The Indiana Department of State Revenue, Inheritance Tax Division (Department) appeals the Tippecanoe Circuit Court's (probate court) order determining the Estate of James M. Pickerill's (Estate) Indiana inheritance tax liability. The issue before this Court is whether the probаte court erred in determining that the Estate's inheritance tax lability was to be calculated according to the distribution set forth in a family settlement agreement as opposed to the decedent's will.
On December 6, 2008, James M. Picke-rill, Sr. (James) died testate. James was survived by his wife, Susan Pickerill (Susan), and three sons from a previous marriage, James M. Pickerill, Jr., (James, Jr.), Casey Pickerill (Casey) and Kipp A. Picke-rill (Kipp).
On January 20, 2000, prior to his marriage to Susan, James executed his Last Will and Testament (Will). In his Will, James provided for the payment of all debts, expenses regarding his last illness and funerаl, administration expenses of his estate, and all inheritance, estate and succession taxes. The Will also provided that all of James's personal belongings were to be divided amongst his three sons in substantially equal shares. James bequeathed all of his residuary estate to his sons equally, per stirpes. Susan was not named as a beneficiary to the Will.
In March of 2004, after James's Will was admitted to probate, James's three sons entered into a family settlement agreement (Agreement) with Susan. Under the terms of the Agreement, the parties agreed that James's three sons would rеceive his one-half (1/2) interest in real estate located in Wisconsin (to be divided into three equal shares). Susan would receive the marital residence and the contents thereof, two marital vehicles, and the contents of a checking account she held jointly with James. The residuary estate was distributed to Susan and the three sons in four equal shares. As part of the Agreement, Susan waived her statutory right to elect to take against the will and to file for a spousal allowance. 1 Likewise, . the three sons waived their rights to contest the will, claim statutory rights of inheritancе, or any other claims against the Estate (other than claims for expenses related to the administration of the Estate). Ultimately, the property transferred to Susan under the Agreement was valued at $735,293. James, Jr. and Casey's interests were each valued at $463,914, while Kipp's interest was valued at $527,707.
On September 3, 2004, the Estate filed an Amended Indiana Inheritance Tax Return (inheritance tax return) in which it treated the $785,293 transferred to Susan as non-taxable, pursuant to Indiana Code § 6-4.1-38-7(a)
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On January 31, 2005, the probate court accepted, as filed, the Estate's amended inheritance tax return and, therefore, determined that the Estate
On May 27, 2005, the Department filed a Petition For Rehearing, Reappraisement and Redetermination of Inheritance and Transfer Tax (Petition) with the probate court. In its Petition, the Department challenged the Estate's asset distribution and сalculation of inheritance tax based on the Agreement. In its supporting brief, the Department argued that pursuant to Indiana Code § 29-1-9-1, the distribution under the Will, as opposed to the Agreement, controlled the calculation of inheritance tax and the Estate, therefore, owеd an additional $25,148.40 in tax, plus interest. (See Appellant's App. at 82-39.)
The probate court held a hearing on the Petition on October 24, 2005; the Department's counsel, however, did not attend the hearing. Consequently, after hearing the Estate's position on the Petition, the probate cоurt instructed the Estate to file a proposed order finding in favor of the Estate. The Estate submitted the order, and the court issued the same, on October 26, 2005. On October 28, 2005, the Department filed an emergency motion to continue the previously held hearing, which the probate court subsequеntly denied. On November 29, 2005, the Department filed a motion to correct errors; the probate court denied that motion as well, on January 3, 2006.
On January 31, 2006, the Department filed an appeal with this Court. The Court heard the parties' oral arguments on September 11, 2006. Additional facts will be supplied as necessary.
STANDARD OF REVIEW
The Indiana Tax Court acts as a true appellate tribunal when it reviews a probate court's determination concerning the amount of Indiana inheritance tax due. Inp.CopE Axm. § 6-4.1-7-7 (West 2006); Dep't of State Revenue, Inheritance Tax Div. v. Estate of Phelps,
DISCUSSION
The issue on appeal is whether the probate court erred in calculating the аmount of inheritance tax the Estate owed. The Department maintains that the probate court should have determined the amount of tax due based on the transfers under the Will and not the Agreement, pursuant to Indiana Code § 29-1-9-1. The Estate, on the other hand, contends that Indiana Code § 29-1-9-1 dоes not apply in this case because a will contest was not filed or contemplated nor was any other claim or dispute filed with the probate court, as contemplated by the statute. (See Appel-lee's Br. at 5-6.) The Department is correct.
Indiana Code § 29-1-9-1 states:
The compromise of any contest or controversy as to:
(a) admission to probate of any instrument offered as the last will of any decedent,
(b) the construction, validity or effect of any such instrument,
(c) the rights or interests in the estate of the decedent of any person, whether claiming under a will or as heir,
(d) the rights or interests of any benefi-clary of any testamentary trust, оr
(e) the administration of the estate of any decedent or of any testamentary trust,
whether or not there is or may be any person interested who is a minor orotherwise without legal capacity to act in person or whose present existence or whereabouts cаnnot be ascertained, or whether or not there is any inalienable estate or future contingent interest which may be affected by such compromise, shall, if made in accordance with the provisions of this article, be lawful and binding upon all parties thereto, whether born or unborn, ascertained or unascertained, including such as are represented by trustees, guardians of estates and guardians ad litem; but no such compromise shall in any way impair the rights of creditors or of taxing authorities.
Inp.Copm Ann. § 29-1-9-1 (West 2003) {emphasis added). The comments to that statute further prоvide:
[the purpose of this article is to set up legal machinery whereby parties having an interest in a decedent's estate may compromise any difference they may have with reference to a division of the corpus of the estate, and obtain a court order аpproving the compromise. Such agreements are sometimes called "Family Agreements" and are looked upon with favor in law.
See id. (at Indiana Probate Code Commission's 1953 Comments, §§ 901-2-8) (emphasis added).
It is clear from the language of Indiana Code § 29-1-9-1 and the comments pertaining thereto that while the legislature favors family settlement agreements, it did not intend for such agreements to alter the manner in which inheritance tax is imposed. See ALC. § 29-1-9-1. See also Estate of McNicholas v. State of Indiana,
More specifically, Indiana's inheritance tax "is imposed at the time of a decedent's death on certain property transfers made by him." Inp.Copm Any. § 6-4.1-2-1(a) (West 2003) (emphasis added). The tax is on the transfer of the propеrty, not the property itself. See id. See also Blood,
Thus, by entering into the Agreement, James's sons transferred their property rights to Susan. This transfer is not the basis of inheritance tax; only the transfers from James to his sons, via the Will, are
CONCLUSION
This Court finds that the probate court's calculation of inheritance tax, based on its legal сonclusion that Indiana Code § 29-1-9-1 is inapplicable to this case, was in error. 5 Therefore, the judgment of the probate court is REVERSED. This case is remanded to the Tippecanoe Circuit Court to calculate the amount of inheritance tax due consistent with this opinion.
Notes
. Indiana Code § 29-1-4-1 provides a $15,000 statutory allowance for the surviving spouse of a decedent who was domiciled in Indiana. Inp.Cope Ann. § 29-1-4-1 (West 2003). In turn, Indiana Code § 29-1-3-1 provides that the surviving spouse of an individual who dies testate may elect to take against the will of the decedent if the surviving spouse is not satisfied with the provision made for him or her in the will. See Inp.Cope Axx. § 29-1-3-i(a) (West 2003). The statute further provides that if, as in this case, the surviving spouse is a subsequent childless spouse, he or she is entitled to one-third (1/3) of the net personal estate of the testator plus an amount equal to twenty-five pеrcent (25%) of the remainder of: (1) the fair market value as of the date of death of the real property of the testator; minus (2) the value of the lens and encumbrances on the real property of the testator. Id. When determining the net estate of the deceased spouse for purposes of computing the amount due the surviving spouse electing to take against the will, the court shall consider only such property as would have passed under the laws of descent and distribution. Id.
. In Indiana, "[a)n inheritance tax is imposed at the time of a decedent's dеath on certain property transfers made by him." Inp Cope ANN. § 6-4.1-2-1 (West 2003). Transfers of property from a decedent to a surviving spouse, however, are exempt from Indiana inheritance tax. Inp Cope Ann. § 6-4.1-3-7(a) (West 2003).
. The distribution set forth in a family settlement agreement could be the basis оf inheritance tax, however, if a will is invalidated, pursuant to Indiana Code § 29-1-7-17, or otherwise set aside. See Estate of McNicholas v. State of Indiana,
. Indeed, the comments to Indiana Code § 29-1-9-1 explain that the statute encompasses any difference parties may have regarding the division of the Estate's assets. See Inp.CopE Ann. § 29-1-9-1 (West 2003) (at Indiana Probate Code Commission's 1953 Comments, §§ 901-2-3). In this case, the parties disagreed with the Will's failure to provide for Susan, having been executed prior to James's marriage to Susan. (See Appellant's App. at 58.) In other words, the family questioned whether the distribution under the Will was an accurate representation of the decedent's wishes as it related to Susan. CJ. with ALC. § 29-1-9-1(c).
. The Court also notes that in its order denying the Department's Petition, the probate court stated that Susan's waiver of her right to elect to take against the will is "tantamount to a disclaimer." (Sеe Appellant's App. at 64.) Based on its interpretation of a footnote in McNicholas, the Estate claims that it could have accomplished the Agreement's distribution by filing a disclaimer and, therefore, to say that the Agreement cannot alter inheritance tax, but a disclaimer can, is to exalt form over substance. (See Appellee's Br. at 2, 8; Oral Argument Tr. at 16-17.) The Estate, however, is incorrect.
In McNicholas, the decedent's will specified that her entire estate was to pass to her three daughters in unequal shares. See McNicho-las,