ATTORNEYS FOR APPELLANT: ATTORNEY FOR APPELLEE:
JEFFREY A. MODISETT GARY L. CHAPMAN
Attorney General of Indiana BOSE McKINNEY & EVANS Indianapolis, Indiana
KATHRYN SYMMES KIRK
Deputy Attorney General
DEPARTMENT OF STATE REVENUE, ) Inheritance Tax Division, ) ) Appellant, ) ) v. ) Cause No. 89T10-9609-TA-00116 ) ESTATE OF CAROLYN HUNT PHELPS, ) ) Appellee. ) _____________________________________________________________________The Honorable Robert E. Reinke, Judge Cause No. 89D02-9412-EU-0041
ON APPEAL FROM THE WAYNE SUPERIOR COURT
proper qualified terminable interest property (QTIP) election. See Ind. Code
Ann. § 6-
4.1-3-7 (West 1989).
appears that this tax liability was paid soon thereafter. In any event, this tax liability is
not an issue in this appeal. On November 20, 1995, after the Department audited the
return, the Department filed a "Petition for Rehearing, Reappraisement and
Redetermination of Inheritance and Transfer Tax" with the probate court to have the
probate court reconsider its order. In its petition, the Department contended that an
additional $11,193.08 of inheritance tax was due because some of the remainder
interests transferred to the children were not included in the calculation of the
inheritance tax. On November 27, 1995, the Estate made a payment of $10,451.59 to
the Wayne County Treasurer toward this alleged additional tax liability.See footnote
On November 29, 1995, the Estate filed a second inheritance tax return prior to the twelve-month period after a decedent's death in which an inheritance tax return must be filed. See Ind. Code Ann. § 6-4.1-4-1(a) (West 1989). This tax return was identical to the initial tax return except that it increased the value reported for the spousal residence and also included an attachment entitled "QTIP election." This "QTIP election" was in a form prescribed by the regulation. On May 30, 1996, the probate court denied the Department's petition and ordered the refund of the $10,451.59 (plus interest) paid by the Estate. This appeal ensued.
probate court concerning the amount of Indiana inheritance tax due. See Ind. Code
Ann. § 6-4.1-7-7 (West Supp. 1997). In its review, the Court acts as a true appellate
tribunal. See Estate of Hibbs v. Department of State Revenue, 636 N.E.2d 204, 206.
(Ind. Tax Ct. 1994). Accordingly, this Court will afford the probate court a great deal of
deference in its role as the finder of fact. See Ind. T.R. 52(A). However, this Court
reviews the legal conclusions of the probate court de novo. See Haseman v. Orman,
680 N.E.2d 531, 533 (Ind. 1997).
decedent to transfer a "qualifying income interest for life"See footnote
to a surviving spouse while
exempting the transfer of the remainder to other beneficiaries from Indiana inheritance
tax. The surviving spouse has a qualifying income 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.
The net effect of the QTIP election is to defer the payment of the Indiana inheritance tax until the death of the surviving spouse. See Ind. Code Ann. § 6-4.1-2- 4(d) (West 1989); Estate of Hibbs, 636 N.E.2d at 207. 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.
In other words, when the surviving spouse dies, the surviving spouse's 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. Thus, "the remainderm[e]n will pay the inheritance taxSee footnote 3 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. Therefore, if the Estate made a proper QTIP election, the probate court properly denied the Department's
petition because the transfers of the remainder interests to the children were properly
excluded from the calculation of inheritance tax due.
QTIP treatment does not happen automatically. In order to obtain QTIP treatment, the person filing an inheritance tax return must elect QTIP treatment. See id. This election must be in writing and it must "manifest an affirmative, unequivocal intent to elect Indiana QTIP treatment." See id. at 209. As this Court pointed out in Estate of Hibbs, the statutory provision does not explain "what documents can, and what documents cannot, be used as an attached writing for purposes of IC 6-4.1-3- 7(d)." Id. at 207. However, the Department has adopted a regulation that was in effect at the time of the decedent's death detailing exactly what must be done in order to make the QTIP election. Ind. Admin. Code tit. 45, 4.1-3-5(b)(4). That regulation provides:
The [Indiana QTIP] election must be in form and content substantially as follows:
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 decedent's surviving spouse.
Qualified Property Percentage
It is understood that this QTIP election is irrevocable and cannot be reversed.
This regulation was issued pursuant to the Department's statutory authority under Ind.
Code Ann. § 6-4.1-12-6(5) (West 1989), and this regulation has the force of law. See
Roehl Transp., Inc. v. Department of State Revenue, 653 N.E.2d 539, 544 (Ind. Tax Ct.
In this case, the Estate did not attach such a writing to the first inheritance tax return (filed July 17, 1995). Instead, the Estate attached a copy of the will and the revocable trust agreement to that return. This does not satisfy the requirements of the regulation. Consequently, the Court holds that the Estate did not make a proper QTIP election on the first inheritance tax return it filed.See footnote 4
The second inheritance tax return (filed November 29, 1995) did have a proper QTIP election attached to it. However, the Estate runs into a different obstacle in the regulation dealing with QTIP elections: "The election must be in writing, signed by a person authorized to make the election, and attached to the original Indiana inheritance tax return at the time it is filed." Ind. Admin. Code tit. 45, r. 4.1-3-5(b)(3) (1996) (emphasis added). The regulation also provides that the failure to comply with the regulation "means that an irrevocable election has been made not to treat the transfer as a QTIP transfer." Id. r. 4.1-3-5(e).
The Estate argues that because the term "original Indiana inheritance tax return" is undefined in the regulation, the Court should construe the regulation in accordance
with the federal regulations governing QTIP elections so as to allow the second Indiana
inheritance tax return the Estate filed to supplement the first one. Under the Indiana
regulation governing QTIP elections, a QTIP election "cannot be made on an amended
inheritance tax return." Id. r. 4.1-3-5(c). This would seem to spell doom for the Estate's
position. However, the Estate cleverly argues that its second return was not an
amended inheritance tax return, but rather a supplemental inheritance tax return.
According to the Estate, the difference between a supplemental return and an amended
return is that a supplemental return is filed before the due date of the return and an
amended return is filed after the due date of the return. Because the Estate filed the
second return before the due date, in the Estate's view, it is a supplemental return and
therefore (with a generous interpretation of "original Indiana inheritance tax return")
part of the original inheritance tax return.
Despite the cleverness of the Estate's argument, the Court finds that the intent of the regulation cannot be thwarted by a mere name change. Whether the second return filed by the Estate in this case is called a supplemental return or amended return does not alter the clear import of the regulation, which is to make the failure to attach a QTIP election to the initial inheritance tax return an election "not to treat the transfer as a QTIP transfer." Id. r. 4.1-3-5(e). Therefore, an Estate cannot cure a failure to attach a QTIP election to the initial inheritance tax return it files by filing subsequent inheritance tax returns containing a QTIP election.
The Court is not without sympathy for the Estate's position. The Department's regulation appears to be unnecessarily inconsistent with federal regulations governing
federal estate tax returns. Additionally, there would appear to be no harm in allowing
amended returns filed before the due date to add a QTIP election. The Court also
notes that one subsection of the regulation (not at issue in this case) is inconsistent
with the statutory provision. Section 6-4.1-3-7(d) clearly contemplates the possibility
that a QTIP election may be made without the filing of an Indiana inheritance tax return.
However, under the regulation an inheritance tax return is required if a QTIP election is
made. Id. r. 4.1-3-6(d). In addition, the regulation does not prohibit QTIP treatment
when the initial inheritance tax return is filed after the due date. In other words, late
filed initial returns are treated more favorably than timely filed amended returns.
That said, it is not this Court's function to substitute its will for that of the Department. The Department has issued a valid regulation. Consequently, this Court may do nothing other than to enforce the regulation as it is written.
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