Baillie v. Raoul
| Decision Date | 16 October 2019 |
| Docket Number | NO. 4-18-0655,4-18-0655 |
| Parties | Glenda J. BAILLIE, as Executor for the Estate of John F. Baillie, Deceased, Plaintiff-Appellant, v. Kwame RAOUL, in His Official Capacity as Attorney General of the State of Illinois, and Michael W. Frerichs, in His Official Capacity as Treasurer of the State of Illinois, Defendants-Appellees. |
| Court | United States Appellate Court of Illinois |
Jeremy J. Stoller, of Stoller Law Office, of El Paso, and John R. Simpson, of Sorling Northrup, of Springfield, for appellant.
Kwame Raoul, Attorney General, of Chicago (Jane Elinor Notz, Solicitor General, and Carl J. Elitz, Assistant Attorney General, of counsel), for appellees.
¶ 1 This is an action pursuant to the State Officers and Employees Money Disposition Act ( 30 ILCS 230/1 to 6a (West 2014)), which allows taxpayers to voluntarily pay taxes under protest and then sue the government for a refund. The tax in question here is the Illinois estate tax. The estate is that of the late John F. Baillie. Plaintiff, Glenda J. Baillie, is his surviving spouse and personal representative. (We will refer to the Baillies by their first names, as Glenda does in her brief.) Defendants are Kwame Raoul, the Attorney General of Illinois, and Michael E. Frerichs, the Treasurer of Illinois. (We will refer to them collectively as "the State.")
¶ 2 The parties disagree on how John's one-half shares in three joint tenancy parcels should be valued. The answer, according to the State, is in subsection (b)(1) of section 2040 of the Internal Revenue Code ( 26 U.S.C. § 2040(b)(1) (2012)): Each of the joint tenancy parcels, the State argues, was a qualified joint interest within the meaning of that subsection, and subsection (b)(1) ( id. § 2040(b)(1) ) says simply to divide the fair market value of a qualified joint interest by two.
¶ 3 Glenda points out, however, that because she made a qualified disclaimer of her survivorship interests in the three joint tenancy parcels (see 755 ILCS 5/2-7 (West 2014) ; 26 U.S.C. § 2518 (2012) ), the probate court did not treat the three parcels as joint tenancy property. Instead, John's one-half shares in those parcels (that is to say, Glenda's disclaimed survivorship interests) passed into John's probate estate and, in turn, to their daughters. Consequently, Glenda argues, instead of being valued under section 2040(b)(1) ( 26 U.S.C. § 2040(b)(1) (2012) ), i.e. , 50% of the fair market value of the joint tenancy parcel, the disclaimed one-half shares should be given their fair market value under section 2033 of the Internal Revenue Code ( id. § 2033 ), which allows a fractional interest discount, a reduction in value to account for the necessity of accommodating cotenants.
¶ 4 The circuit court of Ford County upheld the State's disallowance of fractional interest discounts for the disclaimed shares in the joint tenancy parcels because the court was unconvinced that Glenda's qualified disclaimers had taken those parcels out of section 2040(b)(2)(B) ( id. § 2040(b)(2)(B) ). The joint tenancy parcels, the court concluded, still met that section's definition of a qualified joint interest, and fair market value divided by two was how a decedent's share of a qualified joint interest had to be valued ( id. § 2040(b)(1) ). So, the court denied Glenda's motion for summary judgment and granted the State's motion for summary judgment. Glenda appeals.
¶ 5 In our de novo review (see Lake County Grading Co. v. Village of Antioch , 2014 IL 115805, ¶ 18, 385 Ill.Dec. 683, 19 N.E.3d 615 ), we likewise conclude that, despite Glenda's qualified disclaimer of her survivorship interests in the three joint tenancy parcels, the conditions for using the valuation methodology in section 2040(b)(1) ( 26 U.S.C. § 2040(b)(1) (2012) ) remain fulfilled: Until John's death, he and Glenda alone, as a married couple, held the three parcels in joint tenancy with right of survivorship (see id. § 2040(b)(2)(B) ). Glenda's disclaimer of the survivorship interests did not change that. Therefore, we affirm the judgment.
¶ 7 John died on April 29, 2015. In his will, he gave his estate to Glenda and, in the event she predeceased him, to their daughters, Johneen L. Davis and Suzanne M. Bargmann.
¶ 8 Until John's death, he and Glenda owned farmland in Ford County: five parcels as tenants in common and three parcels as joint tenants with right of survivorship. (The joint tenancy parcels have tax identification Nos. 04-04-06-200-004, 04-04-08-100-001, 04-04-08-100-002, 04-04-08-100-003, and 03-03-21-300-001.)
¶ 9 On October 28, 2015, Glenda made a qualified disclaimer of all of John's interest in real estate, including her survivorship interests (John's one-half shares) in the three joint tenancy parcels. Consequently, John's one-half shares in the joint tenancy parcels entered his probate estate and were distributed to Davis and Bargmann, as if Glenda had predeceased John.
¶ 10 As John's personal representative, Glenda obtained appraisals of the farmland so she could prepare estate tax returns. The appraisals applied a 20% fractional interest discount to John's one-half shares in the tenancies in common and the same discount to his one-half shares in the joint tenancies. Glenda filled out the federal and Illinois estate tax returns accordingly and filed them.
¶ 11 The Attorney General agreed to the 20% fractional interest discount for John's one-half shares in the tenancies in common, but on the authority of sections 2040(b)(1) and (b)(2)(B) (id. § 2040(b)(1), (b)(2)(B)), he rejected any fractional interest discount for John's one-half shares in the joint tenancies. As a result, in his adjustment to the tentative taxable estate, the Attorney General imposed an additional Illinois estate tax, with interest.
¶ 12 In compliance with the Attorney General's demand, Glenda, as the personal representative, paid an additional $120,108 into the state treasury, but she made the payment under protest and brought this action. On her motion, the circuit court ordered the retention of the payment in the protest fund, pending resolution of this case.
¶ 13 The parties filed cross-motions for summary judgment. In arguments on those motions, Glenda's attorney represented to the circuit court that the Internal Revenue Service had approved the federal estate tax return without question or comment. But "[t]hat's not binding on the Attorney General," he conceded.
¶ 14 The circuit court granted the State's motion for summary judgment and denied Glenda's motion for summary judgment.
¶ 15 This appeal followed.
¶ 17 Section 3(a) of the Illinois Estate and Generation-Skipping Transfer Tax Act (Act) ( 35 ILCS 405/3(a) (West 2014)) imposes an estate tax "on every taxable transfer involving transferred property having a tax situs within the State of Illinois." A " ‘[t]axable transfer’ means an event that gives rise to a state tax credit" within the meaning of section 2011 of the Internal Revenue Code as that section read on December 31, 2001 ( 26 U.S.C. § 2011 (2000) ). 35 ILCS 405/2(b), (b-1) (West 2014).
¶ 18 Under section 2011(a) ( 26 U.S.C. § 2011(a) (2000) ), the United States government, when calculating the federal estate tax, allows a state tax credit in "the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or the District of Columbia." The amount of the Illinois estate tax is, with adjustments, the amount of the state tax credit. 35 ILCS 405/2(b), 3(c) (West 2014). The amount of the state tax credit depends in turn on the amount of the adjusted taxable estate; the state tax credit increases as the value of the adjusted taxable estate increases. 26 U.S.C. § 2011(b) (2000). The adjusted taxable estate is "the taxable estate reduced by $60,000" ( id. § 2011(b) ), and the taxable estate is the gross estate minus allowable deductions (id. § 2051). The ultimate result of all those interlocking definitions is that the higher the value of the gross estate, the higher the Illinois estate tax.
¶ 19 Illinois determines gross value the same way the federal government does. "[T]he gross value of transferred property," the Act says, "shall be its value as finally determined for purposes of the federal transfer tax." 35 ILCS 405/5(c) (West 2014). The federal government, generally speaking, attributes to the transferred property the fair market value it had when the decedent died; "[t]he value of the gross estate," section 2033 provides, "shall include the value of all property to the extent of the interest therein of the decedent at the time of his death." 26 U.S.C. § 2033 (2012).
¶ 20 The phrase "at the time of his death" (id. ) is a hole in the net of federal estate taxation: Spouses can hold land in joint tenancy with right of survivorship, and at the time of death it is impossible for the deceased spouse (or his or her estate) to own any interest in a joint tenancy estate. That is because when one of two joint tenants dies, the surviving joint tenant is left as the sole owner of the land ( Bonczkowski v. Kucharski , 13 Ill. 2d 443, 450, 150 N.E.2d 144 (1958) ; Eckardt v. Osborne , 338 Ill. 611, 615, 170 N.E. 774 (1930) ), which never becomes part of the decedent's probate estate ( In re Estate of Alpert , 102 Ill. App. 3d 600, 602, 58 Ill.Dec. 239, 430 N.E.2d 181 (1981) ).
¶ 21 This is not, strictly speaking, because the two joint tenants owned 50% apiece and the deceased tenant's 50% share was automatically transferred , by operation of law, to the surviving tenant. Instead, as the supreme court explains:
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