In re Estate of Roberts

[This decision has been published in Ohio Official Reports at 94 Ohio St.3d 311.]

IN RE ESTATE OF ROBERTS.

[Cite as In re Estate of Roberts, 2002-Ohio-791.]

Taxation—Estate tax—Value of gross estate includes value of a rollover IRA

decedent purchased and to which decedent’s employer did not directly

contribute by reason of decedent’s employment—R.C. 5731.09(A),

construed and applied.

(No. 00-2138—Submitted October 17, 2001—Decided February 27, 2002.)

APPEAL from the Court of Appeals for Miami County, No. 2000CA15.

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SYLLABUS OF THE COURT

Under R.C. 5731.09(A), the value of the gross estate includes the value of a rollover

IRA that the decedent purchased and to which the decedent’s employer or

former employer did not directly contribute by reason of the decedent’s

employment. (R.C. 5731.09[A], construed and applied.)

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COOK, J.

{¶ 1} R.C. 5731.09(A) exempts from estate tax the value of an annuity (or

similar payment to a surviving beneficiary) attributable to contributions by a

decedent’s former employer to an employee’s trust or fund. This case asks whether

the exemption applies even when the decedent has transferred funds from an

employee retirement account to an individual retirement account (“IRA”) to which

the employer has not directly contributed. For the reasons that follow, we find that

it does not.

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{¶ 2} In February 1993, Robert Lawrence Roberts retired from his

employment with Pioneer Rural Electric Cooperative, Inc. (“Pioneer”).1 During

Roberts’s employment, both Roberts and Pioneer had contributed to an employee

retirement fund administered by the National Rural Electric Cooperative

Association. When Roberts retired, his Pioneer retirement account contained

$346,440.22, a sum composed of Roberts’s contributions ($9,463.50), interest on

Roberts’s contributions ($12,813.45), ordinary income ($201,288.08), and capital

gains ($122,875.19). Immediately upon his retirement, Roberts received a check

for $9,463.50, the amount of his own after-tax contributions to his employee

retirement account.

{¶ 3} Shortly after he retired from Pioneer, Roberts requested that the

remainder of his employee retirement fund—$336,976.72—be transferred to an

IRA he had previously opened with Edward D. Jones & Company. Of the amount

rolled over to the IRA, $12,813.45 represented the interest earned on Roberts’s

contributions to his Pioneer employee retirement fund. By the time that Roberts

died in November 1997, the value of his IRA had grown to $597,347.

{¶ 4} In June 1998, Roxie L. Roberts, as administrator of the estate of

Robert Lawrence Roberts, filed an Ohio estate tax return that reported no tax due.

The estate listed among Roberts’s assets the value of the rollover IRA with Edward

D. Jones & Company; the estate claimed, however, that the entire value of the IRA

was excluded from the value of the gross estate by virtue of R.C. 5731.09(A). The

Tax Commissioner filed exceptions to the estate’s tax return in probate court,

contending that the estate’s interpretation of R.C. 5731.09(A) was incorrect. The

commissioner also adjusted the estate’s tax return and, after including the value of

Roberts’s IRA in calculating the value of the gross estate, found an estate tax

1. The parties’ joint stipulations in the probate court refer to Roberts’s “quasi-retirement” from

Pioneer without elaborating on the distinction between retirement and quasi-retirement. As no party

contends that any distinction between the two terms is relevant to this appeal, we refer simply to

Roberts’s retirement from Pioneer.

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deficiency of $28,378.49. The estate filed its own exceptions in the probate court

challenging the commissioner’s assessment of estate tax.

{¶ 5} The estate and the commissioner submitted the matter to the probate

court on briefs and joint stipulations. The estate conceded that $22,713.94—the

amount representing earnings and appreciation traceable to Roberts’s contributions

to his Pioneer employee retirement account before the rollover to his IRA—was

“fully taxable under any reading of R.C. 5731.09.” Thus, the only issue before the

probate court was whether the remaining value of the IRA—$574,633.06—was a

taxable portion of the gross estate under R.C. 5731.09. The parties stipulated that

this amount of the IRA was traceable to “employer contributions originally made

to the Pioneer Rural Electric Cooperative, Inc. retirement plan plus earnings and

appreciation thereon.”

{¶ 6} The probate court ruled in favor of the estate and held that the disputed

value of the IRA should not be included when calculating the value of the gross

estate. The commissioner appealed the probate court’s decision to the Second

District Court of Appeals, which reversed. The court of appeals found R.C.

5731.09(A)’s language ambiguous, noting that it was “unable to determine whether

the legislature intended to exclude from one’s gross estate funds attributable to

employer contributions only insofar as those funds remain in employee retirement

funds maintained by the employer, or if it intended to exclude all funds traceable to

employer contributions without regard to their location at the time of death.” But

because the language of R.C. 5731.09(A) did not “clearly support” the estate’s

claim for an exemption from estate tax, the court of appeals construed the statute

most strongly against the exemption and in favor of taxation. The court of appeals

therefore found that the disputed value of the IRA should be included in calculating

the value of Roberts’s gross estate.

{¶ 7} The cause is now before this court pursuant to the allowance of a

discretionary appeal.

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II

{¶ 8} The estate offers three propositions of law, all of which surround the

proper interpretation of R.C. 5731.09(A). This statute provides:

“Except as provided in division (B) of this section, the value of the gross

estate includes the value of an annuity or other payment receivable by a beneficiary

by reason of surviving the decedent under any form of contract or agreement under

which an annuity or similar payment was payable to the decedent, or the decedent

possessed the right to receive such annuity or payment, either alone or in

conjunction with another, for the decedent’s life or for any period not ascertainable

without reference to the decedent’s death, or for any period which does not in fact

end before the decedent’s death.

“However, the value of the gross estate includes only such part of the value

of the annuity or other payment receivable under the contract or agreement as is

proportionate to that part of the purchase price of the contract or agreement

contributed by the decedent. The value of the gross estate does not include the part

of the value of the annuity or other payment as is proportionate to the part of the

purchase price of the contract or agreement contributed by the employer or former

employer of the decedent, whether to an employee’s trust or fund forming part of a

pension, annuity, retirement, bonus, or profit-sharing plan or otherwise, if the

contributions were made by reason of the decedent’s employment.” (Emphasis

added.)

{¶ 9} The parties disagree on the proper interpretation of the second

paragraph of R.C. 5731.09(A). The estate argues that the value of Pioneer’s

contributions to Roberts’s employee retirement account remained exempt from

estate tax even after Roberts transferred them to his rollover IRA. In contrast, the

commissioner argues that the full purchase price of the IRA was attributable to

Roberts, leaving nothing to qualify for the exclusion described in R.C. 5731.09(A).

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{¶ 10} In support of its argument, the estate first asserts that R.C.

5731.09(A) is a statute that imposes a tax and therefore requires strict construction

against the state, with any doubt resolved in favor of the taxpayer. See Davis v.

Willoughby (1962), 173 Ohio St. 338, 19 O.O.2d 270, 182 N.E.2d 552, paragraph

one of the syllabus; Clark Restaurant Co. v. Evatt (1945), 146 Ohio St. 86, 31 O.O.

576, 64 N.E.2d 113, paragraph three of the syllabus. The estate observes that the

statute uses the words “include” and “includes” rather than the words “except” and

“exception,” which prominently appear in other statutes defining tax exemptions.

Because of this, the estate contends that R.C. 5731.09(A) actually defines what is

part of the gross estate and subject to tax.

{¶ 11} When ascertaining the meaning of statutory language, we must give

meaning to all portions of the statute. See Sims Bros., Inc. v. Tracy (1998), 83 Ohio

St.3d 162, 166, 699 N.E.2d 50, 54. In this case, we must look to both paragraphs

of R.C. 5731.09(A) in order to determine whether the statutory language at issue

imposes a tax or defines an exemption. If the provision does the latter, we must

strictly apply the statute against the exemption. Lakefront Lines, Inc. v. Tracy

(1996), 75 Ohio St.3d 627, 629, 665 N.E.2d 662, 664. “ ‘[T]axation is the rule, and

exemption is the exception. Since the reduction depends on legislative grace, the

statute must clearly express the exemption, Cleveland v. Bd. of Tax Appeals (1950),

153 Ohio St. 97, 99-100, 41 O.O. 176, 178, 91 N.E.2d 480, 482, paragraph one of

the syllabus, and a taxpayer must show his entitlement to it, Natl. Tube Co. v.

Glander (1952), 157 Ohio St. 407, 47 O.O. 313, 105 N.E.2d 648, paragraph two of

the syllabus.’ ” Id., quoting Ares, Inc. v. Limbach (1990), 51 Ohio St.3d 102, 104,

554 N.E.2d 1310, 1312; see, also, Vought Industries, Inc. v. Tracy (1995), 72 Ohio

St.3d 261, 264, 648 N.E.2d 1364, 1366.

{¶ 12} The first paragraph of R.C. 5731.09(A) declares that the value of the

gross estate “includes the value of an annuity or other payment receivable by a

beneficiary * * * under any form of contract or agreement under which an annuity

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or similar payment was payable to the decedent.” This paragraph thus provides a

general rule that the value of any annuity (or similar payment), regardless of how

it was funded or purchased, is included in the gross estate for tax purposes. This

paragraph is consistent with the overriding principle expressed in R.C. 5731.03,

which generally provides that the gross estate for tax purposes “shall include the

value of all property, to the extent of the interest therein of the decedent on the date

of the decedent’s death.” (Emphasis added.)

{¶ 13} While the first paragraph of R.C. 5731.09(A) is a taxing provision

describing the property included in valuing the gross estate, the second paragraph

unmistakably excludes certain property from a calculation of the gross estate’s

value. The second paragraph of R.C. 5731.09(A) explains that the value of the

gross estate does not include the part of the value of an annuity (or other similar

payment) “as is proportionate to the part of the purchase price * * * contributed by

the employer or former employer of the decedent * * * if the contributions were

made by reason of the decedent’s employment.” The second paragraph of R.C.

5731.09(A) thus exempts what the first paragraph would have otherwise included

as part of the gross estate. See In re Estate of White (1986), 25 Ohio St.3d 355,

357, 25 OBR 407, 408, 496 N.E.2d 888, 889 (interpreting the first sentence of R.C.

5731.12 as a taxing provision and the second sentence as an exemption provision).

We therefore conclude that the second paragraph of R.C. 5731.09(A) is a tax-

exemption provision. Accordingly, we must resolve any doubt as to the meaning

of R.C. 5731.09(A)’s second paragraph in favor of taxation and against the

applicability of the exemption. See id., 25 Ohio St.3d at 357-358, 25 OBR at 408,

496 N.E.2d at 889-890.

{¶ 14} Regardless of how we characterize the second paragraph of R.C.

5731.09(A), the estate argues that the disputed amount of Roberts’s rollover IRA

remains exempt from taxation. The estate contends that nothing in R.C. 5731.09(A)

requires that funds remain in the same employee “trust or fund” to which the

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employer originally contributed in order to retain their tax-exempt status. Rather,

the estate argues that the source of the funds is the dispositive factor. And because

the disputed amount of Roberts’s IRA is directly traceable to the amount of

Pioneer’s contributions to Roberts’s employee retirement account, the estate asserts

that the funds retain their exempt status under R.C. 5731.09(A) despite the fact that

Roberts transferred them from the employer-administered retirement fund to the

rollover IRA. We disagree with the estate because the language of R.C. 5731.09(A)

dictates a contrary result.

{¶ 15} The exclusion allowed by the second paragraph of R.C. 5731.09(A)

applies only to the “part of the value of the annuity or other payment as is

proportionate to the part of the purchase price of the contract or agreement

contributed by the employer or former employer of the decedent * * * if the

contributions were made by reason of the decedent’s employment.” (Emphasis

added.) The funds that the estate seeks to exempt do not fit within this description.

The only “contract or agreement” at issue in this case is the IRA contract or

agreement that Roberts entered into as an individual customer of Edward D. Jones

& Company. Pioneer was not a party to Roberts’s IRA contract and contributed

nothing to it by reason of Roberts’s employment. The only “contract or agreement”

to which Pioneer contributed funds within the meaning of R.C. 5731.09(A) was

Roberts’s employee retirement account, which no longer existed at the time of

Roberts’s death. While it is true that Roberts avoided paying federal income tax on

funds that he withdrew from his employee retirement account by transferring them

to a rollover IRA,2 there is no statutory support for the estate’s premise that the

funds retained the same status for purposes of Ohio estate taxation. Because

Roberts himself transferred the disputed funds to the rollover IRA, all contributions

2. See, generally, Sections 402 and 408, Title 26, U.S.Code.

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to the IRA’s “purchase price” were his alone, rendering the exemption in R.C.

5731.09(A) inapplicable to any part of the IRA’s value.

{¶ 16} The estate contends that this reading of R.C. 5731.09(A)’s second

paragraph is “unduly restrictive.” It urges us to interpret the exemption broadly to

apply to funds that are traceable to employer contributions, even if the decedent

has transferred the funds to a rollover IRA as Roberts did in this case.

{¶ 17} In support of its interpretation, the estate first argues that nothing in

the language of R.C. 5731.09(A)’s second paragraph clearly limits the exemption

to funds that remain in the same trust or fund to which the employer originally

contributed. But this argument turns the operative mode of analysis upside down.

The second paragraph of R.C. 5731.09(A) is an exemption provision that must be

strictly construed against the taxpayer. See In re Estate of White, 25 Ohio St.3d at

357, 25 OBR at 408, 496 N.E.2d at 889. Far from demonstrating an entitlement to

the exemption described in R.C. 5731.09(A), the estate has, at best, established an

ambiguity as to whether the phrase “contributed by the employer or former

employer” as used in the statute also refers to funds traceable to contributions from

the employer. We must construe this ambiguity against the estate and resolve any

doubt against the applicability of the exemption.

{¶ 18} The estate also attempts to support its interpretation by emphasizing

the phrase “or otherwise” in R.C. 5731.09(A). The second paragraph of R.C.

5731.09(A) exempts from estate taxation “the value of the annuity or other payment

as is proportionate to the part of the purchase price of the contract or agreement

contributed by the employer or former employer of the decedent, whether to an

employee’s trust or fund forming part of a pension, annuity, retirement, bonus, or

profit-sharing plan or otherwise.” (Emphasis added.) The estate argues that the

phrase “or otherwise” makes the exemption applicable to funds that are not

necessarily contained in an “employee’s trust or fund” at the time of a decedent’s

death. Thus, the estate contends that the funds in Roberts’s rollover IRA (to the

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extent traceable to Pioneer contributions to his employee retirement account) are

excluded when calculating the value of the gross estate. This argument is also

without merit because it ignores other vital portions of R.C. 5731.09(A).

{¶ 19} Admittedly, the phrase “or otherwise” in R.C. 5731.09(A) implies

that the tax exclusion could apply to funds residing in an account other than “an

employee’s trust or fund.” But this possibility does not lead us to conclude that any

part of Roberts’s rollover IRA is excluded from the value of the gross estate. The

first paragraph of R.C. 5731.09(A) includes in the gross estate “the value of an

annuity or other payment receivable by a beneficiary by reason of surviving the

decedent under any form of contract or agreement.” (Emphasis added.) The statute

repeats the phrase “contract or agreement” in the second paragraph of R.C.

5731.09(A), which excludes from the gross estate the value of an annuity (or similar

payment) that is “proportionate to the part of the purchase price of the contract or

agreement contributed by the employer or former employer of the decedent * * *

if the contributions were made by reason of the decedent’s employment.”

(Emphasis added.) The phrase “or otherwise” does not change the fact that any

payment receivable by a beneficiary of Roberts results from a contract or agreement

Roberts himself had with Edward D. Jones & Company and not from any contract

or agreement involving Pioneer. Absent a “contract or agreement” to which the

decedent’s former employer directly contributed, the exclusion in R.C. 5731.09(A)

is inapplicable. “ ‘There is no authority under any rule of statutory construction to

add to, enlarge, supply, expand, extend or improve the provisions of the statute to

meet a situation not provided for.’ ” Vought Industries, 72 Ohio St.3d at 265, 648

N.E.2d at 1367, quoting State ex rel. Foster v. Evatt (1944), 144 Ohio St. 65, 29

O.O. 4, 56 N.E.2d 265, paragraph eight of the syllabus.

{¶ 20} For the foregoing reasons, we uphold the court of appeals’

determination that the disputed portion of Roberts’s IRA should be included when

calculating the value of Roberts’s gross estate. Under R.C. 5731.09(A), the value

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of the gross estate includes the value of a rollover IRA that the decedent purchased

and to which the decedent’s employer or former employer did not directly

contribute by reason of the decedent’s employment. The judgment of the court of

appeals is affirmed.

Judgment affirmed.

MOYER, C.J., DOUGLAS and F.E. SWEENEY, JJ., concur.

RESNICK, PFEIFER and LUNDBERG STRATTON, JJ., dissent.

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LUNDBERG STRATTON, J., dissenting.

{¶ 21} I respectfully dissent from the majority’s restrictive interpretation of

R.C. 5731.09(A). I believe that funds in a qualified IRA that are directly attributed

to the decedent’s employer and were paid by reason of the decedent’s employment

should be excluded from the value of the decedent’s gross estate.

{¶ 22} R.C. 5731.09(A) is intended to exclude from the value of the gross

estate an employer’s contribution or payment made toward an employee’s

retirement. I believe that the key component of the exclusion is the source of the

funds, not their location upon death. The second paragraph of the statute, if read in

its entirety and not in fragments as the majority does, supports this interpretation.

It provides that the gross estate does not include the value of the fund that is

proportionate to the part “of the purchase price of the contract or agreement

contributed by the employer or former employer of the decedent, whether to an

employee’s trust or fund forming part of a pension, annuity, retirement, bonus, or

profit-sharing plan or otherwise, if the contributions were made by reason of the

decedent’s employment.” (Emphasis added.)

{¶ 23} The statute refers to “the purchase price of the contract or

agreement” then provides qualifying examples. The majority contends that the only

applicable contract is the IRA the decedent had with his brokerage company

because that is where the funds are currently located and the decedent’s Pioneer

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account, into which the employer paid contributions, no longer exists. I do not

agree with this narrow reading. The statute does not expressly require that the

employer’s contribution be confined to a “contract or agreement” that is established

or maintained by the employer. The statute enumerates certain applicable funds

but also provides for an alternative by including the words “or otherwise.” The

majority’s construction of the statute renders useless these words if “contract or

agreement” must be one of the employer-established funds referred to in the statute.

{¶ 24} I believe that a qualified rollover IRA may fall within the provision

for a contribution “otherwise” made. A qualified rollover IRA is established to

hold funds from an employer qualified retirement account. In many cases,

including this one, the retirement account is directly rolled over into the IRA and

the beneficiary never has possession of the funds. The employer’s contribution

remains an identifiable source of the IRA funds.

{¶ 25} This is a taxing statute that the General Assembly has amended

through the years. The statute initially excluded only public pensions from the

value of the gross estate. 1967 Am.Sub.S.B. No. 326, 132 Ohio Laws, Part I, 1942.

The General Assembly subsequently expanded this to include the armed services,

police and firefighters, and later both public and private employer-funded

retirement funds generally. 1970 H.B. No. 865, 133 Ohio Laws, Part III, 2706;

1975 Am.Sub.S.B. No. 145, 136 Ohio Laws, Part I, 396; 1976 Am.H.B. No. 1013,

136 Ohio Laws, Part II, 3467.

{¶ 26} I believe that the General Assembly has consistently focused on the

source of the funds, not the name of the fund in which they exist at the time of

death. If an employee is terminated and forced to withdraw or roll over a retirement

fund, or the employee elects to move the funds out of an employer’s stock plan that

is decreasing in value, the employee should not be penalized for moving the

retirement assets from the employer-created fund into another fund, so long as the

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source of the funds is identified. I do not believe that the General Assembly

intended to penalize such transfers.

{¶ 27} This decedent rolled his Pioneer retirement account directly into an

IRA opened with Edward D. Jones & Company. This dispute concerns only the

amount transferred that represents his employer’s contributions and interest earned

on those contributions. It is undisputed that the amount representing earnings and

appreciation attributable to the decedent’s contributions is fully taxable. In fact,

the decedent withdrew the funds that he contributed and paid taxes on that amount.

I believe that the mere transfer of funds from one account to another should not

convert the employer’s contributions into assets valued as part of the decedent’s

gross estate.

{¶ 28} I believe that a qualified rollover IRA falls within the contract or

agreement referred to in R.C. 5731.09(A) under this catchall phrase. Consequently,

I dissent. I would reverse the judgment of the court of appeals and reinstate the

judgment of the probate court.

RESNICK and PFEIFER, JJ., concur in the foregoing dissenting opinion.

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McCulloch, Felger, Fite & Gutmann Co., L.P.A., and William B. McNeil,

for appellant, estate of Robert Lawrence Roberts.

Betty D. Montgomery, Attorney General, and Barbara L. Barber, Assistant

Attorney General, for appellee, Thomas M. Zaino, Tax Commissioner of Ohio.

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