Opinion Information Sheet

Docket Number: 74974-4
Title of Case: ESTATE OF WYLIE M HEMPHILL ET AL VS STATE REVENUE ET AL
File Date: 02/03/2005
Oral Argument Date: 09/30/2004

SOURCE OF APPEAL
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Appeal from Superior Court of Thurston County
Docket No: 02-2-01722-1
Judgment or order under review
Date filed: 12/19/2003
Judge signing: Hon. Daniel J Berschauer

JUSTICES
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Authored by Charles W. Johnson
Concurring: Faith Ireland
C. C. Bridgewater
Barbara A. Madsen
Bobbe J Bridge
Gerry L Alexander
Richard B. Sanders
Susan Owens
Tom Chambers

COUNSEL OF RECORD
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Counsel for Appellant(s)
Charles Richard Jr Lonergan
Siderius Lonergan & Martin LLP
500 Union St Ste 847
Seattle, WA 98101-2394

G. Lawrence Salkield
Attorney at Law
2629 28th Ave W
Seattle, WA 98199-3319

Raymond Huber Siderius
Siderius Lonergan & Martin LLP
500 Union St Ste 847
Seattle, WA 98101-2394

Orly J Sorrel
Attorney at Law
2611 NE 113th St Ste 300
Seattle, WA 98125-6700

William Emmett Wall
Siderius Lonergan & Martin LLP
500 Union St Ste 847
Seattle, WA 98101-2394

Counsel for Respondent(s)
Debra Ellen Casparian
Attorney Generals Office/Revenue Div
905 Plum St Bldg 3 Fl 2
PO Box 40123
Olympia, WA 98504-0123

Donald F. Cofer
Attorney Generals Ofc/Revenue Div
905 Plum St Bldg 3 Fl 2
PO Box 40123
Olympia, WA 98504-0123

Amicus Curiae on behalf of WASHINGTON STATE FARM BUREAU FEDERATION
Richard Patrick Algeo
Attorney at Law
102 E Baldwin Ave
Spokane, WA 99207-2240

Gary C. Randall
Attorney at Law
601 W Main Ave Ste 714
Spokane, WA 99201-0613

Amicus Curiae on behalf of NATIONAL FEDERATION OF INDEPENDENT BUSINESS
Richard Patrick Algeo
Attorney at Law
102 E Baldwin Ave
Spokane, WA 99207-2240

Gary C. Randall
Attorney at Law
601 W Main Ave Ste 714
Spokane, WA 99201-0613

IN THE SUPREME COURT OF THE STATE OF WASHINGTON

ESTATE OF WYLIE M. HEMPHILL, )
by its personal representative, )
THOMAS W. HEMPHILL; ESTATE )
OF WYOMA G. SHEA, by its personal )
representative, BARBARA )
SAUERBREY; and ESTATE OF ) No. 74974-4
MORGAN J. O'BRIEN by its )
co-personal representative, NANCY )
O'BRIEN, )
)
Appellants, )
)
v. ) En Banc
)
STATE OF WASHINGTON, )
Department of Revenue (Estate Tax); )
and WILLIAM RICE, its acting chief )
executive officer, )
) Respondents. )
) Filed February 3, 2005

C. JOHNSON, J.--This case involves a challenge to the validity of the
Department of Revenue's assessment and calculation of estate taxes, under
chapter 83.100 RCW. The estates of Wylie M. Hemphill, Thomas W. Hemphill,
Wyoma G. Shea, Barbara Sauerbrey, Morgan J. O'Brien and Nancy
O'Brien, through their personal representatives (Appellants), represent, in
a class action, those appealing a Thurston County Superior Court cross-
motion summary judgment order dismissing their claim against the State of
Washington, Department of Revenue (Department).
Appellants are requesting a refund of estate taxes paid to the State.
Appellants contend any taxes paid should have been calculated under current
federal law, the Economic Growth and Tax Relief Reconciliation Act of 2001,
(EGTRRA), Pub. L. No. 107-16, 115 Stat. 38 (2001), not under a previous
version of federal law as of January 1, 2001. If current federal law is
used, the result would be lower state taxes owed or no state taxes owed at
all. The class action consists of three subclasses, which are represented
by: the Hemphill estate,1 the O'Brien estate,2 and the Shea estate.3 The
Department contends that current statutory language ties Washington estate
tax to federal tax law as of January 1, 2001, thereby making all
collections proper according to the language of RCW 83.100.200.
We granted direct review from the trial court. The trial court found that
Washington's estate tax law, chapter 83.100 RCW, specifically references
and incorporates the Internal Revenue Code as of January 1, 2001. It found
this reference establishes that Washington's estate tax does not complement
current federal law, but instead ties only to federal law from January 1,
2001. We reverse.
DISCUSSION
Washington has no inheritance tax. By initiative, the voters repealed the
state inheritance tax in 1981. However, like most states, Washington has
an estate tax, also called a 'death tax.' The 1981 initiative4 was
codified at chapter 83.100 RCW, expressly limiting the Washington estate
tax to 'an amount equal to the federal credit.' RCW 83.100.030(1).
Under this statute, the estate tax is received not as a separate tax but
through a tax credit established by the federal code. The credit reduces
the estate's total federal estate tax due and 'transfers' the amount of the
credit to the State. Thus, many states codified their estate tax by
equating the state tax to the total credit allowed to them by the federal
government. Such a tax is called a 'pickup' tax. By 2001, 38 states
relied exclusively on a 'pickup' tax to receive their estate taxes.5 In
this way, states are able to receive their estate tax while not creating
any additional tax burden on the estate.
In 2001, the legislature enacted revisions to chapter 83.100 RCW that
referenced the Internal Revenue Code as 'the United States Internal Revenue
Code of 1986, as amended or renumbered as of January 1, 2001.' RCW
83.100.020(15). The issue in this case arises because the federal code has
changed since 2001, and our statute has not matched these changes.
Although proposals were presented, the Washington Legislature has not acted
to revise our statute since the 2001 revision.6
In 2001, the EGTRRA was enacted by Congress, which ends the federal estate
tax and repeals the federal estate tax credit for state estate taxes. The
implementation of EGTRRA essentially ends the estate tax revenue sharing
between the federal government and states.
Under EGTRRA, all federal estate tax will be repealed as of 2010. Between
2001 and 2010, the base exemption amount will increase from the prior
taxable estate value of $700,000. For example, for decedents dying in
2002, the exemption will be $1 million, and by 2009 will be $3.5 million.
Prior to EGTRRA, unless an estate was worth $700,000, no federal taxes were
paid. Joel Michael, A Survey of State Responses to EGTRRA's Estate Tax
Changes, State Tax Notes, May 3, 2004, at 345-46, available at (last
visited Jan. 28, 2005).
EGTRRA is also phasing out the state estate tax credit, which will be fully
eliminated by January 1, 2005. '{F}or decedents dying in 2002, a 75
percent credit was allowed; in 2003, a 50 percent credit; and in 2004, a 25
percent credit.' Michael, supra, at 346. These credits are different from
those recognized under the 2001 version of the Internal Revenue Code. All
parties represented as estates in this case died in 2002, after the
implementation of EGTRRA.
We have to decide whether the legislature's inaction in not revising the
statutory definitional references has changed the character of our estate
tax, which has been a 'pickup' tax based on current federal law. We hold
it has not changed.
The two statutes at issue are RCW 83.100.030, which at subsection (1)
declares a '{state estate} tax in an amount equal to the federal credit is
imposed on every transfer of property of a resident,' and RCW 83.100.020,
which defines a '{f}ederal credit' as based on 'the United States Internal
Revenue Code of 1986, as amended or renumbered as of January 1, 2001.' RCW
83.100.020(3), (15).
The Department argues that in following the current definitional language
of the section, the tax scheme imposes an estate tax equal to the federal
credit as of January 1, 2001, prior to the implementation of EGTRRA.
Appellants contend that the operative meaning of RCW 83.100.030 asserts a
legislative intent to maintain a state estate tax scheme that does not
exceed current federal credits.
We dealt with a similar issue in Estate of Turner v. Department of Revenue,
106 Wn.2d 649, 724 P.2d 1013 (1986). In that case, we recognized that
Washington had a 'pickup' tax and held 'that Washington estate tax is
limited to those estates which are required to pay federal tax.' Estate of
Turner, 106 Wn.2d at 655.
The Department's argument in Estate of Turner was based on the
then-existing definition of 'federal credit' provided in RCW 83.100.020(3)
as 'the credit for estate taxes allowed by section 2011.' The Turner
estate had qualified for additional credits under the then-existing
sections 2010 and 2013 of the Internal Revenue Code. The Department argued
that since our statute specified only section 2011 credits, other federal
credits could not be applied to calculate the state tax due. We rejected
the Department's argument.
We also determined that based on the 1981 initiative, Washington had
abolished the state inheritance tax and adopted a 'pickup' tax. In part,
we relied on the official explanation of the initiative that stated, ''Only
estates liable for federal estate tax would be subject to tax under the
initiative . . . .'' Estate of Turner, 106 Wn.2d at 654 (quoting Official
Voters Pamphlet, General Election 6 (Nov. 6, 1981)). We stated that
'pickup' statutes ''do not increase the amount of the combined state and
federal tax liability, but merely authorize the state to share in the
proceeds of the federal estate tax to the extent of the allowable
credit . . . .'' Estate of Turner, 106 Wn.2d at 655 (quoting 42 Am. Jur.
2d Inheritance, Estate, and Gift Taxes sec. 244, at 452 (1969)).
We concluded that when an estate has no federal estate tax, there is no
obligation to pay any state estate tax. In doing so, we expressly rejected
the Department's fundamental argument that our statute imposes an
independently operating Washington estate tax.
If we now adopt the Department's rationale that RCW 83.100.020
calculates taxes based on a certain date, then when the federal estate tax
is completely abolished in 2010, the Department would eventually collect
all of its state estate taxes as a separate and independent tax. In the
subclass represented by the Shea estate, for example, the Department
maintains that an estate not obligated to file a federal form must obtain a
newly created state estate tax form, file taxes, and pay completely
independent taxes. Such calculations are contrary to what we held in
Estate of Turner and contrary to RCW 83.100.030. Any tax obligation which
exceeds the applicable federal allowances and requirements would be
inconsistent with the recognized intent of the voter initiative.
Until or unless the legislature revises RCW 83.100.030 to specifically
and expressly create a stand alone estate or inheritance tax, RCW
83.100.030 remains as a pick-up tax, in which all state estate tax due must
be fully reimbursed as a current federal credit. When no credit exists or
where the credit is being phased out, as here, RCW 83.100.030 similarly
calls for a reduction in the state allowed credit. Otherwise, total 'tax'
obligations would exceed federal obligations.
The Department contends that 'the Legislature substantially amended
{chapter 83.100 RCW} when it enacted the Estate and Transfer Tax Act of
1988,' thereby decoupling the tax scheme from its prior classification
interpreted in Estate of Turner. Br. of Resp'ts at 8. This argument is
not persuasive. We find no indication of this in the legislative history,
and the Department has not identified where the legislature changed the
character of the tax and created an independently operating Washington
estate tax.
These statutory revisions simply began a trend by the legislature to tie
the statute to a specific federal tax code, as we have held is
constitutionally required. Const. art. II, sec. 1; Diversified Inv. P'ship
v. Dep't of Soc. & Health Servs., 113 Wn.2d 19, 24-25, 775 P.2d 947 (1989).
These periodic revisions ended with the January 1, 2001, reference.
The estate tax scheme in Washington as currently written, though not
automatically adopting specific federal law, must be administered
complementary to federal law to guarantee that a separate state tax does
not burden estates. See Estate of Turner, 106 Wn.2d at 653-54. A new tax
burden can be created only by law that states such a purpose. Const. art.
VII, sec. 5. 7
By taking no action, the legislature has created an internal conflict
within the statute. Such a conflict can be resolved only through a clear
directive by the legislature. The statute cannot be so ambiguous as to
say, '{n}o Washington return need be filed if no federal return is
required,' while also referencing an old federal code that requires
Washington returns when no federal return is filed. RCW 83.100.050(1).
The same incongruity exists when dealing with state tax burdens that exceed
the current federal credit. RCW 83.100.030.
Ambiguities in taxing statutes are construed 'most strongly against the
government and in favor of the taxpayer.' Dep't of Revenue v. Hoppe, 82
Wn.2d 549, 552, 512 P.2d 1094 (1973). In this case, the original
initiative creating this tax statute, our prior interpretation of the
statute, and the current wording of the statute show that Washington still
has a 'pickup' tax based on current federal law. Any amount of a state
estate tax not fully absorbed by a current federal credit is an invalid
independent tax.
CONCLUSION
Accordingly, Appellants are due a refund of estate taxes collected by the
Department since January 1, 2002.
The decision of the trial court is reversed and remanded.

We Concur: