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Estate of Brooks v. Commissioner of Revenue Services

Supreme Court of Connecticut

May 23, 2017

ESTATE OF HELEN B. BROOKS ET AL.
v.
COMMISSIONER OF REVENUE SERVICES

          Argued December 5, 2016

          Dennis A. Zagroba, with whom were Heather Spaide and Patricio Suarez, for the appellants (plaintiffs).

          Dinah J. Bee, assistant attorney general, with whom were Matthew Budzik, assistant attorney general, and, on the brief, George Jepsen, attorney general, for the appellee (defendant).

          Palmer, Eveleigh, McDonald, Espinosa and Robinson, Js.

          OPINION

          EVELEIGH J.

         The plaintiffs, the coexecutors of the estate of Helen B. Brooks, [1] appeal from the trial court's rendering of summary judgment in favor of the defendant, the Commissioner of Revenue Services.[2] The trial court upheld the decision of the defendant to deny the plaintiffs' request for a refund of estate taxes paid by the estate of the decedent, Helen B. Brooks (decedent). On appeal, the plaintiffs claim that the trial court incorrectly concluded that the defendant had statutory authority to include in the decedent's gross estate the value of certain qualified terminable interest property (QTIP) in which the decedent enjoyed a life interest and levy an estate tax upon such property. The plaintiffs also assert that the defendant's construction of the statute resulted in a violation of the plaintiffs' due process rights. We disagree with the plaintiffs and, accordingly, affirm the judgment of the trial court.

         The following facts and procedural history are relevant to this appeal. The material facts in this case are not in dispute. The decedent died on September 22, 2009, domiciled in Connecticut. She was predeceased by her husband, Everett Brooks (Everett), who died January 31, 2000. Everett was a resident of Florida at the time of his death. At that time, Florida and Connecticut each had an estate tax based on the amount of the federal credit allowed for state death taxes. See 26 U.S.C. § 2011 (2000); General Statutes (Rev. to 1999) § 12-391; Fla. Stat. § 198.02 (2000). Everett's will was probated in Florida. Pursuant to Everett's will, two trusts were created to hold certain assets of the estate.[3]The decedent, acting as executor of Everett's estate, elected to qualify both trusts as QTIP marital deduction trusts. See 26 U.S.C. § 2056 (b) (7) (2000). Pursuant to Everett's will, the decedent enjoyed a beneficial life interest in the assets of the trusts. Everett's will also granted the decedent a testamentary limited power of appointment to direct the remainder of the trusts among Everett's children. In the absence of such an appointment by the decedent, the principal of the trusts was to be distributed according to Everett's will. The trusts consisted of intangible personal property-namely, cash and publicly traded stocks and bonds. The decedent and Attorney Herbert J. Hummers were appointed trustees of the trusts. Hummers was given the power to invade the principal of the trusts for the benefit of the decedent.[4] The decedent did not have the power to invade the principal of the trust. In or about 2002, the decedent moved to Connecticut and lived in the state continuously until her death.

         After the decedent's death, the plaintiffs timely filed a request for extension and made an estimated tax payment of $1, 435, 000. On November 4, 2010, the plaintiffs timely filed a Connecticut estate tax return for the decedent's estate that intentionally omitted the value of the trusts and claimed a refund in the amount of $988, 827. The plaintiffs included a statement on the return asserting that the value of those assets was not properly includable in the Connecticut gross estate of the decedent. The defendant's audit division disallowed the plaintiffs' request for a refund. The plaintiffs subsequently filed a timely appeal to the defendant's appellate division, which affirmed. The plaintiffs then filed a timely appeal from that decision to the trial court pursuant to General Statutes §§ 12-395 (a) (1) and 12-554. See generally Coyle v. Commissioner of Revenue Services, 142 Conn.App. 198, 203-205, 69 A.3d 310 (2013), appeal dismissed, 312 Conn. 282, 91 A.3d 902 (2014). On cross motions for summary judgment, the trial court concluded that the assets of the trusts were properly included in the decedent's gross estate and, therefore, were subject to the estate tax. In addition, the trial court concluded that the imposition of the tax upon the estate did not violate the due process clause of the fourteenth amendment to the United States constitution. Accordingly, the trial court denied the plaintiffs' motion for summary judgment and granted the defendant's motion. The trial court then rendered judgment thereon in favor of the defendant. This appeal followed. Additional facts and procedural history will be set forth as necessary.

         ‘‘Because the decision to grant a motion for summary judgment is a question of law, our review of the trial court's decision is plenary.'' Dattco, Inc. v. Commissioner of Transportation, 324 Conn. 39, 44, 151 A.3d 823 (2016). ‘‘On appeal, we must determine whether the legal conclusions reached by the trial court are legally and logically correct and whether they find support in the facts set out in the memorandum of decision of the trial court.'' (Internal quotation marks omitted.) Cefaratti v. Aranow, 321 Conn. 637, 645, 138 A.3d 837 (2016).

         I

         We begin by discussing the background of the federal tax concepts implicated in the present case. In 1981, Congress enacted ‘‘the most dramatic and expansive liberalization of the [m]arital [d]eduction in history.'' Estate of Clayton v. Commissioner of Internal Revenue, 976 F.2d 1486, 1492 (5th Cir. 1992). Such a feat was achieved in two ways. First, Congress provided for the unlimited marital deduction. Economic Recovery Tax Act of 1981, Pub. L. 97-34, § 403 (a), 95 Stat. 301; see also 26 U.S.C. § 2056 (a).[5] Federal law did not, however, previously allow for the deduction of terminable interests. Estate of Clayton v. Commissioner of Internal Revenue, supra, 1492. Mindful of rising divorce and remarriage rates, Congress created an exception to the general rule against allowing a deduction for the inter-spousal transfer of terminable interests so that a decedent may exert more control over the ultimate disposition of certain assets while still financially providing for the surviving spouse with such assets unburdened by front end taxation. See id., 1492-93 and n.26. Thus, the concept of QTIP was born. Id., 1493.

         Federal tax law currently operates by granting the marital deduction to the first to die spouse in the amount of the value of certain property, subject to certain qualifications, so long as the first to die spouse gives a beneficial life interest in such property to the surviving spouse. 26 U.S.C. § 2056 (b) (7).[6] In order to ensure that the property does not pass to the remainder beneficiaries untaxed, the federal tax code imposes a tax upon the happening of two events. During the life of the surviving spouse, any disposition of a qualifying life interest in property is treated as a transfer of the remainder interest in such property for purposes of the gift tax. See 26 U.S.C. § 2519 (a).[7] To the extent that the surviving spouse did not make any inter vivos disposition of any qualifying life interest in property, the entire value of the property in which the surviving spouse enjoyed a qualifying life interest is included in his or her gross estate and is treated as property passing therefrom. See 26 U.S.C. § 2044.[8] In short, a fictional transfer occurs from the first to die spouse to the surviving spouse, and a second fictional transfer occurs upon the death of the surviving spouse to the remainder beneficiaries. We note that, in the present case, it is undisputed that the assets contained within the trusts established pursuant to Everett's will were properly included in the decedent's federal gross estate.

         II

         First, we address the plaintiffs' claim that, pursuant to General Statutes § 12-391 (c) (3), [9] the assets contained within the trusts are not includable in the decedent's gross estate. Specifically, the plaintiffs claim that the relevant federal estate tax provisions have been incorporated into the state estate tax provisions and, therefore, the assets contained within the trusts form part of the decedent's state gross estate only if the state allowed a deduction with respect to the transfer of such property to the decedent following Everett's death. The defendant claims that such an interpretation of § 12-391 (c) (3) is inconsistent with the plain meaning of the provision-namely, that the gross estate for state estate tax purposes is the same as the gross estate for federal estate tax purposes. We agree with the defendant.

         The plaintiffs' claim implicates a matter of statutory construction. Our standard of review for statutory construction claims is well established. ‘‘When construing a statute, [the court's] fundamental objective is to ascertain and give effect to the apparent intent of the legislature. . . . In other words, [the court seeks] to determine, in a reasoned manner, the meaning of the statutory language as applied to the facts of [the] case, including the question of whether the language actually does apply. . . . In seeking to determine that meaning . . . [General Statutes] § 1-2z directs [the court] first to consider the text of the statute itself and its relationship to other statutes. If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered. . . . The test to determine ambiguity is whether the statute, when read in context, is susceptible to more than one reasonable interpretation.'' (Internal quotation marks omitted.) Allen v. Commissioner of Revenue Services, 324 Conn. 292, 307-308, 152 A.3d 488 (2016). ‘‘[A]long with these principles, we are also guided by the applicable rules of statutory construction specifically associated with the interpretation of tax statutes. . . . [W]hen the issue is the imposition of a tax, rather than a claimed right to an exemption or a deduction, the governing authorities must be strictly construed . . . in favor of the taxpayer. . . . Nevertheless, [i]t is also true . . . that such strict construction neither requires nor permits the contravention of the true intent and purpose of the statute as expressed in the language used.'' (Internal quotation marks omitted.) Groton v. Commissioner of Revenue Services, 317 Conn. 319, 328-29, 118 A.3d 37 (2015).

         We acknowledge that ‘‘when our tax statutes refer to the federal tax code, federal tax concepts are incorporated into state law.'' (Internal quotation marks omitted.) Allen v. Commissioner of Revenue Services, supra, 324 Conn. 305 n.15. Nevertheless, we have explained that ‘‘this rule does not require the wholesale incorporation of the entire body of federal tax principles into our state income tax scheme . . . .'' (Internal quotation marks omitted.) Id. Instead, ‘‘where a reference to the federal tax code expressly is made in the language of a statute, and where incorporation of federal tax principles makes sense in light of the statutory language at issue, our prior cases uniformly have held that incorporation should take place.'' (Emphasis added; internal quotation marks omitted.) Id.

         In the present case, the statutory language provides that the term gross estate ‘‘means the gross estate, for federal estate tax purposes.'' General Statutes § 12-391 (c) (3). The plain language of the statute requires nothing more than the gross estate as reported on the federal estate tax return. The construction urged by the plaintiffs would result in a value of the gross estate for state estate tax purposes that would differ from the value of the gross estate for federal estate tax purposes. Specifically, looking at whether Connecticut deducted the value of a QTIP trust from the estate of the first to die spouse in order to ascertain whether such assets are to be included in the state gross estate of the surviving spouse would not be ‘‘for federal estate tax purposes.''

         General Statutes § 12-391 (c) (3). Thus, according to § 12-391 (c) (3), if assets are included in a decedent's federal gross estate, they are included in his or her state gross estate as well.

         In addition, this construction is buttressed by § 12-391 (f) (2), which provides: ‘‘An election under said [26 U.S.C. § 2056 (b) (7)] may be made for state estate tax purposes regardless of whether any such election is made for federal estate tax purposes. The value of the gross estate shall include the value of any property in which the decedent had a qualifying income interest for life for which an election was made under this subsection.'' (Emphasis added.) Thus, the legislature has created a separate state QTIP election and inclusion provision. Construing § 12-391 (c) (3) to require the state to have first granted a deduction for the value of a QTIP trust from the gross estate of the first to die spouse in order to properly include the value of such in assets in the gross estate of the surviving spouse would, in essence, create a state QTIP election by incorporation that would render a separate election under § 12-391 (f) (2) superfluous. See, e.g., Allen v. Commissioner of Revenue Services, supra, 324 Conn. 309 (‘‘statutes shall not be construed to render any sentence, clause, or phrase superfluous or meaningless'' [internal quotation marks omitted]). Accordingly, we conclude that the plain language of the statute, when read in context with other related provisions, clearly provides that the assets contained within the trusts at issue are includable in the decedent's gross estate pursuant to § 12-391 (c) (3) because they were included in the decedent's gross estate for federal estate tax purposes.

         Not advancing a textual basis for their construction of the provision, the plaintiffs rely principally upon case law for their claim that the federal estate tax code is incorporated into § 12-391 (c) (3). At first blush, our holding in Berkley v. Gavin, 253 Conn. 761, 772-75, 756 A.2d 248 (2000), would appear to strongly support the plaintiffs' position in the present case. In Berkley, the issue was whether the phrase ‘‘as determined for federal income tax purposes'' in the statute defining adjusted gross income; General Statutes (Rev. to 1999) § 12-701 (a) (19); ‘‘means as determined in accordance with federal income tax methodology, or as reported on a taxpayer's federal income tax return.'' Berkley v. Gavin, supra, 772. Relying on case law, this court held that the phrase meant the former because the pertinent federal tax provisions for determining adjusted gross income were incorporated into this state's income tax provisions. Id., 774. This included the tax benefit rule. 26 U.S.C. § 111.[10] As a result, whether certain recovered losses were included in Connecticut adjusted gross income in the present year would depend on whether the taxpayer had reduced his state income tax liability, but not necessarily his federal income tax liability, in a previous year as a result of such previously reported losses. In essence, the incorporation of the federal tax benefit rule resulted in a ‘‘Connecticut tax benefit rule . . . .'' (Emphasis in original.) Id., 783 (Sullivan, J., dissenting).[11] This is precisely the interpretation the plaintiffs seek in the present case-namely, that the inclusion of a QTIP marital deduction trust in a decedent's state gross estate requires the state to have granted a corresponding deduction to the estate of the first to die spouse. Justice Sullivan, in his dissent in Berkley, pointed out that the result reached by the majority in that case was inconsistent with the plain language of the statute because such a modification of Connecticut adjusted gross income was not ‘‘for federal income tax purposes . . . .'' (Internal quotation marks omitted.) Id., 784. Indeed, as a result of the holding in Berkley, the legislature subsequently clarified the definition of adjusted gross income by adding the phrase ‘‘and as properly reported on such person's federal income tax return.'' Public Acts, Spec. Sess., June, 2001, No. 01-6, § 35; see also Public Acts, Spec. Sess., June, 2001, No. 01-6, § 36 (stating legislative intent). To construe the provision defining gross estate in the present case to incorporate the federal estate tax code would result, as Justice Sullivan pointed out in Berkley, in a construction inconsistent with the plain language of the relevant statute. We conclude, especially in light of the principles of § 1-2z, which was not in effect when Berkley was decided, that incorporation of federal tax statutes into our statutory provisions should be determined in the first instance with reference to the plain meaning of § 12-391 (c) (3).

         Next, we disagree with the plaintiffs' contention that our holding in New York Trust Co. v. Doubleday, 144 Conn. 134, 145, 128 A.2d 192 (1956), incorporated all provisions of the federal estate tax into our estate tax code. In that case, we stated the following ‘‘The Connecticut estate tax statute . . . adopts as the base for computing the tax 80 [percent] of the amount of the basic federal estate tax. Inferentially, then, our statute incorporates within itself the provisions of the federal estate tax statute, governing the computation of the federal estate tax, including all of the provisions of the latter statute for exemptions and deductions.'' Id. The estate tax statute at issue in that case bears no resemblance to the estate tax at issue in the present case.[12]The previous estate tax, known as the pick up tax, was principally based upon the federal credit available under 26 U.S.C. § 2011. See G. Wilhelm & L. Weintraub, Connecticut Estate Practice: Death Taxes in Connecticut (4th Ed. 2013) § 1:2, p. 1-6. Under the previous estate tax, ‘‘[t]he amount of the tax was the amount by which such credit exceeded the total amount of all death taxes, including the Connecticut succession tax, actually paid to the several states and territories.'' Id., pp. 1-6 through 1-7. We described our estate tax at that time as one that did ‘‘no more than to divert into the state treasury what would otherwise be taken by the federal government as a part of the federal estate tax.'' New York Trust Co. v. Doubleday, supra, 145. After Congress repealed the state death tax credit, [13] the legislature enacted a new, stand alone estate tax applicable to decedents dying on or after January 1, 2005. See Public Acts 2005, No. 05-251, § 69. The decedent's estate is being taxed under the present, stand-alone estate tax, not the pick up tax. Accordingly, we construe the present estate tax statute anew, unbound by this court's construction of a substantively different and inoperative tax statute.

         In sum, we conclude that the value of the QTIP marital deduction trusts at issue in the present case are included in the decedent's gross estate for Connecticut estate tax purposes because those assets are included in the decedent's gross estate for federal estate tax purposes.

         III

         We next address the plaintiffs' claim that § 12-391 does not permit the defendant to tax the assets contained within the QTIP marital deduction trusts because the decedent did not own the property subject to the tax. In particular, the plaintiffs claim that the statutory language in effect at the time of the decedent's death; General Statutes (Rev. to 2009) § 12-391 (d) (3);[14] limits the authority of the defendant to impose a tax upon intangible personal property to only such property owned by the decedent and that, therefore, the assets contained within the trusts at issue are not taxable. The defendant claims that No. 13-247, § 120, of the 2013 Public Acts (P.A. 13-247), and No. 14-155, § 12, of the 2014 Public Acts (P.A. 14-155), clarified the original intention of the legislature with respect to the meaning of the relevant provision and, therefore, applies retroactively. Specifically, P.A. 13-247, § 120, amended § 12-391 (d) (3) to, inter alia, replace the words ‘‘owned by the decedent'' with ‘‘included in the gross estate of the decedent, '' and P.A. 14-155, § 12, expressly declared the legislative intent of P.A. 13-247, § 120, to be ‘‘clarifying in nature and applicable to all open estates.'' The defendant points to the legislative history of both acts in support of his claim. The plaintiffs counter that, notwithstanding the legislature's belated attempt in P.A. 14-155 to declare its intent regarding the amendments, P.A. 13-247 amounted to a substantive change to the law that can only be applied prospectively. As evidence, the plaintiffs point to the effective date of January 1, 2013, contained in P.A. 13-257, § 120. The plaintiffs further claim that if § 12-391 (d) (3) were construed in accordance with its plain meaning, it would be evident that the amendment amounted to a substantive change. The plaintiffs also dispute that the legislative history is sufficient to support the conclusion that the amendment was clarifying in nature. We agree with the defendant.

         We begin by discussing the legal standard we apply in determining whether the legislature intended statutory amendments to be clarifying in nature. ‘‘We presume that, in enacting a statute, the legislature intended a change in existing law. . . . This presumption, like any other, may be rebutted by contrary evidence of the legislative intent in the particular case. An amendment which in effect construes and clarifies a prior statute must be accepted as the legislative declaration of the meaning of the original act. . . . Furthermore, an amendment that is intended to clarify the intent of an earlier act necessarily has retroactive effect.'' (Citation omitted; internal quotation marks omitted.) Bhinder v. Sun Co., 263 Conn. 358, 368-69, 819 A.2d 822 (2003). ‘‘This court has a long tradition of embracing clarifying legislation.'' Greenwich Hospital v. Gavin, 265 Conn. 511, 520, 829 A.2d 810 (2003); accord State v. Banks, 321 Conn. 821, 841-42, 146 A.3d 1 (2016); see also FairwindCT, Inc. v. Connecticut Siting Council, 313 Conn. 669, 685 n.21, 99 A.3d 1038 (2014) (‘‘there is no question that the legislature has the power to enact clarifying legislation'').[15] ‘‘[W]e have often held . . . that it is as much within the legislative power as the judicial power-subject, of course, to constitutional limits other than the separation of powers-for the legislature to declare what its intent was in enacting previous legislation.'' (Internal quotation marks omitted.) Greenwich Hospital v. Gavin, supra, 520. Accordingly, as a matter of statutory construction, we need not construe the original statutory language upon finding that subsequent legislation is clarifying in nature. See id., 517 and n.8; see also Raftopol v. Ramey, 299 Conn. 681, 685-86 n.7, 12 A.3d 783 (2011).

         ‘‘To determine whether the legislature enacted a statutory amendment with the intent to clarify existing legislation, we look to various factors, including, but not limited to (1) the amendatory language . . . (2) the declaration of intent, if any, contained in the public act . . . (3) the legislative history . . . and (4) the circumstances surrounding the enactment of the amendment, such as, whether it was enacted in direct response to a judicial decision that the legislature deemed incorrect . . . or passed to resolve a controversy engendered by statutory ambiguity . . . .'' (Citations omitted; internal quotation marks omitted.) Middlebury v. Dept. of Environmental Protection, 283 Conn. 156, 174, 927 A.2d 793 (2007). Not each factor is given equal weight. We have previously observed that the legislature ‘‘simplifie[s] our task of determining its intention in adopting [amendatory legislation] by incorporating into the text of the act an explicit statement of the legislature's intention.'' Greenwich Hospital v. Gavin, supra, 265 Conn. 519.

         First and foremost, the legislature enacted express language manifesting its intention to clarify its original intent with respect to the relevant provision. Section 12 of P.A. 14-155 provides in relevant part: ‘‘It is the intent of the General Assembly that the amendments made by section 120 of public act 13-247 to subsections (d) and (e) of section 12-391 of the general statutes, as amended by this act, are clarifying in nature and apply to all open estates.'' ...


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