Estate of McVey v. Dep't of Revenue
| Decision Date | 13 December 2013 |
| Docket Number | NO. 2012-CA-000840-MR,2012-CA-000840-MR |
| Parties | ESTATE OF MILDRED L. MCVEY APPELLANT v. DEPARTMENT OF REVENUE, FINANCE AND ADMINISTRATION CABINET, COMMONWEALTH OF KENTUCKY APPELLEE |
| Court | Kentucky Court of Appeals |
TO BE PUBLISHED
APPEAL FROM FRANKLIN CIRCUIT COURT
The Estate of Mildred L. McVey appeals from the April 11, 2012 order of the Franklin Circuit Court concerning an inheritance tax assessment. First, the circuit court reversed the decision of the Kentucky Board of Tax Appeals (hereinafter "KBTA") and reinstated the decision of the Department of Revenue,Finance and Administration Cabinet (hereinafter the "Department") that had disallowed the deduction for inheritance taxes as a "cost of administration." Further, the circuit court reversed the KBTA's decision regarding the Department's adjustment to the bequests of certain beneficiaries, wherein the Department had added the value of the estate's payment of inheritance taxes to the bequests.
After careful consideration, we affirm the decision of the circuit court.
Mildred L. McVey died testate on January 23, 2007. Her will was probated in Pike County District Court. The facts of the case are not disputed. The inheritance tax assessment of her estate, however, is the subject matter of this appeal. The issues in the case devolve from an interpretation of statutes concerning Kentucky's inheritance and estate taxes found in Kentucky Revised Statutes (KRS) Chapter 140. In particular, the construction, application, and interpretation of KRS 140.010 and KRS 140.090 are in dispute.
The conflict revolves around the impact of the following language of the Will. Item I of Mrs. McVey's Last Will and Testament states:
Any death or inheritance taxes payable at my death on my estate whether on property passing under this will or otherwise shall be paid out of my residuary estate as a cost of administration and shall not be charged in any way to any beneficiary or recipient of my estate.
The obvious rationale of this directive was to enable the Estate to deduct the payment of the inheritance taxes as a "cost of administration" and for the Estate to pay inheritance taxes on the bequests to certain beneficiaries. Therefore, based onthis provision, the Estate of Mildred McVey (hereinafter the "Estate") deducted $134,369.48 of inheritance tax liability as a debt of the estate, that is, as a cost of administration, and made tax-free bequests pursuant to the dictates of the Will.
After the Estate filed its inheritance and estate tax return, the Department conducted an audit. As a result of the audit, the Department assessed an additional inheritance tax in the amount of $14,818.10, plus applicable interest. The basis for the imputation of additional inheritance tax was the Department's decision that the Estate's deduction of the inheritance tax liability of $134,359.48 as a "cost of administration" was improper under KRS 140.090(1).
Furthermore, the Department adjusted the distributive shares of certain beneficiaries to reflect an additional inheritance tax on the "bequest of tax." The Department reasoned that since McVey's Will provided for the inheritance taxes to be paid out of the residuary estate, rather than by the beneficiaries, they were relieved of paying the inheritance tax but not relieved of its tax implications. Thus, according to the Department, the amount of the bequest was increased by the value of the "bequest of tax," and this value represented an additional gift, subject to inheritance tax.
When the Department adjusted the distributive shares of these beneficiaries to reflect the bequest of the tax on those gifts, the adjustment was made by increasing each beneficiary's share by an amount equal to the inheritance tax on their distribution. Hence, the Department adjusted the gifts of three heirs to reflect an additional value to their bequests: $45,595; $91,182; and, $4,143.
In fact, the Estate had calculated and reported on the return an amount for the bequest of the tax for the beneficiaries but the Department ascertained that the Estate's calculation was incorrect and assessed an additional inheritance tax of $10.00. The Estate protested this additional inheritance tax assessment.
On July 2, 2010, after the Department and the representatives of the Estate had a conference, the Department issued its Final Ruling No. 2010-41 affirming the assessment of additional tax. Then, pursuant to KRS 131.110(5), the Estate appealed the Department's ruling to the KBTA, which is an administrative agency created under KRS Chapter 131 and vested with exclusive jurisdiction to hear and determine appeals from final rulings, orders, and determinations of any agency of state or county government affecting revenue and taxation. KRS 131.340.
After its review, the KBTA held that the inheritance taxes were properly deducted as a "cost of administration" because the Will so directed. With reference to the Department's adjustment of certain distributive shares to reflect the "bequest of tax," the decision cited Glessner's Estate v. Carman, 146 W.Va. 282, 118 S.E.2d 873 (W.Va. 1961), and said:
that taxing authorities have no right to artificially increase bequests and that taxes cannot be imposed upon the transfer of property in amounts larger than the bequest and that the algebraic formula required to compute taxes as the Cabinet did in this case is not to be lightly imputed to the Legislature.
Subsequently, the Department appealed the KBTA's decision to the circuit court. It argued in its appeal that the KBTA erred as a matter of law when it reversed the Department's final ruling because the KBTA erroneously interpreted the law to allow inheritance taxes to be deducted as an administrative cost of an estate. And it maintained that KBTA erred in deciding that the Department did not have the legal authority to adjust certain distributive shares to account for the "bequest of tax." The Estate disagreed on both points.
On April 11, 2012, the circuit court entered its Opinion and Order, which reversed the KBTA's decision. It concluded that the Estate is not permitted a deduction under KRS 140.090, notwithstanding the provision in the Will; and further, the Will's direction to pay the inheritance tax out of the residual estate created an additional gift, that is, the "bequest of tax," which is also subject to an inheritance tax. In making this decision, the circuit court used a de novo standard of review since the facts were undisputed and the case involved statutory interpretation. The Estate appeals from this order.
On appeal, the Estate argues the following four issues. First, the Estate maintains that deference should be given to the KBTA's administrative opinion since it is based on a permissible construction of the statute. Second, the Department's disallowance of a deduction for inheritance tax as a debt of the estate was in error. Third, the Department may not assess a tax on a distribution that hasnot been and never will be made to the beneficiary, that is, the "bequest of tax." Lastly, the Estate alleges that Section 2 of the Kentucky Constitution, which forbids the arbitrary exercise of power by governmental authorities, is violated by the Department's taking of a tax on the Will's specific directive to grant the bequest tax-free.
Initially, the Department counters that while three issues are properly preserved for review, the fourth issue concerning the Kentucky Constitution is not preserved. The Department argues that the Estate's Constitutional issue was neither raised nor argued before the lower court and, hence, is not preserved for review.
The other three issues, as outlined by the Department, are whether the circuit court applied the proper standard of review; whether the circuit court erred in reversing the KBTA and reinstating the Department's ruling that the deduction of the inheritance tax is not permissible under KRS 140.090; and finally, whether the circuit court erred in reversing the KBTA and reinstating the Department's adjustment of certain distributive bequests as subject to additional inheritance tax.
Kentucky's inheritance tax is imposed upon the privilege of receiving property from a decedent by reason of the decedent's death. Martin v. Storrs, 277 Ky. 199, 126 S.W.2d 445, 447 (Ky. 1939). The statute provides as follows:
All real and personal property . . . which shall pass by will or by the laws regulating intestate succession . . . to any person or to any body politic or corporate . . . issubject to a tax upon the fair cash value as of the date of the death of the grantor or donor of the property in excess of the exemptions granted . . . .
KRS 140.010. In essence, an inheritance tax is an excise tax on the privilege of receiving property from the deceased. Martin, 126 S.W.2d at 447.
The rate of the inheritance tax is determined by the relationship of the beneficiary to the decedent. KRS 140.070. Moreover, the statutory requisites allow certain deductions when calculating the value of the beneficiary's distributive share. KRS 140.090(1). The interpretation of this statute is one issue in this case. Usually, Kentucky inheritance taxes are paid out of the shares received by the beneficiaries, "unless the will of the decedent directs to the contrary," as is the case here. Gratz v. Hamilton, 309 S.W.2d 181, 182 (Ky. 1958). We now turn to the specific issues herein.
The order of the KBTA was a final and appealable order and, accordingly, subject to judicial review in accordance with KRS Chapter 13B. In reviewing this decision, the circuit court cited Kentucky State Racing Commission v. Fuller, 481 S.W.2d 298, 300- 301 (Ky. 1972). In its Opinion...
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