Estate of Ackerley v. Wash. Dep't of Revenue

• Decision Date: 16 February 2017
• Docket Number: No. 92791-0,92791-0
• Citation: 389 P.3d 583,187 Wash.2d 906
• Parties: ESTATE OF Barry A. ACKERLEY, Appellant, v. WASHINGTON DEPARTMENT OF REVENUE, Respondent.
• Court: Washington Supreme Court

187 Wash.2d 906

389 P.3d 583

ESTATE OF Barry A. ACKERLEY, Appellant,

v.WASHINGTON DEPARTMENT OF REVENUE, Respondent.

No. 92791-0

Supreme Court of Washington.

Argued June 9, 2016

Filed Feb. 16, 2017

Scott M. Edwards, Ryan P. McBride, Lane Powell PC, P.O. Box 91302, 1420 5th Ave., Ste. 4200, Seattle, WA, 98111-9402, for Appellant.

David M. Hankins, Dep't. of Revenue A.G. Office, 7141 Cleanwater Lane S.W., P.O. Box 40123, Olympia, WA, 98504-0123, for Respondent.

MADSEN, J.

¶1 The Estate and Transfer Tax Act, chapter 83.100 RCW, makes clear that calculating a Washington taxable estate begins with the federal taxable estate and that the Washington definition of "transfer" is the same as the federal definition. Under federal estate tax law, the gift tax paid is included in the taxable estate under the "gross-up rule" and, as such, is transferred upon death as part of the entire estate. Following the legislature's clear mandate, we must also find that the gift tax paid is part of the Washington taxable estate and transferred upon death as part of the entire estate. Thus, the Washington State Department of Revenue (DOR) properly included the gift tax paid in its assessment of Barry Ackerley's estate. We affirm the decision of the Thurston County Superior Court.

Facts

¶2 The facts in this case are not in dispute. Ackerley died on March 21, 2011. In 2008 and 2010, Ackerley made substantial gifts of money. On these inter vivos gifts, Ackerley paid the required federal gift taxes, which amounted to over $5.5 million. Upon his death, Ackerley was required under the federal estate tax code to include the value of the gift taxes paid in his federal taxable estate because he died within three years of making the gifts. Ackerley's estate thus included the gift taxes in its federal estate tax return. But when Ackerley's estate filed his Washington estate tax return, it did not include the $5.5 million in federal gift taxes paid as part of the Washington taxable estate. DOR issued a notice of assessment, notifying Ackerley's estate that it owed additional Washington estate taxes on the amount of federal gift taxes paid.

¶3 Ackerley's estate petitioned for review under the Washington Administrative Procedure Act (APA) in Thurston County Superior Court. See RCW 34.05.514. The superior court held that Ackerley's estate was required to pay Washington estate tax on the federal gift taxes paid because those federal gift taxes paid fall within the definitions of "transfer" and "Washington taxable estate." Ackerley's estate appealed, and the Court of Appeals certified the case to this court for direct review.

Analysis

I. Standard of review

¶4 As an appeal of a final agency action, the APA governs review of this case. See RCW 34.05.570(4). This court on appeal sits in the same position as the superior court in reviewing the administrative record. See Verizon Nw., Inc. v. Emp't Sec. Dep't, 164 Wash.2d 909, 915, 194 P.3d 255 (2008). A reviewing court may grant relief from agency action if such action is "(i) Unconstitutional; (ii) Outside the statutory authority of the agency or the authority conferred by a provision of law; (iii) Arbitrary and capricious; or (iv) Taken by persons who were not properly constituted as agency officials lawfully entitled to take such action." RCW 34.05.570(4)(c). Here, Ackerley's estate argues that DOR acted outside its statutory authority. See RCW 34.05.570(4)(c)(ii). Whether an agency has exceeded its statutory authority, as well as the proper interpretation of the underlying statutes, are questions of law that this court reviews de novo. Chi. Title Ins. Co. v. Office of Ins. Comm'r, 178 Wash.2d 120, 133, 309 P.3d 372 (2013) ; Dep't of Ecology v. Campbell & Gwinn, LLC , 146 Wash.2d 1, 9, 43 P.3d 4 (2002).

¶5 When we interpret statutes, our goal is to determine the legislature's intent by giving effect to the plain meaning of the statute, gleaned both from the words of that statute and those in related statutes. Campbell & Gwinn, 146 Wash.2d at 10-11, 43 P.3d 4. We consider the ordinary meaning of the words, any statutory definitions provided, the context of the statute, related provisions, and the statutory scheme as a whole. Bank of Am., NA v. Owens, 173 Wash.2d 40, 53, 266 P.3d 211 (2011) (quoting Christensen v. Ellsworth, 162 Wash.2d 365, 373, 173 P.3d 228 (2007) ).

II. The federal gift tax paid is included in both the "federal taxable estate" and "Washington taxable estate" because the legislature clearly defined the two as the same

¶6 This case concerns the intersections between the Washington and federal estate tax systems. Thus, at the outset, it is important to appreciate the close relationship between these two systems. Prior to 2001, Washington did not have an independent estate tax system. Instead, it participated in a federal "pickup" tax system. In re Estate of Hambleton, 181 Wash.2d 802, 810, 335 P.3d 398 (2014). But when Congress passed legislation in 2001 to gradually eliminate the pickup tax system, Washington responded by creating its own estate tax. Id. This court invalidated the legislature's first attempt at revising the existing statutes, and the legislature enacted a stand-alone estate tax in 2005. Id. ; see also Estate of Hemphill v. Dep't of Revenue, 153 Wash.2d 544, 551, 105 P.3d 391 (2005) ; LAWS OF 2005, ch. 516 (the Estate and Transfer Tax Act).

¶7 While the 2005 act established a stand-alone estate tax, the tax was still tied to a large extent to the federal estate tax code. See RCW 83.100.020(7) (defining Washington "gross estate" the same as federal); In re Estate of Bracken, 175 Wash.2d 549, 581, 290 P.3d 99 (2012) (Madsen, C.J., concurring/dissenting) (noting that the 2005 act ties state estate taxation to federal law to a large extent). By incorporating the federal definition of "taxable estate," the legislature relied on "the extensive and exhaustive detailed federal statutory scheme that contains the directions for what to include in the gross estate." Bracken, 175 Wash.2d at 583, 290 P.3d 99 (Madsen, C.J., concurring/dissenting). Because of the legislature's decision to incorporate much of the federal estate tax scheme, the starting point when analyzing an estate tax in Washington is the federal taxable estate.

¶8 The relevant question here is thus whether the federal gift tax paid is part of the federal taxable estate and, in turn, part of the Washington taxable estate. The federal government assesses estate taxes on gift taxes paid within three years of death under the gross-up rule. See 26 U.S.C. § 2035(b) ; Estate of Morgens v. Comm'r, 678 F.3d 769, 770 (9th Cir. 2012) ; Brown v. United States, 329 F.3d 664, 668 (9th Cir. 2003). Because the federal gift tax paid at issue here was part of the federal taxable estate, and because the legislature clearly incorporated the definition of "federal taxable estate," it follows that the federal gift tax was also part of the Washington taxable estate.

¶9 This analysis involves multiple interrelated statutes. RCW 83.100.040(1) outlines the tax rate for the estate tax to be imposed on "every transfer of property located in Washington," along with property outside of Washington at a fractional rate. The "Washington taxable estate" is defined as the federal taxable estate. RCW 83.100.020(15). In turn, "federal taxable estate" is defined as the taxable estate as determined under chapter 11 of the Internal Revenue Code. RCW 83.100.020(6).

¶10 Chapter 11 of the Internal Revenue Code contains many provisions relating to what property is in the gross estate, how to value different property, and what adjustments and deductions to make. 26 U.S.C. §§ 2031 -2058. Relevant to the present case, the federal gross estate includes the amount of any tax paid on any gift made by the decedent during the three-year period prior to his death.

26 U.S.C. § 2035(b) ; see also Estate of Armstrong v. Comm'r, 119 T.C. 220, 227-28 (2002).

¶11 The federal gift tax paid is thus part of the federal taxable estate. And because the two are defined as the same, the gift tax paid is also part of the Washington taxable estate. DOR properly included the federal gift tax paid in the Washington taxable estate.

III. The federal gift tax paid transferred with the rest of Ackerley's estate because the legislature clearly intended a broad definition of "transfer," consistent with federal law

¶12 It is not enough, however, to impose an estate tax for property simply to exist in the taxable estate. Both the federal and Washington estate taxes are excise taxes, imposed on the transfers of the taxable estate. See Hambleton , 181 Wash.2d at 811, 335 P.3d 398 ; Fernandez v. Wiener , 326 U.S. 340, 352, 66 S.Ct. 178, 90 L.Ed. 116 (1945). The transfer requirement is important because without it, the tax could not be considered an "excise" tax and would thus be subject to the constitutional limitations requiring uniformity on direct taxes. See Hambleton, 181 Wash.2d at 811, 335 P.3d 398 (citing CONST. art. VII, § 1 ); Fernandez, 326 U.S. at 352, 347, 66 S.Ct. 178 (citing U.S. CONST. art. I, § 8, cl. 1 ). RCW 83.100.040(1) imposes the state estate tax on "every transfer of property located in Washington," and 26 U.S.C. § 2001(a) imposes the federal estate tax on "the transfer of the taxable estate of every decedent who is a citizen or resident of the United States."

¶13 As with the taxable estate discussed above, our legislature directly linked the state definition of "transfer" with the federal definition. See RCW 83.100.020(15). The United States Supreme Court has defined that transfer requirement broadly. "Transfer" under federal law is not limited to a formal conveyance. The Supreme Court has described this broad definition of "transfer" as follows:

[T]he power of Congress to impose death taxes is not limited to the taxation of transfers at death. It extends to the creation, exercise, acquisition, or relinquishment of any power or legal privilege which is incident to the ownership of property, and

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