IN THE COURT OF APPEALS OF IOWA No. 16-1974 Filed September 13, 2017

BEVERLY GARDINER NANCE, Petitioner-Appellant, CLERK OF SUPREME COURT

vs. IOWA DEPARTMENT OF REVENUE, Defendant-Appellee. ________________________________________________________________

Appeal from the Iowa District Court for Polk County, Michael D. Huppert, Judge.

Beverly Gardiner Nance appeals from an adverse judgment on judicial SEP 13, 2017

review of the department of revenue’s denial of her request for a partial refund on an inheritance tax payment. REVERSED AND REMANDED.

ELECTRONICALLY FILED

David M. Repp and F. Richard Lyford of Dickinson, Mackaman, Tyler & Hagen, P.C., Des Moines, for appellant.

Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special Assistant Attorney General, and Hristo Chaprazov, Assistant Attorney General, for appellee.

Considered by Danilson, C.J., and Potterfield and Bower, JJ.

Beverly Gardiner Nance unsuccessfully sought judicial review from the Iowa Department of Revenue’s (the Department) denial of her request for a partial refund of an inheritance tax payment. On appeal, she contends the distribution of a decedent’s assets pursuant to a Family Settlement Agreement (FSA) should govern the imposition of inheritance taxes if the FSA was made in good faith and not for the purpose of avoiding taxes. Because we conclude the Department and the district court misapplied the law, we reverse and remand to the district court for remand to the Department for further proceedings consistent with this opinion.

I. Scope and Standard of Review.

Our review of this appeal from a judicial-review decision is governed by Iowa Code section 17A.19(10) (2016). Brakke v. Iowa Dep’t of Nat. Res., 897 N.W.2d 522, 530 (Iowa 2017). We, like the district court, function in an appellate capacity to correct any errors of law on the part of the agency. See id. If we reach the same conclusions as the district court, we affirm; otherwise, we reverse. Iowa Ag Constr. Co. v. Iowa State Bd. of Tax Review, 723 N.W.2d 167, 172 (Iowa 2006). Our review here is limited to deciding whether the Department’s application of the relevant law to the facts of this contested case was irrational, illogical, or wholly unjustifiable. See Iowa Code § 17A.19(10)(m); Iowa Ag. Constr., 723 N.W.2d at 174.

II. Background Facts.

In 2003, Lester Gardiner Sr. and Mildred Gardiner executed a transfer-on- death (TOD) agreement for their brokerage accounts. They named their son,

Mildred died in 2004, Lester Jr. died in 2007, and Lester Sr. died in 2009.

Lester Sr.’s three grandchildren (Beverly’s stepchildren) were the beneficiaries and executors of Lester Sr.’s estate.

1. Estate versus Beverly.

In May 2009, the Estate of Lester Sr. (by the grandchildren) filed an action against Beverly to challenge the validity of the TOD agreement, claiming Lester Sr. had not been competent to execute it.1 During the pendency of that action, the estate filed an inheritance tax return and remitted $18,988 to the Department based on the TOD designation for the assets of the brokerage accounts. This Dallas County lawsuit was resolved as a result of mediation which resulted in the execution of a FSA in July 2010, providing the assets of the brokerage accounts would be divided equally between the estate and Beverly.

2. Estate versus Department of Revenue.

a. Agency action. The estate filed an amended inheritance tax return with the Department and requested a $10,034 refund to reflect the revised distribution of the account assets. The estate reasoned the account assets that ultimately passed to the grandchildren by virtue of the FSA were exempt from the

Iowa Code section 633D.11 (2017) (transferred from section 633.810 by the Code Editor for Code Supp. 2005) provides: “A transfer on death resulting from a registration in beneficiary form shall be effective by reason of the contract regarding the registration between the owner and the registering entity under the provisions of this chapter, and is not testamentary.”

Beverly appealed to the director of the Department. The director adopted the ALJ’s findings and conclusions as “expanded and modified.” The director rejected the argument that the issue was controlled by In re Estate of Van Duzer, 369 N.W.2d 407 (Iowa 1985), writing: Van Duzer hinged on the fact that the claimant in that case— decedent’s surviving spouse—was entitled to a distributive share [from the decedent’s estate] by reason of her election to take against the will. See 369 N.W.2d at 410. In the context of that “In computing the tax on the net estate, the entire amount of property, interest in property, and income passing to . . . lineal descendants . . . are exempt from tax.” See Iowa Code § 450.9 (2009).

The Department sent a letter to the estate dated November 3, 2010, stating in part: “The department of revenue does not accept family settlement agreements to change the calculation of the tax. Refer to the department’s administrative rules [Iowa Administrative Code] rule 86.14(2).”

The record is not clear how Beverly came to present the estate’s protest. In her appellate brief to this court, Beverly indicates the estate has since closed and that it transferred to her any claim it might have to a refund. The State does not dispute this fact in its brief and so we accept this fact as undisputed.

Like Bliven, in this case, [Beverly] and the decedent’s beneficiaries [who] entered into the [FSA] could not elect to take a distributive share against the decedent’s will. Under Bliven, in the case at hand, the portion of the TOD that [Beverly] agreed to give to decedent’s beneficiaries under the [FSA] passed not from decedent’s estate to the beneficiaries but from [Beverly] to the beneficiaries. Therefore, as the [ALJ] properly held, the fact that [Beverly] and decedent’s beneficiaries entered into a [FSA] has no bearing on whether a taxable event occurred when the TOD passed to [Beverly].[5] b. Judicial review sought in district court. Beverly sought judicial review in the district court. The district court noted Beverly did not challenge the Department’s factual findings on judicial review. The court determined the Department was correct in concluding Bliven controlled the present case. It also found: As noted by both the ALJ and the director, the only proof [of Lester Sr.’s incompetency] offered by the petitioner was the opinions of Dr. Bender, someone who never examined or even observed Lester Sr. at any point in time prior to his death. The only basis for his opinions was the aforementioned status examinations, which again were not administered by Dr. Bender.

As the trier of fact in this contested case proceeding, it was the director’s prerogative to weigh the evidence and make the ultimate decision on whether it met the aforementioned burden; that conclusion was n[ot] irrational, illogical, or wholly unjustifiable.

In addition, the director concluded Beverly had failed to meet her burden of proof to establish “the decedent was incompetent when he executed the TOD.” The Department’s finding, or authority to determine competency, are not at issue on appeal.

III. Discussion.

On appeal, Beverly contends this court should follow a rule enunciated in federal courts—a FSA can control inheritance tax consequences when: (1) the underlying claim was based on enforceable legal rights of the claimant, (2) the parties to the agreement were truly adversarial, (3) the agreement was entered into in good faith as the result of arm’s-length negotiations, and (4) no evidence exists suggesting the agreement was entered into for postmortem tax planning purposes. See Estate of Hubert v. Comm’r, 101 T.C. 314, 319-21 (1993), aff’d, 63 F.3d 1083 (11th Cir. 1995); see also Treas. Reg. § 20.2056(e)-2(d)(2); Comm’r v. Estate of Bosch, 387 U.S. 456, 467 (1967); Estate of Brandon v. Comm’r, 828 F.2d 493 (8th Cir. 1987). But federal law differs from Iowa law with respect to inheritance tax and, consequently, the federal authorities interpreting the federal law are not helpful.6 At first blush, the holding in Bliven appears to control. But upon a close review of the facts, it is apparent the facts in the instant case are much closer to the facts in Van Duzer. Thus, we are unable to agree with the district court and the law applied by the Department, and we conclude the decision reached by the Department was irrational, illogical, and wholly unjustifiable.

Both this case and Van Duzer, involved the estate attempting to collect assets believed to be property of the estate. In Van Duzer, the court stated,

See, e.g., In re Will of Miller, 438 N.W.2d 228, 231 (Iowa Ct. App. 1989) (“Iowa inheritance tax, unlike federal estate tax, is not a tax on the estate of the decedent but is a tax on each right of succession and is chargeable to the property each beneficiary receives.”).

Here, Beverly was not a person “named in decedent’s will or otherwise entitled to claim against the estate.” But Beverly was not the “claimant.” Rather the estate on behalf of, and as agent for, the devisees was the claimant. The Department also contends, “The lynchpin of the Estate of Van Duzer holding is the fact that the claimant in that case—the decedent’s surviving spouse was ‘entitled to a distributive share [from the decedent’s estate] by reason of her election to take against the will.’” But the significant fact in Van Duzer was not that the claimant was a surviving spouse entitled to take against the will but the fact that the surviving spouse was entitled to a distributive share of the estate.

Clearly, the estate was representing the devisees in this action, and the devisees were entitled to distributive share of the estate similar to the surviving spouse in Van Duzer. See Iowa Code § 633.3(14) (defining a distributee as “a person entitled to any property of the decedent under the decedent’s will or under the statutes of intestate succession”).

As it turned out, the estate’s claim had sufficient merit to cause the parties to enter into an agreement requiring Beverly to forego one-half of the value of the brokerage accounts—thereby increasing the devisees’ shares—much akin to how the surviving spouse’s share was increased in Van Duzer.

Similar to the settlement agreement in Van Duzer, the settlement agreement here could be viewed as a tripartite agreement. See 369 N.W.2d at 410. The agreement provided that the funds in the Edward D. Jones accounts were to be liquidated to cash. Secondly, one-half of the funds in the accounts were to be distributed to the estate; and thirdly, the estate would then pay the sum it received to the devisees. This agreement and method of distribution was pursuant to a court order approving the family settlement filed September 3, 2010.

The new Iowa Code chapter 633D, pertaining to TOD accounts “do[es] not limit the rights of creditors or security owners against beneficiaries and other transferees under other laws of this state.” Iowa Code § 633D.11(2). Further, the provisions of chapter 633D are supplemented by principles of law and equity.

The fact that contract principles would apply was observed In re Estate of Myers, 825 N.W.2d 1, 6-7 (Iowa 2012), [Pay-on-death] POD accounts, such as the checking and certificate of deposit accounts here, and annuities are nonprobate assets. 1 Sheldon F. Kurtz, Kurtz on Iowa Estates: Intestacy, Wills, and Estate Administration § 11.1, at 451 (3d ed. 1995).

Nonprobate assets are interests in property that pass outside of the decedent’s probate estate to a designated beneficiary upon the decedent’s death. Id. Although these assets are the personal

One of the basic principles of contract law is if a party to a contract does not have sufficient capability to understand the contract, the contract is void. See Allen v. Berryhill, 27 Iowa 534, 537 (1869). Further, “[a] higher degree of mental competence is required for the transaction of ordinary business and the making of contracts than is necessary for testamentary disposition of property.” In re Estate of Fair, 159 N.W.2d 417, 420 (Iowa 1968).

We agree the Department may not always be bound to family agreements and the Department has an obligation to collect inheritance taxes on schemes to avoid paying the taxes. But here, if the estate had presented overwhelming evidence that Lester D. Gardiner Sr. was incompetent, perhaps the Department would not have refused the refund. Moreover, instead of an issue of competency

Here, there is no evidence of a scheme to avoid taxes and, by all indications, the settlement agreement was entered into by the parties in good faith. We decline to weigh the judgment of Beverly in entering into the settlement agreement by attempting to weigh the evidence of incompetency. Other factors exist that cause parties to reach a compromise beyond the likelihood of success at trial.

We are unable to agree with the district court and conclude the Department’s decision was irrational, illogical, and wholly unjustifiable. We reverse and remand for further proceedings consistent with this opinion.

REVERSED AND REMANDED.

Electronically signed on 2017-09-13 09:26:25