Prestidge v. Dept. of Rev.

386 May 13, 2014 No. 52

IN THE OREGON TAX COURT

REGULAR DIVISION

Jacquelyn PRESTIDGE,

Trustee of the Mifflin and Nancy Thomas Trust “A,”

Plaintiff,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC 5137)

Plaintiff (taxpayer) appealed from a Magistrate Division decision as to inher-

itance tax. Taxpayer argued that in subjecting its trust’s assets or interest in

such assets to taxation, Oregon violated the Due Process Clause of the United

States Constitution. Taxpayer argued that certain language from a decision of

the United States Supreme Court imposed a constitutional requirement, conclud-

ing that the requirement was not present in the taxation by Oregon. Granting

Defendant (the department’s) motion, the court held that as both grantors of the

trust were domiciled in Oregon at their times of death, the constitutional basis for

assertion by Oregon of its taxing power was the relationship of Mifflin Thomas

with the state of Oregon at the time of his death.

Oral argument on cross-motions for summary judgment

was held November 12, 2013, in the courtroom of the Oregon

Tax Court, Salem.

Daniel C. Re, Hurley Re PC, Bend, filed the motion and

argued the cause for Plaintiff (taxpayer).

Nathan Carter, Assistant Attorney General, Department

of Justice, Salem, filed the cross-motion and argued the cause

for Defendant Department of Revenue (the department).

Decision for Defendant rendered May 13, 2014.

HENRY C. BREITHAUPT, Judge.

I. INTRODUCTION

This inheritance tax case is before the court on

cross-motions for summary judgment. Plaintiff (taxpayer)

and Defendant (the department) have entered into a stipula-

tion of facts and other uncontroverted material in the record

provides additional facts or context for stipulated facts.

Cite as 21 OTR 386 (2014) 387

II. FACTS

Taxpayer is the representative of decedent Mifflin

Thomas (Mifflin). For many years Mifflin was married to

Nancy Thomas (Nancy). Together Mifflin and Nancy accu-

mulated significant wealth, represented primarily by shares

of stock in major companies.

Prior to Nancy’s death, Mifflin and Nancy estab-

lished and funded a trust (the Mifflin and Nancy Trust) that

contemplated the establishment of three sub-trusts upon the

death of the first to die of Nancy and Mifflin.1 In 2001 Nancy

predeceased Mifflin and at the time of her death, both she

and Mifflin were domiciled in Oregon. As provided for in the

trust instrument, three trusts were then established.

The first sub-trust established at the time of Nancy’s

death, called the Survivor’s Trust, became the owner of all

of Mifflin’s separate property and his community property

interest in any property. That community property interest

derived from a substantial period of residence of the couple

in California. The assets of this trust are not involved in

this case.

The second sub-trust established at the time of

Nancy’s death, the Bypass Trust, was a trust designed to

take advantage of certain federal estate tax generation-

skipping trust rules. It was to be funded with a portion of

the separate property of Nancy or her interest in community

property. The assets of this trust are not involved in this

case.

The third sub-trust established at the time of

Nancy’s death was called the QTIP Trust. After the fund-

ing of the Bypass Trust, the remainder of Nancy’s separate

property and her community property interest in any prop-

erty was placed in the QTIP Trust. The QTIP Trust was

designed to qualify under federal estate tax law as vesting

in Mifflin an interest of such magnitude that the transfer

would qualify for the marital deduction in computing the

federal estate tax liability of the estate of Nancy. As will

1

The original trust agreement for the Mifflin and Nancy Trust was replaced

by an amendment and complete restatement and that document is treated as the

Mifflin and Nancy Trust agreement, except as it might have been later amended.

388 Prestidge v. Dept. of Rev.

be discussed in more detail below, the federal quid pro quo

in such cases requires that any assets in the QTIP Trust

at the time of Mifflin’s death be included in his estate for

purposes of computing the federal estate tax liability of his

estate.

At the time of Nancy’s death, Mifflin, as the surviv-

ing spouse, became the sole trustee of the Mifflin and Nancy

Trust and made the allocations of assets called for by that

trust such that the sub-trusts were funded in accordance

with the terms of the Mifflin and Nancy Trust.

Consistently with federal estate tax law, the QTIP

Trust provided that Mifflin had a right to receive all income

of the trust during his life, as well as such principal the

trustee, originally Mifflin, might deem proper or necessary

to provide him with reasonable support, maintenance, and

care, after taking into consideration his other means of

support.

The Mifflin and Nancy Trust provided that any

trustee could resign at any time upon 30 days notice. If

neither Mifflin nor Nancy were willing or able to serve as

trustee, Northern Trust of California was named as the suc-

cessor trustee.

Any principal income beneficiary of any trust could,

as to such trust, change a corporate trustee of such trust to

a qualified corporate trustee. In addition, such a principal

income beneficiary could move the legal situs of the trust

for reasons of personal convenience by selecting a qualified

corporate trustee outside the state of California.

The Mifflin and Nancy Trust was generally to be

governed by the law of the state of California. If neither

Mifflin nor Nancy were willing or able to serve as trustee,

Northern Trust of California was named as the successor

trustee.

In 2003, after the death of Nancy, Mifflin executed

an instrument amending provisions of his Survivor’s Trust.

In 2004 Mifflin, purporting to act as the sole

income beneficiary of the QTIP Trust, executed an instru-

ment in which he resigned as trustee of that trust, effective

Cite as 21 OTR 386 (2014) 389

on the declination of Northern Trust of California to serve

as trustee. He also purported to appoint Wells Fargo

Bank, N.A., Carmel California Branch, to serve as succes-

sor trustee of the QTIP Trust. Mifflin stated that Wells

Fargo was to administer the QTIP Trust from its Carmel,

California branch.

Mifflin also purported, pursuant to Article III C

of the Mifflin and Nancy Trust, to change the legal situs

of the QTIP Trust from the state of Oregon to the state of

California. Finally, but only to be effective after appoint-

ment of Wells Fargo as successor trustee and the change

of legal situs, Mifflin stated that he renounced his power to

appoint a successor trustee or to change the legal situs of

the QTIP Trust.2

Mifflin died in 2006. At the time of his death he was

domiciled in Oregon. By reason of the provisions of the QTIP

Trust, his interests in income and principal of the trust ter-

minated and those assets passed to other persons in accor-

dance with the terms of the trust (the remainder beneficia-

ries). The assets in the trust were the shares of stock in

various corporations or interests in mutual funds.

The legal representative for Mifflin filed a federal

estate tax return and an Oregon inheritance tax return fol-

lowing the death of Mifflin. On the Oregon inheritance tax

return the tax due to Oregon was computed on the basis

that the assets in the QTIP Trust were subject to Oregon

inheritance tax. Within the allowable time, the representa-

tive filed an amended return with the tax computed on the

basis that the assets in the QTIP Trust were not subject to

Oregon inheritance tax and claimed a refund. The claim for

refund was denied and an appeal to this court followed. The

present case follows a decision in the Magistrate Division

adverse to taxpayer.

2

The stipulation of the parties appears to treat as effective these actions

of Mifflin. The court notes that the action of Mifflin in purporting to change

the legal situs of the trust was facially inconsistent with the provisions of the

trust, as he purported to appoint a trustee within the state of California even

though the trust only permitted such appointment of a trustee outside the state

of California. In any event, taxpayer at the hearing on this matter indicated that

she was not relying on the situs of the trust or the location of the trustee as a

basis for her opposition to the tax in question.

390 Prestidge v. Dept. of Rev.

III. ISSUE

The issue for decision is whether Oregon may, consis-

tently with the Due Process Clause of the 14th Amendment

to the United States Constitution (the Due Process Clause),

impose an inheritance tax in this case.

IV. ANALYSIS

In her briefing and argument in this court, tax-

payer has conceded that she makes no claim that the Oregon

inheritance tax statutes do not reach the assets in question.

Rather, taxpayer asserts that in subjecting such assets or

interest in such assets to taxation, Oregon has violated the

Due Process Clause.

Taxpayer’s concession as to the reach of Oregon law

is well taken. ORS 118.010 subjects to taxation all transfers

subject to federal estate tax.3 There is no question that the

assets in the QTIP Trust were subject to federal estate tax

on the death of Mifflin. They were, therefore, either subject

to Oregon inheritance tax or the basis for the computation of

the tax liability.

The Due Process Clause serves to place a limit on

state taxation of persons, property or events that do not

have a constitutionally adequate connection to the taxing

state. In the case of persons or tangible assets present in

a state, there is no question that such a connection exists,

at least for purposes of appropriately apportioned income or

property taxes.

Intangible property presents—and has historically

presented—a more difficult question, for the reason that the

location of intangible property is difficult, if not impossible,

to locate in a physical or geographic sense. That problem is

at the heart of this case.

The position of the department is relatively straight-

forward. The department observes that Mifflin was, at the

time of his death, a domiciliary of Oregon. It was his death

that resulted in the transfer from him to other beneficia-

ries all of the beneficial interest in the intangible assets

3

Except as otherwise noted, the court’s references to the Oregon Revised

Statutes (ORS) are to 2007.

Cite as 21 OTR 386 (2014) 391

of the QTIP Trust. As he, an Oregon domiciliary, was the

sole beneficial owner of those assets, the department argues

that adequate connection existed between Oregon and that

transfer of those assets.

Taxpayer can point to no case law authority to sup-

port her position as to the constitutionality of the Oregon

inheritance tax as applied in this case. Instead, taxpayer

takes certain language from a decision of the United States

Supreme Court, construes that language as imposing a

constitutional requirement, and then concludes that the

requirement is not present in the taxation by Oregon at

issue in this case.

The case in question is Curry v. McCanless, 307 US

357, 59 S Ct 900, 83 L Ed 1339 (1939). In that case the court

overruled earlier decisions and concluded that more than

one state could have constitutionally adequate connections

to intangible property such that more than one state could

tax the transfer at death of an interest in such intangibles.

In reaching that conclusion the court engaged in a broad

examination of the nature of intangible property and the

relationship of such property to taxpayers. Distinguishing

the rules as to taxation of tangible property that can be

located in one place, the court said:

“Very different considerations, both theoretical and prac-

tical, apply to the taxation of intangibles, that is, rights

which are not related to physical things. Such rights are

but relationships between persons, natural or corporate,

which the law recognizes by attaching to them certain

sanctions enforceable in courts. The power of government

over them and the protection which it gives them cannot

be exerted through control of a physical thing. They can

be made effective only through control over and protection

afforded to those persons whose relationships are the origin

of the rights.”

307 US 357, 365-66 (emphasis in taxpayer’s brief). Taxpayer

takes the emphasized language in that quote as a major

premise. As her minor premise, taxpayer asserts that Nancy

was the origin of the rights in the assets held by Mifflin

under the QTIP Trust. Taxpayer then concludes that any

taxation of the assets or interest in the assets in the QTIP

392 Prestidge v. Dept. of Rev.

Trust could only occur in respect of Nancy but not Mifflin.

As the taxpayer stated in her brief:

“Nancy Thomas was the person who was the origin of the

remainder beneficiaries [sic] rights and interests in the

QTIP TRUST property.”

The first and most important problem with tax-

payer’s logic is that the major premise is incorrect. It is

incorrect because the “origin of rights” language in Curry

does not refer to a transferor or transferee. Read correctly,

“rights” in Curry—the essence of intangible property—have

their origin in “relationships” among persons, natural or

corporate.

The language refers not to the relationship of trans-

feror and transferee as to a share of stock. Instead it refers

to the relationship of shareholder and corporation. That is a

relationship the law recognizes and out of which enforceable

rights and obligations constituting what we call intangible

property arise.

Therefore, the language upon which taxpayer relies

does not support taxpayer’s conclusion. Other language

from Curry does, however, shed light on the proper analysis.

Further in the opinion, the court recognized:

“From the beginning of our constitutional system control

over the person at the place of his domicile and his duty

there, common to all citizens, to contribute to the support of

government have been deemed to afford an adequate con-

stitutional basis for imposing on him a tax on the use and

enjoyment of rights in intangibles measured by their value.

Until this moment that jurisdiction has not been thought to

depend on any factor other than the domicile of the owner

within the taxing state * * *.”

307 US at 366-67. This court is of the opinion that

this observation answers the question presented in this

case. The constitutional basis for assertion by Oregon of its

taxing power is the relationship of Mifflin with the state of

Oregon at the time of his death.

It is the case that Mifflin did not have legal title to

the intangibles in question. However he had all of the bene-

ficial interest in such assets, to the exclusion, during his life,

Cite as 21 OTR 386 (2014) 393

of any interest of any other person. That is a constitutionally

adequate connection between Oregon and Mifflin, or assets

in which he had an exclusive beneficial interest.

There are other considerations that support this

conclusion. Although taxpayer seeks to associate the intan-

gibles in the QTIP Trust entirely with Nancy, Mifflin in fact

had significant relationships to those assets and the trust in

which they were held, even beyond his interest as the sole

beneficial owner during his life.

Upon the death of Nancy, Mifflin acted as the sole

trustee of the trust and in this capacity had the authority

to, and did, determine which assets were to be allocated to

the Bypass Trust. By definition, separate property of Nancy

and her community property interests not allocated to the

Bypass Trust became the corpus of the QTIP Trust. Mifflin

therefore had an important role in determining what assets

went into the QTIP Trust.4

Further, it is important to observe that the Mifflin

and Nancy Trust carried out a comprehensive and coor-

dinated estate plan designed to minimize transfer taxes

within allowable rules. At the death of Nancy this goal

was achieved, in part, by transfers into the QTIP Trust.

For purposes of the federal estate tax the amount in the

QTIP Trust was considered as an interest of the surviving

spouse, Mifflin, such that the amount in the trust quali-

fied for the marital deduction under IRC section 2056 in

computing the federal estate tax obligation at the time of

Nancy’s death.

The transfer tax savings achieved by the use of the

QTIP Trust were not limited to the federal estate tax. At the

time of Nancy’s death, she was a domiciliary of Oregon and

required to pay an Oregon inheritance tax. The amount of

that tax was, at the time of her death, set at the maximum

amount of the credit for state death taxes allowed under

federal estate tax law (the so-called “pick-up” tax). ORS

118.010(2) (1999). The amount of that credit, and hence the

amount of Oregon inheritance tax, was directly proportional

to the size of the federal taxable estate. See IRC § 2011. The

4

Not an unlimited role as he had to follow federal funding rules.

394 Prestidge v. Dept. of Rev.

result was that, at the time of Nancy’s death, the smaller the

federal taxable estate, the smaller the Oregon inheritance

tax obligation.

Federal law provides that assets in the QTIP Trust

were, on the death of Mifflin, considered to pass from Mifflin

to the remainder beneficiaries of the QTIP Trust. IRC sec-

tion 2044(c) provides:

“For purposes of this chapter and chapter 13, property

includible in the gross estate of the decedent under sub-

section (a) shall be treated as property passing from the

decedent.”

ORS 118.007 provides:

“Any term used in ORS 118.005 to 118.840 has the same

meaning as when used in a comparable context in the

laws of the federal Internal Revenue Code relating to fed-

eral estate taxes, unless a different meaning is clearly

required or the term is specifically defined in ORS 118.005

to 118.840.”

Accordingly, Oregon law adopts the federal definition of

transfer. That makes the passage of the assets of the QTIP

Trust to the remainder beneficiaries a transfer of property

from Mifflin.

Taxpayer however maintains that the pattern of

use of the QTIP Trust and deferral—but not elimination—

of taxation at the federal level cannot be followed in Oregon,

even though at the relevant times—the times of death—both

Nancy and Mifflin were domiciled in Oregon. The result of

that argument is that persons domiciled in Oregon would

be able to transfer unlimited amounts of property to future

generations by way of use of QTIP trusts, all without any

Oregon inheritance tax obligation coming into existence.

This court does not read the Due Process Clause as requir-

ing such a result.

V. CONCLUSION

For the foregoing reasons, the cross-motion of the

department for summary judgment is granted and the

motion for summary judgment of the taxpayer is denied.

Now, therefore,

Cite as 21 OTR 386 (2014) 395

IT IS ORDERED that Defendant’s Cross-Motion for

Summary Judgment is granted; and

IT IS FURTHER ORDERED that Plaintiff’s Motion

for Summary Judgment is denied.