ESTATE OF ZIPPORA STAHL, DECEASED, KATHLEEN KRUCKER, PERSONAL REPRESENTATIVE, Plaintiff-Appellant,
IDAHO STATE TAX COMMISSION, Defendant-Respondent.
Opinion No. 93
from the District Court of the Fourth Judicial District of
the State of Idaho, Ada County. Hon. Jason D. Scott, District
judgment of the district court is affirmed.
DeAngeli Law Group LLP, Boise, for appellant. Nicholas S.
Lawrence G. Wasden, Attorney General, Boise, for respondent.
Phil N. Skinner argued.
appeal presents a narrow question of law relating to state
income tax liability. Kathleen Krucker, personal
representative of the Estate of Zippora Stahl, deceased
("the Estate"), appeals from the district
court's grant of summary judgment in favor of the Idaho
State Tax Commission ("Commission") and the
district court's denial of the Estate's motion for
reconsideration. The district court held that the Estate
could not use a different figure as the starting point for
calculating its Idaho taxable income for 2012 than it
reported to the Internal Revenue Service for that year. We
FACTUAL AND PROCEDURAL BACKGROUND
Stahl was an Idaho resident who died in 2010. At the time of
her death, Stahl owned real property located in Chino,
California that had substantially appreciated in value. An
ancillary probate proceeding valued the Chino property at
$16, 000, 000. In December of 2012, the Estate sold the Chino
property for $16, 339, 000.
limited-and necessarily oversimplified-overview of income and
estate tax law may be helpful in describing the context of
the parties' dispute. For purposes of determining income
tax liability arising from the sale of property, a
taxpayer's "basis" in the property is used to
determine whether there has been a taxable gain and the
amount of that gain. Broadly speaking, the taxpayer's
basis is the original price paid for the property, subject to
adjustment for items such as depreciation (downward) and
capital improvements (upward).
many years, the federal government has imposed taxes on the
estates of U.S. citizens and residents. The estate tax is
based upon the value of the property owned by the decedent at
the time of death. Those who inherit property from the
decedent take the property with a "stepped-up
basis" for federal income tax purposes. Under Internal
Revenue Code section 1014 (Section 1014), the recipient's
basis is defined as "the fair market value of the
property at the date of the decedent's death." The
underlying rationale for Section 1014 is to avoid double
taxation; heirs' use of a stepped-up basis avoids
imposition of both estate taxes and income taxes on the
increased value of the property when it was sold by the
2001, Congress passed legislation which provided for a
gradual phase-out of the federal estate tax. Among a number
of other provisions, the Economic Growth and Tax Relief
Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38
(2001) ("EGTRRA"), phased out federal estate taxes,
with their complete elimination at the end of 2009. EGTRRA
evident effort to avoid the windfall to heirs that the
stepped-up basis provision of Section 1014 would otherwise
provide, following repeal of the federal estate tax EGTRRA
also provided that Section 1014 would not apply to the
estates of people who died after 2009. EGTRRA § 541.
Instead, Congress enacted a new Section 1022 of the Internal
Revenue Code, which provided that that transferees of
property of decedents dying after 2009 would have a basis in
the property equal to "the lesser of-(A) the adjusted
basis of the decedent, or (B) the fair market value of the
property at the date of the decedent's death."
EGTRRA § 542(a)(2). The basis defined in Section 1022 is
referred to as the "modified carryover basis."
2010, Congress passed the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010, Pub. L. No.
111-312, 124 Stat. 3296 (2010) ("TRUIRJCA"). Two
sections of this omnibus legislation are germane to this
301(a) of TRUIRJCA provided that "[e]ach provision of
law amended by subtitle A or E of title V of [EGTRRA] is
amended to read as such provision would read if such subtitle
had never been enacted." The statutes repealing the
federal estate tax and the new Section 1022 were both located
in Subtitle A of Title V of EGTRRA. EGTRRA § 1(c).
301(c) of TRUIRJCA created a unique option for estates of
decedents dying in 2010, as was the case with Ms. Stahl,
Notwithstanding subsection (a), in the case of an estate of a
decedent dying after December 31, 2009, and before January 1,
2011, the executor (within the meaning of section 2203 of the
Internal Revenue Code of 1986) may elect to apply such Code
as though the amendments made by subsection (a) do not apply
with respect to chapter 11 of such Code and with respect to
property acquired or passing from such decedent (within the
meaning of section 1014(b) of such Code). Such election shall
be made at such time and in such manner as the Secretary of
the Treasury or the Secretary's delegate shall provide.
Such an election once made shall be revocable only with the
consent of the Secretary of the Treasury or the
Secretary's delegate. For purposes of section 2652(a)(1)
of such Code, the determination of whether any property is
subject to the tax imposed by such chapter 11 shall be made
without regard to any election made under this subsection.
§ 301(c). Although drafted in the nearly impenetrable
prose that seems to be the hallmark of federal legislation,
the effect of Section 301(c) can be stated in comparatively
simple terms. Despite TRUIRJCA's reinstatement of the
federal estate tax, Section 301(c) permitted executors of
estates of people dying in 2010 to elect not to pay the
federal estate tax. In the event that an executor made this
election, for income tax purposes, gains from the sale of the
decedent's property are measured by the modified
carryover basis provided by Section 1022 rather than the
stepped-up basis provided by Section 1014. The effect was to
permit the estates of 2010 decedents to elect to pay federal
income taxes in lieu of estate taxes ("the 1022
Estate made the 1022 Election. Thus, following the sale of
the Chino property, in its 2012 federal income tax return,
the Estate calculated its income tax liability based upon a
modified carryover basis of $1, 457, 341 and a sales price of
$16, 339, 000. This resulted in a taxable gain of $14, 881,
659 from the sale.
Estate also filed an Idaho income tax return for 2012. When
it did so, the Estate initially used the same modified
carryover basis for the Chino property as it had for its
federal income tax return. The Estate computed its state tax
liability as $1, 029, 107, which the Estate paid. The
Commission processed the Estate's 2012 Idaho income tax
return and determined that the Estate had incorrectly
computed a credit for taxes paid to other states. The
Commission adjusted that credit and issued a Notice of
Deficiency Determination ("NODD") in July of 2013.
The NODD identified a deficiency of $20, 629 for tax year
Estate protested the NODD and filed an amended 2012 Idaho
income tax return. In the amended Idaho return, the Estate
computed the gain from the sale of the Chino property using a
stepped-up basis of $16, 000, 000 rather than the earlier
modified carryover basis of $1, 457, 341. The amended Idaho
return was accompanied by a "sample recomputed"
federal income tax return. Schedule D to the recomputed federal tax
return showed a sales price of $16, 318, 909 and a stepped-up
basis of $16, 000, 000. The Estate's amended state income
tax return identified a taxable gain of $318, 909 from the
sale of the Chino property, ...