Appeal from the United States District Court for the Central District of Illinois. No. 82 C 1023 -- Michael M. Mihm, Judge.
Bauer, Eschbach, Circuit Judges, and Jameson, Senior District Judge.*fn*
Plaintiffs, the executors of the estate of Veronica M. Hancher, seek a refund of $21,513.14 in additional federal estate taxes assessed by the Internal Revenue Service (IRS) against the decedent's estate. The district court denied Plaintiffs' claim for a refund and granted the government's motion for summary judgment. We affirm.
Veronica Hancher died on December 2, 1978. On audit of the Federal Estate Tax Return filed by the executors of her estate, the IRS assessed additional taxes on the ground that the executors miscalculated the decedent's total taxable estate. The executors paid the assessment and filed for a refund with the IRS. The IRS disallowed the claimed refund and the present action followed.
On February 21, 1978, Veronica Hancher made a gift to each of her seven children in the form of a house in Florida. The property was valued at $44,090, which resulted in a gift of $6,298.57 to each child. In preparing the decedent's estate tax return, the executors reflected this transfer as part of the decedent's gross estate as required by the Internal Revenue Code (Code) for gifts made within three years of death. See 26 U.S.C. § 2035 (1979 & Supp. 1984). Pursuant to the executors' interpretation of § 2035, however, $21,000 ($3,000 per child) was deducted from the total value of the house. This interpretation employs the "subtraction-out" method under which the first $3,000 of each gift is excluded from the total value of the donor's estate, regardless of the total value of the gift. As a result, only $23,090 out of the property's total $44,090 value was included in the decedent's gross estate. Under this method, the remaining $21,000 value would pass to the transferees untaxed.
On audit, the IRS disallowed the $21,000 claimed exclusion. According to the IRS, § 2035 provides for a "de minimus" approach to determining the portion of a gift which may be excluded from a decedent's gross estate. Under this approach, only gifts not in excess of $3,000 are excludable. Because the value of the gift to each child exceeded $3,000, the entire amount of the gift was included by the IRS in calculating the decedent's total estate. The district court held that the IRS properly applied the de minimus method in calculating the decedent's taxable estate. Plaintiffs' first argument on appeal challenges this determination.
The second issue raised by Plaintiffs on appeal challenges the method by which the IRS calculated the credit applicable to the decedent's estate for taxes paid on property she inherited from her deceased husband, Andrew Hancher. Andrew pre-deceased Veronica by sixteen months, leaving her property valued at approximately $435,000, of which $336,500 qualified for a marital deduction. Section 2013 of the Code sets out a formula for determining the amount of the allowable credit. Under this section, the value of the property transferred to a decedent is adjusted for taxes and other obligations incurred with respect to the transferor's estate. See 26 U.S.C. § 2013(d) (1979). In calculating Veronica's estate tax, the executors adjusted the value of the property she received by reference to only those taxes and obligations chargeable to the non-marital portion of her inheritance. The credit claimed was $19,366. The IRS allowed only $8,310 of the credit on the ground that all encumbrances relating to Veronica's inheritance, marital as well as non-marital property, had to be deducted from the value of the property she received. The district court upheld the view of the IRS, finding its position supported by the language and intent of § 2013, and sustained its adjustment to the Plaintiffs' claimed credit.
The final issue raised by Plaintiffs in this appeal involves whether the decedent's estate is entitled to claim the full amount of the § 2013 credit for the taxes paid on Andrew's estate even though a portion of the tax liability on his estate remained unpaid at the time of the decedent's death. Andrew's estate elected to pay one portion, that of Andrew's son Bernard, in installments over a ten-year period. See 26 U.S.C. § 6166 (1979 & Supp. 1984). At the time the decedent's estate tax return was filed, all but Bernard's portion of the tax on Andrew's estate had been paid. Plaintiffs assert that the decedent's estate is entitled to the entire amount of the § 2013 credit because her share of the tax liability had been satisfied by her estate. Conversely, the IRS concluded that Veronica's estate is not entitled to the full credit until the entire tax assessment against Andrew's estate has been collected. The district court held in favor of the IRS noting that the estate can recover the disallowed credit as each installment toward Andrew's tax balance is made. See Rev. Rul. 83-15, 1983-1 C.B. 224.
Beginning with the Revenue Act of 1916, inter vivos transfers of property made in anticipation of the transferor's death have been subject to estate taxation. This rule was designed to prevent the avoidance of taxation on the full value of a decedent's estate by the transfer of property out of the estate prior to death. See Milliken v. United States, 283 U.S. 15, 20, 75 L. Ed. 809, 51 S. Ct. 324 (1930). Under Code § 2035, the value of any property transferred by the decedent within three years of death is included in the decedent's taxable estate. 28 U.S.C. § 2035(a) (1976). Subsection (b), however, provided and exception to this general rule of inclusion for "any give excludable in computing taxable gifts by reason of section 2503(b) (relating to $3,000 annual exclusion for purposes of the gift tax). . . ." Id. § 2035(b)(2). Because Congress later determined that this section created an ambiguity as to when the $3,000 gift exclusion was allowable, this section was amended in 1978 to provide that the subsection (b)(2) exception is applicable only to transfers "made during a calendar year if the decedent was not required by section 6019 to file any gift tax return for such year. . . ." 26 U.S.C. § 2035(b)(2) (1979). See S. Rep. No. 498, 96th Cong., 2d Sess. 86-87, reprinted in 1980 U.S. Code Cong. & Ad. News 316, 395. Accordingly, this section clearly mandates application of the de minimus approach, and thereby requires the entire amount of a pre-death transfer to be included in the gross estate if the value of the gift exceeds the amount designated for the filing of a gift tax return. At the time relevant to this appeal, that amount was $3,000.*fn1 This amendment, although signed into law on November 6, 1978, was originally given retroactive effect to January 1, 1977. The Technical Corrections Act of 1979 subsequently amended the retroactive date by allowing the election of the subtraction-out method for transfers made during 1977.*fn2
Plaintiffs first contend that the 1976 version of § 2035 provided for the exclusion of $3,000 per gift, in accordance with the subtraction-out approach. Because this was the provision in effect at the time decedent made the gift to her children, Plaintiffs assert that this approach should be allowed in calculating decedent's gross estate. Plaintiffs argue that Congress enacted the 1978 amendment under the mistaken belief that the 1976 provision adopted the de minimum method and that it intended, through the amendment, only to clarify the language of the section. Thus, Plaintiffs urge us to find the 1978 amendment invalid on the ground that the effect of the provision, a change in the substantive law, was not the result Congress intended. In contrast, the IRS asserts that the 1976 version of § 2035 provided for the de minimus approach and that the 1978 amendment merely clarifies this provision. The district court sustained the view of the IRS to the extent that the plain language of the 1978 amendment provides for the de minimus approach and that its application to decedent's estate was proper.
We note initially that Plaintiffs' burden in challenging the validity of a tax provision is substantial. Congress exercises broad discretion in implementing taxes and a strong policy exists against invalidating tax statutes. See Magnano Co. v. Hamilton, 292 U.S. 40, 44, 78 L. Ed. 1109, 54 S. Ct. 599 (1933); Barclay & Co. v. Edwards, 267 U.S. 442, 450, 69 L. Ed. 703, 45 S. Ct. 348, 45 S. Ct. 135 (1924); Danly Machine Co. v. United States, 492 F.2d 30, 33 (7th Cir. 1974); Lewis v. Reagan, 516 F. Supp. 548, 553 (D. D.C. 1981); DiPortanova v. United States, 231 Ct. Cl. 623, 690 F.2d 169, 180 (Ct. Cl. 1982). Where the language and intent of the statute is ...