In re Estate of Lewis

• Decision Date: 20 May 2005
• Docket Number: No. 31778.,31778.
• Citation: 614 S.E.2d 695
• Parties: In re: Estate of Elizabeth M. LEWIS.
• Court: West Virginia Supreme Court

614 S.E.2d 695

In re: Estate of Elizabeth M. LEWIS.

No. 31778.

Supreme Court of Appeals of West Virginia.

Submitted February 8, 2005.

Decided May 20, 2005.

COPYRIGHT MATERIAL OMITTED

Darrell V. McGraw, Jr., Attorney General, Stephen Stockton, Senior Assistant Attorney General, Charleston, West Virginia, Attorneys for Appellant.

John F. Hussell, IV, Esq., Staci Norman Criswell, Esq., Campbell, Woods, Bagley, Emerson, McNeer & Herndon, PLLC, Charleston, West Virginia, Attorneys for the Appellee.

STARCHER, Judge:

In this appeal from the Circuit Court of Fayette County, the State Tax Commissioner appeals a December 30, 2003 order requiring the State of West Virginia to pay interest to a taxpayer on an overpayment of estate taxes, an overpayment that was promptly refunded to the taxpayer upon the taxpayer's request.

After careful consideration of the briefs and arguments of the parties, the statutes and constitutional provisions relied upon by the parties, and all other matters of record, we reverse the circuit court's order.

I. Facts & Background

This case concerns whether the State Tax Commissioner is required to pay interest to a taxpayer, when the taxpayer has overpaid the amount of estate taxes due. The Tax Commissioner concedes that a taxpayer is entitled to interest on an overpayment of taxes, but asserts that the interest only begins to accrue from the date the taxpayer files a formal claim for a refund of the overpayment. The Tax Commissioner also asserts that the Commissioner has a statutory ninety-day grace period from the date of the claim for a refund in which to make the refund. The taxpayer in this case asserts that interest begins to accrue much earlier, at the time of the overpayment of taxes.

Elizabeth M. Lewis died testate on June 1, 1999, and left a substantial estate. Appellee Bank One Trustee Co., N.A., was appointed as the executor of the Estate of Elizabeth M. Lewis ("the Estate"). The Estate analyzed Mrs. Lewis's will and could not determine whether or not Mrs. Lewis had exercised a power of appointment given to her by her deceased husband, J. Edward Lewis, in his will. If Mrs. Lewis had exercised the power of appointment, then certain assets of Mr. Lewis would have been included in Mrs. Lewis's Estate and distributed under the terms of her will to the residuary beneficiaries of the Estate. Conversely, if Mrs. Lewis had not exercised the power of appointment, then the assets would have been distributed to certain charitable beneficiaries in accordance with Mr. Lewis's will.

The resolution of the question regarding the exercise of this power of appointment was important not only to the residuary and charitable beneficiaries of the wills, but was also important to the executor's calculation of the federal and state tax liabilities of the Estate. If Mrs. Lewis had not exercised the power of appointment, and the assets at issue passed to the charitable beneficiaries specified in her husband's will, then Mrs. Lewis's Estate would be entitled to a substantial charitable deduction under the federal and state tax codes. Accordingly, in January 2000, the Estate filed a declaratory judgment action to obtain guidance concerning whether or not Mrs. Lewis exercised the power of appointment. The Estate's declaratory judgment complaint named the residuary and charitable beneficiaries as parties.

Thereafter, on February 25, 2000, the Estate paid to the State Tax Commissioner an estimated West Virginia estate tax in the amount of $3,622,102.84.¹ Within the proper time limits, on September 1, 2000, the Estate filed an estate tax return with the Tax Commissioner, and attached to the return a copy of the declaratory judgment complaint. The Estate also attached a form to the tax return indicating that it was likely that some of the assets of the Estate would "qualify for the estate tax charitable deduction[.]"

On February 26, 2001, the parties to the declaratory judgment action reached a settlement agreement to divide the disputed assets in Mrs. Lewis's Estate. Under the agreement, the residuary beneficiaries were to receive 60% of the assets, and the charitable beneficiaries were to receive 40% of the assets. The circuit court entered an order on July 5, 2001, adopting the parties' agreement.

Because 40% of the assets at issue were distributed to charitable beneficiaries, the executor determined that the Estate was entitled to a charitable estate tax deduction on those assets. After calculating that its tax liability was substantially reduced, on January 18, 2002, the Estate filed an Amended West Virginia Estate Tax Return seeking a refund for an overpayment of estate taxes. In response, on January 31, 2002, the State of West Virginia issued a check to the Estate in the amount of $1,504,542.17, solely for the overpayment of estate taxes.

The Estate subsequently filed claims requesting that the Tax Commissioner pay interest on the overpayment of estate taxes, from the date of the overpayment (February 25, 2000) to the date of the refund (January 31, 2002).² The Estate sought $347,527.83 for interest plus additional interest to the date of payment of the interest refund. The Tax Commissioner responded and denied the Estate's claims for interest. The Tax Commissioner's decision was later reviewed by the West Virginia Office of Tax Appeals and affirmed.

The Estate then appealed to the Circuit Court of Fayette County. On December 30, 2003, the circuit court issued an order reversing the Tax Commissioner's decision and determining that the Estate was entitled to interest on its overpayment of estate taxes. The circuit court found that the "Legislature has omitted any reference to the State estate tax ... [from the statutes] concerning the payment of interest on the refund of a tax overpayment." Because of this omission, the circuit court found the estate tax code was ambiguous and must be construed in favor of the Estate. The circuit court further determined that it would be an unconstitutional taking of private property without just compensation for the State to use the Estate's overpayment of taxes without compensating the Estate through the payment of interest. Lastly, the circuit court determined that "the State has an implied obligation, indeed a moral obligation, to refund such interest to the Estate."

The circuit court concluded that when the Estate provided a copy of the February 2000 declaratory judgment complaint to the Tax Commissioner in September 2000, that "constituted a defacto `claim for refund'" that placed the Tax Commissioner on notice of a potential overpayment of estate taxes by the Estate. The circuit court therefore ordered that the Tax Commissioner pay the Estate the full amount of interest demanded.

The Tax Commissioner now appeals the circuit court's order.

II. Standard of Review

This case requires us to interpret various statutes contained within our tax code. As the questions presented are purely questions of law, our review of the circuit court's decision is de novo. Syllabus Point 1, Chrystal R.M. v. Charlie A.L., 194 W.Va. 138, 459 S.E.2d 415 (1995).

III. Discussion

The parties agree that the Estate of Elizabeth M. Lewis properly paid a conservatively estimated amount of estate tax to the State of West Virginia in February 2000, and that the settlement of the power-of-appointment controversy in 2001 entitled the Estate to seek a refund of a portion of that tax. This case is about whether, and to what extent, the Tax Commissioner is required to pay interest to the taxpayer on that refund.

The Tax Commissioner argues that the circuit court erred in ordering the payment of interest to the Estate. First, the Tax Commissioner contends that the circuit court erred in finding that the language of the tax code is ambiguous, and erred in finding that the tax code contains no provisions regarding interest on the overpayment of estate taxes. The Tax Commissioner instead contends that the tax code plainly sets forth the limited circumstances under which a taxpayer is entitled to receive interest, and contends that the instant case does not include any of those circumstances. The Tax Commissioner asserts that because the tax code clearly specifies when a taxpayer is, or is not, entitled to interest on a refund of overpaid taxes, the circuit court erred in finding an "implied right" to interest.

Second, the Tax Commissioner argues that the circuit court erred in finding that the Estate was entitled to interest on its refund based on the "informal claim" doctrine. And finally, the Tax Commissioner takes the position that the circuit court erred in evaluating the estate tax code under the "takings" clause of the West Virginia Constitution, and argues that instead the circuit court should have evaluated the estate tax code under the taxation clause of the Constitution. We consider these three arguments in turn.

A. Statutory Authority for Interest on Overpayments of Estate Taxes

The estate tax paid by the appellee Estate in this case was established by the Legislature in Article 11 of Chapter 11 of the West Virginia Code. See W.Va.Code, 11-11-1 to -43. The first provision of Article 11, W.Va.Code, 11-11-1 [1985] states that "[t]his article shall be known as the `West Virginia Estate Tax Act.'"

The Tax Commissioner's first argument is that the Estate is not entitled to interest on its overpaid taxes because, read in its entirety, the Estate Tax Act specifies that the Tax Commissioner has a ninety-day grace period, from the time the claim for a refund is made until the overpayment is returned to the taxpayer, to make a refund. The Tax Commissioner asserts it issued a check to the Estate on January 31, 2002, thirteen days after the Estate made a claim for a refund, and therefore further asserts that the Estate is not statutorily entitled to a refund of interest.

The Estate — using an argument made and accepted by the circuit court — argues that the statutory interest...