Opinion ID: 1166559
Heading Depth: 1
Heading Rank: 3

Heading: the residue's payment of taxes

Text: In addition to the specific bequests of stock, Morrison's will made a number of specific bequests of money. The will further provided that all the taxes upon these bequests were to be paid from the residue of the estate, i.e., the bequests paid to the distributees would not be reduced by any inheritance taxes due on the bequests. The State Tax Commission contended that the payment of taxes by the residue on behalf of a distributee was part of that person's distribution so that the total amount of distribution subject to tax must include this portion of the residue in addition to the amount paid to the distributee. The estate also contested this ruling in the appeal to the district court. The district court concluded that the payment of tax from the residue was not itself a transfer subject to tax. The State Tax Commission has also appealed from that ruling. As before, the starting point in our analysis must be the statutes imposing the inheritance tax. The relevant statutes, I.C. §§ 14-401, -402 and -414, provide the following: 14-401. Title of act  Terms defined.  This act shall be known as the `Transfer and Inheritance Tax Act.' The words `estate' and `property' as used in this act shall be taken to mean the real and personal property or interest therein of the [decedent] passing or transferred to individual legatees, devisees, heirs, next of kin, grantees, donees, vendees or successors, and shall include all personal property within or without the state or subject to the jurisdiction thereof; . . The word `transfer' as used in this act shall be taken to include the passing of property or any interest therein, in possession or enjoyment, present or future, by inheritance, descent, devise, succession, bequest, grant, deed, bargain, sale, gift or appointment in the manner herein described... . 14-402. Transfers of property subject to tax  ...  A tax shall be and is hereby imposed upon the transfer of any property, real, personal or mixed, or of any interest therein or income therefrom in trust or otherwise, to persons, institutions or corporations, not hereinafter exempted, ... . 14-413. Deduction of tax from legacy  ... 1. Any administrator, executor, or trustee having in charge or trust any legacy or property for distribution, subject to the said tax, shall deduct the tax therefrom, or if the legacy or property be not money he shall collect the tax thereon, upon the market value thereof, from the legatee or person entitled to such property, and he shall not deliver, or be compelled to deliver, any specific legacy or property subject to tax to any person until he shall have collected the tax thereon; ... . (Emphasis added). First, the payment of inheritance taxes by the estate from the residue pursuant to provision in the will is clearly the transfer of property as defined by I.C. § 14-401 because it is the passing of an estate's property subject to the terms of a will. Because it is a transfer within the meaning of that section, I.C. § 14-402 will subject the transfer to the tax unless the transfer is otherwise exempted. I.C. § 14-408 lists the exemptions from inheritance taxation. Under that section the distributee of the transfer must first be identified in order to determine what exemptions from taxation, if any, are available for that transfer. The next question we must decide is, therefore, who is the distributee for state inheritance tax purposes of the distribution from the estate for payment of the inheritance taxes of the recipient of a specific bequest. There are only two possible answers to this question  either the state of Idaho is the distributee or the person whose taxes are being paid is the distributee. For the following reasons, we think the more reasonable conclusion is that the person whose taxes are being paid is the distributee. First, I.C. § 14-413 clearly makes payment of the inheritance tax a debt of the distributee. A payment discharging a distributee's debt is in substance a gift to the distributee because the distributee has received the benefit of the payment. Indeed, the distributee not only has this beneficial interest in the payment; the distributee also has a legally enforceable interest in the payment because the distributee may sue to compel the estate to pay the tax if the estate declines to do so. These beneficial and legal interests in the money which the estate pays to the state of Idaho are certainly the passing of property or any interest therein, I.C. § 14-401, or the transfer of any property, ... or of any interest therein or income therefrom in trust or otherwise, I.C. § 14-402, where the distributee is the person who benefits from the transfer. Thus, any payment from an estate discharging a debt of a distributee is in substance and for purposes of the Idaho Transfer and Inheritance Tax Act a gift to that distributee subject to tax. [4] We think a contrary holding would be untenable. If a transfer from an estate to the State Inheritance Tax Department, or for that matter to any other creditor of a distributee, were considered to be a gift to the state or the creditor rather than to the distributee, then that transfer would not necessarily discharge the distributee's liability for the tax or for the creditor's debt. If the transfer were a gift which the will provided that the distributee's creditor had a legal right to receive, then the creditor would be entitled to receive the transfer independently of its right to seek payment of the debt from the distributee. Such a payment would not as a matter of law discharge the debt; the debt would be discharged as a matter of law only if the transfer is considered as coming from the distributee. For this reason, also, we feel it is essential that the transfer be considered as a gift to the distributee rather than a gift to the state of Idaho; otherwise, the transfer would not necessarily discharge the distributee's tax liability to the state. We recognize that the estate has cited cases with contrary holdings. In re Loeb's Estate, 400 Pa. 368, 162 A.2d 207 (1960); In re Glessner's Estate, 146 W. Va. 282, 118 S.E.2d 873 (1961). However, in these cases the courts did not discuss statutory schemes such as the one we have discussed in this case. Neither did those courts consider the question who was the distributee of the tax paid from the residue. Yet, in our analysis that question is of critical importance because the statute provides that all transfers except those specifically exempted are subject to tax. An exemption from taxation can only be determined after the distributee of the transfer has been identified. For that reason, these cases are not persuasive. Similarly, the cases relied on by the State Tax Commission are not persuasive. Although those cases arrived at the same result as we do concerning liability for taxes paid by the residue, they were not based on an analysis of statutes similar to Idaho's and have not adopted the same reasoning we do. Finally, the briefs of the parties and the decision of the district court devoted considerable discussion to the calculation of inheritance taxes. The discussion concerning calculation presented no issues of fact or law, so we have not discussed these calculations in the text. However, we have attached an appendix to this opinion to clarify the parties' and the district court's questions concerning these calculations. Reversed and remanded. Costs to appellants. McFADDEN, C.J., and DONALDSON, SHEPARD and BISTLINE, JJ., concur in Part I. McFADDEN, C.J., and BISTLINE, J., concur in Part II. SHEPARD and DONALDSON, JJ., dissent as to Part II.