MARK TREMEL and BRUCE TREMEL, Minors, by CITIZENS FIRST NATIONAL BANK of Storm Lake, Iowa, Their Conservator, Petitioners-Appellants, vs. IOWA DEPARTMENT OF REVENUE, Respondent-Appellee.
Annotate this Case
Download PDF
IN THE COURT OF APPEALS OF IOWA
No. 9-592 / 08-1718
Filed October 7, 2009
MARK TREMEL and BRUCE TREMEL,
Minors, by CITIZENS FIRST NATIONAL
BANK of Storm Lake, Iowa, Their
Conservator,
Petitioners-Appellants,
vs.
IOWA DEPARTMENT OF REVENUE,
Respondent-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Harrison County, G.C. Abel, Judge.
Beneficiaries of a life insurance policy not included in the probate estate
appeal the district court’s ruling holding them responsible for the payment of the
Iowa estate tax. REVERSED.
Steven J. Roy, Denise M. Mendt, and Bridget C. Shapansky of
Nyemaster, Goode, West, Hansell & O’Brien, P.C., Des Moines, for appellants.
Thomas J. Miller, Attorney General, and James D. Miller, Assistant
Attorney General, for appellee.
Heard by Sackett, C.J., and Eisenhauer and Doyle, JJ.
2
EISENHAUER, J.
The Iowa Department of Revenue and the district court determined
designated beneficiaries of a life insurance policy not included in the probate
estate were responsible for the payment of the Iowa estate tax. We reverse.
I.
BACKGROUND FACTS and PROCEEDINGS.
The facts are stipulated and undisputed. Philip Tremel died intestate in
September 1998, leaving a surviving spouse, Lynne, and two minor children,
Mark and Bruce.
Lynne was appointed administrator of Philip’s estate and
Citizens First National Bank of Storm Lake was appointed conservator for the
boys. Lynne disclaimed her interest in the estate and Mark and Bruce became
the sole beneficiaries of the estate. At the time of his death Philip owned a life
insurance policy on his own life.
Lynne filed a separate disclaimer as a
beneficiary under the policy and Mark and Bruce, as named contingent
beneficiaries, became entitled to $516,130.15 in life insurance proceeds.
The estate’s filings showed $98,687.92 due for federal estate tax, no
inheritance tax due, and $31,150.79 due for Iowa estate tax. After the payment
of administrative expenses, the estate had no assets to pay the federal and Iowa
estate taxes. The Iowa estate tax is equal to the federal credit for state death
taxes. The estate was insolvent upon its closing. Mark and Bruce received no
property from the estate.
On May 6, 2004, the Iowa Department of Revenue (IDOR) assessed the
Iowa estate tax against Mark and Bruce and attempted to collect the tax through
a levy on the insurance funds Citizens Bank was holding as conservator.
3
Citizen’s Bank entered into an agreement with the IDOR reserving the right to
request a refund and, after it received court approval to honor the levy, Citizen’s
Bank paid $50,153.05 to the IDOR for Iowa estate tax, interest and penalties.
The next month, in June 2005, Citizen’s Bank filed timely claims for a refund and
the IDOR has no objection to the manner in which the refund claims were made.
The IDOR denied the refund claims and Mark and Bruce sought administrative
relief.
The only property Mark and Bruce received was the life insurance
proceeds. The parties agree these proceeds are not included in or taxable to the
estate for inheritance tax purposes. Therefore, the life insurance proceeds are
outside of the scope of the provisions of Iowa Code chapter 450, inheritance tax.
See In re Estate of Brown, 205 N.W.2d 925, 926 (Iowa 1973) (proceeds of life
insurance payable to a named beneficiary are exempt from Iowa inheritance tax).
The parties also agree the insurance proceeds were included in the taxable
estate for federal estate tax and Iowa estate tax purposes, but were not part of
the probate estate or assets.
In August 2006, the administrative law judge (ALJ) ruled that because the
insurance proceeds were not part of the estate for inheritance tax purposes, the
Iowa Code did not authorize the IDOR to collect the estate tax from Mark and
Bruce. Subsequently, the ALJ found the IDOR’s position was not substantially
justified and awarded attorney’s fees and costs to Mark and Bruce. The IDOR
appealed the decision to its director.
The IDOR director reversed the ALJ’s
decision. The director ruled the IDOR was authorized to collect the estate tax
4
from the insurance proceeds and reversed the award of attorney’s fees and
litigation costs. The district court affirmed the director’s decision and this appeal
followed.
II.
SCOPE OF REVIEW.
In this appeal from an administrative agency, our review is for correction of
errors at law. Camacho v. Iowa Dep’t of Revenue, 666 N.W.2d 537, 540 (Iowa
2003).
III.
TAXATION.
The resolution of this case involves the interplay of the inheritance tax
provisions in Iowa Code chapter 450 and the estate tax provisions in Iowa Code
chapter 451 (1997). Mark and Bruce argue the IDOR has no statutory authority
to assess and collect the estate tax due from the life insurance proceeds. We
strictly construe taxing statutes against the taxing body and liberally in favor of
the taxpayer. Sorg v. Iowa Dep’t of Revenue, 269 N.W.2d 129, 132 (Iowa1978).
“It must appear from the language of the statute the tax assessed was clearly
intended.” Id. For the IDOR’s assessment to be upheld there must be a statute
creating a lien on property possessed by Mark or Bruce or a statue must impose
the requirement to pay the tax on Mark or Bruce. We agree with appellants that
there is neither.
A.
Personal Representative Obligations.
The filing of an estate tax return is addressed in Iowa Code section 451.5,
which provides, “[t]he personal representative of a decedent whose estate may
be subject to the [estate] tax . . . shall file . . . the estate tax return.” The payment
5
of Iowa estate taxes is addressed in Iowa Code section 451.6, which provides,
“[t]he [estate] tax imposed by this chapter shall be paid by the personal
representative.”1
When, as here, the decedent dies intestate, the term “personal
representative” means the administrator of the estate.
See Iowa Code §
451.1(8). Lynne, as administrator, is obligated to file the estate tax return and
pay the estate tax, but has no personal liability for the taxes. See In re Meinert’s
Estate, 204 Iowa 355, 358, 213 N.W. 938, 939 (Iowa 1927) (“The tax is not upon
the [administrator], or upon his property or upon his right. The tax is not his. His
is the duty of deducting or collecting. If he is unable to collect he is not personally
liable.”). Clearly Iowa Code sections 451.5 and .6 contain no language obligating
Mark or Bruce to either file the estate tax return or pay the estate taxes. Rather,
the statute only imposes those duties upon Lynne as the personal representative.
It is undisputed the insurance proceeds are a part of the gross estate for
federal and Iowa estate tax purposes. It is also undisputed the proceeds were
not part of the probate estate. It is Iowa law that must provide for the payment of
Iowa estate tax. Section 451.6 contains no language authorizing the collection of
Iowa estate tax from non-probate assets. “[W]e are bound by what the legislature
said, not by what it should or might have said.”
Ranniger v. Iowa Dep’t of
Revenue, 746 N.W.2d 267, 270 (Iowa 2008). Under the unambiguous language
1
Neither section extends the filing or payment obligation to anyone other than the
personal representative. Iowa Code §§ 451.5, .6. Because Iowa Admin. Code r. 70187.3(4) is inconsistent with these statutes, it exceeds the department’s authority. See
Sorg, 269 N.W.2d at 131.
6
of section 451.6, Mark and Bruce are not liable for the estate tax because the
statute imposes that liability only on the personal representative.
B.
Collection of Estate Tax.
Chapter 451 contains no section specifying from which assets the Iowa
estate tax may be collected or made subject to a lien.
Instead, the Iowa
legislature coupled the collection of Iowa’s estate tax with the collection
provisions of Iowa’s inheritance tax. The controlling estate tax provision in effect
at the date of Phillip’s 1998 death, section 451.12 (1997), provides:
All the provisions of chapter 450 [inheritance tax] with respect to the
lien provisions of section 450.7, and the determination, imposition,
payment, and collection of the tax imposed under that chapter
[inheritance tax] . . . are applicable to this chapter [estate tax],
except as they are in conflict with this chapter.
Therefore, we must look to section 450.7 for the applicable lien provisions.
Shortly before Philip’s death in 1998, the legislature amended the section 450.7
inheritance tax lien provisions, effective July 1, 1997, and added parents and
children to the lien exclusions. The amended section states:
Section 450.7, subsection 1, unnumbered paragraph 1,
Code 1997, is amended to read as follows:
Except for the share of the estate passing to the surviving
spouse, and parents . . . children . . . and other lineal descendants,
the tax [inheritance] is a charge against and a lien upon the estate
subject to tax under this chapter, and all property of the estate or
owned by the decedent from the death of the decedent until
paid . . . .
1997 Iowa Acts ch. 1, § 1 (new language underlined).
Further proof of the applicability of the section 450.7 lien exclusions at the
time of Philip’s death is found by the legislature’s subsequent action amending
section 451.12, the section coupling the collection of the estate tax with the
7
collection of the inheritance tax. As of July 1, 1999, section 451.12 contained
additional language making the exclusions in the inheritance tax lien provisions
inapplicable to the estate tax. For clarity, we again quote the entire section:
All the provisions of chapter 450 [inheritance tax] with respect to the
lien provisions of section 450.7, and the determination, imposition,
payment, and collection of the tax imposed under that chapter
[inheritance tax] . . . are applicable to this chapter [estate tax],
except as they are in conflict with this chapter. The exceptions to
the lien provisions found in section 450.7 do not apply to this
chapter [estate tax].
1999 Iowa Acts ch. 151, §§ 49, 89(8) (new language underlined). Therefore, at
the time of Philip’s death, the exceptions to the lien provisions in section 450.7
applied. Based upon the plain meaning of pre-amendment section 450.12 and
post-amendment 450.7, property passing to children of the decedent is exempt
from a lien for both inheritance tax and estate tax purposes. This includes the life
insurance proceeds at issue here.
Additionally, the collection provisions of chapter 450 provide that
insurance proceeds payable to designated beneficiaries are exempt from
collection for estate tax due. Liability for inheritance tax is established in section
450.5:
Any person becoming beneficially entitled to any property or
interest in property by any method of transfer as specified in this
chapter [inheritance tax], and all personal representatives . . . of
estates or transfers taxable under this chapter [inheritance tax], are
respectively liable for all taxes to be paid by them respectively.
The language of section 450.5, made applicable to estate tax by section
451.12, shows Iowa’s inheritance tax is collectable from two groups of assets:
(1) the probate assets under the control of the personal representative; and (2)
8
the non-probate assets subject to the inheritance tax, i.e., “transfers taxable
under this chapter [inheritance tax].” It is undisputed that life insurance proceeds
payable to named beneficiaries are a non-probate asset and are not subject to
inheritance tax. See Brown, 205 N.W.2d at 926. The only property Mark and
Bruce received was the life insurance proceeds where they were named
beneficiaries. Under Iowa law, the insurance proceeds are outside the scope of
the inheritance tax provisions in chapter 450. Mark and Bruce have no liability
under section 450.5, because they did not receive any property subject to
chapter 450.
By operation of section 451.12, these are the same two groups of assets
the IDOR may look to for collection of the estate tax. The IDOR admits life
insurance proceeds are non-probate assets not subject to inheritance tax. The
IDOR cannot ignore the plain language of section 451.12, which controls and
limits the assessment and collection of the estate tax.
This result is not changed by the language found in inheritance tax section
450.55, entitled, “Means to collect tax,” which provides:
The provisions . . . pertaining to jeopardy assessments and distress
warrants, apply to the unpaid tax . . . imposed under this chapter.
In addition, the director of revenue and finance may bring . . . suit
for the collection of the tax . . . against the personal representative
or against the person entitled to property subject to the tax . . . .
Iowa Code § 450.55 (emphasis added).
In context, the first sentence’s reference to “unpaid tax . . . imposed under
this chapter” shows the second sentence’s reference to “the tax” is the tax
imposed under this chapter, i.e., the inheritance tax.
This section does not
9
expand the class of persons liable for inheritance tax. Rather, as discussed
above, liability for inheritance tax is found in section 450.5, entitled “Liability for
tax.” Therefore, the clear meaning of the section 450.55 phrase “the personal
representative or against the person entitled to property subject to the tax” is
those persons who are liable for the inheritance tax as detailed in section 450.5.
See Carlon v. Bd. of Review, 572 N.W.2d 146, 154 (Iowa 1997) (“It must appear
from the language of the statute that the tax assessed against the taxpayer was
clearly intended.”).
We conclude there is no statutory language in chapter 451 clearly
imposing liability for estate tax on named beneficiaries of life insurance proceeds
not part of the probate estate. Therefore, Mark and Bruce are entitled to a refund
of the erroneously collected estate tax, penalty, and interest.
IV.
LITIGATION COSTS.
Mark and Bruce, as prevailing taxpayers, may be entitled to reasonable
litigation costs incurred subsequent to the IDOR’s denial of a refund claim. See
Iowa Code §§ 421.60(4)(a), .60(4)(a)(4).
A prevailing taxpayer is one who
establishes the IDOR’s position was not substantially justified.
Id. § 421.60
(4)(c). We agree with and adopt the ALJ’s analysis in support of an award of
litigation costs to Mark and Bruce. The ALJ ruled:
The major problem is the tie to Chapter 450 for the lien and
collection process in 451.12. As soon as the Department got
referenced back into the inheritance laws, it should have made an
analysis as to the nature of the property that it was trying to tax and
seize.
Life insurance proceeds made payable to a specific
beneficiary—family members—are special property. Since 1973,
the case of In re Estate of Brown, 205 N.W.2d 925 (Iowa 1973) . . .
10
made clear that it was not probate property. The court held that . . .
the proceeds were exempt from creditors and was passed separate
from probate property. In [the IDOR administrative rules], the
Department makes it clear that the property is not subject to
inheritance tax. The Department wants to close the curtain on this
provision. The Department wants to just stay in Chapter 451 and
use the federal statutes to say the property is subject to the federal
tax, got the federal credit, and, therefore, is subject to a tax lien.
The Department put on its blinders and wanted to look no farther.
Tax statutes did not exist in a vacuum. . . . The probate laws
of Iowa must be reconciled to the tax laws. The Department
completely failed to analyze the nature of the property in relation to
existing Iowa law. . . . [L]aw for the exemption of property subject
to execution is still in existence today. The various aspects of the
probate code must be considered. The Department totally failed to
make this analysis.
As a result, the Department was not
substantially justified in its position.
Therefore, Mark and Bruce, as prevailing taxpayers, are entitled to
reasonable litigation costs in the amount of $14,336.
REVERSED.
Doyle, J., concurs; Sackett, C.J., dissents.
11
SACKETT, C.J. (dissenting)
I respectfully dissent. I would affirm the district court and the director. I
would not award litigation costs. The director and the district court took the
state’s position. The decision of a three-judge panel of this court drew a dissent.
The law is far from clear on this issue. The state’s position on this issue was
clearly and substantially justified.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
