Estate v. Idaho State Tax Comm'n

• Decision Date: 24 August 2017
• Docket Number: Docket No. 43832
• Citation: 162 Idaho 558,401 P.3d 136
• Court: Idaho Supreme Court
• Parties: ESTATE OF Zippora STAHL, Deceased, Kathleen Krucker, Personal Representative, Plaintiff–Appellant, v. IDAHO STATE TAX COMMISSION, Defendant–Respondent.

162 Idaho 558

401 P.3d 136

ESTATE OF Zippora STAHL, Deceased, Kathleen Krucker, Personal Representative, Plaintiff–Appellant,

v.IDAHO STATE TAX COMMISSION, Defendant–Respondent.

Docket No. 43832

Supreme Court of Idaho, Boise, January 2017 Term.

Filed: August 24, 2017

Ahrens DeAngeli Law Group LLP, Boise, for appellant. Nicholas S. Marshall argued.

Hon. Lawrence G. Wasden, Attorney General, Boise, for respondent. Phil N. Skinner argued.

HORTON, Justice.

This appeal presents a narrow question of law relating to state income tax liability. Kathleen Krucker, personal representative of the Estate of Zippora Stahl, deceased ("the Estate"), appeals from the district court's grant of summary judgment in favor of the Idaho State Tax Commission ("Commission") and the district court's denial of the Estate's motion for reconsideration. The district court held that the Estate could not use a different figure as the starting point for calculating its Idaho taxable income for 2012 than it reported to the Internal Revenue Service for that year. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Zippora Stahl was an Idaho resident who died in 2010. At the time of her death, Stahl owned real property located in Chino, California that had substantially appreciated in value. An ancillary probate proceeding valued the Chino property at $16,000,000. In December of 2012, the Estate sold the Chino property for $16,339,000.¹

A limited—and necessarily oversimplified—overview of income and estate tax law may be helpful in describing the context of the parties' dispute. For purposes of determining income tax liability arising from the sale of property, a taxpayer's "basis" in the property is used to determine whether there has been a taxable gain and the amount of that gain. Broadly speaking, the taxpayer's basis is the original price paid for the property, subject to adjustment for items such as depreciation (downward) and capital improvements (upward).

For many years, the federal government has imposed taxes on the estates of U.S. citizens and residents. The estate tax is based upon the value of the property owned by the decedent at the time of death. Those who inherit property from the decedent take the property with a "stepped-up basis" for federal income tax purposes. Under Internal Revenue Code section 1014 ( Section 1014 ), the recipient's basis is defined as "the fair market value of the property at the date of the decedent's death." The underlying rationale for Section 1014 is to avoid double taxation; heirs' use of a stepped-up basis avoids imposition of both estate taxes and income taxes on the increased value of the property when it was sold by the heirs.

In 2001, Congress passed legislation which provided for a gradual phase-out of the federal estate tax. Among a number of other provisions, the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38 (2001) ("EGTRRA"), phased out federal estate taxes, with their complete elimination at the end of 2009. EGTRRA § 511.

In an evident effort to avoid the windfall to heirs that the stepped-up basis provision of Section 1014 would otherwise provide, following repeal of the federal estate tax EGTRRA also provided that Section 1014 would not apply to the estates of people who died after 2009. EGTRRA § 541. Instead, Congress enacted a new Section 1022 of the Internal Revenue Code, which provided that that transferees of property of decedents dying after 2009 would have a basis in the property equal to "the lesser of—(A) the adjusted basis of the decedent, or (B) the fair market value of the property at the date of the decedent's death." EGTRRA § 542(a)(2). The basis defined in Section 1022 is referred to as the "modified carryover basis."

In 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296 (2010) ("TRUIRJCA"). Two sections of this omnibus legislation are germane to this appeal.

Section 301(a) of TRUIRJCA provided that "[e]ach provision of law amended by subtitle A or E of title V of [EGTRRA] is amended to read as such provision would read if such subtitle had never been enacted." The statutes repealing the federal estate tax and the new Section 1022 were both located in Subtitle A of Title V of EGTRRA. EGTRRA § 1(c).

Section 301(c) of TRUIRJCA created a unique option for estates of decedents dying in 2010, as was the case with Ms. Stahl, providing:

Notwithstanding subsection (a), in the case of an estate of a decedent dying after December 31, 2009, and before January 1, 2011, the executor (within the meaning of section 2203 of the Internal Revenue Code of 1986 ) may elect to apply such Code as though the amendments made by subsection (a) do not apply with respect to chapter 11 of such Code and with respect to property acquired or passing from such decedent (within the meaning of section 1014(b) of such Code). Such election shall be made at such time and in such manner as the Secretary of the Treasury or the Secretary's delegate shall provide. Such an election once made shall be revocable only with the consent of the Secretary of the Treasury or the Secretary's delegate. For purposes of section 2652(a)(1) of such Code, the determination of whether any property is subject to the tax imposed by such chapter 11 shall be made without regard to any election made under this subsection.

TRUIRJCA § 301(c). Although drafted in the nearly impenetrable prose that seems to be the hallmark of federal legislation, the effect of Section 301(c) can be stated in comparatively simple terms. Despite TRUIRJCA's reinstatement of the federal estate tax, Section 301(c) permitted executors of estates of people dying in 2010 to elect not to pay the federal estate tax. In the event that an executor made this election, for income tax purposes, gains from the sale of the decedent's property are measured by the modified carryover basis provided by Section 1022 rather than the stepped-up basis provided by Section 1014. The effect was to permit the estates of 2010 decedents to elect to pay federal income taxes in lieu of estate taxes ("the 1022 Election").

The Estate made the 1022 Election. Thus, following the sale of the Chino property, in its 2012 federal income tax return, the Estate calculated its income tax liability based upon a modified carryover basis of $1,457,341 and a sales price of $16,339,000. This resulted in a taxable gain of $14,881,659 from the sale.

The Estate also filed an Idaho income tax return for 2012. When it did so, the Estate initially used the same modified carryover basis for the Chino property as it had for its federal income tax return. The Estate computed its state tax liability as $1,029,107, which the Estate paid. The Commission processed the Estate's 2012 Idaho income tax return and determined that the Estate had incorrectly computed a credit for taxes paid to other states. The Commission adjusted that credit and issued a Notice of Deficiency Determination ("NODD") in July of 2013. The NODD identified a deficiency of $20,629 for tax year 2012.

The Estate protested the NODD and filed an amended 2012 Idaho income tax return. In the amended Idaho return, the Estate computed the gain from the sale of the Chino property using a stepped-up basis of $16,000,000 rather than the earlier modified carryover basis of $1,457,341. The amended Idaho return was accompanied by a "sample recomputed" federal income tax return.² Schedule D to the recomputed federal tax return showed a sales price of $16,318,909 and a stepped-up basis of $16,000,000. The Estate's amended state income tax return identified a taxable gain of $318,909 from the sale of the Chino property, $14,562,750 less than originally reported. Based upon the use of the stepped-up basis, the Estate sought a refund of $1,026,435 of its earlier payment.

In November of 2013, the Commission issued a second NODD denying the Estate's claim for a refund. In October of 2014, the Commission issued a decision upholding the earlier $20,629 tax assessment and denying the Estate's refund claim.

On December 30, 2014, the Estate deposited $21,732 with the Commission to satisfy the $20,629 deficiency, penalty and interest. On January 6, 2015, the Estate filed its complaint with the district court seeking a judgment directing the Commission to refund the deposit and its claimed overpayment of $1,026,435 in state income taxes for 2012, plus accrued interest. The Estate's theory underlying its claim for refund is relatively straightforward: Idaho taxable income for 2012 is to be determined pursuant to the Internal Revenue Code of 1986, as amended, and in effect on January 1, 2012; Section 301(a) of TRUIRJCA repealed the modified carryover basis provisions of Section 1022 ; and thus, despite its exercise of the 1022 Election, the Estate was entitled to use the stepped-up basis provided by Section 1014.

The parties filed cross-motions for summary judgment. The district court granted summary judgment to the Commission. The Estate moved for reconsideration. The district court then issued a memorandum decision denying the Estate's motion for reconsideration, albeit using different reasoning. The Estate timely appealed.

II. STANDARD OF REVIEW

Our standard of review is well-established:

"When this Court reviews a district court's decision on summary judgment, it employs the same standard as that properly employed by the trial court when originally ruling on the motion." Kolln v. Saint Luke's Regl. Med. Ctr. , 130 Idaho 323, 327, 940 P.2d 1142, 1146 (1997). "The judgment sought shall be rendered forthwith if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material facts and that the moving party is entitled to a judgment as a matter of law." I.R.C.P. 56(c) (repealed effective July 1, 2016).... "If there is no genuine issue of material fact, only a question of law

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