Court Opinion

ID: 9482121
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:40:58.24444+00
Date Added: 2024-06-11T17:48:46.684848
License: Public Domain

OPINION
K.K. HALL, Circuit Judge:
Barbara J. Reno, executrix of the estate of her deceased husband, Dr. William L. Reno, appeals an order of the Tax Court upholding a notice of deficiency issued by appellee, the Commissioner of Internal Revenue. We find that Dr. Reno’s purported attempt to shift estate taxes from probate' to nonprobate assets is impermissible under Virginia probate, property, and tax apportionment law. Accordingly, we reverse.
I.
A.
The facts are exhaustively recounted in the opinions of the panel, Estate of Reno v. Commissioner of Internal Revenue, 916 F.2d 955 (4th Cir.1991), and will not be repeated here, except where lucidity demands.
No matter how one frames the issue, the law of Virginia supplies the answer. If the issue is how to apportion estate taxes, Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106 (1942), instructs us to look to state law. If the issue is whether *734the entireties property passed to Barbara Reno outright, thus qualifying it for the marital deduction, we must decide whether Dr. Reno’s will could restrict the property’s passing outright, and, if so, whether it did.1 Again the questions invoke state law.
B.
The fact at the core of this case is Reno’s testamentary directive to shield the Kentucky realty from estate tax. The Commissioner hallows this command and pronounces that it must be obeyed, even at the expense of the entireties property. Though we think Reno’s actual intent is a debatable question, see 916 F.2d at 968 n. 1 (Hall, J., dissenting), we will assume that Reno intended the entireties property to bear some of the estate tax generated by his probate assets. The Commissioner then cites Va.Code § 64.1-165, and concludes that Reno was lawfully able to achieve this burden shifting. We disagree.
The inviolable character of property held by the entireties under Virginia law was described in the dissent to the panel majority opinion:
A husband may not obligate entireties property or subject it to his debts without the consent of his wife. Consequently, a purported sale or mortgage of the property to which the wife does not consent is ineffective. Furthermore, and most importantly for this case, upon the death of one spouse, fee title simply remains in the other by operation of law. No will is necessary; no reference to the law of intestate succession is necessary. A testator is absolutely powerless to alienate the property from his spouse. Any provisions in the will purporting to do so are necessarily inoperative. “This is so ... because in the first instance [the survivor] took the entirety.”
916 F.2d at 969 (citations omitted).
The crushing impact of the Commissioner’s construction of § 64.1-165 on these hoary principles of property law, where a construction is available that is fully harmonious with them, casts much doubt on the validity of the Commissioner’s position. The aforesaid dissent described the irreconcilable conflict between Virginia laws created by the Commissioner’s argument:
Though a testator is unequivocally forbidden to alienate entireties property by his will, the [Commissionerj’s construction of § 64.1-165 would permit a testator to do the functional equivalent by simply designating his entireties property as the fund from which all estate taxes are to be paid. A surviving spouse who must sell her property to pay estate taxes generated by property devised to others will take no solace in her husband’s inability to directly alienate the property.
916 F.2d at 969-970 (footnote omitted).
We think it quite doubtful that the Virginia legislature intended to implicitly repeal centuries-old property and probate law by enacting its tax apportionment statute. Moreover, the language and historical context of the statute, which we develop below, support a construction of the statute that disturbs preexisting law as little as necessary to effect the statute’s purposes.
C.
An administrator or executor in Virginia only controls assets passing through the probate estate, and not nonprobate assets like property held by the entireties. Johnson v. McCarty, 202 Va. 49, 115 S.E.2d 915 (1960); Vasilion v. Vasilion, 192 Va. 735, 66 S.E.2d 599 (1951). The federal estate tax is imposed upon the executor. I.R.C. § 2002.2 At common law, without statutory authority to seek contribution from tax-generating nonprobate assets, a Virginia executor had to pay all federal estate taxes from the probate estate, even to the *735point of exhausting it.3 This situation persisted in Virginia until 1946, when the Virginia apportionment statute was enacted. Va.Code § 64.1-160 et seq.
The 1946 act created a new power in the executor to collect estate taxes from non-probate assets, in “the proportion that the value of the [nonprobate asset] bears to the [gross estate less exemptions, deductions and exclusions].” Va.Code § 64.1-162. The legislature also preserved the testator’s preexisting right to create his own scheme among his probate assets. We supply emphasis, because the legislature’s words are telling:
[N]one of [the foregoing tax apportionment] provisions shall in any way impair the right or power of any person by will ... to make direction from the payment of such estate or inheritance taxes and to designate the fund or funds or property out of which such payment shall be made; and in every such case the provisions of the will... shall be given effect to the same extent as if this article had not been enacted.
Va.Code § 64.1-165.
If the Virginia legislature intended to create a new testamentary power, it chose an exceedingly odd verb to express its design. “Impair” means “to make worse: diminish in quantity, value, excellence, or strength: do harm to: damage, lessen....” Webster’s Third New International Dictionary (1976). The legislature was plainly preserving a power, not engendering one.
Its choice of a verb is not the only clue to the legislature’s goals, however. It further provided that any attempt by a testator to apportion estate taxes immediately short-circuits the apportionment statute— the testator’s will “shall be given effect to the same extent as if this article had not been enacted.” Of course, if the article had not been enacted, the executor could not collect any estate taxes from nonpro-bate assets; therefore, a will disturbing the apportionment scheme forecloses the executor’s power under that scheme to compel contribution from recipients of nonprobate assets. Unambiguous Virginia precedent so holds.
By charging his [probate] real estate with any estate and inheritance taxes and by directing the payment thereof out of the fund created by the sale of his property, the testator fixed the liability for all such taxes upon his probate estate.
Simeone v. Smith, 204 Va. 860, 134 S.E.2d 281, 284 (1964).
In short, far from being a tacit revolution in probate and property law, § 64.1-165 is just a savings clause — if you don’t like the new scheme, you can still use the old. The new scheme provides the executor limited power to collect a proportional share of estate taxes from nonprobate assets; the old provides no collection power at all. Virginia testators lacked the power to assign estate tax liability to nonprobate assets before 1946; they did not acquire such a power from § 64.1-165.
Dr. Reno could have remained silent, and the entireties property would have borne its proportionate share of estate tax, which is zero. Instead, he disturbed the apportionment scheme and thereby affixed liability for all estate taxes on his probate estate; the entireties property’s share of tax is still zero.
II.
The panel majority focused on the marital deduction itself. It argued that Dr. Reno could have made the entireties property “qualify” for the marital deduction,4 *736but he failed to do so. 916 F.2d at 960-62. This focus obscures the issues. So, for the sake of illustration, we will abolish the marital deduction.
In this imaginary but plausible5 world, the entireties property would still be a non-probate asset, and Reno would still lack the testamentary power to burden it with taxes generated by other assets in his estate. If his will was silent as to. apportionment, the entireties property would pay its proportionate share of estate tax. If he exercised the testamentary power preserved to him by § 64.1-165, his executor would be forced to collect tax only from the probate estate; the entireties property could be assessed tax only if there remained a deficiency, and then only by the Commissioner. See note 3 supra. Once again, neither case results in the entireties property bearing a greater share of tax than it generated itself.
In the real world, many nonprobate assets — gifts includable in the gross estate, insurance benefits, survivorship bank accounts — pass to persons other than a surviving spouse. All are beyond the reach of the testator as a matter of state law; none depends on the existence of a federal deduction for its shelter from the testator’s grasp.
Dr. Reno lacked the testamentary power to impose estate taxes generated by the Kentucky realty on the Virginia entireties property, even if he so desired. Therefore, the entireties property passed to appellant without limitation, qualifying it in full for the marital deduction, and removing it in full from the taxable estate. The decision of the Tax Court is reversed.
REVERSED.

. The second formulation is probably the better statement of the issue. The marital deduction reduces the "gross estate” to the “taxable estate.” I.R.C.
§ 2056(a). Estate taxes are then assessed based on the taxable estate, and the bill is sent to the executor, I.R.C. § 2002, where it is then apportioned according to state law.

. "Executor” as used in § 2002 includes administrators of intestate estates. I.R.C. § 2203.

. If the taxes tendered by the executor are insufficient, and he lacks power to collect more, the Commissioner can assert transferee liability against recipients of taxable nonprobate assets. I.R.C. § 6901.

. The marital deduction is generally available only for interests passing without limitation to the surviving spouse. I.R.C. § 2056(b)(1). Where property passes as a probate asset, restrictions in the decedent’s will (e.g. bequest of a life estate rather than fee) may cause the property to lose its eligibility for the marital deduction. Baylor v. National Bank of Commerce, 194 Va. 1, 72 S.E.2d 282 (1952); Wisely v. United States, 893 F.2d 660 (4th Cir.1990). However, under Virginia law, absolute title to property held by the entireties remains in the surviving spouse, notwithstanding the futile testamentary *736attempts of the deceased spouse to alienate it. Vasilion, 66 S.E.2d at 602. By that fact alone, it qualifies for the federal marital deduction.

. Indeed, a miniature version of this scenario was in effect when Reno died. At that time, the marital deduction was limited to the greater of $250,000 or fifty percent of the adjusted gross estate. However, because the value of the en-tireties property does not exceed fifty percent of Reno's adjusted gross estate, this limitation does not apply here.