Beverly Gardiner Nance v. Iowa Department of Revenue

IN THE SUPREME COURT OF IOWA
No. 16–1974

Filed February 23, 2018

BEVERLY GARDINER NANCE,

Appellant,

vs.

IOWA DEPARTMENT OF REVENUE,

Appellee.

On review from the Iowa Court of Appeals.

Appeal from the Iowa District Court for Polk County, Michael D.

Huppert, Judge.

The 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.

David M. Repp and F. Richard Lyford of Dickinson, Mackaman,

Tyler & Hagen, P.C., Des Moines, for appellant.

Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special

Assistant Attorney General, and Hristo Chaprazov, Assistant Attorney

General, for appellee.
 2

WATERMAN, Justice.

In this 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 review.

For the 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
 3

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.

I. Background Facts and Proceedings.

On 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.

Lester 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.

Lester 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
 4

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.

After 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.

While 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 accounts.

With 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
 5

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.

On July 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 2003.

The 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 closed.

On June 26, 2013, the IDOR received a letter from Beverly’s

counsel requesting an informal conference. On July 24, 2014, Beverly
 6

filed a formal written demand to initiate a contested case, and the IDOR

filed an answer denying her right to a refund.

On 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. 1 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.

The ALJ 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

request.

1Beverly previously took the opposite position in the lawsuit filed by her
stepchildren; before the parties settled, Beverly claimed that Lester Sr. was competent
to execute the TOD agreement. Any undue influence on Lester Sr. in 2003 would have
been exerted by his son, Lester Jr.—Beverly’s husband.
 7

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.

The 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 physicians.

The 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.”

The director also determined the IDOR had subject matter

jurisdiction over the issue of Lester Sr.’s competency and that Beverly
 8

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 the TOD.
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 the TOD.

Beverly 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.

Beverly 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
 9

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.

II. Standard of Review.

“Our 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 reverse. Id.

The 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.

Iowa 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
 10

case proceeding in which factual findings were made based on evidence

produced”). For purposes of our review,

“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.

Iowa 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 § 17A.19(10)(f)(3).

“Because 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

substantial rights have been prejudiced by the agency’s “irrational,

illogical, or wholly unjustifiable” application of law to fact)).

We review decisions on statutory interpretation for correction of

errors at law. Branstad v. State ex rel. Nat. Res. Comm’n, 871 N.W.2d

291, 294 (Iowa 2015).

III. Analysis.

We must decide whether the IDOR properly denied Beverly’s refund

claim. We conclude that an FSA is ineffective to alter the inheritance tax

consequences of a TOD agreement when the taxpayer unsuccessfully
 11

challenges the validity of that transfer. In the contested case

proceedings, Beverly litigated and lost her claim that Lester Sr. was

mentally incompetent in August 2003 when he executed the TOD

agreement and beneficiary designation. She had the burden of proof,

and we must uphold that agency determination under our standard of

review. The IDOR therefore correctly determined that the brokerage

accounts transferred to Beverly under the TOD agreement as nonprobate

assets upon Lester Sr.’s death. The postmortem FSA under these

circumstances could not retroactively avoid the inheritance tax liability.

The IDOR properly denied Beverly’s refund claim.

Because Beverly’s challenge to the TOD agreement failed, the

transfer and resulting inheritance tax liability accrued upon Lester Sr.’s

death. See In re Estate of Myers, 825 N.W.2d 1, 6–7 (Iowa 2012).

“Nonprobate assets are interests in property that pass outside of the

decedent’s probate estate to a designated beneficiary upon the decedent’s

death.” Id. at 6. “[T]hese assets are the personal property of the grantor

before death, [but] they become the personal property of the designated

beneficiaries upon the grantor’s death pursuant to a contract between

the grantor and the administrator of the account.” Id. at 6–7. The

brokerage accounts, therefore, became Beverly’s personal property

immediately upon Lester Sr.’s death, pursuant to the TOD agreement.

Iowa’s “inheritance tax is a tax on the receipt of property from a

decedent.” Tremel v. Iowa Dep’t of Revenue, 785 N.W.2d 690, 694 (Iowa

2010) (emphasis added). The inheritance tax differs from an estate tax,

which “is a tax on property held by a decedent at the time of death.” Id.

(emphasis added); see also Estate of Dieleman v. Iowa Dep’t of Revenue,

222 N.W.2d 459, 460 (Iowa 1974) (“Unlike the federal estate tax, which is

a tax upon decedent’s estate, the inheritance tax is a tax upon each right
 12

of succession . . . .”). Real estate and tangible personal property located

in Iowa and intangible personal property owned by a decedent domiciled

in Iowa are subject to the inheritance tax. Iowa Code § 450.2.

The inheritance tax is imposed on “any property passing . . . [b]y

deed, grant, sale, gift, or transfer made or intended to take effect in

possession or enjoyment after the death of the grantor or donor.” Id.

§ 450.3(3). This means the brokerage accounts transferred by the TOD

agreement are subject to the inheritance tax unless they meet the

requirements for an exemption provided in the Code. See id. §§ 450.4,

.9. The Code provides for an exemption for certain individuals.

In computing the tax on the net estate, the entire
amount of property, interest in property, and income passing
to the surviving spouse, and parents, grandparents, great-
grandparents, and other lineal ascendants, children
including legally adopted children and biological children
entitled to inherit under the laws of this state, stepchildren,
and grandchildren, great-grandchildren, and other lineal
descendants are exempt from tax.

Id. § 450.9. This exemption did not apply because the brokerage

accounts passed to Beverly (who is not a lineal descendant) upon

Lester Sr.’s death.

The FSA between Beverly and the estate divided the brokerage

accounts between Beverly and Lester Sr.’s grandchildren. We therefore

must determine what effect, if any, the FSA has on the inheritance tax.

Regulations of the IDOR address family settlement agreements.

Beneficiaries of an estate may contract to divide real or
personal property of the estate, or both, in a manner
contrary to the will of the decedent. The court of competent
jurisdiction may approve the settlement contract of the
beneficiaries. However, the department is not a party to the
contract and is not bound to compute the shares of the
estate based on the settlement contract. Instead, the
department must compute the shares of the estate based
upon the terms of the decedent’s will, unless a court of
 13
competent jurisdiction determines that the will should be set
aside.

Iowa Admin. Code r. 701—86.14(2). This rule is not directly on point
here because the transfer at issue occurred through a TOD agreement,

not Lester Sr.’s will. But the principle of law embodied in the rule

applies independently—the IDOR is not bound by an FSA to which it is

not a party. However, there is tension in our caselaw as to when an FSA

may avoid inheritance taxes.

“We have established in our jurisprudence that family settlement

agreements are favored in law.” Gustafson v. Fogleman, 551 N.W.2d 312,

314 (Iowa 1996). More broadly, Iowa has a well-established public policy

favoring the voluntary settlement of disputes.

The law favors settlement of controversies. A settlement
agreement is essentially contractual in nature. The typical
settlement resolves uncertain claims and defenses, and the
settlement obviates the necessity of further legal proceedings
between the settling parties. We have long held that
voluntary settlements of legal disputes should be
encouraged, with the terms of settlements not inordinately
scrutinized.

Peak v. Adams, 799 N.W.2d 535, 543 (Iowa 2011) (quoting Waechter v.

Aluminum Co. of Am., 454 N.W.2d 565, 568 (Iowa 1990)). It can be
burdensome on families to require an adjudication of incompetency to

avoid an inheritance tax. Recognizing tax relief from an FSA avoids

costly litigation.

Yet we also note that “[t]ax exemption statutes are construed

strictly, with all doubts resolved in favor of taxation.” Sherwin–Williams

Co. v. Iowa Dep’t of Revenue, 789 N.W.2d 417, 424 (Iowa 2010)

(alteration in original) (quoting Dial Corp. v. Iowa Dep’t of Revenue, 634

N.W.2d 643, 646 (Iowa 2001)). Additionally, we have long recognized

that the parties to an FSA providing for a different disposition than that
 14

provided for in a will “do not determine to whom the title passes from

decedent.” Seeley v. Seeley, 242 Iowa 220, 225, 45 N.W.2d 881, 884–85

(1951) (holding that because the decedent’s two sons entered into an FSA

to renounce their gifts under the will, they took title as heirs, and one of

the son’s widow was entitled to her one-third distributive share of the

real estate).

Against that backdrop, we review our precedent adjudicating

claims that FSAs avoided inheritance tax liability.

A. Effect of Family Settlement Agreements on Inheritance

Taxes. The IDOR claims Bliven applies and is dispositive, while Beverly

argues Van Duzer controls the outcome of this case. We held the FSA did

not avoid the inheritance tax in Bliven but did so in Van Duzer under

different circumstances. Here, we conclude the agency’s adjudication

rejecting Beverly’s challenge to Lester Sr.’s competency is fatal to her

refund claim regardless of the terms of her FSA. We limit Van Duzer to

its facts.

In Bliven, Amy C. Bliven tore up the document identified as her

last will and testament. 236 N.W.2d at 368. A copy of the will showed

that most of her estate was bequeathed to two out-of-state charities. Id.

When Bliven died, her heirs at law contended that her will had been

effectively revoked and that Bliven therefore died intestate. Id. The

charities, however, claimed Bliven lacked the mental capacity to revoke

her will. Id. To avoid litigation, the heirs and the charities stipulated

that the will had been revoked and that Bliven died intestate. Id. The

parties agreed to an estate distribution in which each charity received

twenty-five percent of the estate. Id.

The executor filed an inheritance tax return indicating that the

distribution to the charities was exempt from the inheritance tax. Id.
 15

The executor claimed the assets going to the charities in accord with the

settlement agreement “passed in any manner” under section 450.4 and,

therefore, were exempt from taxation. 2 Id. The IDOR disagreed,

claiming, among other things, that “title to property passing under the

terms of a settlement agreement does not bypass those who would have

taken under the statutes of intestate succession.” Id. at 369.

We determined that upon Bliven’s death, her property

automatically passed to and title immediately vested in her heirs at law.

Id. at 370. We also noted that “an heir’s interest in property acquired by

intestate succession is assignable and transferable immediately on the

death by which it vests under the law of descent and distribution.” Id. at

370–71. We recognized that any interest the charities obtained in

property held by Bliven at the time of her death must have been obtained

by conveyance or assignment from her heirs at law. Id. at 371. We

concluded that the “inheritance tax exemption statute never came into

play as to any right in said estate indirectly acquired . . . by these

charitable organizations, i.e., no inheritance, no exemption.” Id.

(emphasis added). The property rights acquired by the charities “passed

to them only by assignment from [the] decedent’s heirs, separate and

apart from her death.” Id. We determined under the Code in place at

that time, that “passes in any manner” meant “passes in any manner by

2Section 450.4(2) provided that an inheritance tax shall not be collected
[w]hen the property passes in any manner to societies, institutions or
associations incorporated or organized under the laws of this state for
charitable, educational, or religious purposes, and which are not
operated for pecuniary profit, . . . provided, however, that this exemption
shall also include property passing to any society, institution or
association incorporated or organized under the laws of any other state
for charitable, educational or religious purposes, and which are not
operated for pecuniary profit . . . .
Iowa Code § 450.4(2) (1971).
 16

will or intestate succession directly from a decedent.” Id. at 372 (quoting

Iowa Code § 450.4(2) (1971)). As a result, we held that Bliven’s entire

estate passed by intestate succession to her heirs at law and was subject

to the inheritance tax, absent any exemption under section 450.4. Id.

The IDOR argues that the holding in Bliven rests on two well-

established propositions: (1) Iowa’s inheritance tax is levied only on

property passing from a decedent, so the inheritance tax exemption only

applies to property passing from a decedent; and (2) interested parties

cannot, by agreement, determine to whom property passed from a

decedent. See id. at 371; Seeley, 242 Iowa at 225, 45 N.W.2d at 884–85

(“The contracting parties do not determine to whom the title passes from

decedent.”). These principles apply here, and we conclude that Bliven is

controlling. Title to the brokerage accounts immediately vested in

Beverly upon Lester Sr.’s death under the TOD agreement. See Iowa

Code § 633D.9 (2009) (“On the death of a sole owner or on the death of

the sole surviving owner of multiple owners, the ownership of securities

registered in beneficiary form passes to the beneficiary or beneficiaries

who survive all owners.”); id. § 633D.11(1) (“A transfer on death resulting

from a registration in beneficiary form shall be effective by reason of the

contract regarding the registration between the owner and the registering

entity under the provisions of this chapter, and is not testamentary.”);

see also Myers, 825 N.W.2d at 7 (recognizing that pay-on-death accounts

“become the personal property of the designated beneficiaries upon the

grantor’s death pursuant to a contract between the grantor and the

administrator of the account”). The accounts were therefore subject to

the inheritance tax, and no exemption applied.

The principle that the property in a TOD account becomes the

property of the designated beneficiary immediately upon death presumes
 17

a valid contract. Here, there has been no determination that the TOD

agreement was invalid. The party challenging a contract based on lack of

capacity bears the burden of proof. See Urbain v. Speak, 258 Iowa 584,

590, 139 N.W.2d 311, 315 (1966) (explaining that a person is presumed

sane when the contract is made and the burden of proving otherwise

rests on the person claiming incompetency); see also Jackson v.

Schrader, 676 N.W.2d 599, 606 (Iowa 2003) (noting “the district court

properly disposed of the competency issue on the ground that [the

plaintiff] failed to show that [the party to financial transactions] lacked

mental capacity” at the time she engaged in such transactions). The

grandchildren settled with Beverly without any adjudication that Lester

Sr. was incompetent to execute the TOD agreement. During the

contested case proceedings, the ALJ determined that Beverly failed to

prove Lester Sr. lacked sufficient mental capacity to execute the TOD

agreement. The director agreed that Beverly did not meet her burden of

proof. In its ruling on the petition for judicial review, the district court

stated,

As noted by both the ALJ and the director, the only
proof [of Lester Sr.’s incompetency] offered by the petitioner
was the opinions of Dr. Bender, someone who never
examined or even observed Lester, Sr. at any point in time
prior to his death. The only basis for his opinions was the
aforementioned status examinations, which again were not
administered by Dr. Bender. As the trier of fact in this
contested case proceeding, it was the director’s prerogative to
weigh the evidence and make the ultimate decision on
whether it met the aforementioned burden; that conclusion
was n[ot] irrational, illogical or wholly unjustifiable.

(Footnote omitted.) The IDOR’s finding regarding Lester Sr.’s competency

was not challenged on appeal. That finding is supported by substantial

evidence, and the IDOR’s application of law to fact on the competency

determination is not irrational, illogical, or wholly unjustifiable on this
 18

record. We are bound by that determination. See Iowa Ag Constr. Co.,

723 N.W.2d at 173–74; see also Christiansen v. Iowa Bd. of Educ.

Exam’rs, 831 N.W.2d 179, 191–92 (Iowa 2013) (discussing deference

given to agency determinations in contested case adjudications). The

TOD agreement is therefore valid, and the brokerage accounts became

Beverly’s property immediately upon her father-in-law’s death.

As with the charities in Bliven, who had no right to property in the

decedent’s estate but for the settlement agreement, the grandchildren

here had no right to the proceeds of the brokerage accounts but for the

FSA. We have previously explained,

The contracting parties do not determine to whom the title
passes from decedent. . . .
In legal effect the contracting parties convey title from
themselves without resorting to the usual instruments of
conveyance. The probate court shapes the administration so
as to carry out the contract but by no theory or fiction of law
does the title bypass the heirs or beneficiaries and pass
direct from decedent to those designated by the contract.

Seeley, 242 Iowa at 225, 45 N.W.2d at 884–85. This remains true

despite the language in the FSA providing that “the Grandchildren will

inherit a portion of the Accounts.”

Beverly argues that Van Duzer controls, and in that case, we held

the FSA avoided inheritance tax. See 369 N.W.2d at 410. Charles

Wayne Van Duzer executed an irrevocable inter vivos trust, which

transferred farmland to two trustees. Id. at 408. The inter vivos trust

gave the trustees absolute discretion to accumulate the trust income or

distribute it to Van Duzer during his lifetime, but Van Duzer retained the

power to dispose of the corpus of the trust through a general power of

appointment exercisable by will and to appoint successor trustees. Id.

The trust instrument provided that if Van Duzer died without exercising
 19

the power of appointment, a life income interest in the trust would be

created in his sister and nieces. Id. Upon their death, the corpus of the

trust was to be distributed to certain designated beneficiaries. Id.

The next year, Van Duzer got married. Id. He died a few years

later without exercising his power of appointment. Id. His “surviving

spouse elected to take against the will,” and she also “commenced an

action against the estate alleging that the trust was illusory, failed

ab initio, and that the trust assets were to be considered as part of the

probate estate for purposes of computing her statutory share.” Id. She

entered into a settlement agreement with the executor of the estate, the

trustees, and the beneficiaries of both the estate and the trust. Id. The

surviving spouse received $106,500 pursuant to the settlement

agreement. Id.

The IDOR included all of the trust corpus in its computation of the

inheritance tax to be paid by the beneficiaries and did not allow the

$106,500 paid to Van Duzer’s surviving spouse to qualify for the spousal

exemption. Id. The district court reversed the IDOR and determined

that this amount qualified for the spousal exemption. Id. In affirming

the district court, we distinguished In re Estate of Wells, 142 Iowa 255,

120 N.W. 713 (1909), and Bliven.

The claimants in Wells were persons not named in
decedent’s will or otherwise entitled to claim against the
estate. The same is true of the charities which were the
claimants in Bliven. In the present case, the claim was made
by the person who was the decedent’s surviving spouse and,
as such, entitled to a distributive share by reason of her
election to take against the will. Her claim was against the
executor and the gravamen thereof concerned the amount of
such statutory share. While based upon various theories, all
aspects of her claim involved the alleged invalidity ab initio of
the inter vivos trust, a circumstance which, if correct, would
increase the share passing to the surviving spouse.
 20

Van Duzer, 369 N.W.2d at 410. We viewed the settlement agreement “as

a tripartite agreement whereby the trustee agreed to return $106,500 to

the estate, and the executor agreed to pay an identical sum to the

surviving spouse in satisfaction of her distributive share.” Id. We noted,

It doubtless would have made a better record if separate
checks were issued for this purpose, a deposit to the estate
account had been documented and a court order had been
obtained authorizing the payment of a distributive share in
the sum agreed to in the settlement.

Id. But we agreed with the district court that such formality was not

necessary “in order to recognize the transaction to be that which it

clearly was.” Id. We held the district court did not err in concluding that

the payment of $106,500 to the surviving spouse qualified for the

spousal exemption. Id. Beverly characterizes Van Duzer as giving effect

to an FSA that dictated the inheritance tax consequences. The IDOR,

however, reads the language regarding what “would have made a better

record” as clarifying that the surviving spouse did not receive the money
pursuant to the settlement agreement but instead received it from the

decedent by claiming against the will. See id.

Van Duzer recognized that the surviving spouse took the $106,500

by reason of her election to take against her husband’s will, but the effect

of the FSA increased her statutory share. See id. (noting that the

executor would pay the amount “to the surviving spouse in satisfaction of

her distributive share”); cf. In re Estate of Spurgeon, 572 N.W.2d 595, 598

(Iowa 1998) (“When testator died and his will was admitted to probate,

the widow . . . had to make a choice: whether to accept the will and

forego a statutory share, or to reject the will and take a statutory share

instead. . . . The authorities are clear as to the effect of an election by a

surviving spouse: a choice to take against the will is a genuine election
 21

which nullifies gifts to the surviving spouse in the will but leaves the will

to be carried out as to the other devisees as nearly as may be done.”

(quoting In re Campbell, 319 N.W.2d 275, 277 (Iowa 1982))). A spousal

election to take against the decedent’s will transfers title over the

distributive share from the decedent to the surviving spouse. See

Watrous v. Watrous, 180 Iowa 884, 898, 163 N.W. 439, 443 (1917) (“The

surviving spouse has the absolute right to elect not to consent to the

provisions of the will, the effect of which is to give such survivor

absolutely an undivided one-third interest, in value, of all the property,

real and personal, of which the deceased spouse died seised.”). We

conclude that Van Duzer is inapplicable here and limit its holding to

spousal elections against the will.

The IDOR itself has limited its adherence to Van Duzer to spousal

elections against the will, and in other inheritance tax cases that agency

has continued to rely on Bliven. See Estate of Leland E. Robertson,

Inheritance Tax Assessment Docket No. 86-402-3-A (1987). The

legislature has not overruled either Van Duzer or Bliven. We can infer

the legislature has acquiesced in their holdings interpreting Iowa Code

section 450, such that FSAs cannot be used to avoid inheritance taxes

except when a spouse elects against the will. See In re Estate of Vajgrt,

801 N.W.2d 570, 574 (Iowa 2011) (“The rule of stare decisis ‘is especially

applicable where the construction placed on a statute by previous

decisions has been long acquiesced in by the legislature . . . .’ ” (quoting

Iowa Dep’t. of Transp. v. Soward, 650 N.W.2d 569, 574 (Iowa 2002))); see

also Crane v. Mann, 162 S.W.2d 117, 118 (Tex. Civ. App. 1942) (“[S]ince

the year 1929 that Department has construed the Inheritance Tax Statue

to place the tax on the entire estate passing by virtue of the will,

regardless of any compromise agreement which permits a portion of the
 22

estate to go to a contestant. That Departmental construction having

been acquiesced in by the Legislature of Texas for more than twelve years

is of itself persuasive and should not be overturned in the absence of

strong reason therefor.”).

Van Duzer is distinguishable for another reason—because there

was no adjudication of the validity of the trust created by Van Duzer.

The surviving spouse in Van Duzer did not litigate and lose on the issue

of the trust’s enforceability. By contrast, Beverly failed to meet her

burden of proof to show that Lester Sr. lacked the capacity to execute the

TOD agreement. Here, we have an adjudication that the TOD agreement

was valid, and this controls how the property passed at Lester Sr.’s

death. Cf. Ind. Dep’t of Revenue v. Estate of Binhack, 426 N.E.2d 714,

715–16, 718 (Ind. Ct. App. 1981) (concluding that the court erroneously

redetermined the amount of inheritance taxes based on a family

settlement agreement, which provided that grandchildren who were

excluded from and contested the will inherited part of the estate because

“[t]he crucial fact remains . . . that the will . . . has never been set aside”);

Borish v. Zink, 64 A.2d 461, 461 (N.J. Super. Ct. App. Div. 1949)

(acknowledging that “[i]f the appeal from probate had been prosecuted to

conclusion, the probate might have been reversed and the fact

established that Mr. Borish died intestate” but noting that after the

settlement agreement was reached, “the appeal was dismissed and the

decree of the Orphans’ Court conclusively establishe[d] the factum of the

will[, so t]he transfers made by the will have taken effect and are

taxable”).

Beverly suggests that the determining factor in Bliven and

Van Duzer was whether there was a bona fide dispute between the
 23

parties, pointing out that the Bliven parties stipulated that the will was

revoked. Beverly claims that

[h]ad [the parties to the settlement agreement] not stipulated
that the decedent’s will had been revoked, the Iowa Supreme
Court in Bliven would likely have ruled (as it did in
Van Duzer) that the decedent’s property “passed” to the
charities by virtue of the settlement agreement rather than to
the heirs under intestacy.

We disagree. In Bliven we stated,

[W]e have searched chapter 450 in a futile effort to find
therein any provision which even intimates a recognition of
the passing of property rights from a decedent in any
manner other than by terms of a will or intestate succession.

236 N.W.2d at 370. The 2009 version of chapter 450, which governs this

case, applies to the passing of property rights from a decedent by virtue

of TOD agreements but not by virtue of postmortem FSAs. See Iowa

Code § 450.3. Beverly’s argument also ignores the language in Seeley

providing that “contracting parties do not determine to whom title passes

from decedent.” Seeley, 242 Iowa at 225, 45 N.W.2d at 884–85; cf. Ind.

Dep’t of State Revenue v. Estate of Pickerill, 855 N.E.2d 1082, 1086 (Ind.

T.C. 2006) (“[W]hen a family settlement agreement exists, how the

agreement came into existence (i.e., whether or not litigation actually
ensued or a claim was filed) does not change the fact that the agreement

cannot alter the manner in which inheritance tax is imposed.”). Our

holding in Seeley corresponds with “[t]he majority view . . . that a

succession tax is computable in accordance with the terms of the will,

unaffected by [a] compromise agreement.” De Rosa v. Dir., Div. of

Taxation, 28 N.J. Tax 73, 78 (Tax. Ct. 2014) (quoting Pope v. Kingsley,

191 A.2d 33, 36 (N.J. 1963)); see also Emanuelson v. Sullivan, 161 A.2d

788, 790 (Conn. 1960) (“[T]he testator’s property devolves by virtue of the

probated will, even though its effect may have been changed
 24

subsequently by those who took under it. The succession tax should,

therefore, be computed and assessed on the basis of the disposition of

the estate in the probated will. The weight of authority in other

jurisdictions supports this rule.”); Crane, 162 S.W.2d at 118 (“The other

line of authorities, the majority, holds that where a contested will is

probated by virtue of a compromise agreement all the property is to be

considered as having vested at the death of the testator in accordance

with the terms of the will, and hence the inheritance tax is to be

computed upon all the property of the estate unaffected by the

compromise agreement. We think this the sounder rule.” (Citations

omitted.)).

Additionally, while the Bliven parties stipulated that the will was

revoked, the facts of Bliven still closely align with the facts presented

here. Lester Sr.’s grandchildren challenged the TOD agreement, claiming

their grandfather lacked capacity. They then compromised their claim by

entering into the FSA, in which Beverly was allowed to keep half of the

proceeds of the brokerage accounts. Similarly, in Bliven, the charities

challenged the will revocation, claiming the decedent lacked the capacity

to revoke her will. They also compromised their claim by entering into a

settlement agreement. The charities in Bliven stipulated that the

decedent’s will had been revoked, even though the stipulation was

inconsistent with their original claim of lack of capacity. In entering into

the FSA, the grandchildren gave up their claim challenging the TOD

agreement’s validity.

The Estate and the Grandchildren hereby release and acquit
and forever discharge Beverly from any and all liability
including all claims, demands, and causes of action of every
nature affecting them which they may have or forever claim
to have by reason of any and all matters relating to the
Litigation described above.
 25
....
. . . [T]he parties agree that the Litigation shall be
dismissed with prejudice, each party to bear its, his or her
own costs.

The court of appeals noted “the estate’s claim had sufficient merit to

cause the parties to enter into an agreement requiring Beverly to forego

one-half of the value of the brokerage accounts.” But as that court

acknowledged, “[o]ther factors exist that cause parties to reach a

compromise beyond the likelihood of success at trial.” While Beverly also

released any claims she might have had relating to the litigation, the

status quo meant that title to the brokerage accounts passed to her upon

Lester Sr.’s death.

The court of appeals suggested that the IDOR may not have

refused the refund “if the estate had presented overwhelming evidence

that Lester D. Gardiner Sr. was incompetent.” One might expect it would

be easy to obtain an adjudication of incompetency when the evidence is

overwhelming. But the estate settled its claims without proving

Lester Sr.’s incompetency in probate court. Beverly in turn failed to

prove Lester Sr.’s lack of mental capacity in the contested case hearing.

She does not challenge the director’s finding that Lester Sr. was

competent, and that finding is binding on appeal. Iowa Ag Constr. Co.,

723 N.W.2d at 173.

The court of appeals also questioned whether the IDOR would have

refused a refund “if there was overwhelming evidence the contract was

the product of dependent adult abuse by undue influence.” No

dependent adult abuse is claimed here, and in any event, Beverly, who

seeks the refund now, was the beneficiary of the alleged undue influence

on Lester Sr.
 26

B. Adopting a Test for When Family Settlement Agreements

Can Control Inheritance Tax Consequences. Beverly suggested that in

some circumstances, FSAs should control inheritance tax consequences.

She advocated for a four-part test gleaned from federal cases: (1) the

underlying claim was based on enforceable legal rights of the claimant,

(2) the parties to the agreement were truly adversarial, (3) “the agreement

was made in good faith as the result of arm’s-length negotiations,” and

(4) there is no evidence suggesting the agreement “was entered into for

post mortem tax planning purposes.” See Estate of Hubert v. Comm’r,

101 T.C. 314, 318–21 (1993), aff’d, 63 F.3d 1083 (11th Cir. 1995), aff’d,

520 U.S. 93, 117 S. Ct. 1124 (1997). We note that the federal estate tax

differs from Iowa’s inheritance tax. See Dieleman, 222 N.W.2d at 460

(“Unlike the federal estate tax, which is a tax upon decedent’s estate, the

inheritance tax is a tax upon each right of succession and is chargeable

upon the property each beneficiary receives.”). Based on this distinction,

the court of appeals rejected the federal test. The court of appeals

created a two-part test for when an FSA can control inheritance tax

consequences: (1) the agreement is entered into in good faith, and (2)

“there is no evidence of a scheme to avoid taxes.” This test incorporates

the third and fourth prongs of the federal test.

As the IDOR points out, it is unclear what constitutes “evidence of

a scheme to avoid taxes” (and we realize the same concern would arise

under the fourth part of the federal test if we adopted it). The IDOR also

points out that such evidence may be present here; the FSA provided

that “[b]ecause the Grandchildren will inherit a portion of the Accounts,

an amended Inheritance Tax Return shall be filed by the Estate seeking a

refund.” We decline to adopt either the federal test or the test created by

the court of appeals. Estate planning should precede the testator’s
 27

death. Moreover, even when family members have bona fide disputes, all

gain when taxes are avoided because every dollar of inheritance tax

avoided is a dollar that can be reallocated among the family members in

the settlement. In that sense, the parties are not truly adversarial as to

the tax issue nor are the negotiations on that point truly arms’ length.

Cf. Burditt v. Comm’r, 77 T.C.M. (CCH) 1767, 1999 WL 185163, at *7

(T.C. 1999) (concluding that settlement proceeds allocated to petitioner

“individually for mental anguish, pain and suffering, damage to his

reputation and loss of good will” could not be excluded from petitioner’s

gross income as damages received on account of personal injuries

because “the parties to the . . . settlement were not adversarial with

respect to allocations made in the settlement agreement” and because

“the written allocation . . . was not . . . made at arm’s length, was entirely

tax-motivated, and did not accurately reflect the claims at issue in the

lawsuit”). Rather, the interests of the parties are aligned against the

taxing authority based on their common interest in avoiding the tax. We

hold the FSA did not control the inheritance tax consequences after the

taxpayer’s challenge to the validity of the TOD agreement failed.

IV. Disposition.

For these reasons, we vacate the decision of the court of appeals

and affirm the judgment of the district court upholding the IDOR’s denial

of Beverly’s inheritance tax refund claim.

DECISION OF THE COURT OF APPEALS VACATED; DISTRICT

COURT JUDGMENT AFFIRMED.

All justices concur except Wiggins, J., who concurs specially, and

Mansfield, J., who dissents.
 28

#16–1974, Nance v. Iowa Dep’t of Revenue

WIGGINS, Justice (concurring specially).

I concur in the result. I agree with Justice Mansfield that the In re

Estate of Van Duzer, 369 N.W.2d 407 (Iowa 1985), and In re Estate of

Bliven, 236 N.W.2d 366 (Iowa 1975), decisions are irreconcilable. In my

review of the tax statutes and regulations, I find no support to allow a

private postmortem family settlement agreement, even if entered in good

faith, to circumvent inheritance tax. I do not find the terms “passing to”

and “passes” in Iowa Code sections 450.9 and 450.10 (2009) ambiguous.

In those statutes, “passes” and “passing to” mean passing through an

estate, not from a contract or a settlement agreement.

As Justice Mansfield notes, a federal regulation allows a private

postmortem family settlement agreement entered in good faith to

circumvent estate tax. Neither our court nor our court of appeals has

the power or the authority to write such a provision in the law. Only the

legislature or the executive branch through rulemaking has the power

and authority to do so. Consequently, I agree with the result reached by

the majority and would overrule In re Estate of Van Duzer.
 29
#16–1974, Nance v. Iowa Dep’t of Rev.
MANSFIELD, Justice (dissenting).

I respectfully dissent. The terms “passing to” and “passes” in Iowa

Code sections 450.9 and 450.10 (2009) are ambiguous. I would continue

to follow the approach we took in In re Estate of Van Duzer, 369 N.W.2d

407 (Iowa 1985), and hold that property passes from the decedent to a

beneficiary when it is transferred to that beneficiary pursuant to a good-

faith settlement agreement resolving litigation over distribution of the

decedent’s assets. Therefore, I would affirm the decision of the court of

appeals.

Federal estate tax law takes the same approach. See 26 C.F.R.

§ 20.2056(c)–2(d)(2) (2017) (indicating that the marital deduction is

available following a will contest when property is assigned to a surviving

spouse based on “a bona fide evaluation of the rights of the spouse”);

Estate of Hubert v. Comm’r, 101 T.C. 314, 319–21 (1993) (“Although the

regulations state that the settlement agreement will not necessarily be

accepted as a bona fide evaluation of such rights, they do not require

rejection of such settlement agreement. In this instance we think it is

appropriate to recognize the amounts passing to Mrs. Hubert under the

settlement agreement as passing from decedent, especially in the

absence of any suggestion that the settlement agreement was entered

into for post mortem tax planning purposes.”), aff’d, 63 F.3d 1083 (11th

Cir. 1995), aff’d, 520 U.S. 93, 117 S. Ct. 1124 (1997); Estate of Barrett v.

Comm’r, 22 T.C. 606, 611 (1954) (“We find nothing in the statute or in

logic that would deny similar treatment to a settlement payment made in

advance of the contest where there is sufficient basis for a reasonable

belief that only such payment would avoid a serious and substantial

threat to the testamentary plan provided by the decedent.”).
 30

Notably, the relevant statutory language is similar in both

contexts. In Iowa, inheritance tax is imposed (or not imposed) when

property is “passing to” or “passes” to certain beneficiaries. Iowa Code

§§ 450.9, .10(1)–(4). Under federal estate tax law, a marital deduction is

allowed for any interest in property which “passes or has passed” from

the decedent to his surviving spouse. See 26 U.S.C. § 2056(a) (2012). In

both instances, the terminology is susceptible to more than one

reasonable interpretation. See In re Estate of Lamoureux, 412 N.W.2d

628, 632 (Iowa 1987) (indicating that because the term “transfer” is used

in both the federal estate tax and the Iowa inheritance tax, federal

construction of the term “is applicable by analogy”).

Significantly, our most recent case in this area, Van Duzer, gave

effect to a settlement for inheritance tax purposes. There we held that an

additional payment of $106,500 to a surviving spouse under a family

settlement agreement was not subject to inheritance tax, because

testamentary transfers to spouses were exempt. 369 N.W.2d at 409–10.

We overlooked formalities and “recognize[d] the transaction to be that

which it clearly was.” Id. at 410.

It’s true that in the earlier case of In re Estate of Bliven, 236

N.W.2d 366, 370–71 (Iowa 1975), we declined to give inheritance tax

effect to a settlement. In that case, two charities had been essentially the

sole beneficiaries of the decedent’s will. Id. at 368. However, the

decedent tore up her will before her death. Id. Subsequently, the

charities brought a claim, contending the decedent had lacked the

mental capacity to revoke her will. Id. The charities settled with the

family on the basis that the charities would receive half the estate. Id.

We held, regardless, that the amounts passing to the charities were not
 31

exempt from inheritance tax under the charitable exemption. Id. at 370–

71.

Van Duzer and Bliven are impossible to reconcile, in my view.

Either you allow good-faith settlements for tax purposes or you don’t.

Nonetheless, in Van Duzer, we said that Bliven and another, older case 3

were “clearly distinguishable.” 369 N.W.2d at 410. The asserted

distinction was that the claimants in the earlier cases—unlike the

surviving spouse in Van Duzer—would not have inherited at all from the

estate but for the settlement. Id. (noting that the claimants in the earlier

cases were “persons not named in decedent’s will or otherwise entitled to

claim against the estate”). That distinction seems forced to me. The

critical similarity in both Van Duzer and Bliven is that the transfers

whose tax status was in dispute would not have occurred without the

settlement agreement. To my mind, Van Duzer therefore controls when

the cases are irreconcilable because it is the more recent precedent.

Of course, if one accepts the distinction in Van Duzer at face value,

the taxpayer still wins here. Here, the settlement beneficiaries, i.e., the

lineal descendants Donald Gardiner, Donnita Gardiner, and Dianne

Gardiner Green, were persons who stood to inherit from the decedent. In

fact, they received additional inheritances beside the family settlement

agreement.

The Department of Revenue itself has struggled to reconcile Bliven

and Van Duzer. In 1987, it wrote to a taxpayer accepting a settlement for

the following reasons:

While the Department continues to rely on In Re Estate
of Wells and In Re Estate of Bliven as authority for the tax
treatment of out-of-court settlements, the Department
recognizes that the Iowa Supreme Court’s decision in Van

3In re Estate of Wells, 142 Iowa 255, 120 N.W. 713 (1909).
 32
Duzer does carve out an exception to the long-established
rule enunciated in Wells and Bliven. . . .

....

While the legal theory used by the Court in Van Duzer
is not readily apparent, it does appear that the Iowa
Supreme Court is of the opinion that when a surviving
spouse challenges the distribution to be made from an estate
coupled with an election to take against the will, the
settlement of the dispute is entitled to the spousal exemption
and tax rates and status provided to surviving spouses by
statute. The facts in the instant case being for all practical
purposes the same as in Van Duzer, the Committee finds
that the estate is entitled to the spousal exemption for the
full amount of the $152,000 received by the surviving
spouse.

Estate of Leland E. Robertson, Inheritance Tax Assessment Docket No.

86-402-3-A (1987). I disagree with this effort to confine Van Duzer to its

narrowest set of facts and don’t think you can read Van Duzer as just a

“spousal exemption” case.

Van Duzer is also more faithful to the legislature’s likely intent.

See Iowa Code § 4.6(1). I presume the legislature cared most about who

was actually receiving the decedent’s property—whether it was a close

relative (exempt), a charity (exempt), or someone else (not exempt). In

addition, allowing parties to settle litigation in good faith without

forfeiting tax benefits is sound policy. See id. § 4.4(3). It doesn’t make

sense to incentivize heirs to litigate among themselves to the end and

delay the closing of estates. 4

4Other states appear to be divided on whether a good-faith settlement can affect
inheritance tax treatment. “In some jurisdictions, a state inheritance tax properly may
be based on the terms of a contested will even where the contest results in a
compromise or settlement agreement which changes the estate’s distribution, and in
others, the transfer of the property or interest under the compromise or settlement
agreement may be considered.” 42 Am. Jur. 2d Inheritance, Estate, and Gift Taxes § 81,
at 277 (2010) (footnotes omitted); see also R.D. Hursh, Annotation, Succession, Estate,
or Inheritance Tax as Affected by Compromise of Will Contest, 36 A.L.R.2d 917, § 2[a]
(1954).
 33

Another issue is whether we need to give deference to the

Department of Revenue’s interpretation of the term “passes” as used in

Iowa Code section 450.10. See Iowa Code § 17A.19(10)(c), (l); Renda v.

Iowa Civil Rights Comm’n, 784 N.W.2d 8, 12–14 (Iowa 2010); see also

Myria Holdings Inc. v. Iowa Dep’t of Revenue, 892 N.W.2d 343, 347 (Iowa

2017) (declining to decide whether the Department of Revenue’s

interpretation of a different tax provision was entitled to judicial

deference). I believe we do not need to do so because the agency’s rule

cites only Bliven and does not take into account or even mention Van

Duzer. See Iowa Admin. Code r. 701—86.14(2). Van Duzer, as

discussed, is the more recent case. In State v. Iowa District Court, we

expressed skepticism about agency retroactive reinterpretations that

conflict with prior judicial interpretations of statutes. See 902 N.W.2d

811, 819 & n.6 (Iowa 2017). While I do not know whether this particular

rule came before or after Van Duzer, the plain fact is it doesn’t attempt to

address it.

The majority invokes the principle of legislative acquiescence in

support of its position. See In re Estate of Vajgrt, 801 N.W.2d 570, 574

(Iowa 2011) (“The rule of stare decisis ‘is especially applicable where the

construction placed on a statute by previous decisions has been long

acquiesced in by the legislature . . . .’ ” (quoting Iowa Dep’t of Transp. v.

Soward, 650 N.W.2d 569, 574 (Iowa 2002))). But what did the legislature

acquiesce in? Van Duzer is the more recent decision, it is thirty-three

years old, and it is consistent with my views, not the majority’s. 5

I recognize there is some danger of postmortem fraud by taxpayers.

That is, a beneficiary who is due to receive an inheritance and is subject

5The special concurrence acknowledges this point.
 34

to inheritance tax could cut a deal with a beneficiary who has exempt

status. Under such a corrupt deal, the exempt beneficiary would bring a

bogus claim challenging the testamentary distribution, the parties would

enter into a friendly settlement, the exempt beneficiary would receive the

assets under the staged settlement, and the exempt beneficiary would

then redirect most of them under the table to the nonexempt beneficiary.

By this chain of events, inheritance tax could be avoided. Yet the danger

of sham transactions exists anyway in many tax-related situations. It

can be minimized here by requiring the taxpayer to affirmatively prove

the good-faith attributes of the settlement.

Here, the taxpayer established that a litigation settlement was

made, and that it was made in good faith and not for purposes of tax

avoidance. 6 Accordingly, I would affirm the decision of the court of

appeals.

6The taxpayer urged two positions in the alternative below. First, it insisted the
settlement should be accepted by the Department of Revenue. Second, it maintained
that the decedent Lester Gardiner Sr. lacked testamentary capacity, thus rendering the
transfer on death invalid under the law. The Department rejected both arguments after
conducting an evidentiary hearing. It found that the settlement had “no bearing on
whether a taxable event occurred” and, further, the taxpayer did not “me[e]t her burden
to prove by, clear, convincing, and satisfactory evidence that the Decedent was
incompetent when he executed the [transfer on death].” I would reverse on the first
ground. The unrebutted evidence demonstrates the good-faith character of the
settlement, including the presence of an objective basis for believing that Lester Sr. was
not competent when he executed the beneficiary designation form in 2003.
Ironically, the Department acknowledged at oral argument that allowing the
taxpayer an opportunity to prove Lester Sr.’s lack of testamentary capacity in a
Department hearing was inconsistent with the Department’s own administrative
position that only a prior judicial determination of lack of capacity would be accepted.