Decedent’s Delinquent Income Taxes Are Debts Against the Estate

To collect $106,898 of unpaid income taxes from the estate of Francis Glaser, the Iowa Department of Revenue (IDOR) sought to set aside Glaser’s predeath transfers of real estate to his friend. The Iowa Supreme Court held that fraudulent conveyances may only be voided to the extent necessary to pay the debts and charges of the estate. Iowa Code § 633.368. On remand, the friend argued that income taxes are not a debt of the estate. The Court of Appeals disagreed and found that the properties could be sold to satisfy the estate’s debts including IDOR’s claim. However, any remaining funds or unsold properties must be returned to the decedent’s friend.

Background

To avoid paying taxes, Francis Glaser transferred a farm property and three other parcels of real estate to his friend, Sherry Kindsfather. In 2014, Glaser died intestate. At the request of the IDOR, the administrator of the estate petitioned the court to set aside “the Property transferred by the Decedent within three (3) years of his death in the gross estate for income tax purposes.” The motion defined “the Property” as the three parcels conveyed to the friend, but it did not reference the farm property.

On appeal, the Court of Appeals determined that the applicable five-year statute of limitations barred the claim against the farm property. However, the court held that the transfers of the other three properties should be voided to pay for the debts and charges of the estate.

The Iowa Supreme Court granted further review and held that a fraudulent conveyance may be voided only to the extent required to pay the decedent’s creditors. See Iowa Code § 633.368. The Court reversed on the excessive relief issue alone and remanded the case to the district court to determine a remedy which “satisf[ies] the debts and charges of the estate.”

On remand, the administrator provided a final report itemizing the estate’s $181,144 debts and charges. Of that amount, the report attributed $138,031 to the IDOR’s claim. The administrator reported $52,799 in liquid assets which resulted in a $128,345 shortfall. Kindsfather objected to the report and argued that the delinquent income taxes did not qualify as “debts and charges” of the estate.

The district court approved the final report and ordered the administrator to pay the obligations of the estate according to law and, if necessary, sell the three parcels of land to satisfy the debts. Any remaining funds from the sale of a property or any property not required to be sold would be returned to Kindsfather. Kindsfather appealed.  

Income Taxes as Debts and Charges

Property liable for the debts and charges of an estate “shall include all property transferred by the decedent with intent to defraud the decedent’s creditors….” Iowa Code § 633.368. On appeal, Kindsfather argued that “debts and charges” of an estate does not include income taxes.

To support her argument, Kindsfather relied on Eide v. Hotttman, in which the Iowa Supreme Court concluded that “a tax is not a debt” for federal estate tax purposes. 132 N.W.2d 755 (Iowa 1965) (emphasis added). Because Eide was decided under the tax code, the court found it distinguishable. Conversely, the probate code does consider taxes to be a debt. For example, a debt “includes liabilities of the decedent which survive, whether arising in contract, tort, or otherwise.” Iowa Code § 633.3(12). Additionally, the debts and charges “include[] [a]ll taxes having preferences under the laws of this state.” Iowa Code § 633.425(6).

Equitable Lien

The court next considered whether the court erred by not establishing “an equitable lien to the extent necessary to satisfy only the debts and charges against the estate.” The administrator of an estate may recover all fraudulently transferred property “so far as necessary” to pay for the estate’s debts and charges. Iowa Code § 633.368.

All the decedent’s property must pass through the administrator and be distributed to his creditors as required by law. Thus, the court concluded that “[a] request for a constructive trust or equitable lien is essentially a request for the fraudulent grantee to ‘be paid ahead of debts and charges of the estate,’ at least when the estate is insolvent.” Cf. VanDeWalker v. Lau, 581 N.W.2d 644, 645 (Iowa 1998).

Redemption

Lastly, Kindsfather argued that under Iowa Code §§ 684.7(2) and 628.3 she had the right to redeem the properties from any court ordered sale. Although Kindsfather failed to properly raise the claim in district court, the court found that it would fail on the merits.

Iowa Code § 684.7(2) provides remedies for a creditor. Redemption is not an available remedy under the statute and, additionally, Kindsfather was not a creditor. Iowa Code § 628.3 gives a debtor the right to redeem real property. However, Kindsfather was not a debtor.