenue, 771 N.W.2d 404, 408 (Iowa 2009)
(quoting Iowa Code § 17A.19 (10)(l) (Supp. 1999)).
“[W]e must examine the specific statutory provision at issue in
this case and decide whether the legislature intended the board to have
interpretive authority with respect to that provision.” Clay County v.
Pub. Employment Relations Bd., 784 N.W.2d 1, 5 (Iowa 2010). Here, the
taxpayers challenge the department’s interpretation of Iowa Code section
451.12. That section provides, in part:
All the provisions of chapter 450 with respect to the
lien provisions of section 450.7, and the determination,
imposition, payment, and collection of the tax imposed
under that chapter, including penalty and interest upon
delinquent taxes and the confidentiality of the tax return, are
applicable to this chapter, except as they are in conflict with
this chapter. . . .
Iowa Code § 451.12 (1997).
If the IDOR has clearly been vested with discretion to interpret
section 451.12, we will reverse the department’s interpretation only if it
is “irrational, illogical, or wholly unjustifiable.” Id. § 17A.19 (10)(l). “The
question of whether interpretive discretion has clearly been vested in an
agency is easily resolved when the agency's enabling statute explicitly
addresses the issue.” Renda v. Iowa Civil Rights Comm’n, 784 N.W.2d 8,
11 (Iowa 2010). In this case, the legislature has explicitly given the
Director of the IDOR the power to “adopt rules necessary for the
enforcement of this chapter” in Iowa Code section 451.12, the statutory
provision at issue in this case. Iowa Code § 451.12.
If the legislature had not explicitly given the IDOR authority to
interpret section 451.12, then we would examine “the phrases or
statutory provisions to be interpreted, their context, the purpose of the
statute, and other practical considerations to determine whether the
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legislature intended to give interpretive authority [to the IDOR].” Renda,
784 N.W.2d at 11–12. The statute’s purpose, providing for collection
procedures of the tax assessed in chapter 451, requires the IDOR to
adopt some but not all of the provisions of chapter 450; it also requires
the IDOR to determine which parts of chapter 450 are in conflict with
chapter 451. Further, the context and practical considerations of
adapting the procedures in chapter 450 to chapter 451 lead us to find
that the legislature intended to give interpretive authority to the IDOR.
We conclude that the interpretation of section 451.12 has “clearly
been vested” in the IDOR. Iowa Code § 17A.19(10)(l). As a result, the
interpretation by the department will be found invalid only if it is
“irrational, illogical, or wholly unjustifiable.” Id. We also note that
“[b]ecause factual determinations are by law clearly vested in the agency,
it follows that application of the law to the facts is likewise vested by a
provision of law in the discretion of the agency.” Iowa Ag Constr. Co. v.
Iowa State Bd. of Tax Review, 723 N.W.2d 167, 174 (Iowa 2006); accord
Iowa Code § 17A.19(10)(f); see also Mycogen Seeds v. Sands, 686 N.W.2d
457, 465 (Iowa 2004). We will therefore reverse the agency’s application
of the law to the facts only if we determine such application was
“irrational, illogical, or wholly unjustifiable.” Iowa Code § 17A.19(10)(m);
see also Mycogen Seeds, 686 N.W.2d at 465.
III. Discussion and Analysis.
The question we must answer is whether the designated
beneficiaries of a life insurance policy not included in the probate estate
may be held responsible for the Iowa estate tax. The resolution of this
issue involves the interplay of the inheritance tax provisions in Iowa
Code chapter 450, the estate tax provisions of Iowa Code chapter 451,
and several provisions of the Federal Tax Code.
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A. Statutory Scheme. The Internal Revenue Code imposes a
federal estate tax on the transfer of the taxable estate of every decedent.
26 U.S.C. § 2001 (1994). Under the statute, the taxable estate is the
gross estate minus certain allowable deductions. Id. § 2053. At the time
of Philip’s death, a credit was allowed for the amount of any state death
taxes actually paid by the estate. Id. § 2011. 1
In addition to the federal estate tax, at the time of Philip’s death
the State of Iowa imposed an estate tax upon the transfer of the total net
estate of every decedent dying after April 1929. Iowa Code § 451.4. The
Iowa estate tax was governed by chapter 451 of the Code. 2 Under this
chapter, the net estate was determined by taking the gross estate as it is
defined for federal tax purposes, minus deductions permitted by federal
law. Id. § 451.3. Under the Internal Revenue Code, the gross estate is
defined as the value of all property, real or personal, tangible or
intangible at the time of the decedent’s death. 26 U.S.C. § 2031. This
definition includes the proceeds of life insurance receivable by the estate
executor or receivable by other beneficiaries. See id. § 2042(1) (stating
the value of the gross estate shall include property received by the
executor, including amounts received by all other beneficiaries “as
insurance under policies on the life of the decedent”).
The inheritance tax is a tax on the receipt of property from a
decedent. In re Millard’s Estate, 251 Iowa 1282, 1291, 105 N.W.2d 95,
1Since the filing of this case many changes have been made to the Internal
Revenue Code’s chapter on estate tax. The Economic Growth and Tax Relief
Reconciliation Act of 2001 phased out the state death tax credit. Economic Growth and
Tax Relief Reconciliation Act of 2001 § 531, 26 U.S.C. § 2011(b)(2) (Supp. 2002)). In
accordance with the 2001 act, in 2005 the credit was replaced by a federal estate tax
deduction for state death taxes which are actually paid. Id. § 532(d), 26 U.S.C. § 2058
(Supp. 2005)).
2ThisChapter was repealed in 2008. 2008 Iowa Acts ch. 1119, § 37 (codified at
Iowa Code ch. 451 (2009)).
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101 (1960). An estate tax, on the other hand, is a tax on property held
by a decedent at the time of death. A state estate tax typically “ ‘acts as
a ‘pick-up’ or ‘sponge’ tax, merely imposing tax up to the amount of the
allowable federal credit, thereby shifting revenue from the federal
government to the states.’ ” Tye J. Klooster, Repeal of the Death Tax?
Shoving Aside the Rhetoric to Determine the Consequences of the Economic
Growth and Tax Relief Reconciliation Act of 2001, 51 Drake L. Rev. 633,
651 (2003) (quoting Krisanne M. Schlachter, Repeal of the Federal Estate
and Gift Tax: Will It Happen and How Will It Affect Our Progressive Tax
System?, 19 Va. Tax. Rev. 781, 799 (2000)); see also Iowa Code § 451.2
(providing for the Iowa estate tax in an amount equal to the federal estate
tax credit for state death taxes).
B. The Adopting Statute. The IDOR argues that it has the
authority under Iowa Code sections 451.12 and 450.55 to collect the
Iowa estate tax from persons entitled to property subject to the Iowa
estate tax. It is clear from the structure of the federal estate tax
provisions and the language in Iowa Code chapter 451 that the Iowa
estate tax was intended to mirror the federal estate tax to some degree.
See 26 U.S.C. § 2011 (providing for the state death tax credit); see also
Iowa Code § 451.3 (defining the gross estate for Iowa tax purposes in
terms of the federal definition). However, the Iowa legislature must still
provide for the determination, imposition, and collection of this tax under
Iowa law. It did so through Iowa Code section 451.12, which adopts all
of the provisions from chapter 450 dealing with the determination,
imposition, payment and collection of the tax that are not in conflict with
chapter 451.
Iowa Code section 451.12 is an adopting statute. See, e.g., Nelson
v. City of Omaha, 589 N.W.2d 522, 528 (Neb. 1999). This means its
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language refers to another statute and makes the language of that
statute applicable to the subject matter of section 451.12. 1A Norman J.
Singer & J.D. Shambie Singer, Statutes and Statutory Construction §
22:25, at 328 (7th ed. 2009) (“When a statute adopts the provisions of
another statute by specific reference, the effect is as if the referenced
statute had been incorporated into the adopting statute.”). “[A] statute
may adopt all or a part of another statute by a specific reference, and the
effect is the same as if the statute or part thereof adopted had been
written into the adopting statute.” Nelson, 589 N.W.2d at 528.
Incorporation by reference is a perfectly acceptable and
appropriate method of drafting legislation. The purpose of
such practice is to incorporate into the new act the
provisions of other statutes by reference and adoption, and
in so doing to avoid encumbering the statute books by
unnecessary repetition.
73 Am. Jur. 2d Statutes § 16, at 242 (2001). The language of the
adopting statute, Iowa Code section 451.12, provides in pertinent part:
All the provisions of chapter 450 with respect to . . .
the determination, imposition, payment, and collection of the
tax imposed under that chapter . . . are applicable to this
chapter, except as they are in conflict with this chapter.
The Generation Skipping Transfer Tax chapter and the Qualified Use
Inheritance Tax chapter have similar provisions. See Iowa Code
§ 450A.12 (“All of the provisions of chapter 450 with respect to the
payment and collection of the tax imposed under that chapter . . . are
applicable to the provisions of this chapter, except as they are in conflict
with this chapter.”); id. § 450B.7 (“All the provisions of chapter 450 with
respect to the payment, collection and administration of the inheritance
tax imposed under that chapter . . . are applicable to the provisions of
this chapter to the extent consistent.”). It is clear from this language
that the legislature intended for the detailed provisions of chapter 450,
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providing for tax collection procedures, to fill in the holes in other more
sparsely compiled tax chapters. 3
The IDOR argues that in accordance with Iowa Code section
451.12, the language of Iowa Code sections 450.55 and 450.5 are
incorporated by reference into Iowa Code chapter 451. The IDOR claims
that these sections allow for the collection of estate tax against any
persons entitled to property which is subject to the tax.
The pertinent provisions of the inheritance tax statute read:
[T]he director of revenue and finance may bring, or cause to
be brought in the director’s name of office, suit for the
collection of the tax, penalty, interest, and costs, against the
personal representative or against the person entitled to
property subject to the tax . . . and upon obtaining judgment
may cause execution to be issued as is provided by statute
in other cases.
Id. § 450.55. Similarly, Iowa Code section 450.5 provides:
Any person becoming beneficially entitled to any
property or interest in property by any method of transfer as
specified in this chapter, and all personal representatives
and referees of estates or transfers taxable under this
chapter, are respectively liable for all taxes to be paid by
them respectively.
The IDOR also promulgated a rule to implement these sections and
incorporate them into the estate tax chapter which provides that “[t]he
personal representative of the decedent’s estate and any person,
including a trustee, in actual or constructive possession of any property
included in the gross estate, have the duty to file the return with the
department and pay the tax due.” Iowa Admin. Code r. 701–87.3(4).
3Chapter 450 contains over ninety-seven sections detailing how the applicable
tax must be computed and collected. See Iowa Code ch. 450. In contrast, chapters
450A, 450B and 451 dealing with the generation skipping transfer tax, the qualified use
inheritance tax, and the estate tax each have less than fifteen sections. See Iowa Code
chs. 450A, 450B, 451.
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The beneficiaries point out, however, that the life insurance
payable to Mark and Bruce is not taxable and cannot be reached under
chapter 450. See In re Brown’s Estate, 205 N.W.2d 925, 926 (1973)
(holding life insurance payable to a named beneficiary is not taxable for
inheritance tax purposes). Further, because the boys were lineal
descendants of the deceased, any property received by them is exempt
from inheritance tax. Iowa Code § 450.9 (Supp. 1997). In addition, tax
liens for inheritance taxes cannot be placed upon property inherited by
lineal descendants. Id. § 450.7 (Supp. 1997). There is no corresponding
exemption in the estate tax chapter for life insurance proceeds or
property received by lineal descendants. Nonetheless, the beneficiaries
argue that these provisions in chapter 450 prevent the assessment and
collection of chapter 451 estate taxes from the life insurance proceeds
they received because the provisions of chapter 450 are incorporated into
chapter 451.
Iowa Code section 451.12 specifically provides that all of the
determination and collection procedures are applicable “except as they
are in conflict with this chapter.” A conflict exists in the definition of
what property is taxed under the inheritance tax and the estate tax
chapters. Therefore, provisions exempting property from assessment and
collection that is taxable under the inheritance tax chapter would be in
conflict with the estate tax chapter. The exemptions for life insurance
payable to a named beneficiary and transfers to lineal descendants are
two specific examples that would not be incorporated into chapter 451
because they would be in conflict with the provisions of that chapter.
When we read into chapter 451 the provisions of sections 450.5
and 450.55 as if they were part of that chapter, Mark and Bruce, as
beneficiaries of Philip’s life insurance policy, are “person[s] entitled to
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property subject to the tax” or “entitled to any property or interest in
property by any method of transfer as specified in this chapter . . . .”
Iowa Code §§ 450.55, .5. Mark and Bruce, therefore, as recipients of the
life insurance proceeds which were taxable under the estate tax chapter,
are liable for the estate tax and may be assessed for that tax. We
determine that the IDOR’s interpretation of Iowa Code section 451.12
and subsequent collection of the estate tax was not irrational, illogical, or
wholly unjustifiable.
IV. Disposition.
We hold that Iowa Code section 451.12 permits the IDOR to assess
and collect the estate tax from Mark and Bruce as beneficiaries of the life
insurance policy, and therefore, we affirm the district court judgment
affirming the final order of the Director of the IDOR.
DECISION OF COURT OF APPEALS VACATED; DISTRICT
COURT JUDGMENT AFFIRMED.