Estate of Reno v. C.I.R.

• Citation: 945 F.2d 733
• Decision Date: 24 October 1991
• Docket Number: No. 89-2078,89-2078
• Parties: -6035, 91-2 USTC P 60,083 ESTATE OF William L. RENO, Jr.; Barbara G. Reno, Executrix, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee, Virginia Bar Association, Amicus Curiae.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 733

945 F.2d 733

68 A.F.T.R.2d 91-6035, 91-2 USTC P 60,083

ESTATE OF William L. RENO, Jr.; Barbara G. Reno, Executrix,

Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee, Virginia Bar Association, Amicus Curiae.

No. 89-2078.

United States Court of Appeals,

Fourth Circuit.

Argued April 9, 1991.

Decided Sept. 13, 1991.

As Amended Oct. 24, 1991.

James Laurence Malone, III, McDermott, Will & Emery, Chicago, Ill., argued (Richard L. Dees, on brief), for petitioners-appellants.

Teresa Ellen McLaughlin, Tax Div., U.S. Dept. of Justice, Washington, D.C., argued (Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen, and Jonathan S. Cohen, on brief), for respondent-appellee.

Thomas E. Spahn, C.L. Dimos and Suzanne W. Doggett, McGuire, Woods, Battle & Boothe, Richmond, Va., for amicus curiae.

Before ERVIN, Chief Judge, RUSSELL, WIDENER, HALL, PHILLIPS, MURNAGHAN, SPROUSE, WILKINSON, WILKINS and NIEMEYER, Circuit Judges, and CHAPMAN, Senior Circuit Judge, sitting en banc.

OPINION

K.K. HALL, Circuit Judge:

Barbara J. Reno, executrix of the estate of her deceased husband, Dr. William L. Reno, appeals an order of the Tax Court upholding a notice of deficiency issued by appellee, the Commissioner of Internal Revenue. We find that Dr. Reno's purported attempt to shift estate taxes from probate to nonprobate assets is impermissible under Virginia probate, property, and tax apportionment law. Accordingly, we reverse.

I.

A.

The facts are exhaustively recounted in the opinions of the panel, Estate of Reno v. Commissioner of Internal Revenue, 916 F.2d 955 (4th Cir.1991), and will not be repeated here, except where lucidity demands.

No matter how one frames the issue, the law of Virginia supplies the answer. If the issue is how to apportion estate taxes, Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106 (1942), instructs us to look to state law. If the issue is whether the entireties property passed to Barbara Reno outright, thus qualifying it for the marital deduction, we must decide whether Dr. Reno's will could restrict the property's passing outright, and, if so, whether it did. ¹ Again the questions invoke state law.

B.

The fact at the core of this case is Reno's testamentary directive to shield the Kentucky realty from estate tax. The Commissioner hallows this command and pronounces that it must be obeyed, even at the expense of the entireties property. Though we think Reno's actual intent is a debatable question, see 916 F.2d at 968 n. 1 (Hall, J., dissenting), we will assume that Reno intended the entireties property to bear some of the estate tax generated by his probate assets. The Commissioner then cites Va.Code § 64.1-165, and concludes that Reno was lawfully able to achieve this burden shifting. We disagree.

The inviolable character of property held by the entireties under Virginia law was described in the dissent to the panel majority opinion:

A husband may not obligate entireties property or subject it to his debts without the consent of his wife. Consequently, a purported sale or mortgage of the property to which the wife does not consent is ineffective. Furthermore, and most importantly for this case, upon the death of one spouse, fee title simply remains in the other by operation of law. No will is necessary; no reference to the law of intestate succession is necessary. A testator is absolutely powerless to alienate the property from his spouse. Any provisions in the will purporting to do so are necessarily inoperative. "This is so ... because in the first instance [the survivor] took the entirety."

916 F.2d at 969 (citations omitted).

The crushing impact of the Commissioner's construction of § 64.1-165 on these hoary principles of property law, where a construction is available that is fully harmonious with them, casts much doubt on the validity of the Commissioner's position. The aforesaid dissent described the irreconcilable conflict between Virginia laws created by the Commissioner's argument:

Though a testator is unequivocally forbidden to alienate entireties property by his will, the [Commissioner]'s construction of § 64.1-165 would permit a testator to do the functional equivalent by simply designating his entireties property as the fund from which all estate taxes are to be paid. A surviving spouse who must sell her property to pay estate taxes generated by property devised to others will take no solace in her husband's inability to directly alienate the property.

916 F.2d at 969-970 (footnote omitted).

We think it quite doubtful that the Virginia legislature intended to implicitly repeal centuries-old property and probate law by enacting its tax apportionment statute. Moreover, the language and historical context of the statute, which we develop below, support a construction of the statute that disturbs preexisting law as little as necessary to effect the statute's purposes.

C.

An administrator or executor in Virginia only controls assets passing through the probate estate, and not nonprobate assets like property held by the entireties. Johnson v. McCarty, 202 Va. 49, 115 S.E.2d 915 (1960); Vasilion v. Vasilion, 192 Va. 735, 66 S.E.2d 599 (1951). The federal estate tax is imposed upon the executor. I.R.C. § 2002. ² At common law, without statutory authority to seek contribution from tax-generating nonprobate assets, a Virginia executor had to pay all federal estate taxes from the probate estate, even to the point of exhausting it. ³ This situation persisted in Virginia until 1946, when the Virginia apportionment statute was enacted. Va.Code § 64.1-160 et seq.

The 1946 act created a new power in the executor to collect estate taxes from nonprobate assets, in "the proportion that the value of the [nonprobate asset] bears to the [gross estate less exemptions, deductions and exclusions]." Va.Code § 64.1-162. The legislature also preserved the testator's preexisting right to create his own scheme among his probate assets. We supply emphasis, because the legislature's words are telling:

[N]one of [the foregoing tax apportionment] provisions shall in any way impair the right or power of any person by will ... to make direction from the payment of such estate or inheritance taxes and to designate the fund or funds or property out of which such payment shall be made; and in every such case the provisions of the will ... shall be given effect to the same extent as if this article had not been enacted.

Va.Code § 64.1-165.

If the Virginia legislature intended to create a new testamentary power, it chose an exceedingly odd verb to express its design. "Impair" means "to make worse: diminish in quantity, value, excellence, or strength: do harm to: damage, lessen...." Webster's Third New International Dictionary (1976). The legislature was plainly preserving a power, not engendering one.

Its choice of a verb is not the only clue to the legislature's goals, however. It further provided that any attempt by a testator to apportion estate taxes immediately short-circuits the apportionment statute--the testator's will "shall be given effect to the same extent as if this article had not been enacted." Of course, if the article had not been enacted, the executor could not collect any estate taxes from nonprobate assets; therefore, a will disturbing the apportionment scheme forecloses the executor's power under that scheme to compel contribution from recipients of nonprobate assets. Unambiguous Virginia precedent so holds.

By charging his [probate] real estate with any estate and inheritance taxes and by directing the payment thereof out of the fund created by the sale of his property, the testator fixed the liability for all such taxes upon his probate estate.

Simeone v. Smith, 204 Va. 860, 134 S.E.2d 281, 284 (1964).

In short, far from being a tacit revolution in probate and property law, § 64.1-165 is just a savings clause--if you don't like the new scheme, you can still use the old. The new scheme provides the executor limited power to collect a proportional share of estate taxes from nonprobate assets; the old provides no collection power at all. Virginia testators lacked the power to assign estate tax liability to nonprobate assets before 1946; they did not acquire such a power from § 64.1-165.

Dr. Reno could have remained silent, and the entireties property would have borne its proportionate share of estate tax, which is zero. Instead, he disturbed the apportionment scheme and thereby affixed liability for all estate taxes on his probate estate; the entireties property's share of tax is still zero.

II.

The panel majority focused on the marital deduction itself. It argued that Dr. Reno could have made the entireties property "qualify" for the marital deduction, ⁴ but he failed to do so. 916 F.2d at 960-62. This focus obscures the issues. So, for the sake of illustration, we will abolish the marital deduction.

In this imaginary but plausible ⁵ world, the entireties property would still be a nonprobate asset, and Reno would still lack the testamentary power to burden it with taxes generated by other assets in his estate. If his will was silent as to apportionment, the entireties property would pay its proportionate share of estate tax. If he exercised the testamentary power preserved to him by § 64.1-165, his executor would be forced to collect tax only from the probate estate; the entireties property could be assessed tax only if there remained a deficiency, and then only by the Commissioner. See note 3 supra. Once again, neither case results in the entireties property bearing a greater share of tax than it generated itself.

In the real world, many nonprobate assets--gifts includable in the gross estate, insurance benefits, survivorship bank accounts--pass to persons other than a surviving spouse. All are beyond the reach of the testator as a matter of state law; none depends on the existence of a federal deduction for its shelter from the...