In a recent case involving Kentucky’s inheritance tax, the Supreme Court of Kentucky held a reviewing court does not owe any deference to the Kentucky Board of Tax Appeals (“KBTA”) as to questions of law. The case involved whether inheritance taxes paid as a “cost of administration” under a will’s tax exoneration provision may be deducted from the value of distributive shares under KRS § 140.090 and thereby reduce the overall tax liability, and whether the payment of tax by an estate on behalf of a beneficiary is itself a taxable “bequest of tax”.
The KBTA held that inheritance taxes paid by the estate under a tax exoneration provision are deductible under KRS § 140.090 where the decedent’s will directs that such taxes shall be paid as “costs of administration”. The KBTA also held that a bequest of tax is not a taxable transaction. The Franklin Circuit Court reversed, reviewing the KBTA’s decision de novo, and the Court of Appeals affirmed. The Supreme Court of Kentucky granted discretionary review.
The Court held the KBTA’s interpretation of the statutes at issue was not entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. The Court first noted that so-called “Chevron deference” applies only where a statute is silent or ambiguous with respect to the specific issue before the court. Because the statutes involved were neither, the Court found no deference should be given to the KBTA’s interpretation.
More importantly, the Court noted that deference is given only to an administrative agency’s interpretation of a statute which it administers. The KBTA is an administrative review agency that determines appeals of tax rulings. Thus, the Court stated, the KBTA does not administer Kentucky’s inheritance tax statutes or any other portion of the Kentucky statutes. Instead, the statutes are administered by the Kentucky Department of Revenue (the “Department”). According to the Court, if any deference is to be given, it is to the Department’s formal interpretation of statutes it administers. Therefore, the Court held a reviewing court’s review of a decision by the KBTA is de novo, and no deference is to be given to the KBTA’s interpretation of tax statutes.
The Court also held that inheritance taxes paid by an estate are not deductible from the value of the gross estate under KRS § 140.090, because they do not fall within the deductions listed in the statute. Furthermore, the Court held that taxes paid by an estate on behalf of a beneficiary – “bequests of tax” – are taxable transactions. The Court reasoned that when a beneficiary receives the benefit of tax paid on his or her behalf, the tax paid is itself a taxable transfer of property and is part of the overall bequest; therefore, it is subject to inheritance tax. Interestingly, the Court found the Department’s attempted correction of the estate’s inheritance tax return was incorrect and resulted in an understatement of the tax due. However, because the Department sought a judgment in the amount of tax it had assessed, the Court found the Department was not entitled to recover the additional tax.