Indiana Dept. of State Revenue, Inheritance Tax Div. v. Estate of Nichols

• Decision Date: 14 December 1995
• Docket Number: No. 41T10-9506-TA-00054,41T10-9506-TA-00054
• Citation: 659 N.E.2d 694
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, INHERITANCE TAX DIVISION, Appellant (Petitioner Below), v. ESTATE OF Robert E. NICHOLS, Sr., Appellee (Respondent Below).
• Court: Indiana Tax Court

Page 694

659 N.E.2d 694

INDIANA DEPARTMENT OF STATE REVENUE, INHERITANCE TAX

DIVISION, Appellant (Petitioner Below), v. ESTATE OF Robert E. NICHOLS, Sr., Appellee (Respondent Below).

No. 41T10-9506-TA-00054.

Tax Court of Indiana.

Dec. 14, 1995.

Pamela Carter, Attorney General, Kathryn Symmes Kirk, Deputy Attorney General, Indianapolis, for Appellant.

James F.T. Sargent, Sargent & Meier, Greenwood, for Appellee.

FISHER, Judge.

The Indiana Department of Revenue, Inheritance Tax Division (the Department) appeals the Johnson County Superior Court's (the Probate Court) February 1995 order denying the Department's petition for rehearing, reappraisement, and redetermination of inheritance tax due from the Estate of Robert E. Nichols, Sr. (the Estate).

ISSUE

Whether the Probate Court erred in finding that a transfer of Florida real estate, held in trust, was a transfer of an interest in real property and therefore not subject to Indiana inheritance tax under IND.CODE 6-4.1-2-2.

FACTS AND PROCEDURAL HISTORY

On May 20, 1991, Robert E. Nichols, Sr. (the Settlor) executed the Robert E. Nichols, Sr. Trust (the Trust). Among the assets included in the Trust's corpus was a residence that the Settlor owned in Cape Coral, Florida. In the Trust Agreement, the Settlor named himself as trustee and retained all incidents of legal and equitable title for his lifetime, including the right to alter, amend or revoke the Trust. The Settlor named his son, Robert E. Nichols, Jr. (Nichols), as successor trustee.

The Settlor died testate on June 26, 1993, at the age of seventy-six. At the time of his death, the Settlor was a domiciled resident of Johnson County, Indiana. The Settlor's will provided that all of his remaining assets would be "poured over" into the Trust.

The Trust Agreement provided that upon the Settlor's death, Nichols would be the beneficiary of all the Trust estate's tangible personal property. The Trust Agreement also provided that the Settlor's daughter and her two children would each be the recipient of a specific monetary gift, and that the remainder of the Trust's estate would be held in trust for the Settlor's wife, Janet Nichols (the Wife). Accordingly, the Trust created the "Janet Nichols Trust," which provided in relevant part:

The Settler's [sic.] wife shall have full use of the property owned by the Settlor located at 5608 South West 11th Place, Cape Coral, Florida for and during the remainder of her life or until her remarriage. The Trustee is specifically directed to pay the real estate taxes, insurance and up-keep on said house during the term that the Settlor's wife uses the same. The Settlor's wife is also given full right to use any and all furniture, fixtures and applicances [sic] located in said home in Florida for and during the term of her natural life or until her remarriage.

Trust Agreement at 5 (entered as Exhibit 2 at the hearing and incorporated into the Record of Proceedings at 341). Upon the death or remarriage of the Wife, the balance of the "Janet Nichols Trust" is to be distributed to Nichols. Trust Agreement at 6.

On June 23, 1994, Nichols filed the Estate's Indiana Inheritance Tax Return with the Probate Court. On June 28, 1994, the Probate Court entered its Order Determining Inheritance Tax Due in the amount of $80,980.00. The Department petitioned the On January 12, 1995, the Probate Court held a hearing on the Department's petition. During the hearing, the Estate moved for an involuntary dismissal under Ind.Trial Rule 41(B). As the sole basis for its motion, the Estate argued that because the Department had not presented any evidence at the hearing, it therefore had not met its burden of proving its petition. The Probate Court took the matter under advisement.

Probate Court for a rehearing on October 25, 1994, alleging that, because the Estate failed to report the transfer of the Florida property held in trust as taxable, the Estate owed an additional $26,404.50 in inheritance tax. As a result, the Department claims that the Probate Court's Order Determining Inheritance Tax Due should have been in the amount of $107,384.50.

On February 13, 1995, the Probate Court issued the following order:

On the [sic] January 12, 1995 the Court heard oral argument and evidence pursuant to Petitioner, Indiana Department of State Revenue, Inheritance Division's Petition For Rehearing, Reappraisement And Redetermination Of Inheritance And Transfer Tax filed October 25, 1994. Personal Representative appeared in person and by counsel, James F.T. Sargent. Petitioner, Indiana Department of State Revenue Inheritance Division, appeared by counsel, Kathryn Symmes Kirk.

The Court, having taken this matter under advisement and having considered the arguments of counsel and the Personal Representative's Memorandum Regarding Procedure At Hearing on Redetermination of Inheritance Tax filed January 13, 1995 and Petitioner's Post Hearing Brief filed January 31, 1995, now finds that said Petition should be denied.

THEREFORE, IT IS ORDERED BY THE COURT that Petitioner, Indiana Department of State Revenue, Inheritance Tax Division's Petition For Rehearing, Reappraisement And Redetermination of Inheritance And Transfer Tax filed October 25, 1994 is hereby denied.

Record of Proceedings at 95. The Department now appeals to this court. Additional facts will be supplied as necessary. ¹

STANDARD OF REVIEW

"The Indiana Tax Court acts as a true appellate tribunal when it reviews a probate court's final determination concerning the amount of Indiana inheritance tax due." Indiana Dep't of State Revenue v. Estate of Baldwin (1995), Ind.Tax, 652 N.E.2d 124, 125; IND.CODE 6-4.1-7-7. Thus, "[o]n appeal, the court will not reweigh the evidence nor judge the credibility of witnesses, but will affirm the probate court's judgment upon any legal theory supported by evidence introduced at trial." Id. "More specifically, the tax court will reverse the probate court's judgment only if there is no substantial evidence of probative value to support the judgment." Estate of Hibbs v. Indiana Dep't of State Revenue (1994), Ind.Tax, 636 N.E.2d 204, 206.

DISCUSSION AND DECISION

IND.CODE 6-4.1-2-1 provides that Indiana's inheritance tax is imposed on a resident decedent's property interest transfer if the property transferred is described in both IND.CODE 6-4.1-2-2 and IND.CODE 6-4.1-2-4 ² and the transfer is not exempt under IND.CODE 6-4.1-3. Neither party to this case disputes the applicability of I.C. 6-4.1-2-4 or I.C. 6-4.1-3. The parties do, however, dispute whether the property transfer I.C. 6-4.1-2-2 reads:

at issue is one to which I.C. 6-4.1-2-2 applies.

The inheritance tax applies to a property interest transfer made by a resident decedent if the interest transferred is in:

(1) real property located in this state;

(2) tangible personal property which does not have an actual situs outside this state; or

(3) intangible personal property regardless of where it is located.

(Prior to amendment by P.L. 78-1993, § 1). ³ In the case at bar, the Department contends that the Settlor's transfer of the Cape Coral, Florida property, held in trust, is a taxable transfer of a beneficial interest in intangible personal property under I.C. 6-4.1-2-2(a)(3). More specifically, the Department argues that while the nature of the interest in the Florida property is real property, the fact that the property is held in trust alters the interest's character to that of taxable intangible personal property. Appellant's Brief at 11.

The Estate, on the other hand, asserts that the nature of the interest in the Florida property is that of real property. Indeed, the Estate explains that because the trustee must distribute the Cape Coral property to the Wife in the form of a life estate, the trustee has no power to sell or exchange the property until her life estate divests, which is upon her death or remarriage. At that point, however, the trustee must then directly convey the Florida property to Nichols as remainderman. Accordingly, the Estate continues, because the character of the interest in the Florida property is that of real property, it is not taxable under I.C. 6-4.1-2-2, as it is located outside the state of Indiana.

The issue for the Court to decide is whether the interest in this particular Florida property, which is held in trust, is an interest in real property or an interest in intangible personal property. To decide that issue, the Court looks to the Indiana Trust Code, which defines the nature of a beneficiary's interest in property held in trust:

(a) The beneficiary takes an equitable interest in the trust property.

(b) The extent of the beneficiary's estate shall be determined from the terms of the trust. The Rule in Shelley's Case and the Doctrine of Worthier Title shall not be applied to determine the meaning or application of these terms.

(c) Except as provided in 30-4-2-14, if, under the terms of the trust, the trustee is required at some time to distribute real property from the trust estate to a beneficiary, that beneficiary's equitable interest is real property. In all other cases the beneficiary's interest is personal property.

IND.CODE 30-4-2-7 (emphasis added). This Court has previously held that "a trust interest has the character of real property under I.C. 30-4-2-7(c) only if the terms of the trust contain an absolute requirement that the trustee distribute real property at some time to a beneficiary." Indiana Dep't of State Revenue v. Estate of Puschel (1991), Ind.Tax, 582 N.E.2d 923, 927 (emphasis added).

To determine whether a trust document absolutely requires that the trustee distribute real property at some time to a beneficiary, the Court examines three factors: 1) whether the trust document expressly requires the trustee to make distributions in kind; 2) whether the discretion given to the trustee in administering the trust's corpus is limited; and 3) whether the trust's beneficiaries have the power...