Filed
Washington State
Court of Appeals
Division Two
February 26, 2019
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
SCOTT B. OSBORNE, Personal No. 50762-5-II
Representative of the Estate of Barbara Hagyard
Mesdag,
Appellant,
v.
DEPARTMENT OF REVENUE OF THE UNPUBLISHED OPINION
STATE OF WASHINGTON,
Respondent.
MELNICK, J. — Joseph Mesdag died in 2002 and his estate created a qualified terminable
interest property (QTIP) for the benefit of his surviving spouse, Barbara Hagyard Mesdag. 1 When
Barbara died in 2007, the applicability of Washington estate tax to QTIP was in a state of
confusion. After multiple Supreme Court decisions and new legislation, we concluded in an earlier
decision in this case that the Estate owed estate tax on the QTIP and remanded to the Department
of Revenue (DOR) for a determination of whether the Estate additionally owed interest on the
portion of the estate tax attributable to QTIP.
On remand, DOR denied the Estate a refund for the interest it paid on the QTIP estate tax.
The trial court affirmed. The Estate appeals, arguing that estate tax on the QTIP did not become
“due” until the legislature amended the statute in 2013 and that DOR erred by assessing interest
1
We refer to Joseph Mesdag and Barbara Hagyard Mesdag by their first names. We intend no
disrespect.
50762-5-II
on tax it paid in 2010, before the tax was “due.” We agree. Therefore, we reverse and remand to
DOR for it to refund the Estate’s overpaid taxes along with interest.
FACTS
Joseph died in 2002 and his estate created a QTIP for the benefit of his surviving spouse,
Barbara. A QTIP is a trust “created by a deceased spouse” that “gives the surviving spouse a life
interest in the income or use of trust property.” In re Estate of Hambleton, 181 Wn.2d 802, 809,
335 P.3d 398 (2014). A QTIP can “be transferred tax free without granting the surviving spouse
total control.” In re Estate of Bracken, 175 Wn.2d 549, 555, 290 P.3d 99 (2012) superseded by
statute, LAWS OF 2013, 2d Spec. Sess., ch. 2 (Bracken amendment), as recognized in Hambleton,
181 Wn.2d 802. Effectively, “the estate of the first spouse gets a full marital deduction, yet the
property does not escape ultimate taxation” because it will eventually be taxed upon the death of
the surviving spouse. Bracken, 175 Wn.2d at 556.
Barbara died on July 4, 2007, and her Estate filed its Washington Estate and Transfer Tax
Return on October 6, 2008. The Estate did not pay any tax on the QTIP. As a result, DOR issued
a deficiency notice for additional taxes owed on the value of the QTIP. On February 26, 2010, the
Estate paid taxes under protest on the QTIP property, plus interest accrued between October 6,
2008 and the date of payment. The Estate then applied for a tax refund which DOR denied.
The Estate appealed the denial of its refund to the superior court, which stayed the case
pending the Supreme Court’s resolution of Bracken, 175 Wn.2d 549. After Bracken decided that
no estate tax was owed on QTIP, the superior court ruled in favor of the Estate and DOR appealed
to this court. We stayed the case pending the Supreme Court’s resolution of Hambleton, 181
Wn.2d 802.
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Once Hambleton issued, we applied its reasoning to the Estate’s appeal and ruled that the
Estate was liable for estate tax on the QTIP. Osborne v. Dep’t of Revenue, No. 44766-5-II, slip
op. at 6 (Wash. Ct. App. Aug. 11, 2015) (unpublished), http://www.courts.wa.gov/opinions/.
However, we did not resolve whether the Estate also had to pay interest on the QTIP accrued
between 2008, when the estate tax became due, and 2010, when the Estate paid the tax under
protest. Osborne, No. 44766-5-II, slip op. at 5-6. Instead, we remanded to DOR to determine
whether the Estate owed interest. Osborne, No. 44766-5-II, slip op. at 6.
DOR concluded that the Estate was not entitled to a refund on the interest it had paid. The
Estate appealed the decision to the superior court, arguing that the estate tax on the QTIP had not
become “due” until the legislature amended the statute in 2013 and thus, that it had not owed any
tax in 2008 when it paid tax on the rest of the estate property. The superior court affirmed DOR’s
decision and the Estate appealed to this court.
ANALYSIS
I. LEGAL PRINCIPLES
DOR’s denial of a refund request and demand for interest is “other agency action” under
the Administrative Procedure Act (APA). RCW 34.05.570(4); Wells Fargo Bank, NA v. Dep’t of
Revenue, 166 Wn. App. 342, 360-61, 271 P.3d 268 (2012). We reverse DOR’s decision if it was
unconstitutional, outside DOR’s statutory authority, or arbitrary and capricious. RCW
34.05.570(4)(c). The party challenging agency action has the burden of demonstrating the
invalidity of the action. Beatty v. Fish & Wildlife Comm’n, 185 Wn. App. 426, 443, 341 P.3d 291
(2015).
We review whether the agency erroneously interpreted or applied the law under the error
of law standard. Beatty, 185 Wn. App. at 443. When applying this standard, we “may substitute
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[our] own judgment for that of the [agency], although [we] must give substantial weight to the
agency’s view of the law it administers.” Beatty, 185 Wn. App. at 443. When reviewing
administrative action, we sit in the same position as the superior court and apply APA standards
directly to the agency record. Thomas v. Emp’t Sec. Dep’t, 176 Wn. App. 809, 812, 309 P.3d 761
(2013).
We review questions of statutory interpretation de novo. Jametsky v. Olsen, 179 Wn.2d
756, 761, 317 P.3d 1003 (2014). In interpreting statutes, we determine and give effect to the
legislature’s intent. Jametsky, 179 Wn.2d at 762. If a statute’s meaning is plain on its face, we
give effect to that meaning as an expression of legislative intent. Blomstrom v. Tripp, 189 Wn.2d
379, 390, 402 P.3d 831 (2017).
If, after the plain meaning inquiry, “the statute remains ambiguous or unclear, it is
appropriate to resort to canons of construction and legislative history.” Blomstrom, 189 Wn.2d at
390. If the statute “uses plain language and defines essential terms, the statute is not ambiguous.”
Regence Blueshield v. Office of the Ins. Comm’r, 131 Wn. App. 639, 646, 128 P.3d 640 (2006).
“A statute is ambiguous if ‘susceptible to two or more reasonable interpretations,’ but ‘a statute is
not ambiguous merely because different interpretations are conceivable.’” HomeStreet, Inc. v.
Dep’t of Revenue, 166 Wn.2d 444, 452, 210 P.3d 297 (2009) (quoting State v. Hahn, 83 Wn. App.
825, 831, 924 P.2d 392 (1996)).
We “avoid [a] literal reading of a statute which would result in unlikely, absurd, or strained
consequences.” Fraternal Order of Eagles, Tenino Aerie No. 564 v. Grand Aerie of Fraternal
Order of Eagles, 148 Wn.2d 224, 239, 59 P.3d 655 (2002). We “strictly interpret[ ] ambiguities
in statutes imposing taxes in favor of the taxpayer.” Sacred Heart Med. Ctr. v. Dep’t of Revenue,
88 Wn. App. 632, 636-37, 946 P.2d 409 (1997).
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II. WASHINGTON ESTATE TAX
In 2005, the legislature amended the Washington estate tax in light of changes to the federal
estate taxation scheme. LAWS OF 2005, ch. 516, § 1. The new law imposed an estate tax on “every
transfer of property located in Washington” and applied it prospectively but not retroactively.
Bracken, 175 Wn.2d at 559 (quoting RCW 83.100.040(1)).
In 2012, the Supreme Court in Bracken interpreted the new taxation scheme to provide an
exception for QTIP trusts created by people who died prior to 2005, but whose surviving spouses
died after 2005. 175 Wn.2d at 553. The QTIP had been “transferred” by the first spouse prior to
passage of the purely prospective tax and no “transfer” of QTIP property occurred upon the death
of the surviving spouse. Bracken, 175 Wn.2d at 566-67. Accordingly, under the 2005 law as
interpreted by Bracken, such QTIP trusts would never be subject to any Washington estate tax.
In 2013, in response to Bracken, the legislature amended the estate tax. LAWS OF 2013, 2d
Spec. Sess., ch. 2, § 1. The legislature “broadened the meaning of ‘transfer’ to its ‘broadest
possible meaning consistent with established United States supreme court precedents” and
intended the amendments to “‘apply both prospectively and retroactively to all estates of decedents
dying on or after May 17, 2005.’” Hambleton, 181 Wn.2d at 813-14 (quoting LAWS OF 2013, 2d
Spec. Sess., ch. 2, §§ 1(5), 9.
The legislature found that Bracken created “an inequity never intended by the legislature
because unmarried individuals did not enjoy any similar opportunities to avoid or greatly reduce
their potential Washington estate tax liability” and also may have created “disparate treatment
between QTIP property and other property transferred between spouses that is eligible for the
marital deduction.” LAWS OF 2013, 2d Spec. Sess., ch. 2, § 1(4). The Supreme Court affirmed the
legislature’s authority to retroactively amend the estate tax in Hambleton. 181 Wn.2d at 836.
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III. ESTATE TAX DUE DATE
The Estate contends that estate tax on the QTIP did not become “due” until the legislature
passed the Bracken amendment in 2013. Because the tax was not actually due in 2008, pursuant
to Bracken, it contends that DOR lacked statutory authority to collect interest accrued between
2008 and 2010. We agree.
DOR may collect interest on overdue estate tax. RCW 83.100.070. In this case, the parties
dispute on what date the tax on the QTIP came “due” and thus began accruing interest. The Estate
contends the tax did not come “due” until the legislature enacted the Bracken amendment in 2013,
while DOR contends that it came due along with the rest of the estate tax in 2008. DOR’s
interpretation would begin imposing interest on the Estate five years before the legislature enacted
the Bracken amendment. Although the expressly retroactive statute imposed liability on estates of
decedents who died as early as 2005, it did not expressly make such taxes “due” in the past.
Washington estate tax bases the due date for required returns on the federal estate tax
scheme. RCW 83.100.050. It requires persons filing a required estate tax to file “on or before the
date the federal return is required to be filed,” including any extensions. RCW 83.100.050(2)(a).
Regulations specify that the Washington estate tax return is due nine months after the date of the
decedent’s death. WAC 458-57-135(3)(a). However, the tax is imposed only on “transfers of the
taxable estate” which, in 2008, did not include QTIP. WAC 458-57-015.
At the time of Barbara’s death, Washington’s estate taxation scheme did not tax QTIP
because no “transfer” occurred at the death of the QTIP-receiving spouse. Bracken, 175 Wn.2d at
575-76. “It is a fundamental rule of statutory construction that once a statute has been construed
by the highest court of the state, that construction operates as if it were originally written into it.”
Johnson v. Morris, 87 Wn.2d 922, 927, 557 P.2d 1299 (1976). “In other words, there is no
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‘retroactive’ effect of the court’s construction of a statute; rather, once the court has determined
the meaning, that is what the statute has meant since its enactment.” Johnson, 87 Wn.2d at 928.
Bracken held that, because no “transfer” occurred on the death of the surviving beneficiary of a
QTIP, the 2005 estate tax did not impose any taxation on QTIP. 175 Wn.2d at 566-67. Under
Bracken, the estate tax did not apply to QTIP at any point from when it was drafted in 2005 until
the Bracken amendment in 2013.
However, the Bracken amendment has express retroactive application and has been
approved by the Supreme Court. Hambleton, 181 Wn.2d at 836. In the Bracken amendment, the
legislature stated:
[T]he legislature finds that it is necessary to reinstate the legislature’s intended
meaning when it enacted the estate tax, restore parity between married couples and
unmarried individuals, restore parity between QTIP property and other property
eligible for the marital deduction, and prevent the adverse fiscal impacts of the
Bracken decision by reaffirming its intent that the term “transfer” as used in the
Washington estate and transfer tax is to be given its broadest possible meaning
consistent with established United States supreme court precedents, subject only to
the limits and exceptions expressly provided by the legislature. . . .
As curative, clarifying, and remedial, the legislature intends for this act to
apply both prospectively and retroactively to estates of decedents dying on or after
May 17, 2005.
LAWS OF 2013, 2d Spec. Sess., ch. 2, § 1(5), (6).
When the legislature makes clear that an act “is intended to apply retroactively, ‘an
appellate court must apply that law in reviewing judgments still on appeal that were rendered
before the law was enacted, and must alter the outcome accordingly.’” Hambleton, 181 Wn.2d at
822 (quoting Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 226, 115 S. Ct. 1447, 131 L. Ed. 2d
328 (1995)).
Hambleton expressly upheld the retroactive effect of the Bracken amendment to numerous
constitutional challenges, including separation of powers, due process, impairment of contracts,
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and uniformity of taxation. 181 Wn.2d at 823, 829, 831-32. However, retroactive application of
the statute is not inconsistent with a due date as of the statute’s enactment in 2013. Making the
tax “due” up to eight years before its enactment, inconsistent with the statutory scheme as it existed
at the time, would be absurd and inequitable and cannot be what the legislature intended. 2
Beginning accrual of interest in 2008 would punish the Estate for failing to pay an obligation that
it had no way of predicting and was in fact inconsistent with the taxation scheme in place at the
time.
We interpret the Bracken amendment consistent with Hambleton to apply retroactively to
all estates of persons dying on or after May 17, 2005. However, the legislature cannot have
intended to make this tax due years before its own enactment. Accordingly, the tax came due
when the legislature passed the amendment in 2013 and could not begin accruing interest before
that date.
The Estate is entitled to a refund of the interest it paid in 2010.
IV. INTEREST ON INTEREST
In addition to recovering the interest the Estate already paid to DOR, the Estate also seeks
interest on the interest from the date of its payment until passage of the Bracken amendment, when
it contends the payment became “due.” The Estate is entitled to this interest.
If DOR determines that a person has overpaid the estate tax due, it must refund the amount
of the overpayment, “together with interest.” RCW 83.100.130(1). The statute provides an interest
2
DOR brings our attention to a federal case that ruled taxpayers “liable for interest on . . .
underpayments, even though the payments were proper when made” and that “[t]he congressional
understanding was that interest is payable on retroactive tax increases unless Congress forgives
it.” Brown & Williamson, Ltd. v. United States, 688 F.2d 747, 749-50 (Ct. Cl. 1982). We do not
find Brown & Williamson persuasive and we choose not to follow it.
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rate computed at the same rate as interest DOR assesses for overdue payments and “shall be
refunded from the date of overpayment until the date the refund is mailed.” RCW 83.100.130(2).
Because the Estate overpaid its estate tax when it paid interest accrued between 2008 and
2010, it should receive its refund “together with interest” on the overpaid amount, as mandated by
statute.
CONCLUSION
The legislature has authority to issue a retroactively applicable tax. However, it cannot
have intended to make such a tax come due and begin accruing interest as early as eight years
before its own enactment. We conclude that, while the Bracken amendment applies to the estates
of all persons dying on or after 2005, such taxes came “due” in 2015 at the time the legislature
passed the amendment and not earlier. Accordingly, we reverse and remand to DOR for it to
refund the Estate the interest it paid in 2010 and interest on that interest, consistent with RCW
83.100.130(1).
A majority of the panel having determined that this opinion will not be printed in the
Washington Appellate Reports, but will be filed for public record in accordance with RCW 2.06.040,
it is so ordered.
Melnick, J.
We concur:
Maxa, C.J.
Sutton, J.
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