Court Opinion

ID: 7825762
Source: CourtListenerOpinion
Date Created: 2022-09-07 18:06:33.711459+00
Date Added: 2024-06-11T16:30:51.755115
License: Public Domain

Robert H. Dudley, Justice, dissenting. Granville M. Cook died testate on August 10, 1989, survived by his wife, Ruby S. Cook. Peoples Bank & Trust Company was initially appointed executor of the estate, and Worthen Bank & Trust Company, Inc., appellee, was appointed successor executor. The decedent died leaving a will and two codicils. On August 20, 1990, the executor filed a federal estate tax return, form 706, with the Internal Revenue Service. The return provided that a qualified terminable interest property election was made to qualify Share No. 1 for the marital deduction under section 2056 (b)(7) of the Internal Revenue Code. 26 U.S.C. § 2056(b)(7) (1988). On the same date, the executor filed an Arkansas estate tax return and attached to it a copy of the federal form 706. Subsequently, the Internal Revenue Service determined that the estate was not entitled to the marital deduction because, under the will and codicils, Ruby S. Cook was not entitled to receive all of the net income of Share No. 1 for the remainder of her life. See § 2056(b)(7). As a result of this determination, federal estate tax was assessed. As a consequence of the Internal Revenue Service’s determination that federal estate tax was due, appellant Director notified appellee executor of the estate’s liability for Arkansas estate tax. The amount of the Arkansas estate tax due was based on the amount of state estate tax allowable as a credit on the federal tax return. Ark. Code Ann. § 26-59-106(a) (1987). Appellee executor paid the tax and interest under protest and filed a petition in chancery court for refund of the amount paid. See Ark. Code Ann. § 26-18-406 (Repl. 1992). At trial in chancery court it was agreed that appellee executor supplied appellant Director with copies of documentation that it had provided to the Internal Revenue Service, and from that documentation, the Internal Revenue Service had determined that additional federal estate tax was owed. Under federal law, the Internal Revenue Service would give credit on the federal return for any tax paid to the State. Appellant Director contended that the applicable state statute was written to correspond with the federal law. The applicable state statute, section 26-59-106 of the Arkansas Code Annotated of 1987, provides that the amount of state estate tax is equal to the amount of credit allowable under federal law. The chancery court rejected appellant Director’s argument and ruled that appellant Director “erroneously concluded that it is not required to look behind the amount of the federal credit allowable.” Appellant Director’s first point of appeal is “the chancellor erroneously determined that appellant must look behind the amount of the federal credit allowable in determining the amount of the Arkansas estate tax due. Ark. Code Ann. § 26-59-106(a) (1987).” The majority opinion affirms the ruling of the chancery court and, in discussing the first point of appeal, states that the Director only argues that he is “not required” to look behind the Internal Revenue Service’s disallowance of the marital deduction, but “does not go so far as to say he is bound by the IRS decision but only that he may, if he so chooses, accept it.” The majority opinion’s quoted statement is obtuse. The reason that the Director argues that he is “not required” to look behind the Internal Revenue Service’s disallowance of the marital deduction obviously is that the chancellor ruled that “[t]he Department of Finance and Administration erroneously concluded that it is not required to look behind the amount of the federal credit allowable.” The words “not required” are the chancellor’s words. The Director straightforwardly appeals from that ruling and, in doing so, uses the chancellor’s words. It is unfair to state, as the majority opinion does, that in some way the Director contends that he is not “bound by the IRS decision but only that he may, if he so chooses, accept it.” The Director does not make such an argument. On the substantive merits of the case, the majority opinion disregards the language of the governing statute, which is as follows: A tax is imposed upon the transfer of real estate and personal property of every kind owned by every person who at the time of death was a resident of the State of Arkansas, the amount of which shall be a sum equal to the federal credit allowable under the federal estate tax laws. 26 U.S.C. § 2001 et seq., as in effect on January 1, 1983. Ark. Code Ann. § 26-59-106(a) (1987) (emphasis supplied). This statute plainly states that the amount of the state estate tax shall be the amount allowable as a “federal credit” “under the federal estate tax laws.” Id. This is the only statute that sets the amount of the state estate tax. It says nothing about “state credits” or “state determinations.” The plain wording of the statute, standing alone, should be enough for the majority to hold that appellant Director’s first point of appeal has merit, but even if the plain wording is not enough, when the policy underlying the plain wording is considered, the merit of appellant’s point ought to be admitted. As set out in cases cited below, the Internal Revenue Service has the staff and resources to examine the books of accounts and other financial records, to conduct the appraisals of real property, to conduct the difficult evaluations of personal property, such as closed corporations with exclusive purchase agreements, and to do all the other complex tasks necessary to determine the value of an estate. Under the statutory design, the State does not have to duplicate the expense of such a staff and does not have to maintain the same resources. The federal and state statutes are deliberately harmonized so that the state provision for the amount of state estate tax will match the amount of credit allowed for state taxes on a federal estate tax return. The Director is, in the plain words of the statute, authorized to utilize the “federal credit” allowable “under the federal estate tax laws” to determine this otherwise complex and difficult question. A significant number of other states have similar statutory provisions. See, e.g., Henley v. Boswell, 316 So. 2d 342 (Ala. 1975); State v. Merchant’s Nat’l Bank, 91 So. 2d 480 (Ala. 1956); Page v. Comptroller, 313 A.2d 691 (Md. 1974); In re Gallagher’s Will, 255 P.2d 317 (N.M. 1953); In re Ward’s Estate, 49 P.2d 485 (Wash. 1935). For a more complete discussion of the development of this and other similar statutes see Max Oliver Cog-burn, The Credit Allowable Against the Basic Federal Estate Tax for Death Taxes Paid to State Statutes Enacted to Take Advantage Thereof— Constitutional Difficulty and Some Suggested Solutions, 30 N.C. L. Rev. 123 (1952). The Arkansas statute is not unique. It, like those of other states, was deliberately drafted to blend with the federal statutes. The words of the statute should be given their plain and ordinary meaning. The majority opinion’s construction of the state statute destroys the symmetry of the federal and state statutes. Under the holdings of the majority opinion, the federal and state statutes become asymmetrical. Using the rationale of the majority opinion, neither the executor of an estate nor the Director will now be bound by the value assessed to an estate. As an example, assume the decedent owned Blackacre. The estate might claim, for state estate tax purposes, either a higher or lower value than did the Internal Revenue Service for Blackacre, and the Director might assess either a higher or lower value than did the Internal Revenue Service. If the Director assesses a higher value to Blackacre, the state estate tax would exceed the credit allowed under the federal estate tax, and thus the estate would be required to pay more taxes. If the Director assesses a lower value than did the Internal Revenue Service, the state estate tax would not be as great as the amount allowed by the Internal Revenue Service for the state estate tax credit, so the amount of the federal estate tax could be increased. This may well be the case at bar. Tax attorneys and the estates they represent will now have two separate estate tax proceedings rather than the present one. The whole estate tax procedure will be made unnecessarily complex, difficult and expensive. These complications could be avoided if the words of the governing statute were given their plain and ordinary meaning. The tax “shall be a sum equal to the federal credit allowable under the federal estate tax laws!' In response to the foregoing, the majority opinion offers two answers. First, it answers that “we do not equate resolution of legal questions pertaining to the construction of a will and its codicils to appraisals of property, examination of financial records or other matters regarding valuation of an estate.” This is a holding that the estate is not bound by Internal Revenue Service’s determination of a legal question, but is bound by a factual determination on such matters as “property, examination of financial records or other matters regarding valuation of an estate.” Yet, there is only one statute, and it provides that the amount of the state estate tax “shall be a sum equal to the federal credit allowable under the federal estate tax laws.” It is impossible to candidly read the statute to provide that matters of fact shall be determined by federal law, but matters of law shall be determined by state courts. And, again, the statement only complicates estate tax matters. Suppose that the Internal Revenue Service determines that a decedent made gifts in contemplation of death, and the gifts must be counted for federal estate tax purposes. Is this a matter of law that is now subject to review by state courts for state estate tax purposes, or is it a matter of fact that is to be determined by Internal Revenue Service? Second, the majority opinion answers that “a similar situation faced this court in McCastlain v. Berry, 240 Ark. 587, 401 S.W.2d 38 (1966),” but it “does not appear to have opened any floodgates for estate tax disputes.” The answer ignores the critical fact that the governing statute was neither cited, nor argued, nor at issue in McCastlain. But it is cited in this case, argued in this case, and is at issue in this case. The floodgates were not opened in McCastlain because the statute was not considered and was not given the interpretation the majority now gives it. The majority opinion will apply to all estate tax cases. There is only one state estate tax statute. Now, under the majority opinion, neither an estate nor the Director is now bound by a federal determination of the amount of “the federal credit allowable under the federal estate tax laws.” Even the appellee executor does not seriously challenge the appellant Director’s interpretation of the language of the statute. Appellee executor merely says “such an interpretation . . . distorts the plain meaning of Ark. Code Ann. § 26-59-106(a).” Appellee executor offers no further challenge to the meaning of the words used in the statute. He does not suggest a reason for not giving the words their usual and customary meaning. He does not suggest an alternate meaning. Rather, he gives a wholly different reason to uphold the trial court. He contends that a literal reading of the statute would result in an “unconstitutional delegation of legislative and judicial power to the federal government.” Appellee executor then cites cases holding that the general assembly cannot delegate its legislative authority. See, e.g., Cheney v. St. Louis Southwestern Ry. Co., 239 Ark. 870, 394 S.W.2d 731 (1965); Crowly v. Thornbrough, 226 Ark. 768, 294 S.W.2d 62 (1956). The governing statute provides that the amount of credit is to be determined under the federal estate tax laws “as in effect on January 1, 1983.” The statute was enacted after January 1, 1983. See Ark. Code Ann. § 26-59-106 publisher’s notes (1987). Consequently, the statute was based on federal law in existence at the time it was adopted and is not subject to future federal legislation. It appears that every jurisdiction would hold this provision does not constitute an unconstitutional delegation of legislative authority. See Annotation, Constitutionality, construction, and application of provisions of state tax law for conformity with federal income tax law or administrative and judicial interpretation, 166 A.L.R. 516 (1947) and supplement in 42 A.L.R.2d 797 (1955). The statute at issue in this case is not “a formula subject to prospective federal legislation or administrative rules,” as was the provision in Cheney v. St. Louis Southwestern Railway Co., 239 Ark. 870, 394 S.W.2d 731 (1965). The statute, when given its literal meaning, does not amount to an unconstitutional delegation of legislative authority. Even if Congress should change the federal laws, the state estate tax still would be determined under the federal estate tax law “as in effect on January 1, 1983.” In conclusion, this case does not involve a common law subject, and it does not involve this court’s determination of what the common law should be. Rather, this case involves taxation and the subject of taxation is governed entirely by statute. The governing statute provides that the state estate tax “shall be a sum equal to the federal credit allowable under the federal estate tax laws.” (Emphasis supplied.) The majority opinion affords no meaning to the clear wording of the statute that provides for the state estate tax, and it offers no explanation for its default in explaining the meaning of the statute. Therefore, I dissent. Newbern, J., joins in this dissent.