Indiana Dept. of State Revenue, Inheritance Tax Div. v. Smith

• Decision Date: 05 February 1985
• Docket Number: No. 285S40,285S40
• Citation: 473 N.E.2d 611
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, INHERITANCE TAX DIVISION, Appellant (Petitioner below), v. Estate of Maud SMITH, Deceased, Appellee (Respondent below).
• Court: Indiana Supreme Court

Page 611

473 N.E.2d 611

INDIANA DEPARTMENT OF STATE REVENUE, INHERITANCE TAX

DIVISION, Appellant (Petitioner below), v. Estate of Maud SMITH, Deceased, Appellee (Respondent below).

No. 285S40.

Supreme Court of Indiana.

Feb. 5, 1985.

Linley E. Pearson, Atty. Gen. of Indiana, Dan S. LaRue, Deputy Atty. Gen., Indianapolis, for appellant.

Jeanne S. Miller, Miller & Miller, New Haven, for appellee.

HUNTER, Justice.

This cause is before us upon the petition to transfer of respondent-appellee, the Estate of Maud Smith, Deceased (Estate). The Court of Appeals, Third District, reversed a lower court judgment in favor of the Estate concerning the amount of inheritance tax owed by the Estate. Indiana Department of State Revenue v. Estate of Maud Smith, (1984) Ind.App., 460 N.E.2d 980. We find that the Court of Appeals did correctly decide one issue in this case when they determined that the real property held originally by Maud Smith and her husband O. Clem Smith as tenants by the entireties and then transferred by them to their children, subject to the joint and successive life estates in the grantors, became wholly subject to the Indiana Inheritance Tax at the time of death of the last grantor.

However, we find that the Court of Appeals failed to consider the issue of whether the doctrine of equitable recoupment is applicable to this case. We therefore grant transfer and reverse. The opinion and decision of the Court of Appeals are hereby vacated, and appellee's petition to transfer is granted. The decision of the trial court is affirmed in part and the cause is remanded with instructions.

The facts in this case are not in dispute and were summarized by the Court of Appeals as follows:

"On April 2, 1971, O. Clem Smith and Maud Smith, husband and wife, conveyed, without consideration, part of a sixty-seven acre tract which they owned as tenants by the entireties, to their three sons and their wives (transferees). As transferors, O. Clem Smith and Maude Smith each reserved joint and successive life estates in the above property. Subsequently, on March 20, 1972, the transferors conveyed the balance of the sixty-seven acres to the transferees with the same reservation.

"On May 11, 1975, O. Clem Smith died. Included in his gross estate for Indiana inheritance tax purposes was $41,875.00 which represented the value of one-half of the sixty-seven acres. The probate court's order of the amount of tax due also included the value of one-half of the sixty-seven acres. The transferees paid the tax and the Tax Department never challenged or filed for a redetermination of tax. Furthermore, the estate of O. Clem Smith never filed a claim for refund of any inheritance tax erroneously paid.

"On April 16, 1981, Maud Smith died, and included in her gross estate was the transfer of a one-half interest in the sixty-seven acres valued at $72,188.00. The Allen Superior Court entered its order assessing the tax and found that the transfer by Maud Smith of one-half of the sixty-seven acres was includable in her estate at a value of $72,188.00. The Tax Department determined that it was improper to include only one-half the value of the sixty-seven acres in her estate, and further determined that the full value of the property should have been included in her estate pursuant to 45 I.A.C. 4-2-5 (formerly Inheritance Tax Regulation 2, Sec. 2.5). The Tax Department calculated that the Estate owed an additional inheritance tax in the amount of $3,314.94, representing the tax due on the full value of the sixty-seven acres at the time of the wife's death.

"The Tax Department filed its petition to redetermine tax, seeking inclusion of the full value of the sixty-seven acres. Upon findings of fact and conclusions of law, the trial court granted the Tax Department's petition, but then vacated its judgment and granted the Estate's motion to correct errors without making any further findings." (Footnotes omitted.)

Ind. Dept. of State Rev. v. Estate of Smith, 460 N.E.2d at 981-82.

The Court of Appeals considered the following issue presented by the Indiana Department of Revenue:

"Whether real estate that is held by a husband and wife as tenants by the entireties and which is gratuitously transferred subject to their joint and successive life estates is taxed in the estate of the last grantor to die or is taxed one-half in the estate of the first to die and one-half in the estate of the second to die."

Ind. Dept. of State Rev. v. Estate of Smith, 460 N.E.2d at 982. They correctly considered our inheritance tax laws, as follows:

"The taxation of property interests transferred at the time of death is governed entirely by statute. Indiana Department of State Revenue v. Puett, (1982) Ind.App., 435 N.E.2d 298; and Matter of the Estate of Compton, (1980) Ind.App. 406 N.E.2d 365. The inheritance tax statutes are designed to tax the privilege of succeeding to property rights of deceased persons and the tax is imposed on the interest taken by the transferee and not on the property itself. Puett, supra; and In re Estate Grotrian, (1980) Ind.App., 405 N.E.2d 69. Thus, the Indiana inheritance tax is not a tax on property, but a tax on the right of the heirs to succeed to that property. Indiana Department of State Revenue v. Cohen, (1982) Ind.App., 436 N.E.2d 832. The inheritance tax is levied upon the beneficiary-transferee's share, not upon the decedent-transferor's estate as with the Federal Estate Tax. Cohen, supra.

"IND.CODE 6-4.1-2-4 imposes an inheritance tax on the following transfers of interests in property, in part:

'(a) The inheritance tax applies to transfers of property interests described in subsection (d) and to the following types of property interest transfers:

(1) transfers which are made under a deceased transferor's will or under the laws of intestate succession, as a result of the transferor's death;

(2) transfers which are made in contemplation of the transferor's death;

(3) transfers which are made in such a manner that they are intended to take effect in possession or enjoyment at or after the transferor's death;'

By reserving joint and successive life estates, the transferors intended for the transfer 'to take effect in possession or enjoyment at or after the transferor's death'. Thus, imposition of the inheritance tax would occur upon the death of the last transferor, as contemplated by IND.CODE 6-4.1-2-4."

Ind. Dept. of State Rev. v. Estate of Smith, 460 N.E.2d at 983.

The Court also considered a Tax Department ruling and a 1978 case upon which the Tax Department relied. The ruling, 45 I.A.C. 4-2-5 (1984 ed.), provides:

"Whenever real estate which is held by the entireties is transferred, subject to joint and successive life estates in the grantors, without valuable and sufficient consideration in money or money's worth, such transfer shall be taxed in the estate of the last grantor to die."

In the case of State, Department of State Revenue v. Union Bank and Trust Company, (1978) 177 Ind.App. 632, 380 N.E.2d 1279, the court held that whenever real estate which is owned by the entireties is transferred without valuable consideration, subject to joint and successive life estates in the grantors, the transfer is taxed in the estate of the last grantor to die. The court then concluded:

"In the case at bar, the record shows that Maud Smith continued to enjoy a present possessory interest as a life tenant in the property after the death of her husband, O. Clem Smith. There is no evidence in the record indicating that the transferees received present possession in 50% of the 67 acres at the time of the death of O. Clem Smith."

* * *

* * *

"We can only conclude that the transfer of the present possessory interest by O. Clem Smith and Maude [sic] Smith was intended to take effect upon the death of the last grantor, since both transferors reserved joint and successive life estates. Upon Maud Smith's death, the transferees took possession of the whole property, and were then subject to the Indiana inheritance tax. This result is in full accord with Indiana's tax statutes and...