Taxing one stepchild but not another does not violate equal protection, Iowa Supreme Court rules

by Rox Laird | November 27, 2017

Iowa tax law does not run afoul of the equal protection clause of the Iowa Constitution in treating certain stepchildren differently than others for inheritance-tax purposes, the Iowa Supreme Court ruled in Tyler & Alcorn vs. Iowa Department of Revenue.

The distinction is whether a stepchild’s parent was married to the stepparent whose estate is distributed after death.

The stepfather of Paula Tyler and Mark Alcorn left his $1.8 million estate to the two children he had raised as his own, and to their mother to whom he had been married for 35 years before divorcing. Because the divorce occurred before their stepfather’s death, Paula and Mark were assessed $203,000 in inheritance tax.

Had their mother and stepfather been married at the time of his death, there would have been no tax due, and the appellants argued that is an equal-protection violation.

The Supreme Court disagreed in a unanimous decision by Justice Edward Mansfield handed down on Nov. 17.

For the purposes of this appeal, the Court assumed that Paula and Mark are “similarly situated” with stepchildren whose parent and stepparent were not divorced. The question, then, is whether treating the two classes of stepchildren differently on inheritance taxes is “rationally related to a legitimate state interest.”

On that question, the Court agreed with the State’s position that it has a legitimate interest in promoting family relationships and close connections among relatives.

The preferential tax treatment is “intended to promote and preserve the family relationship while balancing that interest against the goal of raising revenue,” Mansfield wrote for the Court. “Favorable tax treatment of intrafamily transfers, at the most basic level, allows more assets to remain within the family. This strengthens the family and helps the family maintain financial security. Such tax laws also incentivize persons to keep their wealth within that group rather than transferring it outside.”

Mansfield noted that none of the parties to this case argued that inheritance tax laws should treat all beneficiaries the same, or that they cannot favor family over non-family beneficiaries. Indeed, the stepchildren’s mother also was assessed the inheritance tax on her share of her ex-husband’s estate.

The Court acknowledged it is difficult to draw precise lines to achieve fairness in taxation, but uniformity can also lead to unfairness. “For example,” Mansfield wrote, “if the child of a decedent’s ex-spouse is constitutionally entitled to preferential inheritance tax treatment, why not a decedent’s nephew, niece, or foster child?”


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