ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEE:
INDIANA TAX COURT
STEPHEN J. WILLIAMS STEVE CARTER
NATHAN S.J. WILLIAMS ATTORNEY GENERAL OF INDIANA
Shambaugh, Kast, Beck Indianapolis, IN
& Williams, LLP
Fort Wayne, IN KATHRYN SYMMES KIRK
DEPUTY ATTORNEY GENERAL
THE ESTATE OF THEODORE F. HAGERMAN )
v. ) Cause No. 02T10-0106-TA-41
INDIANA DEPARTMENT OF STATE )
ON APPEAL FROM THE ALLEN SUPERIOR COURT
The Honorable Stanley A. Levine, Judge
Cause No. 02D01-9902-EU-137
June 28, 2002
The Estate of Theodore F. Hagerman (Estate) appeals the Allen Superior Courts (probate
court) order redetermining inheritance tax and disallowing a Qualified Terminable Interest Property (QTIP)
exemption for a trust. The Indiana Department of Revenue (Department) cross appeals
the probate courts allowance of certain deductions on the Estates inheritance tax return.
The parties raise the following issues on appeal, which the court restates
I. whether the probate court erred in determining that the Estate did not make
a valid QTIP election; and
II. whether the probate court erred by allowing the Estate to take deductions for
certain items on the Indiana inheritance tax return that it might later take
on the Indiana fiduciary tax return.
The Court AFFIRMS the probate courts decision.
The relevant facts are not in dispute. In 1997, Theodore F. Hagerman
funded the Theodore F. Hagerman 1997 Revocable Trust (1997 Trust). On January
31, 1999, Theodore died testate. He was survived by his spouse, Dorothy
Hagerman. On January 31, 2000, the Estate filed its Indiana inheritance tax
return. A written Schedule of Beneficiaries was attached to the Return.
On the Schedule, listed to the right of Dorothys name is, among other
things, Theodore F. Hagerman 1997 Rev. Trust [Sched. E, Item 6] QTIP Election
with a value listed of $602,398.00. (App. at 76.)
On March 6, 2000, the probate court entered an order determining the inheritance
tax due, which allowed the QTIP exemption for the Trust remainder and certain
deductions for expenses incurred in administering the property subject to inheritance tax.
After an audit of the inheritance tax return, the Department filed a Petition
for Rehearing, Reappraisement and Redetermination of Inheritance and Transfer Tax in the probate
court stating that additional inheritance tax of $24,940.13 was due because the Estate
did not make a valid QTIP election and improperly deducted certain expenses on
the inheritance tax return. Following a hearing, the probate court issued an
order redetermining the inheritance tax due, disallowing the QTIP exemption, and allowing the
deductions at issue.
On April 20, 2001, the Estate filed its notice of appeal. Oral
argument was held on November 26, 2001. Additional facts will be supplied
ANALYSIS AND OPINION
Standard of Review
This Court has jurisdiction to review an appeal from a probate courts redetermination
of the amount of Indiana inheritance tax due. Ind. Code § 6-4.1-7-7.
In this type of case, the Court acts as a true appellate
tribunal. Department of State Revenue, Inheritance Tax Div. v. Estate of Phelps,
697 N.E.2d 506, 509 (Ind. Tax Ct. 1998); Indiana Dept of State Revenue,
Inheritance Tax Div. v. Estate of Riggs, 735 N.E.2d 340, 342 (Ind. Tax
Ct. 2000). Consequently, this Court will affirm the probate courts judgment upon
any legal theory supported by evidence introduced at trial. Estate of Hibbs
v. Indiana Dept of State Revenue, Inheritance Tax Div., 636 N.E.2d 204, 206
(Ind. Tax Ct. 1994) (citations and internal quotations omitted). This Court will
reverse the probate courts judgment if there is no substantial evidence of probative
value to support the judgment or if the judgment is contrary to law.
Id. The Court will not reweigh the evidence, nor will it
assess the credibility of the witnesses. Id.
I. QTIP Election
The first issue is whether the probate court erred in determining that the
Estate did not make a valid QTIP election. The Estate argues that
it made a valid QTIP election because it substantially complied with the requirements
of the regulation governing QTIP elections. See Ind. Admin. Code tit. 45,
r. 4.1-3-11 (1996). The Department contends that the Estate did not comply
with the requirements of the QTIP statute or regulation, and therefore, owes additional
inheritance tax. See Ind. Code § 6-4.1-3-7; 45 IAC 4.1-3-11.
In Indiana, [a]n inheritance tax is imposed at the time of a decedents
death on certain property interest transfers made by him. Ind. Code §
6-4.1-2-1(a) (West 2000). The inheritance tax is based on the fair market
value of the property interest on the date of the decedents death or
on the date used for valuation of the property interest for federal estate
tax purposes if a federal return was filed. Ind. Code § 6-4.1-5-1.5.
Actuarial tables are used to calculate the fair market value of an
interest if a beneficiary receives less than a fee interest, such as a
life estate or a future interest, in the property transferred. Ind. Code
§ 6-4.1-6-1 (West 2000).
A property interest that is passed from a decedent to a surviving spouse
is exempt from the Indiana inheritance tax. Ind. Code § 6-4.1-3-7(a) (West
2000). Therefore, when a decedent spouse transfers a life estate in property
to the surviving spouse, no tax is due on that transfer. Ind.
Code § 6-4.1-3-7(b); Estate of Phelps, 697 N.E.2d at 509. However, the
transfer of the remainder interest is ordinarily subject to tax. Estate of
Phelps, 697 N.E.2d at 509. This tax on the remainder may be
postponed by making the QTIP election. Ind. Code § 6-4.1-3-7(c). The
QTIP election allows a decedent to transfer a qualifying income interest for life
to a surviving spouse while exempting from Indiana inheritance tax the transfer of
the remainder to other beneficiaries. Estate of Phelps, 697 N.E.2d at 509.
A surviving spouse has a qualifying interest for life if he/she is
entitled to all of the income for life and if, during his/her lifetime,
no one has the power to appoint any part of the property to
any person other than him/her.
Estate of Hibbs, 636 N.E.2d at 207
(citing 26 U.S.C. § 2056(b)(7)(B)(i)).
As a result of making a QTIP election, the payment of the Indiana
inheritance tax is postponed until the surviving spouse dies. Ind. Code §
6-4.1-2-4(d) (West 2000)
See footnote ;
Estate of Hibbs, 636 N.E.2d at 207. When
the surviving spouse dies, his qualifying income interest for life is treated as
a fee interest for purposes of determining the inheritance tax due upon its
transfer to the remaindermen. I.C. § 6-4.1-2-4(d). Consequently, the remaindermen will
pay the inheritance tax on the value of the entire property at the
date of death of the surviving spouse. Estate of Hibbs, 636 N.E.2d
at 207. See also Ind. Admin. Code tit. 45, r. 4.1-2-8 (1996).
QTIP treatment is not automatic. To achieve QTIP treatment, the person filing
an inheritance tax return is required to make an election. I.C. §
6-4.1-3-7. This election must be in writing and it must manifest an
affirmative, unequivocal intent to elect Indiana QTIP treatment. Estate of Hibbs,
636 N.E.2d at 209. The statute governing the election provides in
(c) The personal representative of the decedents estate or the trustee or transferee
of property transferred by the decedent may, for the purpose of the exemption
established by subsection (a), elect to treat property passing from the decedent in
which the surviving spouse has a qualifying income interest for life as a
property interest which a decedent transfers to his surviving spouse. For purposes
of this section, qualifying income interest for life means a qualifying income interest
for life (as defined in Section 2056(b)(7) of the Internal Revenue Code).
(d) The election referred to in subsection (c) shall be made in writing
and shall be attached to the inheritance tax return, if one is required
to be filed. The election, once made, is irrevocable.
I.C. § 6-4.1-3-7(c) & (d). The Department has promulgated a regulation that
sets forth specifically what must be done in order to make a valid
QTIP election. Ind. Admin. Code tit. 45, r. 4.1-3-5(b)(4). The regulation
requires that the election specifically state which property is being elected and that
the election be in writing, signed by the authorized person, and attached to
the original inheritance tax return when it is filed. Id. More
specifically, that regulation provides in relevant part:
* * * *
(4) The [Indiana QTIP] election must be in form and content substantially as
Pursuant to IC 6-4.1-3-7, an election is hereby made to treat the following
property passing from the decedent in which the surviving spouse has a qualifying
income interest for life as a property interest which a decedent transfers to
a decedents surviving spouse.
Qualified Property Percentage
It is understood that this QTIP election is irrevocable and cannot be reversed.* * * *
(e) The failure to comply with subsection (b) as to any property
that would qualify under Section 2056(b)(7) of the Internal Revenue Code means that
an irrevocable election has been made not to treat the transfer as a
45 IAC 4.1-3-5(b)(4). This regulation was issued pursuant to the Departments statutory
authority under Indiana Code Section 6-4.1-12-6(5),
See footnote and has the force of law.
Estate of Phelps, 697 N.E.2d at 510; Roehl Transp., Inc. v. Dept
of State Revenue, 653 N.E.2d 539, 544 (Ind. Tax Ct. 1995).
In this case, the Estate did not attach a written election to the
inheritance tax return that was substantially similar in form and content to that
set forth by the regulation. The only indication that the Estate wanted
to make a QTIP election was written on a Schedule of Beneficiaries that
was attached to the Estates inheritance tax return. (App. at 76.)
In a column to the right of Dorothy M. Hagerman on the
Schedule, among other things, was written Theodore F. Hagerman 1997 Rev. Trust [Sched.
E, Item 6] QTIP Election. (App. at 76.) In a
column, farther to the right was written the amount of $602,398.00.
The Estate argues that it substantially complied with the regulation by writing QTIP
Election on the Schedule of Beneficiaries next to the name of the trust
and the value of it. More specifically, the Estate asserts that this
qualifies as a valid election because it was in writing, identified the property,
and was attached to the inheritance tax return. However, in Department of
State Revenue, Inheritance Tax Division v. Estate of Phelps, this Court held that
an estates attachment of a copy of the will and revocable trust agreement
to the inheritance tax return was not sufficient to satisfy the requirements of
the regulation. Estate of Phelps, 697 N.E.2d at 510. Therefore, this
Court held that the estate did not make a proper QTIP election on
the inheritance tax return.
Id. The Court emphasized that failure to
attach a QTIP election in compliance with the regulation means that an irrevocable
election has been made not to treat the transfer as QTIP transfer.
Id. (quoting Ind. Admin. Code tit. 45, r. 4.1-3-5(e)).
In this case, the Estate did not substantially conform with the form and
content of an election under the regulation by merely stating QTIP Election on
the Schedule of Beneficiaries. There was no affirmative statement that the election
was being made pursuant to Indiana Code Section 6-4.1-3-7, no statement of understanding
that the election was irrevocable, and no signature on the asserted election (Designation
See footnote Consequently, as in
Estate of Phelps, the Estate did not
make a valid QTIP election in this case.
Nonetheless, the Estate argues that if absolute compliance with Indiana Administrative Code Title
45 Regulation 4.1-3-5 is required, the regulation is invalid because it adds to
the statute. Even assuming arguendo that the regulation is invalid, the Estates
indication that it wanted to make a QTIP election is not adequate to
meet the requirements of the statute. In Estate of Hibbs, which arose
before the Department promulgated the regulation, this Court held that the estates election,
which consisted of language in the trust instrument and will that were attached
to the return, was sufficient to satisfy the requirements of the statute.
Estate of Hibbs, 636 N.E.2d at 209-10. The language stated My Executor
is directed to qualify the property in the trust . . . as
qualified terminable interest property for purposes of Marital Deduction and as a property
interest which a decedent transfers to his or her surviving spouse and exempt
from Indiana death tax as provided in I.C. § 6-4.1-3-7. Estate of
Hibbs, 636 N.E.2d at 210 (original emphasis). This Court stated in Estate
of Hibbs that to make a QTIP election, the attached writing must manifest
an affirmative, unequivocal intent to elect Indiana QTIP treatment. Id. at 209.
In Estate of Hibbs, the language in the trust and will was
unequivocal and affirmatively communicated the personal representatives intent to elect Indiana QTIP treatment.
Here, however, writing QTIP Election on a schedule of beneficiaries is not
an affirmative and unequivocal expression of intent to elect QTIP treatment. This
writing is buried in a schedule. The fact that the statute states
that the election is irrevocable makes it especially important that the personal representative
make an affirmative, unequivocal expression of intent to elect QTIP status.
There was no affirmative statement and no citation to the statute regarding QTIP
elections indicating an understanding about the irrevocability of the election. Therefore, the
Estate did not make a valid QTIP election and additional inheritance tax is
due. Thus, the Court AFFIRMS the probate courts decision.
The second issue is whether the probate court erred by allowing the Estate
to take deductions for certain itemsSee footnote on the Indiana inheritance tax return that
it might later take on the Indiana fiduciary tax return. The Department
argues that if the Estate takes the deductions on this inheritance tax return
and on the fiduciary tax return it would result in a double deduction
that is prohibited by Indiana Administrative Code Title 45, r. 4.1-3-11. That
regulation provides in relevant part:
Reasonable expenses incurred in administering property subject to the inheritance tax may
be deducted from the value of such property.
(b) As used in this section, reasonable expenses means expenditures that are
actually and necessarily incurred to effect the settlement of the estate and the
transfer of property of the estate to an individual transferee or a trustee.
The term does not include expenditures for the individual benefit of a
transferee such as the expense of litigation by a transferee as an individual
or by claimants against the estate. Except as provided in subsection (f), the
term includes the expense of preparing the fiduciary income tax return.* * * *
(f) Expenses that are deducted, or will be deducted, against the estates
fiduciary income are not reasonable expenses for purposes of subsection (a).
45 IAC 4.1-3-11 (1992)(emphasis added). It is clear from the regulation that
the expenses deducted by the Estate on the inheritance tax return will not
be considered reasonable if it also deducts or plans to deduct those expenses
from its fiduciary tax return. Here, the Estate has not yet filed
the fiduciary tax return. Therefore, there is no evidence that a double
deduction has taken or will take place. Consequently, there is no evidence
to indicate a violation of the regulation. The probate court held that
the mere possibility that the estate may in the future act inconsistently with
the regulation prohibiting double deductions is not determinative in this proceeding. (App.
at 12.)(original emphasis.) This factual situation forces the Court to determine
whether it has subject matter jurisdiction to decide this issue.
Subject matter jurisdiction is the power of a court to hear and determine
the general class of cases to which the proceedings before it belong.
Musgrave v. State Bd. of Tax Commrs, 658 N.E.2d 135, 138 (Ind. Tax
Ct. 1995). Whether a court has subject matter jurisdiction depends on whether
the type of claim advanced by the petitioner falls within the general scope
of authority conferred upon the court by constitution or statute. Id.
Included within subject matter jurisdiction is whether a claim is ripe for review.
Carroll County Rural Elec. Membership Corp. v. Indiana Dept of State Revenue,
733 N.E.2d 44, 47 (Ind. Tax Ct. 2000). Ripeness relates to
the degree to which the defined issues in a case are based on
actual facts rather than on abstract possibilities, and are capable of being adjudicated
on an adequately developed record. Indiana Dept of Envtl. Management v. Chemical
Waste Management, Inc., 643 N.E.2d 331, 336 (Ind. 1994). Blacks Law Dictionary
defines ripeness as the circumstance existing when a case has reached, but has
not passed, the point when the facts have developed sufficiently to permit an
intelligent and useful decision to be made. Blacks Law Dictionary 1328 (7th
ed. 1999). Furthermore, in deciding ripeness claims, consideration must be given to, among
other things, the need to defer to other branches of government. Carroll
County Rural Elec. Membership Corp., 733 N.E.2d at 47, n.3. When deciding
a ripeness issue, the Court must consider: (1) the fitness of the
issues for judicial decision; and (2) the hardship to the parties of
withholding court consideration. Id. at 48 (internal quotation and citation omitted).
Here, the Court cannot make a decision on whether the regulation is violated
because the Estate has not yet filed a fiduciary tax return. There
are no actual facts present upon which the Court can make a decision.
See Indiana Dept of Envtl. Management, 643 N.E.2d at 336. The facts
simply have not developed sufficiently at this point. See Blacks Law Dictionary
1328 (7th ed. 1999). The Department appears to argue that it is
placed under hardship in this case because it only has 120 days after
the inheritance tax order is issued to petition for rehearing and often fiduciary
tax returns are not filed within that time period. See Ind Code
6-4.1-7-1. While this may be true, the Court believes that resolution of
this timing problem would be best left to the legislature or Department by
respectively amending the statute or promulgating additional regulations.
See Carroll County Rural
Elec. Membership Corp., 733 N.E.2d at 47 n.3. Finally, the Court may
not issue advisory opinions. See id. at 47 n.2 (citing INS Investigations
Bureau, Inc. v. Lee, 709 N.E.2d 736, 742 (Ind. Ct. App. 1999), trans.
denied; Community Hosps. of Ind., Inc. v. Estate of North, 661 N.E.2d
1235, 1239 (Ind. Ct. App. 1996), trans. denied). A decision in this
case, a case that is not ripe for adjudication, would effectively be an
advisory opinion beyond this Court's subject matter jurisdiction. See id. Accordingly,
this Court AFFIRMS the probate Courts decision with regard to this issue.
For the foregoing reasons, the probate courts decision to deny the QTIP election
because a valid election was not made and allow the deductions because the
issue is not ripe for review is hereby AFFIRMED.
Footnote: The Indiana statute defines the term qualifying interest for life pursuant
to Section 2056(b)(7) of the Internal Revenue Code.
Ind. Code § 6-4.1-3-7(c)
Section 6-4.1-2-4(d) provides in relevant part:
If at the time of death a surviving spouse has been entitled to
income from a property interest that was the subject of a previous transfer
exempt from inheritance tax under IC 6-4.1-3-7(b) or IC 6-4.1-3-7(c), then the value
of the property interest at the time of death of the surviving spouse
is subject to the inheritance tax as if it were a transfer of
property owned by the surviving spouse.
Ind. Code § 6-4.1-2-4(d).
This statute provides in relevant part:
The department of state revenue:
* * * *
(5) shall promulgate any rules or regulations which are necessary for the
interpretation or enforcement of this article [on death taxes.]
Ind. Code § 6-4.1-12-6.
Estate of Phelps, the estate filed a second inheritance tax
return with the proper QTIP Election attached to it. Estate of Phelps,
697 N.E.2d at 510. However, this Court held that the estate was
not entitled to the election because the election had to be attached to
the original Indiana inheritance tax return at the time it was filed.
The Court acknowledges that the Estate signed the actual inheritance tax
return as required for filing. However, this does not substantially meet the
requirements of the regulation that the QTIP election itself be signed.
Footnote: There may be cases where a taxpayer makes a federal QTIP
election but chooses not to elect Indiana QTIP treatment because it would not
See Estate of Hibbs, 636 N.E.2d at 210 n.4.
These items included personal representative fees, attorney fees, court costs, and
appraisal fees. (App. at 11, 23-24.) These types of items are
deductible pursuant to Indiana Code Section 6-4.1-3-13(b)(9).
Footnote: The logical solution to this dilemma is to allow the estate
to take the deduction on either the inheritance or fiduciary tax return.
Taking the deduction on one return would preclude the estate from taking the
deduction on the other return. Present law does not currently provide for
Footnote: The Department contends that the probate court decision should be reversed
because it did not place the burden on the Estate to prove that
it was entitled to take the deductions at issue. However, the Department
admits that the probate court did not state who had the burden to
prove the deduction issue. Nonetheless, this Court does not reach the burden
issue because the issue of a potential double deduction is not ripe for
See supra Part II.