Recent Developments in Indiana Taxation - I.U. School of Law ...

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1170 INDIANA LAW REVIEW [Vol. 40:1103 768 under a de novo standard, the Tax Court agreed with the DOR’s argument. It found that the language of the statute and the commentary to it clearly covered any differences between parties with an interest in an estate, whether or not the 769 difference resulted in litigation. The statute provides that family settlement agreements like this one are binding on all parties but may not “in any way 770 impair the rights of creditors or of taxing authorities.” A family settlement agreement is a transfer of property rights between parties other than the decedent 771 that takes place after a death. Inheritance tax, however, is based on the 772 transfers that take place at death from the decedent to the beneficiaries. A family settlement agreement cannot change the way that inheritance tax is 773 calculated. The Tax Court reversed the probate court’s judgment that the statute did not apply and remanded the case for recalculation of the inheritance tax due. 774 775 3. Estate of Dunnick v. Indiana Department of State Revenue. —The estate initiated an action on April 1, 2005, in response to a probate court order denying 776 a marital deduction for all assets transferred to the decedent’s wife. At his 777 death, the decedent was married, with three sons from a prior marriage. The wife was not a beneficiary of the decedent’s will or of an inter vivos trust that he 778 had created before their marriage. She filed a petition for her statutory 779 allowance and an election to take against the will with the probate court. The estate objected to the petitions, claiming that a prenuptial agreement barred the 780 wife’s claims against the estate. The estate reached a settlement with the wife 781 who then withdrew her election claims. Under the terms of the settlement, the wife received more than twice as much as she would have received if she had 782 pursued her statutory allowance and election to take against the will. The estate filed an amended inheritance tax return that treated the entire amount 783 transferred to the wife as non-taxable because of the marital deduction. The DOR filed a Petition for Rehearing, Reappraisement and Redetermination of Inheritance and Transfer Tax, arguing that any settlement could not impair its 768. Id. 769. Id. at 1085-86. 770. Id. at 1085 (quoting IND. CODE § 29-1-9-1 (2004)). 771. Id. 772. Id. at 1085-86. 773. Id. at 1086. 774. Id. 775. 855 N.E.2d 1087 (Ind. Tax Ct. 2006). 776. Id. at 1090. 777. Id. at 1088. 778. Id. 779. Id. 780. Id. 781. Id. 782. Id. 783. Id.
2007] TAX LAW 1171 784 taxing ability pursuant to I.C. § 29-1-9-1. Therefore, the estate should have calculated its inheritance tax by including only the value of the assets that the wife would have received under her election claim in the marital deduction. 785 786 The estate appealed the order of the probate court. The estate challenged the probate court’s jurisdiction to hear the DOR’s petition claiming that it was not timely filed and that it failed to state specific grounds for requesting a 787 rehearing. The DOR filed its petition on a Monday, two days after the 788 calculated deadline, which fell on a Saturday. However, Indiana Trial Rule 6(A) extends deadlines that would otherwise end on a day when the courts are 789 closed to the following business day. The DOR filed its petition on the first business day after the end of the deadline period and it was therefore timely 790 filed. The Tax Court also held that the petition was not required to state specifically that the application of I.C. § 29-1-9-1 was at issue because the petition did give the estate sufficient notice that it would have to explain how it 791 calculated its inheritance tax obligation. The estate also challenged the applicability of I.C. § 29-1-9-1 to this case, claiming that the statute did not reach settlement agreements involving inter vivos trusts, prenuptial agreements, and 792 elections. However, the Tax Court found that the wife was attempting to 793 establish her rights to the estate as an heir, as listed in I.C. § 29-1-9-1(c). Such 794 settlement agreements cannot reduce the taxing authority of the DOR. The estate argued, in the alternative, that the wife’s elections could have reached the trust assets, so the settlement agreement actually increased the amount of tax that the DOR could collect because it reduced the amount of assets that were 795 transferred to the wife. The Tax Court could not address the issue of whether or not her elections could have reached the trust assets because the estate did not 796 raise the issue with the probate court. However, the Tax Court did note that avoiding a reduction in inheritance taxes was only one purpose of I.C. § 797 29-1-9-1. To argue that the statute would allow settlement agreements to alter the imposition of inheritance taxes as long as the taxes were increased would be 798 unjust and unfair to the taxpayers. The statute must apply equally to all 784. Id. at 1090. 785. Id. 786. Id. 787. Id. at 1091. 788. Id. 789. Id. 790. Id. 791. Id. at 1092. 792. Id. at 1093. 793. Id. 794. Id. 795. Id. 796. Id. at 1094 n.10. 797. Id. at 1094. 798. Id.
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