In lieu of the tax credit offered to taxpayers who must pay state death taxes as well as federal estate taxes, Congress added § 2058 to the Internal Revenue Code, effective January 1, 2005.¹² This new provision allows a decedent's estate to deduct "from the value of the gross estate the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State. . . ."¹³ The value of this deduction (in terms of how much federal estate tax is saved by claiming the deduction) will vary with the size of the estate. However, if the state of Missouri doesn't impose an estate tax, then, at least for Missouri resident decedents or owners of property located in Missouri, IRC § 2058 is irrelevant.

III. Some Hypotheticals

Perhaps the Missouri Department of Revenue isn't interested in collecting taxes from an unpopular source, and thus has deliberately decided to ignore its possible right to continue to collect the Missouri estate tax from the estates of Missouri property-owning decedents who die after January 1, 2005. Because of this political sensitivity, the following hypothetical arguments that the DOR might assert (or that the General Assembly might consider) in order to enhance state revenues probably will be ignored. Still, spenders of the public fisc no doubt have noticed that in 2000, the state of Missouri took in $132,700,000 from Missouri's estate tax; and in 2001 Missouri's estate tax receipts were $156,819.000.¹⁴ As might have been expected, the effect of the DOR's position that only that portion of the § 2011 credit which actually reduces federal estate taxes payable coupled with the limits on the § 2011 credit (75% in 2002; 50% in 2003; 25% in 2004 described above) reduced Missouri's estate tax receipts to $136,955,000 in 2002, $79,071,000 in 2003, and only $61,500,000 in 2004.¹⁵ Receipts in 2005 from Missouri's estate tax apparently will be collected only with respect to estates of decedents who died before January 1, 2005, and thus probably will be less than half of this tax's collections for 2004. Receipts of this tax will decline to zero in 2006 based on the DOR's decision to refrain from trying to collect any taxes based on the present statutory scheme.

The state legislature's only response to EGTRRA thus far has been §145.1000, RSMo, which states:

Other provisions of this chapter to the contrary notwithstanding, if the federal estate tax imposed pursuant to Section 2011 of the Internal Revenue Code, as amended, is repealed, then no tax shall be imposed on the transfer of a decedent's estate in Missouri. The provisions of this section shall become effective on the same date as the effective date of the repeal of the federal estate tax.¹⁶

Could DOR Argue That § 145.011, RSMo, Should Be Construed as Referring to § 2011 of the Internal Revenue Code as it Existed in 1980?

A statute which incorporates a federal law by reference ought to have a fixed and not floating reference point. Otherwise, in effect, the Missouri legislature has ceded jurisdiction to the U.S. Congress to modify Missouri's revenue laws from time to time. Unless the Missouri Constitution expressly authorizes it, letting Congress set Missouri's estate tax rates should be considered an unconstitutional delegation of the General Assembly's taxation responsibility. For the General Assembly to incorporate laws yet to be written by Congress within Missouri's estate taxation scheme is to let legislators elected by out-of-state voters determine Missouri's tax revenues.¹⁸ After all, it took an amendment to the state constitution to permit the state legislature to incorporate federal definitions of income into the state's income tax laws.¹⁹ No such state constitutional amendment exists which allows incorporation of federal estate tax definitions as they are changed from time to time by the U.S. Congress. Indeed, Article X of Missouri's Constitution expressly provides: "The power to tax shall not be surrendered, suspended or contracted away, except as authorized by this constitution."²⁰

The Missouri Constitution does allow the state's income tax laws to incorporate federal definitions of income, so long as the rate of tax is separately determined by Missouri's General Assembly.²¹ Accordingly, when Missouri's incorporation of federal income tax concepts resulted in an effective taxation of Social Security under Missouri's income tax laws, Mr. and Mrs. Carter brought suit challenging the state's right to do so. Among the arguments these taxpayers made in opposition to their having to pay state income tax on their Social Security income was that "pegging of Missouri taxpayers' adjusted gross income to the taxpayers' federal adjusted gross income is an unconstitutional delegation of legislative power. . . ."²²

The Supreme Court of Missouri, in the case of Carter v. Department of Revenue,²³ dismissed this argument because of the express provision in the constitution of the state of Missouri which allows the General Assembly to "define income by reference to provisions of the laws of the United States. . . ."²⁴ But the issue in Carter involved income taxes only-not estate taxes. Furthermore, in Carter, the tax rate which applied to the Carters' Social Security income was set by the Missouri General Assembly, not by Congress.

No constitutional provision permits Missouri's General Assembly to delegate the authority to change Missouri's estate tax laws to the U.S. Congress. Article X, § 4(d) of the Missouri Constitution was the only authority cited by the Supreme Court of Missouri in upholding Missouri's income tax scheme against a challenge based on the argument that it violates Article III, § 1, and Article X, § 2 of the Missouri Constitution. If our state's estate tax law is deemed to incorporate within it each change to the rate schedule within § 2011 (as was the case in 2002, 2003, and 2004), then the U.S. Congress, indeed, not only has been delegated the General Assembly's power to establish tax definitions, but the power to set the rate of tax as well.

Furthermore, EGTRRA also reduced the burden of the federal estate tax by increasing the unified credit (applicable exclusion amount) prescribed by IRC § 2010.²⁵ This had the effect of gradually reducing the amount of estate taxes payable each year to both Missouri and the IRS by increasing the "applicable exclusion amount" specified in § 2010(c). This increase is tantamount to setting (decreasing) the tax rate of Missouri's estate tax over the years 2001 through 2005, again without any action on the part of Missouri's General Assembly. Thus, it seems that a good argument can be made that Missouri's existing estate tax law, as it has been interpreted by DOR, is unconstitutional.

Every statute is entitled to the presumption that the enacting legislature intended a constitutional result. If the only way to construe a statute as constitutional is by reference to a "fixed" and not "floating" vantage point, i.e., by reference to the language of § 2011 as it existed when § 145.011, RSMo, was enacted, then shouldn't that construction be applied? Otherwise, as Congress changes either IRC § 2010 or § 2011, Missouri's revenues change without any action by the General Assembly.

Naturally, if DOR were to adopt the foregoing argument, this would have the effect of causing estates of Missouri residents to pay more tax than would have been the case had Congress not repealed (albeit temporarily) § 2011. Until EGTRRA, the effect of § 145.011, RSMo, on estates was inconsequential-the tax paid to the State of Missouri would have been paid to the IRS but for the "pickup" specified by that law. The tax arrangement was revenue neutral from the decedent's estate's perspective. But if that statute is construed as requiring the payment of a Missouri estate tax measured by the state death tax credit that would have been allowed by § 2011 as it existed in 1980, then a tax payment to Missouri in addition to the full federal estate tax payable under current law would result. Of course, the taxpaying estate would receive the "benefit" of the deduction afforded by § 2058 under these circumstances. But that would not make the estate whole.

For the largest of estates (those with a taxable estate of more than $2,500,000), the federal estate tax rate for 2005 on amounts above this threshold is 47%.²⁶ Accordingly, and for example, if such an estate were forced to pay $10,000 in Missouri estate taxes, that estate's federal estate tax bill would decline by $4,700 because of the deduction afforded by IRC § 2058-a net loss to that estate of $5,300 in tax above the result which would have applied (all other things being equal, including the maximum tax rate) had the tax been computed in 2001 (or 1980, for that matter). In other words, if a decedent's estate pays out $10,000 in state estate taxes, even though IRC § 2058 reduces its federal tax burden by $4,700, the estate would still find itself paying out $5,300 more in total tax (federal and state combined) than would have been the case in 2001 and earlier years.

Presumably, the reason no challenge has been lodged through the Missouri courts against the Missouri estate tax (until now, at least), is because, from the taxpaying public's perspective, it did not cost anything, i.e., not paying the Missouri estate tax would result in the estate's federal estate tax bill increasing by the same amount. Thus, there was no financial incentive to challenge Missouri's estate tax, and no discernable non-financial reason either. But if the DOR were to adopt the above described construction of § 145.011, RSMo, a challenge certainly would result. Can the outcome of that challenge be predicted?

In the case of Estate of Hemphill v. Revenue,²⁷ representatives of several decedents' estates sought a refund of Washington state estate taxes that the Washington Department of Revenue asserted should be computed based on IRC § 2011 before EGTRRA. The Washington Supreme Court rejected the argument of the state's DOR that Washington's estate tax was a "stand alone" tax.²⁸ This holding was based in major part on the language of the voter initiative which adopted Washington's estate tax law and repealed its former inheritance tax.²⁹ State constitutional objections to the law based on an impermissible delegation of the legislative taxing authority were not made. Instead, the Hemphill case was strictly one of statutory construction. Thus, although the Hemphill case may seem applicable, it doesn't appear to be pertinent and probably wouldn't be considered as relevant precedent.

The Riethmann Trust³⁰ case may give a clearer indication of how the Supreme Court of Missouri would rule if presented with a DOR argument similar to the Washington state's pre-Hemphill approach to EGTRRA. In Riethmann Trust, the taxpayer (the trust) didn't need the tax credit offered by IRC § 2011 to eliminate its federal estate tax liability-it had enough tax credits under another provision of the IRC (§ 2013-the credit for taxes paid on prior transfers) to completely shelter the trust from having to pay any federal estate tax. The Missouri DOR asserted that the language of § 145.011, RSMo ("but not less than the maximum credit for state death taxes allowable. . .") meant that a Missouri estate tax was nevertheless payable. The Supreme Court of Missouri began its analysis in the Riethmann Trust case by stating that "[t]he clear purpose [of §145.011] is to pickup revenue that would otherwise go to the federal treasury."³¹ Where the court found this "clear purpose" escapes the author of this article, as none was cited or appears from the legislative history to § 145.011. Regardless, the Court went on in its opinion to wholly read out of § 145.011 the language quoted above. The Riethmann Trust holding means that if no tax benefit (reduction in federal estate taxes payable) results from the application of the credit allowed by IRC § 2011, then no Missouri estate tax is payable.³² The constitutional issues raised in this article were not raised in the Riethmann Trust case, however. Nevertheless, the author predicts that it would be too difficult for the Supreme Court of Missouri to ignore its opinion in Riethmann Trust. It would be impossible to reconcile that case with the conclusion that, for § 145.011 to be constitutional, it must incorporate only the federal estate tax law prior to EGTRRA.³³ The Supreme Court of Missouri would have to repudiate all the concepts it articulated in Riethmann Trust in order to resurrect Missouri's estate tax. Assuming this would occur if the proper case were brought before the Supreme Court of Missouri probably is unrealistic.

IV. Budgeting

The obvious appeal of a "painless tax" no doubt influenced Missouri's legislators when they scrapped Missouri's inheritance tax in favor of the "pickup tax" that Congress nullified (for the time being, at least). If Congress ultimately does repeal the federal estate tax, Missouri's estate tax simultaneously will be repealed. If Congress does nothing, presumably DOR will begin collecting this tax again in 2011. How can rational state budgets be prepared when $150,000,000 in revenue can materialize and then disappear with the vagaries of federal law? Thus, even if Missouri's estate tax can be construed as not violating the Missouri Constitution, it is a bad idea in its present form.

V. Conclusion

The U.S. Congress did not take into account the damage done to states such as Missouri when it changed IRC § 2011, even though, as of the date EGTRRA was adopted, fully 38 states had "pickup" laws similar to Missouri's estate tax scheme.³⁴ The repeal of § 2011 had the effect of increasing the amount of revenue raised by the federal government because it no longer had to share as large a portion of the federal estate tax with the "pickup" states, i.e., those states whose legislatures had enacted "pickup" or "sponge" taxes such as Missouri's. The federal gain in this regard was literally Missouri's loss. That this is true perhaps is the best reason for Missouri's tax system not to become the "tail of the federal tax dog" in the future.

Footnotes

¹Craig A. Van Matre is the managing shareholder of Van Matre & Harrison, P.C. in Columbia. He is a graduate of the University of Missouri-Columbia School of Law (J.D. 1970) and the New York University School of Law (LL.M. in Taxation 1974). He is a member of The Missouri Bar and the Boone County and American Bar Associations. Mr. Van Matre was assisted in the preparation of this article by UMC law student Fredrick Lutz.

² Sections 145.011, et seq,, RSMo 1980; repealed by § 145.009, RSMo.

³ Sections 145.009-145.995, RSMo 2000.

⁴ See Riethmann Trust v. Dir. of Revenue, 62 S.W.3d 46, 47 (Mo. banc 2001); William B. Prugh & Daniel T. Murphy, Recent Developments in Missouri: Missouri Estate Tax and Federal Credit for State Death Taxes, 54 UMKC L. Rev. 590 (1986).

⁵ 26 U.S.C. § 2011(a).

⁶ 26 U.S.C. § 2011(b) (the credit as a percentage of a decedent's adjusted taxable estate ranges from 0.8% "of the amount by which the taxable estate exceeds $40,000" on estates of less than $90,000 to "$1,082,800 plus 16%" of estates of more than $10,040,000).

⁷ 26 U.S.C. § 2011(f).

⁸ 26 U.S.C. § 2011(b)(2)(B).

⁹ Economic Growth and Tax Relief Reconcilitation Act of 2001, Pub. L. No. 107-16 § 501, 115 Stat. 38 (2001).

¹⁰ "All provisions of, and amendments made by, this Act shall not apply . . . to decedents dying, gifts made, or generation skipping transfers, after December 31, 2010 . . . as if the provisions and amendments described in subsection (a) had never been enacted." Pub.L. 107-16 § 901 (2005).

¹¹ The name of the first person to label EGTRRA's estate tax law provisions as the "Throw Daddy Out of the Lear Jet in 2010" isn't discoverable; however, the label is clearly appropriate.

¹² Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16 § 532(b) 115 Stat. 38 (2001).

¹³26 U.S.C. § 2058(a).

¹⁴Missouri Department of Revenue Comprehensive Annual Financial Report (CAFR), Fiscal Year Ended June 30, 2003, "General Fund Receipts Summary" for fiscal years 1994-2003 at 140 (available at the Department of Revenue's website at: http://www.dor.mo.gov/cafr).

¹⁵ Id.

¹⁶ 2001 Mo. Legis. Serv. H.B. 241.

¹⁷ With apologies to William Shakespeare, Julius Caesar, act 3, sc. 2.

¹⁸ See Mo. Const. art. III, § 1 (vesting legislative power in the Missouri General Assembly); Mo. Const. art. X, § 1 (granting the taxing power to the General Assembly); Mo. Const. art. X, § 2; Carter v. Dir. of Revenue, 805 S.W.2d 154,158 (Mo. banc 1991).

¹⁹ Mo. Const. art. X, § 4(d).

²⁰ Mo. Const. art. X, § 2.

²¹ Mo. Const. art. X, § 4(d).

²² Carter, 805 S.W.2d at 158.

²³ Id.

²⁴ Mo. Const. art. X, § 4(d).

²⁵ 26 U.S.C. § 2010(c).

²⁶ 26 U.S.C. § 2001(c)(2)(B).

²⁷ 105 P.3rd 391 (Wash. 2005).

²⁸ Id. at 394.

²⁹ Id. at 392 n.4 ("Initiative Measure 402 reads: 'Shall inheritance and gift taxes be abolished, and state death taxes be restricted to the federal estate tax credit allowed?'").

³⁰ 62 S.W.3rd 46 (Mo. banc 2001).

³¹ Id. at 47.

³² The opinion in the Riethmann Trust case cites with approval the Indiana Supreme Court case of Dept. of Revenue v. Estate of Eberbach, 535 N.E.2d 1194 (Ind. 1989). Exactly the opposite conclusion was reached by the Minnesota tax court in the case of Estate of Kelly v. Comm'r of Revenue, 1991 WL 278273 (Minn. T.C. 1991), in a case involving substantially the same facts and statute.

³³ Hopefully the Court would ignore some curious language in the case of Kansas City v. Frogge, 176 S.W.2d 498 (Mo. banc 1943), to the effect that "[t]he power to levy taxes is inherent in the Legislature independent of any constitutional grant, and is absolute and uncontrolled except as specifically limited in the Constitution."

³⁴ Joel Michael, A Survey of State Responses to EGTRRA's Estate Tax Changes, State Tax Notes, May 3, 2004, at 345-347 (available at http://www.taxanalysts.com).