Beverly Gardiner Nance v. Iowa Department of Revenue

IN THE SUPREME COURT OF IOWA
No. 16–1974
Filed February 23, 2018
BEVERLY GARDINER NANCE,
Appellant,
vs.
IOWA DEPARTMENT OF REVENUE,
Appellee.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Polk County, Michael D.
Huppert, Judge.
The Iowa Department of Revenue seeks further review of decision
of court of appeals that allowed taxpayer to avoid state inheritance tax
through a postmortem family settlement agreement. DECISION OF
COURT OF APPEALS VACATED; DISTRICT COURT JUDGMENT
AFFIRMED.
David M. Repp and F. Richard Lyford of Dickinson, Mackaman,
Tyler & Hagen, P.C., Des Moines, for appellant.
Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special
Assistant Attorney General, and Hristo Chaprazov, Assistant Attorney
General, for appellee.
2
WATERMAN, Justice.
In this appeal, we must decide whether the court of appeals
correctly held a taxpayer avoided an Iowa inheritance tax through a
private postmortem family settlement agreement (FSA). The taxpayer’s
father-in-law, over five years before his death, signed a beneficiary form
listing her as a contingent beneficiary of his brokerage account. That
account transferred to her alone upon his death, and the Iowa
Department of Revenue (IDOR) determined the estate owed the
inheritance tax on the full account value. The decedent’s grandchildren
from his son’s prior marriage sued the taxpayer, claiming they were
entitled to the brokerage account under their grandfather’s will. They
alleged their grandfather had dementia and lacked the mental capacity to
execute an enforceable beneficiary designation for his brokerage account.
The taxpayer settled the lawsuit by transferring half the account value to
the grandchildren under an FSA without any judicial determination of
incapacity. She then sought a refund of part of the inheritance tax
already paid. The IDOR denied the refund and determined the taxpayer
failed to meet her burden to establish incapacity. The district court
affirmed. The taxpayer appealed, and we transferred the case to the
court of appeals, which reversed and held the FSA controlled the tax
issue. We granted the IDOR’s application for further review.
For the reasons explained below, we hold that the IDOR correctly
denied the taxpayer’s refund, and its refusal to give effect to the FSA was
not irrational, illogical, or wholly unjustifiable. Without an adjudication
of incapacity, the beneficiary designation transferred the brokerage
account to the decedent’s daughter-in-law upon his death, and the
postmortem FSA was not binding on the IDOR and could not avoid the
inheritance tax when the taxpayer failed to prove incapacity in the
3
IDOR’s contested case proceeding. The contrary holding of the court of
appeals would allow parties to evade inheritance taxes without an
adjudication defeating facially valid beneficiary designations. We vacate
the decision of the court of appeals and affirm the district court
judgment that upheld the IDOR decision.
I. Background Facts and Proceedings.
On August 17, 2003, Lester D. Gardiner Sr. and his wife,
Mildred M. Gardiner, executed a transfer on death (TOD) agreement
naming their only son, Lester Gardiner Jr., as the sole primary
beneficiary of their brokerage accounts at Edward D. Jones. The TOD
agreement designated their son’s wife, Beverly Gardiner (now Beverly
Gardiner Nance), as the sole contingent beneficiary. Lester Sr. was
nearly age 92 when he signed the beneficiary designation. James
Gibbons, a broker for Edward D. Jones, was present when the TOD
agreement was executed and later testified that Lester Sr. and Mildred
were mentally alert when they signed it. Beverly was not informed of her
contingent designation at that time.
Lester Jr. had been married and divorced before he married
Beverly in 1979. Lester Jr.’s three children from his prior marriage—
Donald Gardiner, Donitta Gardiner, and Dianne Gardiner Green—are
Lester Sr.’s only grandchildren. Donald, Donitta, and Dianne were the
beneficiaries of Lester Sr.’s will, which he executed on November 22,
1988, nearly five years before he executed the TOD agreement.
Lester Sr. and Mildred moved into the Rowley Masonic Home in
Perry in 2000 and resided in that nursing home until their deaths.
Mildred died in 2004, and Lester Jr. died in 2007. On August 3, 2007—
almost four years after Lester Sr. executed the TOD agreement—Beverly
and Dianne filed an involuntary petition seeking the appointment of a
4
guardian and conservator for Lester Sr. One of his treating physicians
opined in a signed statement that Lester Sr.’s “mental condition makes
him incapable of caring for his own personal safety or provid[ing] for the
necessities of life such as food, shelter, clothing and continuing medical
care.” Lester Sr. was declared unfit to manage his affairs on
September 11, and Beverly and Dianne were appointed coguardians and
coconservators. Lester Sr. died testate on January 31, 2009, at the age
of 97.
After Lester Sr.’s death, his grandchildren, as coexecutors of his
estate, sued Beverly, challenging the validity of the beneficiary
designation form. They alleged that Lester Sr. lacked the requisite
capacity to execute the form in August 2003 due to his dementia.
Beverly denied the allegations, claiming Lester Sr. was competent when
he and his wife signed the beneficiary designation over five years before
his death.
While the lawsuit was pending, the estate timely filed an
inheritance tax return on October 20, 2009. The estate paid the required
inheritance tax of $18,988 based on the fact that Beverly received the full
balance of the TOD brokerage accounts.
With the grandchildren’s lawsuit pending, counsel for the estate
retained Dr. Robert Bender to review the medical and nursing home
records of Lester Sr. and his wife. Dr. Bender had never examined or
seen Lester Sr. Dr. Bender opined in a June 21, 2010 letter that both
Lester Sr. and his wife suffered from dementia. He noted that the
records showed Lester Sr. “was found to have impairment in decision-
making skills” by June 2002, and by November of that year, Lester Sr.
“was often confused[] and unable to manage his own affairs.” Based on
his review of the records, Dr. Bender concluded that Lester Sr. was
5
incapable of understanding his finances and “was very vulnerable to
undue influence being exerted on him by those around him.” Lester Sr.’s
grandchildren used Dr. Bender’s opinion to support their claim that
Lester Sr. lacked the requisite mental capacity to execute the beneficiary
designation form in August 2003. Beverly found no expert who would
opine to the contrary. However, Gibbons, the broker who was present
when the TOD agreement was executed in 2003, testified at a deposition
that he believed both Lester Sr. and Mildred to be mentally alert at the
time.
On July 27, the grandchildren and Beverly settled their dispute in
mediation and entered into an FSA. The IDOR was not a party to the
FSA. The FSA provided that the brokerage accounts would be liquidated
and the proceeds divided equally between Beverly and the estate. The
proceeds had already been reduced by the inheritance tax payment, and
the parties agreed that any tax refund would be divided equally between
the estate and Beverly. The probate court approved the FSA on
September 3 without any adjudication of Lester Sr.’s incapacity in 2003.
The estate filed an amended inheritance tax return on October 28.
The estate requested a refund of $10,034 based on the FSA providing
that half of the brokerage accounts were paid to Lester Sr.’s
grandchildren. The estate claimed the proceeds passing by operation of
the FSA to the grandchildren were exempt from inheritance tax under
Iowa Code section 450.9 (2009) as property passing to Lester Sr.’s lineal
descendants. The IDOR denied the refund on November 3. The estate
protested the denial on December 29. The estate transferred any refund
claim to Beverly. The estate was closed.
On June 26, 2013, the IDOR received a letter from Beverly’s
counsel requesting an informal conference. On July 24, 2014, Beverly
6
filed a formal written demand to initiate a contested case, and the IDOR
filed an answer denying her right to a refund.
On November 24, a contested case hearing was held before an
administrative law judge (ALJ). Beverly argued that the beneficiary
designation was invalid, relying on Dr. Bender’s letter opining that
Lester Sr. was incompetent in August 2003 because he suffered from
dementia. 1 Dr. Bender—who had not personally examined Lester Sr.—
was not called as a witness at the contested case hearing. Beverly
testified that she visited her father-in-law during the weekends at the
nursing home. But she did not testify regarding her personal
observations of Lester Sr.’s mental state at the time he executed the TOD
agreement or at any other time.
The ALJ issued a proposed order on February 3, 2015. The ALJ
found that the IDOR had subject matter jurisdiction over the issue of
Lester Sr.’s competency to execute the TOD agreement because such
determination would be necessary to decide whether a taxable event
occurred. The ALJ concluded that the FSA, executed after the transfer of
the accounts to Beverly through the TOD agreement, “ha[d] no bearing
on whether a taxable event occurred when the Accounts passed to
[Beverly].” The ALJ also determined that Beverly failed to prove by clear,
convincing, and satisfactory evidence that Lester Sr. lacked sufficient
mental capacity to execute the beneficiary designation. The ALJ
concluded that upon Lester Sr.’s death the TOD accounts passed directly
to Beverly and that the IDOR, therefore, properly denied the refund
request.
1Beverly previously took the opposite position in the lawsuit filed by her
stepchildren; before the parties settled, Beverly claimed that Lester Sr. was competent
to execute the TOD agreement. Any undue influence on Lester Sr. in 2003 would have
been exerted by his son, Lester Jr.—Beverly’s husband.
7
Beverly appealed to the director of the IDOR. She filed a motion to
allow witness testimony and a supporting brief, requesting the
opportunity to present the oral testimony of Dr. Bender. The IDOR filed
a resistance. The director granted Beverly’s motion to allow witness
testimony.
The director held an evidentiary hearing on January 14, 2016.
Dr. Bender testified. He described the “mini-mental status
examinations” used to evaluate a patient’s cognitive abilities and
elaborated on how Lester Sr.’s performance on such tests demonstrated
his severe dementia. Dr. Bender concluded his direct testimony by
stating, “My opinion is that [Lester Sr.] was cognitively incapable of
understanding the document that he signed in August of ’03, and that
shouldn’t have happened from the medical perspective.” On
cross-examination, Dr. Bender admitted that he did not remember ever
personally examining Lester Sr. or Mildred or speaking to any of the
treating physicians.
The director found that In re Estate of Bliven, 236 N.W.2d 366
(Iowa 1975), was controlling and, therefore, agreed with the ALJ that the
FSA had no bearing on whether a taxable event occurred when the TOD
accounts passed to Beverly. The director rejected Beverly’s claim that In
re Estate of Van Duzer, 369 N.W.2d 407 (Iowa 1985) (involving a spousal
election against the will), controlled. The director noted that “the portion
of the TOD that [Beverly] agreed to give to Decedent’s beneficiaries under
the Family Settlement Agreement passed not from Decedent’s estate to
the beneficiaries but from [Beverly] to the beneficiaries.”
The director also determined the IDOR had subject matter
jurisdiction over the issue of Lester Sr.’s competency and that Beverly
8
failed to meet her burden of proof on the issue of her father-in-law’s
alleged lack of capacity. The director reasoned,
No physician or other medical practitioner who
provided care to the decedent at the time that he executed
the TOD testified at either the Administrative Law Judge or
the Director hearing. In fact, no witness testified regarding
any personal observations of the Decedent at the time he
executed the TOD.
At the hearing before the Director, Dr. Bender testified
to explain his opinion regarding the significance of the
Decedent’s mini-mental status examination results. He also
testified, based on his review of the mini-mental status
examination results, it was his opinion that Decedent was
not competent when he executed the TOD. However,
Dr. Bender did not ever personally examine the Decedent.
The oral testimony was consistent with the information
provided to the Administrative Law Judge, however, it did
not rise to the level of clear and convincing evidence that the
contract should be set aside.
Based on the foregoing evidence, the Protester has not
met her burden to prove by clear, convincing, and
satisfactory evidence that the Decedent was incompetent
when he executed the TOD.
Beverly filed a timely petition for judicial review in the district
court. The district court agreed with the director that Bliven controlled
and that the postmortem FSA had no effect on the amount of inheritance
tax owed. The district court concluded that the assets covered by the
TOD agreement passed to Beverly at the moment of Lester Sr.’s death,
and “any entitlement to those assets by his grandchildren was created
after his death by virtue of the family settlement agreement.” The district
court affirmed the decision of the IDOR denying Beverly’s request for a
refund of inheritance tax.
Beverly appealed, and we transferred the case to the court of
appeals. The court of appeals concluded that Van Duzer—not Bliven—
controlled and that the FSA changed how half of Lester Sr.’s brokerage
accounts passed upon his death. As a result, the court determined that
9
the settlement proceeds paid to the grandchildren under the FSA were
exempt from inheritance tax. The IDOR filed an application for further
review, which we granted.
II. Standard of Review.
“Our review is governed by the standards set forth in Iowa’s
Administrative Procedure Act, chapter 17A.” Lange v. Iowa Dep’t of
Revenue, 710 N.W.2d 242, 246 (Iowa 2006). “In exercising its judicial
review power, the district court acts in an appellate capacity.” Iowa Ag
Constr. Co. v. Iowa State Bd. of Tax Review, 723 N.W.2d 167, 172 (Iowa
2006) (quoting Mycogen Seeds v. Sands, 686 N.W.2d 457, 463 (Iowa
2004), superseded by statute on other grounds, 2004 Iowa Acts 1st
Extraordinary Sess. ch. 1001, §§ 12, 20, as recognized in JBS Swift & Co.
v. Ochoa, 888 N.W.2d 887, 890, 898–900 (Iowa 2016)). “When we review
the district court’s decision, ‘we apply the standards of chapter 17A to
determine whether the conclusions we reach are the same as those of the
district court.’ ” Id. (quoting Mycogen Seeds, 686 N.W.2d at 464). If we
reach the same conclusions, we affirm; if not, we reverse. Id.
The fighting issues here turn on the IDOR’s factual determinations
and application of law to those facts. We may grant relief if the
taxpayer’s substantial rights have been prejudiced because the agency
action is
[b]ased upon a determination of fact clearly vested by a
provision of the law in the discretion of the agency that is not
supported by substantial evidence in the record before the
court when that record is viewed as a whole.
Iowa Code § 17A.19(10)(f); see also Iowa Ag Constr. Co., 723 N.W.2d at
173 (concluding that factual determinations regarding the applicability of
certain sales tax exemptions were clearly vested by a provision of law in
the discretion of the agency when “[t]he case was tried as a contested
10
case proceeding in which factual findings were made based on evidence
produced”). For purposes of our review,
“Substantial evidence” means the quantity and quality of
evidence that would be deemed sufficient by a neutral,
detached, and reasonable person, to establish the fact at
issue when the consequences resulting from the
establishment of that fact are understood to be serious and
of great importance.
Iowa Code § 17A.19(10)(f)(1). “In assessing evidentiary support for the
agency’s factual determinations, we consider evidence that detracts from
the agency’s findings, as well as evidence that supports them, giving
deference to the credibility determinations of the presiding officer.”
Lange, 710 N.W.2d at 247; see also Iowa Code § 17A.19(10)(f)(3).
“Because 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., 723 N.W.2d at 174; see also Mycogen Seeds, 686 N.W.2d at 465. We
therefore can only reverse the agency’s application of the law to the facts
if we determine the application was “irrational, illogical, or wholly
unjustifiable.” Iowa Ag Constr. Co., 723 N.W.2d at 174 (quoting Iowa
Code § 17A.19(10)(m) (allowing a court to reverse when the challenger’s
substantial rights have been prejudiced by the agency’s “irrational,
illogical, or wholly unjustifiable” application of law to fact)).
We review decisions on statutory interpretation for correction of
errors at law. Branstad v. State ex rel. Nat. Res. Comm’n, 871 N.W.2d
291, 294 (Iowa 2015).
III. Analysis.
We must decide whether the IDOR properly denied Beverly’s refund
claim. We conclude that an FSA is ineffective to alter the inheritance tax
consequences of a TOD agreement when the taxpayer unsuccessfully
11
challenges the validity of that transfer. In the contested case
proceedings, Beverly litigated and lost her claim that Lester Sr. was
mentally incompetent in August 2003 when he executed the TOD
agreement and beneficiary designation. She had the burden of proof,
and we must uphold that agency determination under our standard of
review. The IDOR therefore correctly determined that the brokerage
accounts transferred to Beverly under the TOD agreement as nonprobate
assets upon Lester Sr.’s death. The postmortem FSA under these
circumstances could not retroactively avoid the inheritance tax liability.
The IDOR properly denied Beverly’s refund claim.
Because Beverly’s challenge to the TOD agreement failed, the
transfer and resulting inheritance tax liability accrued upon Lester Sr.’s
death. See In re Estate of Myers, 825 N.W.2d 1, 6–7 (Iowa 2012).
“Nonprobate assets are interests in property that pass outside of the
decedent’s probate estate to a designated beneficiary upon the decedent’s
death.” Id. at 6. “[T]hese assets are the personal property of the grantor
before death, [but] they become the personal property of the designated
beneficiaries upon the grantor’s death pursuant to a contract between
the grantor and the administrator of the account.” Id. at 6–7. The
brokerage accounts, therefore, became Beverly’s personal property
immediately upon Lester Sr.’s death, pursuant to the TOD agreement.
Iowa’s “inheritance tax is a tax on the receipt of property from a
decedent.” Tremel v. Iowa Dep’t of Revenue, 785 N.W.2d 690, 694 (Iowa
2010) (emphasis added). The inheritance tax differs from an estate tax,
which “is a tax on property held by a decedent at the time of death.” Id.
(emphasis added); see also Estate of Dieleman v. Iowa Dep’t of Revenue,
222 N.W.2d 459, 460 (Iowa 1974) (“Unlike the federal estate tax, which is
a tax upon decedent’s estate, the inheritance tax is a tax upon each right
12
of succession . . . .”). Real estate and tangible personal property located
in Iowa and intangible personal property owned by a decedent domiciled
in Iowa are subject to the inheritance tax. Iowa Code § 450.2.
The inheritance tax is imposed on “any property passing . . . [b]y
deed, grant, sale, gift, or transfer made or intended to take effect in
possession or enjoyment after the death of the grantor or donor.” Id.
§ 450.3(3). This means the brokerage accounts transferred by the TOD
agreement are subject to the inheritance tax unless they meet the
requirements for an exemption provided in the Code. See id. §§ 450.4,
.9. The Code provides for an exemption for certain individuals.
In computing the tax on the net estate, the entire
amount of property, interest in property, and income passing
to the surviving spouse, and parents, grandparents, great-
grandparents, and other lineal ascendants, children
including legally adopted children and biological children
entitled to inherit under the laws of this state, stepchildren,
and grandchildren, great-grandchildren, and other lineal
descendants are exempt from tax.
Id. § 450.9. This exemption did not apply because the brokerage
accounts passed to Beverly (who is not a lineal descendant) upon
Lester Sr.’s death.
The FSA between Beverly and the estate divided the brokerage
accounts between Beverly and Lester Sr.’s grandchildren. We therefore
must determine what effect, if any, the FSA has on the inheritance tax.
Regulations of the IDOR address family settlement agreements.
Beneficiaries of an estate may contract to divide real or
personal property of the estate, or both, in a manner
contrary to the will of the decedent. The court of competent
jurisdiction may approve the settlement contract of the
beneficiaries. However, the department is not a party to the
contract and is not bound to compute the shares of the
estate based on the settlement contract. Instead, the
department must compute the shares of the estate based
upon the terms of the decedent’s will, unless a court of
13
competent jurisdiction determines that the will should be set
aside.
Iowa Admin. Code r. 701—86.14(2). This rule is not directly on point
here because the transfer at issue occurred through a TOD agreement,
not Lester Sr.’s will. But the principle of law embodied in the rule
applies independently—the IDOR is not bound by an FSA to which it is
not a party. However, there is tension in our caselaw as to when an FSA
may avoid inheritance taxes.
“We have established in our jurisprudence that family settlement
agreements are favored in law.” Gustafson v. Fogleman, 551 N.W.2d 312,
314 (Iowa 1996). More broadly, Iowa has a well-established public policy
favoring the voluntary settlement of disputes.
The law favors settlement of controversies. A settlement
agreement is essentially contractual in nature. The typical
settlement resolves uncertain claims and defenses, and the
settlement obviates the necessity of further legal proceedings
between the settling parties. We have long held that
voluntary settlements of legal disputes should be
encouraged, with the terms of settlements not inordinately
scrutinized.
Peak v. Adams, 799 N.W.2d 535, 543 (Iowa 2011) (quoting Waechter v.
Aluminum Co. of Am., 454 N.W.2d 565, 568 (Iowa 1990)). It can be
burdensome on families to require an adjudication of incompetency to
avoid an inheritance tax. Recognizing tax relief from an FSA avoids
costly litigation.
Yet we also note that “[t]ax exemption statutes are construed
strictly, with all doubts resolved in favor of taxation.” Sherwin–Williams
Co. v. Iowa Dep’t of Revenue, 789 N.W.2d 417, 424 (Iowa 2010)
(alteration in original) (quoting Dial Corp. v. Iowa Dep’t of Revenue, 634
N.W.2d 643, 646 (Iowa 2001)). Additionally, we have long recognized
that the parties to an FSA providing for a different disposition than that
14
provided for in a will “do not determine to whom the title passes from
decedent.” Seeley v. Seeley, 242 Iowa 220, 225, 45 N.W.2d 881, 884–85
(1951) (holding that because the decedent’s two sons entered into an FSA
to renounce their gifts under the will, they took title as heirs, and one of
the son’s widow was entitled to her one-third distributive share of the
real estate).
Against that backdrop, we review our precedent adjudicating
claims that FSAs avoided inheritance tax liability.
A. Effect of Family Settlement Agreements on Inheritance
Taxes. The IDOR claims Bliven applies and is dispositive, while Beverly
argues Van Duzer controls the outcome of this case. We held the FSA did
not avoid the inheritance tax in Bliven but did so in Van Duzer under
different circumstances. Here, we conclude the agency’s adjudication
rejecting Beverly’s challenge to Lester Sr.’s competency is fatal to her
refund claim regardless of the terms of her FSA. We limit Van Duzer to
its facts.
In Bliven, Amy C. Bliven tore up the document identified as her
last will and testament. 236 N.W.2d at 368. A copy of the will showed
that most of her estate was bequeathed to two out-of-state charities. Id.
When Bliven died, her heirs at law contended that her will had been
effectively revoked and that Bliven therefore died intestate. Id. The
charities, however, claimed Bliven lacked the mental capacity to revoke
her will. Id. To avoid litigation, the heirs and the charities stipulated
that the will had been revoked and that Bliven died intestate. Id. The
parties agreed to an estate distribution in which each charity received
twenty-five percent of the estate. Id.
The executor filed an inheritance tax return indicating that the
distribution to the charities was exempt from the inheritance tax. Id.
15
The executor claimed the assets going to the charities in accord with the
settlement agreement “passed in any manner” under section 450.4 and,
therefore, were exempt from taxation. 2 Id. The IDOR disagreed,
claiming, among other things, that “title to property passing under the
terms of a settlement agreement does not bypass those who would have
taken under the statutes of intestate succession.” Id. at 369.
We determined that upon Bliven’s death, her property
automatically passed to and title immediately vested in her heirs at law.
Id. at 370. We also noted that “an heir’s interest in property acquired by
intestate succession is assignable and transferable immediately on the
death by which it vests under the law of descent and distribution.” Id. at
370–71. We recognized that any interest the charities obtained in
property held by Bliven at the time of her death must have been obtained
by conveyance or assignment from her heirs at law. Id. at 371. We
concluded that the “inheritance tax exemption statute never came into
play as to any right in said estate indirectly acquired . . . by these
charitable organizations, i.e., no inheritance, no exemption.” Id.
(emphasis added). The property rights acquired by the charities “passed
to them only by assignment from [the] decedent’s heirs, separate and
apart from her death.” Id. We determined under the Code in place at
that time, that “passes in any manner” meant “passes in any manner by
2Section 450.4(2) provided that an inheritance tax shall not be collected
[w]hen the property passes in any manner to societies, institutions or
associations incorporated or organized under the laws of this state for
charitable, educational, or religious purposes, and which are not
operated for pecuniary profit, . . . provided, however, that this exemption
shall also include property passing to any society, institution or
association incorporated or organized under the laws of any other state
for charitable, educational or religious purposes, and which are not
operated for pecuniary profit . . . .
Iowa Code § 450.4(2) (1971).
16
will or intestate succession directly from a decedent.” Id. at 372 (quoting
Iowa Code § 450.4(2) (1971)). As a result, we held that Bliven’s entire
estate passed by intestate succession to her heirs at law and was subject
to the inheritance tax, absent any exemption under section 450.4. Id.
The IDOR argues that the holding in Bliven rests on two well-
established propositions: (1) Iowa’s inheritance tax is levied only on
property passing from a decedent, so the inheritance tax exemption only
applies to property passing from a decedent; and (2) interested parties
cannot, by agreement, determine to whom property passed from a
decedent. See id. at 371; Seeley, 242 Iowa at 225, 45 N.W.2d at 884–85
(“The contracting parties do not determine to whom the title passes from
decedent.”). These principles apply here, and we conclude that Bliven is
controlling. Title to the brokerage accounts immediately vested in
Beverly upon Lester Sr.’s death under the TOD agreement. See Iowa
Code § 633D.9 (2009) (“On the death of a sole owner or on the death of
the sole surviving owner of multiple owners, the ownership of securities
registered in beneficiary form passes to the beneficiary or beneficiaries
who survive all owners.”); id. § 633D.11(1) (“A transfer on death resulting
from a registration in beneficiary form shall be effective by reason of the
contract regarding the registration between the owner and the registering
entity under the provisions of this chapter, and is not testamentary.”);
see also Myers, 825 N.W.2d at 7 (recognizing that pay-on-death accounts
“become the personal property of the designated beneficiaries upon the
grantor’s death pursuant to a contract between the grantor and the
administrator of the account”). The accounts were therefore subject to
the inheritance tax, and no exemption applied.
The principle that the property in a TOD account becomes the
property of the designated beneficiary immediately upon death presumes
17
a valid contract. Here, there has been no determination that the TOD
agreement was invalid. The party challenging a contract based on lack of
capacity bears the burden of proof. See Urbain v. Speak, 258 Iowa 584,
590, 139 N.W.2d 311, 315 (1966) (explaining that a person is presumed
sane when the contract is made and the burden of proving otherwise
rests on the person claiming incompetency); see also Jackson v.
Schrader, 676 N.W.2d 599, 606 (Iowa 2003) (noting “the district court
properly disposed of the competency issue on the ground that [the
plaintiff] failed to show that [the party to financial transactions] lacked
mental capacity” at the time she engaged in such transactions). The
grandchildren settled with Beverly without any adjudication that Lester
Sr. was incompetent to execute the TOD agreement. During the
contested case proceedings, the ALJ determined that Beverly failed to
prove Lester Sr. lacked sufficient mental capacity to execute the TOD
agreement. The director agreed that Beverly did not meet her burden of
proof. In its ruling on the petition for judicial review, the district court
stated,
As noted by both the ALJ and the director, the only
proof [of Lester Sr.’s incompetency] offered by the petitioner
was the opinions of Dr. Bender, someone who never
examined or even observed Lester, Sr. at any point in time
prior to his death. The only basis for his opinions was the
aforementioned status examinations, which again were not
administered by Dr. Bender. As the trier of fact in this
contested case proceeding, it was the director’s prerogative to
weigh the evidence and make the ultimate decision on
whether it met the aforementioned burden; that conclusion
was n[ot] irrational, illogical or wholly unjustifiable.
(Footnote omitted.) The IDOR’s finding regarding Lester Sr.’s competency
was not challenged on appeal. That finding is supported by substantial
evidence, and the IDOR’s application of law to fact on the competency
determination is not irrational, illogical, or wholly unjustifiable on this
18
record. We are bound by that determination. See Iowa Ag Constr. Co.,
723 N.W.2d at 173–74; see also Christiansen v. Iowa Bd. of Educ.
Exam’rs, 831 N.W.2d 179, 191–92 (Iowa 2013) (discussing deference
given to agency determinations in contested case adjudications). The
TOD agreement is therefore valid, and the brokerage accounts became
Beverly’s property immediately upon her father-in-law’s death.
As with the charities in Bliven, who had no right to property in the
decedent’s estate but for the settlement agreement, the grandchildren
here had no right to the proceeds of the brokerage accounts but for the
FSA. We have previously explained,
The contracting parties do not determine to whom the title
passes from decedent. . . .
In legal effect the contracting parties convey title from
themselves without resorting to the usual instruments of
conveyance. The probate court shapes the administration so
as to carry out the contract but by no theory or fiction of law
does the title bypass the heirs or beneficiaries and pass
direct from decedent to those designated by the contract.
Seeley, 242 Iowa at 225, 45 N.W.2d at 884–85. This remains true
despite the language in the FSA providing that “the Grandchildren will
inherit a portion of the Accounts.”
Beverly argues that Van Duzer controls, and in that case, we held
the FSA avoided inheritance tax. See 369 N.W.2d at 410. Charles
Wayne Van Duzer executed an irrevocable inter vivos trust, which
transferred farmland to two trustees. Id. at 408. The inter vivos trust
gave the trustees absolute discretion to accumulate the trust income or
distribute it to Van Duzer during his lifetime, but Van Duzer retained the
power to dispose of the corpus of the trust through a general power of
appointment exercisable by will and to appoint successor trustees. Id.
The trust instrument provided that if Van Duzer died without exercising
19
the power of appointment, a life income interest in the trust would be
created in his sister and nieces. Id. Upon their death, the corpus of the
trust was to be distributed to certain designated beneficiaries. Id.
The next year, Van Duzer got married. Id. He died a few years
later without exercising his power of appointment. Id. His “surviving
spouse elected to take against the will,” and she also “commenced an
action against the estate alleging that the trust was illusory, failed
ab initio, and that the trust assets were to be considered as part of the
probate estate for purposes of computing her statutory share.” Id. She
entered into a settlement agreement with the executor of the estate, the
trustees, and the beneficiaries of both the estate and the trust. Id. The
surviving spouse received $106,500 pursuant to the settlement
agreement. Id.
The IDOR included all of the trust corpus in its computation of the
inheritance tax to be paid by the beneficiaries and did not allow the
$106,500 paid to Van Duzer’s surviving spouse to qualify for the spousal
exemption. Id. The district court reversed the IDOR and determined
that this amount qualified for the spousal exemption. Id. In affirming
the district court, we distinguished In re Estate of Wells, 142 Iowa 255,
120 N.W. 713 (1909), and Bliven.
The claimants in Wells were persons not named in
decedent’s will or otherwise entitled to claim against the
estate. The same is true of the charities which were the
claimants in Bliven. 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. While based upon various theories, all
aspects of her claim involved the alleged invalidity ab initio of
the inter vivos trust, a circumstance which, if correct, would
increase the share passing to the surviving spouse.
20
Van Duzer, 369 N.W.2d at 410. We viewed the settlement agreement “as
a tripartite agreement whereby the trustee agreed to return $106,500 to
the estate, and the executor agreed to pay an identical sum to the
surviving spouse in satisfaction of her distributive share.” Id. We noted,
It doubtless would have made a better record if separate
checks were issued for this purpose, a deposit to the estate
account had been documented and a court order had been
obtained authorizing the payment of a distributive share in
the sum agreed to in the settlement.
Id. But we agreed with the district court that such formality was not
necessary “in order to recognize the transaction to be that which it
clearly was.” Id. We held the district court did not err in concluding that
the payment of $106,500 to the surviving spouse qualified for the
spousal exemption. Id. Beverly characterizes Van Duzer as giving effect
to an FSA that dictated the inheritance tax consequences. The IDOR,
however, reads the language regarding what “would have made a better
record” as clarifying that the surviving spouse did not receive the money
pursuant to the settlement agreement but instead received it from the
decedent by claiming against the will. See id.
Van Duzer recognized that the surviving spouse took the $106,500
by reason of her election to take against her husband’s will, but the effect
of the FSA increased her statutory share. See id. (noting that the
executor would pay the amount “to the surviving spouse in satisfaction of
her distributive share”); cf. In re Estate of Spurgeon, 572 N.W.2d 595, 598
(Iowa 1998) (“When testator died and his will was admitted to probate,
the widow . . . had to make a choice: whether to accept the will and
forego a statutory share, or to reject the will and take a statutory share
instead. . . . The authorities are clear as to the effect of an election by a
surviving spouse: a choice to take against the will is a genuine election
21
which nullifies gifts to the surviving spouse in the will but leaves the will
to be carried out as to the other devisees as nearly as may be done.”
(quoting In re Campbell, 319 N.W.2d 275, 277 (Iowa 1982))). A spousal
election to take against the decedent’s will transfers title over the
distributive share from the decedent to the surviving spouse. See
Watrous v. Watrous, 180 Iowa 884, 898, 163 N.W. 439, 443 (1917) (“The
surviving spouse has the absolute right to elect not to consent to the
provisions of the will, the effect of which is to give such survivor
absolutely an undivided one-third interest, in value, of all the property,
real and personal, of which the deceased spouse died seised.”). We
conclude that Van Duzer is inapplicable here and limit its holding to
spousal elections against the will.
The IDOR itself has limited its adherence to Van Duzer to spousal
elections against the will, and in other inheritance tax cases that agency
has continued to rely on Bliven. See Estate of Leland E. Robertson,
Inheritance Tax Assessment Docket No. 86-402-3-A (1987). The
legislature has not overruled either Van Duzer or Bliven. We can infer
the legislature has acquiesced in their holdings interpreting Iowa Code
section 450, such that FSAs cannot be used to avoid inheritance taxes
except when a spouse elects against the will. See In re Estate of Vajgrt,
801 N.W.2d 570, 574 (Iowa 2011) (“The rule of stare decisis ‘is especially
applicable where the construction placed on a statute by previous
decisions has been long acquiesced in by the legislature . . . .’ ” (quoting
Iowa Dep’t. of Transp. v. Soward, 650 N.W.2d 569, 574 (Iowa 2002))); see
also Crane v. Mann, 162 S.W.2d 117, 118 (Tex. Civ. App. 1942) (“[S]ince
the year 1929 that Department has construed the Inheritance Tax Statue
to place the tax on the entire estate passing by virtue of the will,
regardless of any compromise agreement which permits a portion of the
22
estate to go to a contestant. That Departmental construction having
been acquiesced in by the Legislature of Texas for more than twelve years
is of itself persuasive and should not be overturned in the absence of
strong reason therefor.”).
Van Duzer is distinguishable for another reason—because there
was no adjudication of the validity of the trust created by Van Duzer.
The surviving spouse in Van Duzer did not litigate and lose on the issue
of the trust’s enforceability. By contrast, Beverly failed to meet her
burden of proof to show that Lester Sr. lacked the capacity to execute the
TOD agreement. Here, we have an adjudication that the TOD agreement
was valid, and this controls how the property passed at Lester Sr.’s
death. Cf. Ind. Dep’t of Revenue v. Estate of Binhack, 426 N.E.2d 714,
715–16, 718 (Ind. Ct. App. 1981) (concluding that the court erroneously
redetermined the amount of inheritance taxes based on a family
settlement agreement, which provided that grandchildren who were
excluded from and contested the will inherited part of the estate because
“[t]he crucial fact remains . . . that the will . . . has never been set aside”);
Borish v. Zink, 64 A.2d 461, 461 (N.J. Super. Ct. App. Div. 1949)
(acknowledging that “[i]f the appeal from probate had been prosecuted to
conclusion, the probate might have been reversed and the fact
established that Mr. Borish died intestate” but noting that after the
settlement agreement was reached, “the appeal was dismissed and the
decree of the Orphans’ Court conclusively establishe[d] the factum of the
will[, so t]he transfers made by the will have taken effect and are
taxable”).
Beverly suggests that the determining factor in Bliven and
Van Duzer was whether there was a bona fide dispute between the
23
parties, pointing out that the Bliven parties stipulated that the will was
revoked. Beverly claims that
[h]ad [the parties to the settlement agreement] not stipulated
that the decedent’s will had been revoked, the Iowa Supreme
Court in Bliven would likely have ruled (as it did in
Van Duzer) that the decedent’s property “passed” to the
charities by virtue of the settlement agreement rather than to
the heirs under intestacy.
We disagree. In Bliven we stated,
[W]e have searched chapter 450 in a futile effort to find
therein any provision which even intimates a recognition of
the passing of property rights from a decedent in any
manner other than by terms of a will or intestate succession.
236 N.W.2d at 370. The 2009 version of chapter 450, which governs this
case, applies to the passing of property rights from a decedent by virtue
of TOD agreements but not by virtue of postmortem FSAs. See Iowa
Code § 450.3. Beverly’s argument also ignores the language in Seeley
providing that “contracting parties do not determine to whom title passes
from decedent.” Seeley, 242 Iowa at 225, 45 N.W.2d at 884–85; cf. Ind.
Dep’t of State Revenue v. Estate of Pickerill, 855 N.E.2d 1082, 1086 (Ind.
T.C. 2006) (“[W]hen a family settlement agreement exists, how the
agreement came into existence (i.e., whether or not litigation actually
ensued or a claim was filed) does not change the fact that the agreement
cannot alter the manner in which inheritance tax is imposed.”). Our
holding in Seeley corresponds with “[t]he majority view . . . that a
succession tax is computable in accordance with the terms of the will,
unaffected by [a] compromise agreement.” De Rosa v. Dir., Div. of
Taxation, 28 N.J. Tax 73, 78 (Tax. Ct. 2014) (quoting Pope v. Kingsley,
191 A.2d 33, 36 (N.J. 1963)); see also Emanuelson v. Sullivan, 161 A.2d
788, 790 (Conn. 1960) (“[T]he testator’s property devolves by virtue of the
probated will, even though its effect may have been changed
24
subsequently by those who took under it. The succession tax should,
therefore, be computed and assessed on the basis of the disposition of
the estate in the probated will. The weight of authority in other
jurisdictions supports this rule.”); Crane, 162 S.W.2d at 118 (“The other
line of authorities, the majority, holds that where a contested will is
probated by virtue of a compromise agreement all the property is to be
considered as having vested at the death of the testator in accordance
with the terms of the will, and hence the inheritance tax is to be
computed upon all the property of the estate unaffected by the
compromise agreement. We think this the sounder rule.” (Citations
omitted.)).
Additionally, while the Bliven parties stipulated that the will was
revoked, the facts of Bliven still closely align with the facts presented
here. Lester Sr.’s grandchildren challenged the TOD agreement, claiming
their grandfather lacked capacity. They then compromised their claim by
entering into the FSA, in which Beverly was allowed to keep half of the
proceeds of the brokerage accounts. Similarly, in Bliven, the charities
challenged the will revocation, claiming the decedent lacked the capacity
to revoke her will. They also compromised their claim by entering into a
settlement agreement. The charities in Bliven stipulated that the
decedent’s will had been revoked, even though the stipulation was
inconsistent with their original claim of lack of capacity. In entering into
the FSA, the grandchildren gave up their claim challenging the TOD
agreement’s validity.
The Estate and the Grandchildren hereby release and acquit
and forever discharge Beverly from any and all liability
including all claims, demands, and causes of action of every
nature affecting them which they may have or forever claim
to have by reason of any and all matters relating to the
Litigation described above.
25
....
. . . [T]he parties agree that the Litigation shall be
dismissed with prejudice, each party to bear its, his or her
own costs.
The court of appeals noted “the estate’s claim had sufficient merit to
cause the parties to enter into an agreement requiring Beverly to forego
one-half of the value of the brokerage accounts.” But as that court
acknowledged, “[o]ther factors exist that cause parties to reach a
compromise beyond the likelihood of success at trial.” While Beverly also
released any claims she might have had relating to the litigation, the
status quo meant that title to the brokerage accounts passed to her upon
Lester Sr.’s death.
The court of appeals suggested that the IDOR may not have
refused the refund “if the estate had presented overwhelming evidence
that Lester D. Gardiner Sr. was incompetent.” One might expect it would
be easy to obtain an adjudication of incompetency when the evidence is
overwhelming. But the estate settled its claims without proving
Lester Sr.’s incompetency in probate court. Beverly in turn failed to
prove Lester Sr.’s lack of mental capacity in the contested case hearing.
She does not challenge the director’s finding that Lester Sr. was
competent, and that finding is binding on appeal. Iowa Ag Constr. Co.,
723 N.W.2d at 173.
The court of appeals also questioned whether the IDOR would have
refused a refund “if there was overwhelming evidence the contract was
the product of dependent adult abuse by undue influence.” No
dependent adult abuse is claimed here, and in any event, Beverly, who
seeks the refund now, was the beneficiary of the alleged undue influence
on Lester Sr.
26
B. Adopting a Test for When Family Settlement Agreements
Can Control Inheritance Tax Consequences. Beverly suggested that in
some circumstances, FSAs should control inheritance tax consequences.
She advocated for a four-part test gleaned from federal cases: (1) the
underlying claim was based on enforceable legal rights of the claimant,
(2) the parties to the agreement were truly adversarial, (3) “the agreement
was made in good faith as the result of arm’s-length negotiations,” and
(4) there is no evidence suggesting the agreement “was entered into for
post mortem tax planning purposes.” See Estate of Hubert v. Comm’r,
101 T.C. 314, 318–21 (1993), aff’d, 63 F.3d 1083 (11th Cir. 1995), aff’d,
520 U.S. 93, 117 S. Ct. 1124 (1997). We note that the federal estate tax
differs from Iowa’s inheritance tax. See Dieleman, 222 N.W.2d at 460
(“Unlike the federal estate tax, which is a tax upon decedent’s estate, the
inheritance tax is a tax upon each right of succession and is chargeable
upon the property each beneficiary receives.”). Based on this distinction,
the court of appeals rejected the federal test. The court of appeals
created a two-part test for when an FSA can control inheritance tax
consequences: (1) the agreement is entered into in good faith, and (2)
“there is no evidence of a scheme to avoid taxes.” This test incorporates
the third and fourth prongs of the federal test.
As the IDOR points out, it is unclear what constitutes “evidence of
a scheme to avoid taxes” (and we realize the same concern would arise
under the fourth part of the federal test if we adopted it). The IDOR also
points out that such evidence may be present here; the FSA provided
that “[b]ecause the Grandchildren will inherit a portion of the Accounts,
an amended Inheritance Tax Return shall be filed by the Estate seeking a
refund.” We decline to adopt either the federal test or the test created by
the court of appeals. Estate planning should precede the testator’s
27
death. Moreover, even when family members have bona fide disputes, all
gain when taxes are avoided because every dollar of inheritance tax
avoided is a dollar that can be reallocated among the family members in
the settlement. In that sense, the parties are not truly adversarial as to
the tax issue nor are the negotiations on that point truly arms’ length.
Cf. Burditt v. Comm’r, 77 T.C.M. 1767, 1999 WL 185163, at *7
(T.C. 1999) (concluding that settlement proceeds allocated to petitioner
“individually for mental anguish, pain and suffering, damage to his
reputation and loss of good will” could not be excluded from petitioner’s
gross income as damages received on account of personal injuries
because “the parties to the . . . settlement were not adversarial with
respect to allocations made in the settlement agreement” and because
“the written allocation . . . was not . . . made at arm’s length, was entirely
tax-motivated, and did not accurately reflect the claims at issue in the
lawsuit”). Rather, the interests of the parties are aligned against the
taxing authority based on their common interest in avoiding the tax. We
hold the FSA did not control the inheritance tax consequences after the
taxpayer’s challenge to the validity of the TOD agreement failed.
IV. Disposition.
For these reasons, we vacate the decision of the court of appeals
and affirm the judgment of the district court upholding the IDOR’s denial
of Beverly’s inheritance tax refund claim.
DECISION OF THE COURT OF APPEALS VACATED; DISTRICT
COURT JUDGMENT AFFIRMED.
All justices concur except Wiggins, J., who concurs specially, and
Mansfield, J., who dissents.
28
#16–1974, Nance v. Iowa Dep’t of Revenue
WIGGINS, Justice (concurring specially).
I concur in the result. I agree with Justice Mansfield that the In re
Estate of Van Duzer, 369 N.W.2d 407 (Iowa 1985), and In re Estate of
Bliven, 236 N.W.2d 366 (Iowa 1975), decisions are irreconcilable. In my
review of the tax statutes and regulations, I find no support to allow a
private postmortem family settlement agreement, even if entered in good
faith, to circumvent inheritance tax. I do not find the terms “passing to”
and “passes” in Iowa Code sections 450.9 and 450.10 (2009) ambiguous.
In those statutes, “passes” and “passing to” mean passing through an
estate, not from a contract or a settlement agreement.
As Justice Mansfield notes, a federal regulation allows a private
postmortem family settlement agreement entered in good faith to
circumvent estate tax. Neither our court nor our court of appeals has
the power or the authority to write such a provision in the law. Only the
legislature or the executive branch through rulemaking has the power
and authority to do so. Consequently, I agree with the result reached by
the majority and would overrule In re Estate of Van Duzer.
29
#16–1974, Nance v. Iowa Dep’t of Rev.
MANSFIELD, Justice (dissenting).
I respectfully dissent. The terms “passing to” and “passes” in Iowa
Code sections 450.9 and 450.10 (2009) are ambiguous. I would continue
to follow the approach we took in In re Estate of Van Duzer, 369 N.W.2d
407 (Iowa 1985), and hold that property passes from the decedent to a
beneficiary when it is transferred to that beneficiary pursuant to a good-
faith settlement agreement resolving litigation over distribution of the
decedent’s assets. Therefore, I would affirm the decision of the court of
appeals.
Federal estate tax law takes the same approach. See 26 C.F.R.
§ 20.2056(c)–2(d)(2) (2017) (indicating that the marital deduction is
available following a will contest when property is assigned to a surviving
spouse based on “a bona fide evaluation of the rights of the spouse”);
Estate of Hubert v. Comm’r, 101 T.C. 314, 319–21 (1993) (“Although the
regulations state that the settlement agreement will not necessarily be
accepted as a bona fide evaluation of such rights, they do not require
rejection of such settlement agreement. In this instance we think it is
appropriate to recognize the amounts passing to Mrs. Hubert under the
settlement agreement as passing from decedent, especially in the
absence of any suggestion that the settlement agreement was entered
into for post mortem tax planning purposes.”), aff’d, 63 F.3d 1083 (11th
Cir. 1995), aff’d, 520 U.S. 93, 117 S. Ct. 1124 (1997); Estate of Barrett v.
Comm’r, 22 T.C. 606, 611 (1954) (“We find nothing in the statute or in
logic that would deny similar treatment to a settlement payment made in
advance of the contest where there is sufficient basis for a reasonable
belief that only such payment would avoid a serious and substantial
threat to the testamentary plan provided by the decedent.”).
30
Notably, the relevant statutory language is similar in both
contexts. In Iowa, inheritance tax is imposed (or not imposed) when
property is “passing to” or “passes” to certain beneficiaries. Iowa Code
§§ 450.9, .10(1)–(4). Under federal estate tax law, a marital deduction is
allowed for any interest in property which “passes or has passed” from
the decedent to his surviving spouse. See 26 U.S.C. § 2056(a) (2012). In
both instances, the terminology is susceptible to more than one
reasonable interpretation. See In re Estate of Lamoureux, 412 N.W.2d
628, 632 (Iowa 1987) (indicating that because the term “transfer” is used
in both the federal estate tax and the Iowa inheritance tax, federal
construction of the term “is applicable by analogy”).
Significantly, our most recent case in this area, Van Duzer, gave
effect to a settlement for inheritance tax purposes. There we held that an
additional payment of $106,500 to a surviving spouse under a family
settlement agreement was not subject to inheritance tax, because
testamentary transfers to spouses were exempt. 369 N.W.2d at 409–10.
We overlooked formalities and “recognize[d] the transaction to be that
which it clearly was.” Id. at 410.
It’s true that in the earlier case of In re Estate of Bliven, 236
N.W.2d 366, 370–71 (Iowa 1975), we declined to give inheritance tax
effect to a settlement. In that case, two charities had been essentially the
sole beneficiaries of the decedent’s will. Id. at 368. However, the
decedent tore up her will before her death. Id. Subsequently, the
charities brought a claim, contending the decedent had lacked the
mental capacity to revoke her will. Id. The charities settled with the
family on the basis that the charities would receive half the estate. Id.
We held, regardless, that the amounts passing to the charities were not
31
exempt from inheritance tax under the charitable exemption. Id. at 370–
71.
Van Duzer and Bliven are impossible to reconcile, in my view.
Either you allow good-faith settlements for tax purposes or you don’t.
Nonetheless, in Van Duzer, we said that Bliven and another, older case 3
were “clearly distinguishable.” 369 N.W.2d at 410. The asserted
distinction was that the claimants in the earlier cases—unlike the
surviving spouse in Van Duzer—would not have inherited at all from the
estate but for the settlement. Id. (noting that the claimants in the earlier
cases were “persons not named in decedent’s will or otherwise entitled to
claim against the estate”). That distinction seems forced to me. The
critical similarity in both Van Duzer and Bliven is that the transfers
whose tax status was in dispute would not have occurred without the
settlement agreement. To my mind, Van Duzer therefore controls when
the cases are irreconcilable because it is the more recent precedent.
Of course, if one accepts the distinction in Van Duzer at face value,
the taxpayer still wins here. Here, the settlement beneficiaries, i.e., the
lineal descendants Donald Gardiner, Donnita Gardiner, and Dianne
Gardiner Green, were persons who stood to inherit from the decedent. In
fact, they received additional inheritances beside the family settlement
agreement.
The Department of Revenue itself has struggled to reconcile Bliven
and Van Duzer. In 1987, it wrote to a taxpayer accepting a settlement for
the following reasons:
While the Department continues to rely on In Re Estate
of Wells and In Re Estate of Bliven as authority for the tax
treatment of out-of-court settlements, the Department
recognizes that the Iowa Supreme Court’s decision in Van
3In re Estate of Wells, 142 Iowa 255, 120 N.W. 713 (1909).
32
Duzer does carve out an exception to the long-established
rule enunciated in Wells and Bliven. . . .
....
While the legal theory used by the Court in Van Duzer
is not readily apparent, it does appear that the Iowa
Supreme Court is of the opinion that when a surviving
spouse challenges the distribution to be made from an estate
coupled with an election to take against the will, the
settlement of the dispute is entitled to the spousal exemption
and tax rates and status provided to surviving spouses by
statute. The facts in the instant case being for all practical
purposes the same as in Van Duzer, the Committee finds
that the estate is entitled to the spousal exemption for the
full amount of the $152,000 received by the surviving
spouse.
Estate of Leland E. Robertson, Inheritance Tax Assessment Docket No.
86-402-3-A (1987). I disagree with this effort to confine Van Duzer to its
narrowest set of facts and don’t think you can read Van Duzer as just a
“spousal exemption” case.
Van Duzer is also more faithful to the legislature’s likely intent.
See Iowa Code § 4.6(1). I presume the legislature cared most about who
was actually receiving the decedent’s property—whether it was a close
relative (exempt), a charity (exempt), or someone else (not exempt). In
addition, allowing parties to settle litigation in good faith without
forfeiting tax benefits is sound policy. See id. § 4.4(3). It doesn’t make
sense to incentivize heirs to litigate among themselves to the end and
delay the closing of estates. 4
4Other states appear to be divided on whether a good-faith settlement can affect
inheritance tax treatment. “In some jurisdictions, a state inheritance tax properly may
be based on the terms of a contested will even where the contest results in a
compromise or settlement agreement which changes the estate’s distribution, and in
others, the transfer of the property or interest under the compromise or settlement
agreement may be considered.” 42 Am. Jur. 2d Inheritance, Estate, and Gift Taxes § 81,
at 277 (2010) (footnotes omitted); see also R.D. Hursh, Annotation, Succession, Estate,
or Inheritance Tax as Affected by Compromise of Will Contest, 36 A.L.R. 2d 917, § 2[a]
(1954).
33
Another issue is whether we need to give deference to the
Department of Revenue’s interpretation of the term “passes” as used in
Iowa Code section 450.10. See Iowa Code § 17A.19(10)(c), (l); Renda v.
Iowa Civil Rights Comm’n, 784 N.W.2d 8, 12–14 (Iowa 2010); see also
Myria Holdings Inc. v. Iowa Dep’t of Revenue, 892 N.W.2d 343, 347 (Iowa
2017) (declining to decide whether the Department of Revenue’s
interpretation of a different tax provision was entitled to judicial
deference). I believe we do not need to do so because the agency’s rule
cites only Bliven and does not take into account or even mention Van
Duzer. See Iowa Admin. Code r. 701—86.14(2). Van Duzer, as
discussed, is the more recent case. In State v. Iowa District Court, we
expressed skepticism about agency retroactive reinterpretations that
conflict with prior judicial interpretations of statutes. See 902 N.W.2d
811, 819 & n.6 (Iowa 2017). While I do not know whether this particular
rule came before or after Van Duzer, the plain fact is it doesn’t attempt to
address it.
The majority invokes the principle of legislative acquiescence in
support of its position. See In re Estate of Vajgrt, 801 N.W.2d 570, 574
(Iowa 2011) (“The rule of stare decisis ‘is especially applicable where the
construction placed on a statute by previous decisions has been long
acquiesced in by the legislature . . . .’ ” (quoting Iowa Dep’t of Transp. v.
Soward, 650 N.W.2d 569, 574 (Iowa 2002))). But what did the legislature
acquiesce in? Van Duzer is the more recent decision, it is thirty-three
years old, and it is consistent with my views, not the majority’s. 5
I recognize there is some danger of postmortem fraud by taxpayers.
That is, a beneficiary who is due to receive an inheritance and is subject
5The special concurrence acknowledges this point.
34
to inheritance tax could cut a deal with a beneficiary who has exempt
status. Under such a corrupt deal, the exempt beneficiary would bring a
bogus claim challenging the testamentary distribution, the parties would
enter into a friendly settlement, the exempt beneficiary would receive the
assets under the staged settlement, and the exempt beneficiary would
then redirect most of them under the table to the nonexempt beneficiary.
By this chain of events, inheritance tax could be avoided. Yet the danger
of sham transactions exists anyway in many tax-related situations. It
can be minimized here by requiring the taxpayer to affirmatively prove
the good-faith attributes of the settlement.
Here, the taxpayer established that a litigation settlement was
made, and that it was made in good faith and not for purposes of tax
avoidance. 6 Accordingly, I would affirm the decision of the court of
appeals.
6The taxpayer urged two positions in the alternative below. First, it insisted the
settlement should be accepted by the Department of Revenue. Second, it maintained
that the decedent Lester Gardiner Sr. lacked testamentary capacity, thus rendering the
transfer on death invalid under the law. The Department rejected both arguments after
conducting an evidentiary hearing. It found that the settlement had “no bearing on
whether a taxable event occurred” and, further, the taxpayer did not “me[e]t her burden
to prove by, clear, convincing, and satisfactory evidence that the Decedent was
incompetent when he executed the [transfer on death].” I would reverse on the first
ground. The unrebutted evidence demonstrates the good-faith character of the
settlement, including the presence of an objective basis for believing that Lester Sr. was
not competent when he executed the beneficiary designation form in 2003.
Ironically, the Department acknowledged at oral argument that allowing the
taxpayer an opportunity to prove Lester Sr.’s lack of testamentary capacity in a
Department hearing was inconsistent with the Department’s own administrative
position that only a prior judicial determination of lack of capacity would be accepted.