               IN THE SUPREME COURT OF IOWA
                             No. 08–1718

                          Filed July 16, 2010


MARK TREMEL and BRUCE TREMEL, Minors,
By CITIZENS FIRST NATIONAL BANK of
Storm Lake, Iowa, their Conservator,

      Appellants,

vs.

IOWA DEPARTMENT OF REVENUE,

      Appellee.



      On review from the Iowa Court of Appeals.



      Appeal from the Iowa District Court for Harrison County, G.C.

Abel, Judge.



      The Iowa Department of Revenue seeks further review of the

decision of the court of appeals reversing the district court’s order on

judicial review affirming the final order of the Director of the Iowa

Department of Revenue denying the petitioners’ claims for a refund on

previously paid estate taxes, interest, and penalties.   DECISION OF

COURT OF APPEALS VACATED; DISTRICT COURT JUDGMENT

AFFIRMED.



      Steven J. Roy, Denise M. Mendt, and Bridget C. Shapansky of

Nyemaster, Goode, West, Hansell & O’Brien, P.C., Des Moines, for

appellants.
                                   2

      Thomas J. Miller, Attorney General, and James D. Miller, Assistant

Attorney General, for appellee.
                                     3

BAKER, Justice.

      The Iowa Department of Revenue (IDOR) seeks further review of

the decision of the court of appeals reversing the district court’s order on

judicial review affirming the final order of the Director of the IDOR

denying the petitioners’ claims for a refund on previously paid estate

taxes, interest, and penalties. The IDOR argues that the court of appeals

erred in interpreting Iowa Code section 451.12 in a manner that limits

the department’s ability to collect estate taxes only from property subject

to inheritance tax under Iowa Code chapter 450 and in awarding the

petitioners’ attorney fees. The petitioners counter that the district court

erred in determining the designated beneficiaries of a life insurance

policy that was not included in the probate estate were responsible for

the payment of the Iowa estate tax, and that they are entitled to litigation

costs since the department was not substantially justified in collecting

the estate tax from them. We find that Iowa Code section 450.12 permits

the IDOR to assess and collect the estate tax from the beneficiaries of a

life insurance policy, and therefore, we affirm the district court judgment

affirming the final order of the Director of the IDOR.

      I. Background Facts and Proceedings.

      Philip Tremel died intestate on September 22, 1998, leaving a

surviving spouse, Lynne Tremel, and two minor children, Mark and

Bruce Tremel.    Lynne was appointed as the administrator of Philip’s

estate, and Citizens First National Bank of Storm Lake (Bank) was

appointed as conservator for Mark and Bruce. At the time the estate was

closed, it was insolvent, and no beneficiary received any property from

the estate. At the time of Philip’s death, he owned a life insurance policy

on his own life naming Lynne as the primary beneficiary of the policy and

Mark and Bruce as contingent beneficiaries.         Lynne disclaimed her
                                    4

interest in the policy, and Mark and Bruce became entitled to

$516,130.15 in life insurance proceeds.

      The estate filed its federal estate tax return, which showed the

estate owed $129,838.71 in federal estate taxes. This figure was then

adjusted down to $98,687.92 because of a federal credit for state death

taxes. The estate owed $31,150.79 for Iowa estate taxes. Neither the

federal nor Iowa estate taxes were paid by the administrator of the estate

because the estate had no assets after the payment of administrative

expenses.

      The IDOR assessed Iowa estate tax against Mark and Bruce and

attempted to collect the tax through an administrative levy on funds held

by the Bank as conservator for the boys.      The Bank entered into an

agreement with IDOR paying the department $50,153.05, which

represents $31,150.79 in Iowa estate tax and $19,002.26 in interest and

penalties. The Bank filed timely claims for a refund on behalf of Mark

and Bruce. IDOR denied the refund claims, and Mark and Bruce sought

administrative relief.

      A hearing was held on the matter before an administrative law

judge (ALJ) who issued a proposed decision finding that the life

insurance proceeds were not part of the estate for inheritance tax

purposes, and that the collection tools and rights from the inheritance

tax chapter were not incorporated into the estate tax chapter and could

not be used to reach the life insurance proceeds. A second hearing was

held to determine whether Mark and Bruce were entitled to attorney fees.

The ALJ determined that the IDOR’s position was not substantially

justified and awarded Mark and Bruce reasonable attorney fees.        The

IDOR appealed both decisions of the ALJ to the Director of the IDOR,

who issued a decision finding that the insurance proceeds are a part of
                                     5

the gross and net estate for estate tax purposes, and therefore, actions

may be brought against Mark and Bruce because they were the

beneficiaries of the insurance policy.

      Mark and Bruce filed a petition for judicial review with the district

court which affirmed the decision of the Director.        Mark and Bruce

appealed, and the appeal was routed to the court of appeals. The court

of appeals reversed the district court, concluding that “there is no

statutory language in chapter 451 clearly imposing liability for estate tax

on named beneficiaries of life insurance proceeds not part of the probate

estate.”   The court ordered that the collected tax, plus penalties and

interest, be refunded to Mark and Bruce, and that they were entitled to

reasonable litigation costs.

      The IDOR filed an application for further review with this court

which we accepted.

      II. Scope of Review.

      Both parties agree that the scope of our review is determined by

Iowa’s Administrative Procedure Act, Iowa Code chapter 17A, and

further agree that we are reviewing for correction of errors at law. We do

not believe that the issue is this simple. Although the result does not

change, we believe we must determine the appropriate scope of review.

      Under the Iowa Administrative Procedure Act,

             [a]n agency’s interpretation of law is given deference if
      authority to interpret the law has “clearly been vested by a
      provision of law in the discretion of the agency.” If the
      interpretation is so vested in the agency, then the court may
      reverse an agency’s interpretation only if it is “irrational,
      illogical, or wholly unjustifiable.”         If, however, the
      interpretation of a provision of law is not vested in the
      discretion of the agency, our review is for correction of errors
      at law and we are free to substitute our interpretation of the
      statute de novo.
                                       6

AOL LLC v. Iowa Dept. of Revenue, 771 N.W.2d 404, 408 (Iowa 2009)

(quoting Iowa Code § 17A.19 (10)(l) (Supp. 1999)).

      “[W]e must examine the specific statutory provision at issue in

this case and decide whether the legislature intended the board to have

interpretive authority with respect to that provision.”       Clay County v.

Pub. Employment Relations Bd., 784 N.W.2d 1, 5 (Iowa 2010). Here, the

taxpayers challenge the department’s interpretation of Iowa Code section

451.12. That section provides, in part:

            All the provisions of chapter 450 with respect to the
      lien provisions of section 450.7, and the determination,
      imposition, payment, and collection of the tax imposed
      under that chapter, including penalty and interest upon
      delinquent taxes and the confidentiality of the tax return, are
      applicable to this chapter, except as they are in conflict with
      this chapter. . . .

Iowa Code § 451.12 (1997).

      If the IDOR has clearly been vested with discretion to interpret

section 451.12, we will reverse the department’s interpretation only if it

is “irrational, illogical, or wholly unjustifiable.” Id. § 17A.19 (10)(l). “The
question of whether interpretive discretion has clearly been vested in an

agency is easily resolved when the agency's enabling statute explicitly

addresses the issue.” Renda v. Iowa Civil Rights Comm’n, 784 N.W.2d 8,

11 (Iowa 2010).     In this case, the legislature has explicitly given the

Director of the IDOR the power to “adopt rules necessary for the

enforcement of this chapter” in Iowa Code section 451.12, the statutory

provision at issue in this case. Iowa Code § 451.12.

      If the legislature had not explicitly given the IDOR authority to

interpret section 451.12, then we would examine “the phrases or

statutory provisions to be interpreted, their context, the purpose of the

statute, and other practical considerations to determine whether the
                                      7

legislature intended to give interpretive authority [to the IDOR].” Renda,

784 N.W.2d at 11–12.      The statute’s purpose, providing for collection

procedures of the tax assessed in chapter 451, requires the IDOR to

adopt some but not all of the provisions of chapter 450; it also requires

the IDOR to determine which parts of chapter 450 are in conflict with

chapter 451.     Further, the context and practical considerations of

adapting the procedures in chapter 450 to chapter 451 lead us to find

that the legislature intended to give interpretive authority to the IDOR.

      We conclude that the interpretation of section 451.12 has “clearly

been vested” in the IDOR. Iowa Code § 17A.19(10)(l). As a result, the

interpretation by the department will be found invalid only if it is

“irrational, illogical, or wholly unjustifiable.”    Id.   We also note that

“[b]ecause 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. v.

Iowa State Bd. of Tax Review, 723 N.W.2d 167, 174 (Iowa 2006); accord

Iowa Code § 17A.19(10)(f); see also Mycogen Seeds v. Sands, 686 N.W.2d

457, 465 (Iowa 2004). We will therefore reverse the agency’s application

of the law to the facts only if we determine such application was

“irrational, illogical, or wholly unjustifiable.” Iowa Code § 17A.19(10)(m);

see also Mycogen Seeds, 686 N.W.2d at 465.

      III. Discussion and Analysis.

      The   question   we   must    answer   is     whether   the   designated

beneficiaries of a life insurance policy not included in the probate estate

may be held responsible for the Iowa estate tax. The resolution of this

issue involves the interplay of the inheritance tax provisions in Iowa

Code chapter 450, the estate tax provisions of Iowa Code chapter 451,

and several provisions of the Federal Tax Code.
                                          8

       A.      Statutory Scheme.       The Internal Revenue Code imposes a

federal estate tax on the transfer of the taxable estate of every decedent.

26 U.S.C. § 2001 (1994).         Under the statute, the taxable estate is the

gross estate minus certain allowable deductions. Id. § 2053. At the time

of Philip’s death, a credit was allowed for the amount of any state death

taxes actually paid by the estate. Id. § 2011. 1

       In addition to the federal estate tax, at the time of Philip’s death

the State of Iowa imposed an estate tax upon the transfer of the total net

estate of every decedent dying after April 1929. Iowa Code § 451.4. The

Iowa estate tax was governed by chapter 451 of the Code. 2 Under this

chapter, the net estate was determined by taking the gross estate as it is

defined for federal tax purposes, minus deductions permitted by federal

law. Id. § 451.3. Under the Internal Revenue Code, the gross estate is

defined as the value of all property, real or personal, tangible or

intangible at the time of the decedent’s death. 26 U.S.C. § 2031. This

definition includes the proceeds of life insurance receivable by the estate

executor or receivable by other beneficiaries. See id. § 2042(1) (stating

the value of the gross estate shall include property received by the

executor, including amounts received by all other beneficiaries “as
insurance under policies on the life of the decedent”).

       The inheritance tax is a tax on the receipt of property from a

decedent. In re Millard’s Estate, 251 Iowa 1282, 1291, 105 N.W.2d 95,

       1Since  the filing of this case many changes have been made to the Internal
Revenue Code’s chapter on estate tax.         The Economic Growth and Tax Relief
Reconciliation Act of 2001 phased out the state death tax credit. Economic Growth and
Tax Relief Reconciliation Act of 2001 § 531, 26 U.S.C. § 2011(b)(2) (Supp. 2002)). In
accordance with the 2001 act, in 2005 the credit was replaced by a federal estate tax
deduction for state death taxes which are actually paid. Id. § 532(d), 26 U.S.C. § 2058
(Supp. 2005)).
       2ThisChapter was repealed in 2008. 2008 Iowa Acts ch. 1119, § 37 (codified at
Iowa Code ch. 451 (2009)).
                                     9

101 (1960). An estate tax, on the other hand, is a tax on property held

by a decedent at the time of death. A state estate tax typically “ ‘acts as

a ‘pick-up’ or ‘sponge’ tax, merely imposing tax up to the amount of the

allowable federal credit, thereby shifting revenue from the federal

government to the states.’ ” Tye J. Klooster, Repeal of the Death Tax?

Shoving Aside the Rhetoric to Determine the Consequences of the Economic

Growth and Tax Relief Reconciliation Act of 2001, 51 Drake L. Rev. 633,

651 (2003) (quoting Krisanne M. Schlachter, Repeal of the Federal Estate

and Gift Tax: Will It Happen and How Will It Affect Our Progressive Tax

System?, 19 Va. Tax. Rev. 781, 799 (2000)); see also Iowa Code § 451.2

(providing for the Iowa estate tax in an amount equal to the federal estate

tax credit for state death taxes).

      B.   The Adopting Statute.         The IDOR argues that it has the

authority under Iowa Code sections 451.12 and 450.55 to collect the

Iowa estate tax from persons entitled to property subject to the Iowa

estate tax.    It is clear from the structure of the federal estate tax

provisions and the language in Iowa Code chapter 451 that the Iowa

estate tax was intended to mirror the federal estate tax to some degree.

See 26 U.S.C. § 2011 (providing for the state death tax credit); see also

Iowa Code § 451.3 (defining the gross estate for Iowa tax purposes in

terms of the federal definition). However, the Iowa legislature must still

provide for the determination, imposition, and collection of this tax under

Iowa law. It did so through Iowa Code section 451.12, which adopts all

of the provisions from chapter 450 dealing with the determination,

imposition, payment and collection of the tax that are not in conflict with

chapter 451.

      Iowa Code section 451.12 is an adopting statute. See, e.g., Nelson

v. City of Omaha, 589 N.W.2d 522, 528 (Neb. 1999).         This means its
                                    10

language refers to another statute and makes the language of that

statute applicable to the subject matter of section 451.12. 1A Norman J.

Singer & J.D. Shambie Singer, Statutes and Statutory Construction §

22:25, at 328 (7th ed. 2009) (“When a statute adopts the provisions of

another statute by specific reference, the effect is as if the referenced

statute had been incorporated into the adopting statute.”). “[A] statute

may adopt all or a part of another statute by a specific reference, and the

effect is the same as if the statute or part thereof adopted had been

written into the adopting statute.” Nelson, 589 N.W.2d at 528.

      Incorporation by reference is a perfectly acceptable and
      appropriate method of drafting legislation. The purpose of
      such practice is to incorporate into the new act the
      provisions of other statutes by reference and adoption, and
      in so doing to avoid encumbering the statute books by
      unnecessary repetition.

73 Am. Jur. 2d Statutes § 16, at 242 (2001).         The language of the

adopting statute, Iowa Code section 451.12, provides in pertinent part:

            All the provisions of chapter 450 with respect to . . .
      the determination, imposition, payment, and collection of the
      tax imposed under that chapter . . . are applicable to this
      chapter, except as they are in conflict with this chapter.

The Generation Skipping Transfer Tax chapter and the Qualified Use

Inheritance Tax chapter have similar provisions.          See Iowa Code

§ 450A.12 (“All of the provisions of chapter 450 with respect to the

payment and collection of the tax imposed under that chapter . . . are

applicable to the provisions of this chapter, except as they are in conflict

with this chapter.”); id. § 450B.7 (“All the provisions of chapter 450 with

respect to the payment, collection and administration of the inheritance

tax imposed under that chapter . . . are applicable to the provisions of

this chapter to the extent consistent.”).   It is clear from this language

that the legislature intended for the detailed provisions of chapter 450,
                                          11

providing for tax collection procedures, to fill in the holes in other more

sparsely compiled tax chapters. 3

       The IDOR argues that in accordance with Iowa Code section

451.12, the language of Iowa Code sections 450.55 and 450.5 are

incorporated by reference into Iowa Code chapter 451. The IDOR claims

that these sections allow for the collection of estate tax against any

persons entitled to property which is subject to the tax.

       The pertinent provisions of the inheritance tax statute read:

       [T]he director of revenue and finance may bring, or cause to
       be brought in the director’s name of office, suit for the
       collection of the tax, penalty, interest, and costs, against the
       personal representative or against the person entitled to
       property subject to the tax . . . and upon obtaining judgment
       may cause execution to be issued as is provided by statute
       in other cases.

Id. § 450.55. Similarly, Iowa Code section 450.5 provides:

              Any person becoming beneficially entitled to any
       property or interest in property by any method of transfer as
       specified in this chapter, and all personal representatives
       and referees of estates or transfers taxable under this
       chapter, are respectively liable for all taxes to be paid by
       them respectively.

The IDOR also promulgated a rule to implement these sections and

incorporate them into the estate tax chapter which provides that “[t]he

personal representative of the decedent’s estate and any person,

including a trustee, in actual or constructive possession of any property

included in the gross estate, have the duty to file the return with the

department and pay the tax due.” Iowa Admin. Code r. 701–87.3(4).


       3Chapter   450 contains over ninety-seven sections detailing how the applicable
tax must be computed and collected. See Iowa Code ch. 450. In contrast, chapters
450A, 450B and 451 dealing with the generation skipping transfer tax, the qualified use
inheritance tax, and the estate tax each have less than fifteen sections. See Iowa Code
chs. 450A, 450B, 451.
                                      12

      The beneficiaries point out, however, that the life insurance

payable to Mark and Bruce is not taxable and cannot be reached under

chapter 450. See In re Brown’s Estate, 205 N.W.2d 925, 926 (1973)

(holding life insurance payable to a named beneficiary is not taxable for

inheritance tax purposes).     Further, because the boys were lineal

descendants of the deceased, any property received by them is exempt

from inheritance tax. Iowa Code § 450.9 (Supp. 1997). In addition, tax

liens for inheritance taxes cannot be placed upon property inherited by

lineal descendants. Id. § 450.7 (Supp. 1997). There is no corresponding

exemption in the estate tax chapter for life insurance proceeds or

property received by lineal descendants. Nonetheless, the beneficiaries

argue that these provisions in chapter 450 prevent the assessment and

collection of chapter 451 estate taxes from the life insurance proceeds

they received because the provisions of chapter 450 are incorporated into

chapter 451.

      Iowa Code section 451.12 specifically provides that all of the

determination and collection procedures are applicable “except as they

are in conflict with this chapter.”   A conflict exists in the definition of

what property is taxed under the inheritance tax and the estate tax

chapters. Therefore, provisions exempting property from assessment and

collection that is taxable under the inheritance tax chapter would be in

conflict with the estate tax chapter. The exemptions for life insurance

payable to a named beneficiary and transfers to lineal descendants are

two specific examples that would not be incorporated into chapter 451

because they would be in conflict with the provisions of that chapter.

      When we read into chapter 451 the provisions of sections 450.5

and 450.55 as if they were part of that chapter, Mark and Bruce, as

beneficiaries of Philip’s life insurance policy, are “person[s] entitled to
                                     13

property subject to the tax” or “entitled to any property or interest in

property by any method of transfer as specified in this chapter . . . .”

Iowa Code §§ 450.55, .5. Mark and Bruce, therefore, as recipients of the

life insurance proceeds which were taxable under the estate tax chapter,

are liable for the estate tax and may be assessed for that tax.          We

determine that the IDOR’s interpretation of Iowa Code section 451.12

and subsequent collection of the estate tax was not irrational, illogical, or

wholly unjustifiable.

      IV. Disposition.

      We hold that Iowa Code section 451.12 permits the IDOR to assess

and collect the estate tax from Mark and Bruce as beneficiaries of the life

insurance policy, and therefore, we affirm the district court judgment

affirming the final order of the Director of the IDOR.

      DECISION OF COURT OF APPEALS VACATED; DISTRICT

COURT JUDGMENT AFFIRMED.
