review from the Iowa Court of Appeals.
from the Iowa District Court for Polk County, Michael D.
Iowa Department of Revenue seeks further review of decision
of court of appeals that allowed taxpayer to avoid state
inheritance tax through a postmortem family settlement
agreement. DECISION OF COURT OF APPEALS VACATED; DISTRICT
COURT JUDGMENT AFFIRMED.
M. Repp and F. Richard Lyford of Dickinson, Mackaman, Tyler
& Hagen, P.C., Des Moines, for appellant.
J. Miller, Attorney General, Donald D. Stanley Jr., Special
Assistant Attorney General, and Hristo Chaprazov, Assistant
Attorney General, for appellee.
appeal, we must decide whether the court of appeals correctly
held a taxpayer avoided an Iowa inheritance tax through a
private postmortem family settlement agreement (FSA). The
taxpayer's father-in-law, over five years before his
death, signed a beneficiary form listing her as a contingent
beneficiary of his brokerage account. That account
transferred to her alone upon his death, and the Iowa
Department of Revenue (IDOR) determined the estate owed the
inheritance tax on the full account value. The decedent's
grandchildren from his son's prior marriage sued the
taxpayer, claiming they were entitled to the brokerage
account under their grandfather's will. They alleged
their grandfather had dementia and lacked the mental capacity
to execute an enforceable beneficiary designation for his
brokerage account. The taxpayer settled the lawsuit by
transferring half the account value to the grandchildren
under an FSA without any judicial determination of
incapacity. She then sought a refund of part of the
inheritance tax already paid. The IDOR denied the refund and
determined the taxpayer failed to meet her burden to
establish incapacity. The district court affirmed. The
taxpayer appealed, and we transferred the case to the court
of appeals, which reversed and held the FSA controlled the
tax issue. We granted the IDOR's application for further
reasons explained below, we hold that the IDOR correctly
denied the taxpayer's refund, and its refusal to give
effect to the FSA was not irrational, illogical, or wholly
unjustifiable. Without an adjudication of incapacity, the
beneficiary designation transferred the brokerage account to
the decedent's daughter-in-law upon his death, and the
postmortem FSA was not binding on the IDOR and could not
avoid the inheritance tax when the taxpayer failed to prove
incapacity in the IDOR's contested case proceeding. The
contrary holding of the court of appeals would allow parties
to evade inheritance taxes without an adjudication defeating
facially valid beneficiary designations. We vacate the
decision of the court of appeals and affirm the district
court judgment that upheld the IDOR decision.
Background Facts and Proceedings.
August 17, 2003, Lester D. Gardiner Sr. and his wife, Mildred
M. Gardiner, executed a transfer on death (TOD) agreement
naming their only son, Lester Gardiner Jr., as the sole
primary beneficiary of their brokerage accounts at Edward D.
Jones. The TOD agreement designated their son's wife,
Beverly Gardiner (now Beverly Gardiner Nance), as the sole
contingent beneficiary. Lester Sr. was nearly age 92 when he
signed the beneficiary designation. James Gibbons, a broker
for Edward D. Jones, was present when the TOD agreement was
executed and later testified that Lester Sr. and Mildred were
mentally alert when they signed it. Beverly was not informed
of her contingent designation at that time.
Jr. had been married and divorced before he married Beverly
in 1979. Lester Jr.'s three children from his prior
marriage- Donald Gardiner, Donitta Gardiner, and Dianne
Gardiner Green-are Lester Sr.'s only grandchildren.
Donald, Donitta, and Dianne were the beneficiaries of Lester
Sr.'s will, which he executed on November 22, 1988,
nearly five years before he executed the TOD agreement.
Sr. and Mildred moved into the Rowley Masonic Home in Perry
in 2000 and resided in that nursing home until their deaths.
Mildred died in 2004, and Lester Jr. died in 2007. On August
3, 2007- almost four years after Lester Sr. executed the TOD
agreement-Beverly and Dianne filed an involuntary petition
seeking the appointment of a guardian and conservator for
Lester Sr. One of his treating physicians opined in a signed
statement that Lester Sr.'s "mental condition makes
him incapable of caring for his own personal safety or
provid[ing] for the necessities of life such as food,
shelter, clothing and continuing medical care." Lester
Sr. was declared unfit to manage his affairs on September 11,
and Beverly and Dianne were appointed coguardians and
coconservators. Lester Sr. died testate on January 31, 2009,
at the age of 97.
Lester Sr.'s death, his grandchildren, as coexecutors of
his estate, sued Beverly, challenging the validity of the
beneficiary designation form. They alleged that Lester Sr.
lacked the requisite capacity to execute the form in August
2003 due to his dementia. Beverly denied the allegations,
claiming Lester Sr. was competent when he and his wife signed
the beneficiary designation over five years before his death.
the lawsuit was pending, the estate timely filed an
inheritance tax return on October 20, 2009. The estate paid
the required inheritance tax of $18, 988 based on the fact
that Beverly received the full balance of the TOD brokerage
the grandchildren's lawsuit pending, counsel for the
estate retained Dr. Robert Bender to review the medical and
nursing home records of Lester Sr. and his wife. Dr. Bender
had never examined or seen Lester Sr. Dr. Bender opined in a
June 21, 2010 letter that both Lester Sr. and his wife
suffered from dementia. He noted that the records showed
Lester Sr. "was found to have impairment in
decision-making skills" by June 2002, and by November of
that year, Lester Sr. "was often confused and unable
to manage his own affairs." Based on his review of the
records, Dr. Bender concluded that Lester Sr. was incapable
of understanding his finances and "was very vulnerable
to undue influence being exerted on him by those around
him." Lester Sr.'s grandchildren used Dr.
Bender's opinion to support their claim that Lester Sr.
lacked the requisite mental capacity to execute the
beneficiary designation form in August 2003. Beverly found no
expert who would opine to the contrary. However, Gibbons, the
broker who was present when the TOD agreement was executed in
2003, testified at a deposition that he believed both Lester
Sr. and Mildred to be mentally alert at the time.
27, the grandchildren and Beverly settled their dispute in
mediation and entered into an FSA. The IDOR was not a party
to the FSA. The FSA provided that the brokerage accounts
would be liquidated and the proceeds divided equally between
Beverly and the estate. The proceeds had already been reduced
by the inheritance tax payment, and the parties agreed that
any tax refund would be divided equally between the estate
and Beverly. The probate court approved the FSA on September
3 without any adjudication of Lester Sr.'s incapacity in
estate filed an amended inheritance tax return on October 28.
The estate requested a refund of $10, 034 based on the FSA
providing that half of the brokerage accounts were paid to
Lester Sr.'s grandchildren. The estate claimed the
proceeds passing by operation of the FSA to the grandchildren
were exempt from inheritance tax under Iowa Code section
450.9 (2009) as property passing to Lester Sr.'s lineal
descendants. The IDOR denied the refund on November 3. The
estate protested the denial on December 29. The estate
transferred any refund claim to Beverly. The estate was
26, 2013, the IDOR received a letter from Beverly's
counsel requesting an informal conference. On July 24, 2014,
Beverly filed a formal written demand to initiate a contested
case, and the IDOR filed an answer denying her right to a
November 24, a contested case hearing was held before an
administrative law judge (ALJ). Beverly argued that the
beneficiary designation was invalid, relying on Dr.
Bender's letter opining that Lester Sr. was incompetent
in August 2003 because he suffered from
dementia. Dr. Bender-who had not personally examined
Lester Sr.- was not called as a witness at the contested case
hearing. Beverly testified that she visited her father-in-law
during the weekends at the nursing home. But she did not
testify regarding her personal observations of Lester
Sr.'s mental state at the time he executed the TOD
agreement or at any other time.
issued a proposed order on February 3, 2015. The ALJ found
that the IDOR had subject matter jurisdiction over the issue
of Lester Sr.'s competency to execute the TOD agreement
because such determination would be necessary to decide
whether a taxable event occurred. The ALJ concluded that the
FSA, executed after the transfer of the accounts to
Beverly through the TOD agreement, "ha[d] no bearing on
whether a taxable event occurred when the Accounts passed to
[Beverly]." The ALJ also determined that Beverly failed
to prove by clear, convincing, and satisfactory evidence that
Lester Sr. lacked sufficient mental capacity to execute the
beneficiary designation. The ALJ concluded that upon Lester
Sr.'s death the TOD accounts passed directly to Beverly
and that the IDOR, therefore, properly denied the refund
Beverly appealed to the director of the IDOR. She filed a
motion to allow witness testimony and a supporting brief,
requesting the opportunity to present the oral testimony of
Dr. Bender. The IDOR filed a resistance. The director granted
Beverly's motion to allow witness testimony.
director held an evidentiary hearing on January 14, 2016. Dr.
Bender testified. He described the "mini-mental status
examinations" used to evaluate a patient's cognitive
abilities and elaborated on how Lester Sr.'s performance
on such tests demonstrated his severe dementia. Dr. Bender
concluded his direct testimony by stating, "My opinion
is that [Lester Sr.] was cognitively incapable of
understanding the document that he signed in August of
'03, and that shouldn't have happened from the
medical perspective." On cross-examination, Dr. Bender
admitted that he did not remember ever personally examining
Lester Sr. or Mildred or speaking to any of the treating
director found that In re Estate of Bliven, 236
N.W.2d 366 (Iowa 1975), was controlling and, therefore,
agreed with the ALJ that the FSA had no bearing on whether a
taxable event occurred when the TOD accounts passed to
Beverly. The director rejected Beverly's claim that
In re Estate of Van Duzer, 369 N.W.2d 407 (Iowa
1985) (involving a spousal election against the will),
controlled. The director noted that "the portion of the
TOD that [Beverly] agreed to give to Decedent's
beneficiaries under the Family Settlement Agreement passed
not from Decedent's estate to the beneficiaries but from
[Beverly] to the beneficiaries."
director also determined the IDOR had subject matter
jurisdiction over the issue of Lester Sr.'s competency
and that Beverly failed to meet her burden of proof on the
issue of her father-in-law's alleged lack of capacity.
The director reasoned,
No physician or other medical practitioner who provided care
to the decedent at the time that he executed the TOD
testified at either the Administrative Law Judge or the
Director hearing. In fact, no witness testified regarding any
personal observations of the Decedent at the time he executed
At the hearing before the Director, Dr. Bender testified to
explain his opinion regarding the significance of the
Decedent's mini-mental status examination results. He
also testified, based on his review of the mini-mental status
examination results, it was his opinion that Decedent was not
competent when he executed the TOD. However, Dr. Bender did
not ever personally examine the Decedent. The oral testimony
was consistent with the information provided to the
Administrative Law Judge, however, it did not rise to the
level of clear and convincing evidence that the contract
should be set aside.
Based on the foregoing evidence, the Protester has not met
her burden to prove by clear, convincing, and satisfactory
evidence that the Decedent was incompetent when he executed
filed a timely petition for judicial review in the district
court. The district court agreed with the director that
Bliven controlled and that the postmortem FSA had no
effect on the amount of inheritance tax owed. The district
court concluded that the assets covered by the TOD agreement
passed to Beverly at the moment of Lester Sr.'s death,
and "any entitlement to those assets by his
grandchildren was created after his death by virtue of the
family settlement agreement." The district court
affirmed the decision of the IDOR denying Beverly's
request for a refund of inheritance tax.
appealed, and we transferred the case to the court of
appeals. The court of appeals concluded that Van
Duzer-not Bliven- controlled and that the FSA
changed how half of Lester Sr.'s brokerage accounts
passed upon his death. As a result, the court determined that
the settlement proceeds paid to the grandchildren under the
FSA were exempt from inheritance tax. The IDOR filed an
application for further review, which we granted.
Standard of Review.
review is governed by the standards set forth in Iowa's
Administrative Procedure Act, chapter 17A." Lange v.
Iowa Dep't of Revenue, 710 N.W.2d 242, 246 (Iowa
2006). "In exercising its judicial review power, the
district court acts in an appellate capacity." Iowa
Ag Constr. Co. v. Iowa State Bd. of Tax Review, 723
N.W.2d 167, 172 (Iowa 2006) (quoting Mycogen Seeds v.
Sands, 686 N.W.2d 457, 463 (Iowa 2004), superseded
by statute on other grounds, 2004 Iowa Acts 1st
Extraordinary Sess. ch. 1001, §§ 12, 20, as
recognized in JBS Swift & Co. v. Ochoa, 888 N.W.2d
887, 890, 898-900 (Iowa 2016)). "When we review the
district court's decision, 'we apply the standards of
chapter 17A to determine whether the conclusions we reach are
the same as those of the district court.' "
Id. (quoting Mycogen Seeds, 686 N.W.2d at
464). If we reach the same conclusions, we affirm; if not, we
fighting issues here turn on the IDOR's factual
determinations and application of law to those facts. We may
grant relief if the taxpayer's substantial rights have
been prejudiced because the agency action is
[b]ased upon a determination of fact clearly vested by a
provision of the law in the discretion of the agency that is
not supported by substantial evidence in the record before
the court when that record is viewed as a whole.
Code § 17A.19(10)(f); see also Iowa Ag
Constr. Co., 723 N.W.2d at 173 (concluding that factual
determinations regarding the applicability of certain sales
tax exemptions were clearly vested by a provision of law in
the discretion of the agency when "[t]he case was tried
as a contested case proceeding in which factual findings were
made based on evidence produced"). For purposes of our
"Substantial evidence" means the quantity and
quality of evidence that would be deemed sufficient by a
neutral, detached, and reasonable person, to establish the
fact at issue when the consequences resulting from the
establishment of that fact are understood to be serious and
of great importance.
Code § 17A.19(10)(f)(1). "In assessing
evidentiary support for the agency's factual
determinations, we consider evidence that detracts from the
agency's findings, as well as evidence that supports
them, giving deference to the credibility determinations of
the presiding officer." Lange, 710 N.W.2d at
247; see also Iowa Code §
factual determinations are by law clearly vested in the
agency, it follows that application of the law to the facts
is likewise vested by a provision of law in the discretion of
the agency." Iowa Ag Constr. Co., 723 N.W.2d at
174; see also Mycogen Seeds, 686 N.W.2d at 465. We
therefore can only reverse the agency's application of
the law to the facts if we determine the application was
"irrational, illogical, or wholly unjustifiable."
Iowa Ag Constr. Co., 723 N.W.2d at 174 (quoting Iowa
Code § 17A.19(10)(m) (allowing a court to
reverse when the challenger's ...