Comptroller of the Treasury v. Richard Reeves Taylor
No. 56
IN THE COURT OF APPEALS OF MARYLAND
July 29, 2019
September Term, 2018. Opinion by Hotten, J. Circuit Court for Washington County Case No. 21-C-15-055059. Argued: April 8, 2019
QUALIFIED TERMINABLE INTEREST PROPERTY – ESTATE TAXES – The Court of Appeals held that the decedent’s surviving spouse, Margaret Beale Taylor (“Ms. Taylor”), was entitled to a valuable property interest in the qualified terminable interest property (“QTIP”) that was deemed to transfer upon her death through operation of the federal statutory scheme. The Court considered the relationship between Ms. Taylor’s federal gross estate and her Maryland estate, concluding that the value of both were the same through operation of
ESTATE TAXES – LATE PENALTY WAIVER – The Court of Appeals held that, pursuant to
AGENCY DECISIONS – PRESERVATION OF ISSUES – The Court of Appeals held that its review is limited to agency findings and the reasons for those findings. Because the Tax Court did not base its final decision on any constitutional grounds, Respondent’s issues on cross-appeal were not preserved. As such, the Court declined to review the merits of the personal representative’s argument.
Barbera, C.J.,
* Greene,
McDonald,
Watts,
Hotten,
Getty,
Raker, Irma S. (Senior Judge, Specially Assigned) JJ.
Opinion by Hotten, J.
Watts, J., concurs.
Getty, J., dissents.
Filed: July 29, 2019
*Greene, J., now retired, participated in the hearing and conference of this case while an active member of this Court; after being recalled pursuant to the Maryland Constitution, Article IV, Section 3A, he also participated in the decision and adoption of this opinion
In a reported opinion, Comptroller of the Treasury v. Taylor, 238 Md. App. 139, 152, 189 A.3d 799, 807 (2018), the Court of Special Appeals held that “the Comptroller lack[ed] the authority to tax the [trust assets] as part of [the] Maryland estate.” The Court also held that “[g]iven no tax was authorized under the statute, no penalty could be properly charged against the Estate.” Id.
On appeal, the Comptroller presents the following questions for our review:
- Is the value of a surviving spouse’s interest in a QTIP trust created in another state properly included in the surviving spouse’s Maryland estate, and therefore subject to the Maryland estate tax?
- Did the Tax Court improperly waive a late-filing penalty when waiver must be supported by affirmative evidence and the only basis cited for the waiver was the personal representative’s erroneous interpretation of the tax laws?
The
- Is [the Comptroller’s] taxation of the QTIP trust in the [E]state unconstitutional?
- Is the fact that an issue was raised before the Tax Court, but not expressly decided by that agency, sufficient to permit review of that issue on appeal from the agency ruling?
For reasons discussed infra, we reverse the judgment of the Court of Special Appeals on the first issue. We conclude that, upon the death of decedent’s surviving spouse, Margaret Beale Taylor (“Ms. Taylor”), the QTIP trust assets were deemed to be transferred upon her death and that transfer was taxable by Maryland. As to issue two, we answer in the negative, concluding that the Tax Court properly waived the late-filing penalty.
With respect to the cross-petition, we consider the second issue first, concluding that this Court’s review is limited to the Tax Court’s findings and to the reasons for those findings. Because the Tax Court did not expressly address a constitutionality argument in its written opinion, we decline to review the personal representative’s first issue in the cross-petition.
BACKGROUND
Factual Background
The instant tax dispute arose from events that were triggered by the death of Ms. Taylor’s husband, John Wilson Taylor (“Mr. Taylor”). Mr. Taylor predeceased Ms. Taylor on December 1, 1989. At the time of Mr. Taylor’s death, Mr. and Ms. Taylor were residents of Wayne County, Michigan.
Upon the death of Mr. Taylor, the personal representative for his estate filed a timely federal tax return with the Internal Revenue Service in which the estate claimed a deduction for the marital trust, known as a qualified terminable interest property (“QTIP”) election. Election of the QTIP deduction enables a married couple to defer payment of any estate tax on the transfer of the QTIP until the death of the surviving spouse. The marital deduction is allowed for the entire value of the QTIP. See
Following Mr. Taylor’s death, Ms. Taylor continued to reside in Michigan until 1993, when she moved to Washington County, Maryland. She died testate on January 15, 2013.
The personal representative filed a federal Estate (and Generation-Skipping Transfer) Tax Return with the Internal Revenue Service, which included the value of the property in the marital trust. On the federal estate tax return, the personal representative reported an Estate value of $5,582,245. The personal representative also filed a Maryland estate tax return, in which he excluded the value of the marital trust, decreasing the reported value of Ms. Taylor’s federal gross estate by $4,108,048.02.
The personal representative explained his deduction of Ms. Taylor’s interest in the marital trust in a statement attached to the Maryland return. It stated:
In reliance on
Section 7-309(b)(6)(i) 1 of the Maryland Tax-General Code Annotated, the marital trust created under the Last Will and Testament of decedent’s deceased spouse, John Wilson Taylor, in which decedent had an income interest for life and which is reported on Schedule F of decedent’s Federal Estate Tax Return, Form 706, has been excluded from the federal gross estate (line 1, federal Form 706) reported on line 1 of Section IV of the MET-1. John Wilson Taylor died on December 1, 1989, and was a resident of the State of Michigan on the date of his death. No Maryland estate tax return was filed for Mr. Taylor, and thus no “marital deduction qualified terminable interest property election was made for the decedent’s predeceased spouse on a timely filed Maryland estate tax return.”
After examining the Maryland estate tax return, the Comptroller disallowed the claimed exclusion of Ms. Taylor’s interest in the marital trust, adding back the value to the federal gross estate and the corresponding Maryland estate. The Comptroller then sent the personal representative a Deficiency Notice, which added interest, a 10% late penalty, and imposed a 25% penalty “due on underpayment attributable to substantial estate tax valuation.”
On May 28, 2014, the Comptroller sent a revised Deficiency Notice, waiving the 25% penalty, but retaining the 10% late penalty. On June 24, 2014, the personal representative filed a Petition of Appeal.
Procedural Background
1. Maryland Tax Court Proceeding
The Tax Court held a hearing on May 6, 2015, followed by a written opinion, Taylor v. Comptroller of the Treasury, Maryland Tax Court, Case No. 14-EL-OO-0691, Memorandum and Order of the Court dated Sept. 2, 2015 (“Tax Court Proceeding”), which affirmed the estate tax assessed on the trust assets, as well as the assessed interest. In an amendment to the memorandum and order, the Court waived and abated the 10% late penalty fee, citing
The Tax Court found that, at the time of Ms. Taylor’s death, she possessed a federal gross estate, consisting entirely of personal property, valued at $5,582,245. In considering this State’s authority to tax the trust’s assets, the Tax Court concluded that:
[T]he Maryland estate tax is directly linked to the federal estate tax, and completely integrated with it. The linkage and integration is accomplished by adopting, at the outset, the federal definition of “gross estate.”
Tax-Gen. § 7-301(b) . (The term “ ‘estate’ means the federal gross estate of the decedent as determined by Subtitle B of the Internal Revenue Code . . . .”). . . . Thus, the Maryland estate means the federal gross estate — as increased by any property not otherwise included in the federal gross estate that is deemed to be included pursuant to§ 7-309(b)(6) of this subtitle.Tax-Gen. § 7-301(b) .Ms. Taylor’s [e]state was properly reported by [the personal representative] on the Estate’s federal estate tax return as $5,582,245 on her date of death. This value, pursuant to
26 U.S.C. § 2044(a) , included the value of the property in which Ms. Taylor had “a qualifying income interest for life[,]” which was Ms. Taylor’s QTIP property. There is no statute or statutory provision that authorizes [the personal representative] to subtract the value of Ms. Taylor’s QTIP property from her federal gross estate for Maryland [e]state tax purposes.
Tax Court Proceeding at 4-5. The personal representative filed an appeal with the Circuit Court for Washington County on September 17, 2015. The Comptroller filed a cross-petition for review of the Tax Court’s decision to abate the late penalty payment.
2. Circuit Court Proceeding
The circuit court reversed the Tax Court’s assessment of taxes and interest against the Estate. In the Matter of Richard Reeves Taylor, Case No. 21-C-15-055059; Memorandum Opinion of the Court dated Nov. 23, 2016.
The circuit court indicated that the Tax Court erred in concluding that Ms. Taylor’s
The circuit court held that the federal QTIP election simply enabled the trust assets to be taxable as part of the federal estate; the election did not convert the trust assets into Ms. Taylor’s personal property which could be subjected to Maryland estate tax.
The circuit court explained that, because the trust assets were not the property of Ms. Taylor, the only way for the State to impose taxes on the assets would be through statutory authority. After conducting a statutory analysis of
The circuit court also held that imposition of a Maryland estate tax on the trust assets violated the Fourteenth Amendment to the U.S. Constitution and the Maryland Declaration of Rights, because the State had taxed property outside its jurisdiction and taxed an item from which this State had received no benefit.
3. Court of Special Appeals Proceeding
The Court of Special Appeals affirmed the decision of the circuit court. The Court held that “the Tax Court’s decision was premised upon an erroneous conclusion of law, and the Comptroller lacks the authority to tax the [trust assets] as part of Ms. Taylor’s Maryland estate.” Taylor, 238 Md. App. at 152, 189 A.3d at 807. The Court of Special Appeals based this holding on its statutory analysis, which mirrored the circuit court’s analysis.
The Court also held that “[g]iven no tax was authorized under the statute, no penalty could be properly charged against the Estate.” Id.
The Court of Special Appeals did not address the circuit court’s decision regarding the Fourteenth Amendment and the Maryland Declaration of Rights, “as it was not decided by the Tax Court.” Id.
STANDARD OF REVIEW
[D]ecisions of the Tax Court receive the same judicial review as other administrative agencies. In this context [. . . we] evaluate[ . ] the decision of the agency. A court’s role in reviewing an administrative agency adjudicatory decision is narrow; it is limited to determining if there is substantial evidence in the record as a whole to support the agency’s findings and conclusions, and to determine if the administrative decision is premised upon an erroneous conclusion of law. We cannot uphold the Tax Court’s decision on grounds other than the findings and reasons set forth by the Tax Court.
Taylor, 238 Md. App. at 145, 189 A.3d at 803 (internal citations and quotations omitted).
DISCUSSION
A. The value of the property contained in Ms. Taylor’s Maryland estate includes the value of her QTIP, and the transfer of such property at death is subject to the Maryland estate tax.
1. Ms. Taylor was deemed to have a property interest in the marital trust that transferred upon her death, such that the entire value of the marital trust is included in her federal gross estate.
The personal representative contends that Ms. Taylor did not own, control,
[O]n Mr. Taylor’s death, legal title to the QTIP property transferred to the trustees of the trust and equitable title transferred to Mr. Taylor’s son and grandchildren, the remainder beneficiaries of the trust. Accordingly, the transfer of the QTIP property occurred in Michigan in 1989 under Mr. Taylor’s [W]ill, not in Maryland in 2013 when Ms. Taylor died.
However, the personal representative fails to adequately consider the estate tax scheme and the creation of QTIP trusts. Ms. Taylor’s property interest in the marital trust was deemed to have transferred upon Ms. Taylor’s death. We review the general estate tax scheme and creation of QTIP trusts to explain our conclusion.
Estate Taxes and QTIP Trusts
The estate tax applies on the transfer of assets from an estate upon one’s death. The federal code, however, provides an exception for married couples through the marital deduction, codified in
as the “terminable interest rule.” Estate of Smith v. Commissioner of Internal Revenue, 565 F.2d 455, 459 (7th Cir. 1977).
In the instant matter, Ms. Taylor had a terminable property interest because she had a qualifying terminable income interest for life, paid annually, through operation of the QTIP trust. See
The QTIP rules provide an election under which a qualifying terminable interest can be covered by the marital deduction at the death of the first spouse with the proviso that the underlying property be included in the estate of the second spouse upon death. See secs.
2056(b)(7) ,2044 . In effect, the rules employ a fiction that treats the second spouse as owning the subject property outright, rather than owning merely a life or other terminable interest.
Estate of Sommers, 149 T.C. at 223 (emphasis added). The provisions creating the QTIP option, codified in
Our review of the federal estate tax scheme and QTIP trusts reveals that the entire value of the marital trust was deemed to have transferred upon Ms. Taylor’s death. See supra; see also In re Estate of Bracken, 175 Wash.2d 549, 577-78, 290 P.3d 99, 112 (2012) (Madsen, C.J., concurring/dissenting), overturned by statute (“[U]nder federal law there are two relevant transfers where QTIP property is concerned. . . . When the surviving spouse dies, a second transfer of the entire property is deemed to occur—the transfer of the property from the surviving spouse to the third party remainder beneficiaries.”); see 2006 Leg. Sess., Fiscal and Policy Note, Senate Bill 2 (“SB 2”) (stating that “[t]he value of the QTIP that qualifies for the marital deduction as a result of the election is included in the surviving spouse’s estate when the surviving spouse dies.” (emphasis added)).
The Comptroller did not seek to tax Mr. Taylor’s property or the transfer of his property, but rather sought to tax the deemed transfer of the QTIP property upon Ms. Taylor’s death as a Maryland resident.4
2. The value of Ms. Taylor’s Maryland estate is the same as the value of her federal gross estate.
The “Maryland estate” is defined as “the part of an estate that this State has the power to subject to the Maryland estate tax.” See
included in the federal gross estate that is deemed to be included pursuant to
As to the first part of the Estate, the personal representative properly reported a value of $5,582,245 for Ms. Taylor’s federal gross estate. As to the second part of the Estate, we must consider the statutory language of
Plain Language of
For purposes of calculating Maryland estate tax, a decedent shall be deemed to have had a qualifying income interest for life under
§ 2044(a) of the Internal Revenue Code with regard to any property for which a marital deduction qualified terminable interestproperty election was made for the decedent’s predeceased spouse on a timely filed Maryland estate tax return under paragraph (5) of this subsection.
Paragraph (5), in turn, states:
(5)(i) With regard to an election to treat property as marital deduction qualified terminable interest property in calculating the Maryland estate tax, an irrevocable election made on a timely filed Maryland estate tax return shall be deemed to be an election as required by
§ 2056(b)(7)(B)(i) ,(iii) , and(v) of the Internal Revenue Code.
(ii) An election under this paragraph made on a timely filed Maryland estate tax return shall be recognized for purposes of calculating the Maryland estate tax even if an inconsistent election is made for the same decedent for federal estate tax purposes.
(emphasis added). Cumulatively, subsections (5) and (6) provide that a spouse who dies first may elect a QTIP on the Maryland estate tax return. Specifically,
The plain language of an “estate,” as defined by
applicable federal law and there was no additional property to augment the Maryland estate. Given the lack of any augmenting property,
The personal representative contends that
In the event of an ambiguity in the plain language of the statute, we look to the legislative history of
Legislative History of
[In 2001, Congress enacted the Economic Growth and Tax Relief Reconciliation Act, which] provided for the reduction and ultimate repeal of the credit allowed under the federal estate tax for state death taxes paid
(federal credit).7 Maryland, like most states, had an estate tax that was linked directly to the federal credit. Without statutory changes by the General Assembly, the repeal of the federal credit under the 2001 federal tax Act would have automatically repealed the State estate tax because of the link between the State tax and federal credit.
2006 Leg. Sess., Fiscal and Policy Note, SB 2. In essence, prior to the 2001 federal act, state governments enjoyed revenue sharing with the federal government for purposes of the estate tax.8 As a result of the federal government’s 2001 legislation, a number of states amended their tax codes to preserve state estate taxes. In 2002 and 2004, the Maryland General Assembly partially decoupled Maryland’s estate tax from the federal estate tax. Id.9
In 2006, the General Assembly amended Subtitle 7 of the Tax-Gen. Article through Chapter 225 (SB 2). SB 2 made changes to
Maryland estate tax returns. In sum, the effect of SB 2 on
We conclude that both the plain language and legislative history of
of the property,”10 and the entire value of the marital trust is properly taxed by operation of the federal taxation scheme. Ms. Taylor’s fictional “outright ownership” interest did not dissipate upon her death. That value was deemed to have transferred to the beneficiaries of the trust and is subject to taxation by this State pursuant to the definition of an “estate” in
B. The Tax Court did not improperly waive the late-filing penalty because it had broad discretion to waive the penalty for “reasonable cause,” which the personal representative sufficiently demonstrated.
[W]hen the Tax Court considers appeals from a tax collector’s refusal to abate an interest assessment, that court considers whether the party has demonstrated with affirmative evidence that reasonable cause exists or that the tax collector’s decision was an obvious error. See
[Tax-Gen.] § 13-528(b) . Under this standard, a tax collector’s assessment of interest will not be overturned unless the complaining party provides affirmative evidence
demonstrating reasonable cause for the abatement or the tax collector has made an obvious error.
Frey v. Comptroller, 422 Md. 111, 187, 29 A.3d 475, 519 (2011) (emphasis added). In Frey, this Court held that the Tax Court has the authority to waive interest for “reasonable cause” and the party appealing an assessment bears the burden of proving that the assessment was in error through affirmative evidence. Id. Though the issue in Frey was the Tax Court’s authority to waive interest as opposed to late payments, the Court found that the authority would likely extend to the waiver of penalties as well. Id. at 185, 29 A.3d at 518, n.21.
In a response filed during the Tax Court proceeding, the Comptroller conceded that the Tax Court could waive late
Contrary to the Comptroller‘s argument, we conclude that the personal representative did provide sufficient affirmative evidence for waiver of the late penalty. The Personal Representative contends that:
The evidence before the Tax Court included the letters to the Comptroller from the Personal Representative, which specifically set forth the [legal] reasons why the Personal Representative thought the tax on the QTIP was not due. The Personal Representative also submitted extensive briefing and argument before the Tax Court on why the tax was not due.
Despite this evidence, the Comptroller contends that the evidence is insufficient for two reasons: (i) legal argument is inadequate to constitute sufficient affirmative evidence, and (ii) the personal representative‘s “good faith” argument cannot be conflated with a showing of “reasonable cause.”
We find it difficult to conceptualize that a coherent legal argument based on the peculiar facts of the case, even if erroneous, does not constitute sufficient affirmative evidence for waiving the late penalty. Furthermore, the Comptroller neglects to consider the history of
The Comptroller also disregards a 1985 opinion from the Attorney General, which provided advice on the “Comptroller‘s authority to waive certain penalty and interest charges on late-filed sales and admissions tax returns.” 70 Md. Op. Atty. Gen.
The 1985 Opinion of the Attorney General found that ‘cause’ and ‘good cause’ are synonymous,13 and that “a general test of ‘ordinary prudence’ or ‘reasonable diligence’ has been recognized as satisfying the ‘good cause’ standard.” The Attorney General advised that:
[T]he Comptroller has comparably broad discretion to determine whether a taxpayer had shown ‘ordinary prudence’ or ‘reasonable diligence’ and, hence, has met the statutory standard of good cause. Under one view of the waiver provisions, the taxpayer would meet the ‘good cause shown’ standard by his or her demonstrated record of past timely filing. In other words, that taxpayer will have demonstrated ‘ordinary prudence’ or ‘reasonable diligence’ through a pattern of compliance with the applicable law, and the Comptroller may properly treat one instance of untimely filing as not vitiating that diligent track record.
As such, the 1985 opinion provides that “reasonable cause” may be found under a variety of circumstances to enable the waiver of late penalties. In the instant case, the personal representative adequately met the threshold of “reasonable cause” to permit waiver of the late penalty.
The Tax Court had broad authority to waive the late penalty. As “an adjudicatory administrative agency . . . the Tax Court‘s factual findings and the inferences drawn therefrom” are reviewed under a substantial evidence standard. Frey, 422 Md. at 136-37, 29 A.3d at 489-90. Under the standard,
The question for the reviewing court is . . . whether the [agency‘s] conclusions reasonably may be based upon the facts proven. The [reviewing] court may not substitute its judgment on the question whether the inference drawn is the right one or whether a different inference would be better supported. The test is reasonableness, not rightness.
Alviani v. Dixon, 365 Md. 95, 108, 775 A.2d 1234, 1242 (2001) (internal quotations and citations omitted). In the instant matter, we conclude that the Tax Court reasonably waived the late penalty based on its assessment that the personal representative provided sufficient evidence to meet the threshold of “reasonable cause.” The Tax Court considered the personal representative‘s arguments and concluded that those arguments met the threshold of “reasonable cause” to waive the late penalty.
C. This Court‘s review is limited to the Tax Court‘s findings and to the reasons for those findings; because the Court did not expressly make a finding regarding the constitutionality of the tax, the issue is not preserved for appeal.
Judicial review of administrative action differs from appellate review of a trial court judgment. In the latter context the appellate court will search the record for evidence to support the judgment and will sustain the judgment for a reason plainly appearing on the record whether or not the reason was expressly relied upon by the trial court. However, in judicial review of agency
action the court may not uphold the agency order unless it is sustainable on the agency‘s findings and for the reasons stated by the agency.
United Steelworkers v. Beth. Steel, 298 Md. 665, 679, 472 A.2d 62, 69 (1984) (emphasis added). The personal representative rightfully contends that it raised the issue of constitutionality at the agency level. However, in an administrative proceeding, raising the issue is insufficient to preserve it on appeal. This Court‘s holding in United Steelworkers, quoted supra, reveals the distinction for preserving an issue at the trial court level as opposed to the agency level, the latter of which is relevant to the case at bar. Though the Tax Court contemplated the personal representative‘s constitutionality argument,14 it did not base its final decision on the issue. Rather, the Court‘s Memorandum and Order focused on statutory interpretation. The Court of Special Appeals reflected this limitation in its opinion:
We need not address the circuit court‘s decision regarding the Fourteenth Amendment to the United States Constitution and the Maryland Declaration of Rights, as it was not decided by the Tax Court. See Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, 437 Md. 492, 503, 87 A.3d 1263 (2014) (internal citations omitted) (“We cannot uphold the Tax Court‘s decision ‘on grounds other than the findings and reasons set forth by [the Tax Court]‘“).
Taylor, 238 Md. App. at 152, 189 A.3d at 807 (emphasis added). Because we conclude that any constitutional issues were not preserved, we decline to review the merits of the personal representative‘s constitutionality argument.15
CONCLUSION
Contrary to the holding of the Court of Special Appeals, we conclude that Ms. Taylor had a property interest in the full value of the marital trust by operation of the fictional transfers created through the federal statutory scheme. Pursuant to
We agree with the Court of Special Appeals holding as to the late-filing penalty, but on separate grounds from the rationale advanced by our intermediate court. We conclude that the Tax Court did not improperly waive the penalty because it had broad discretion to waive the penalty for “reasonable cause,” which the personal representative sufficiently demonstrated.
As to the personal representative‘s cross-appeal, we note that this Court‘s review is limited to the Tax Court‘s findings and to the reasons for those findings. Because the Tax Court did not expressly make a finding regarding the constitutionality of the tax, the issue is not preserved for appeal and we therefore decline to consider the personal representative‘s constitutional arguments on the merits.
JUDGMENT OF THE COURT OF SPECIAL APPEALS IS REVERSED IN PART AND AFFIRMED IN PART. COSTS TO BE PAID 2/3 BY RESPONDENT/CROSS-PETITIONER AND 1/3 BY PETITIONER/CROSS-RESPONDENT.
IN THE COURT OF APPEALS OF MARYLAND
No. 56
September Term, 2018
COMPTROLLER OF THE TREASURY v. RICHARD REEVES TAYLOR
Barbera, C.J., *Greene, McDonald, Watts, Hotten, Getty, Raker, Irma S. (Senior Judge, Specially Assigned), JJ.
Concurring Opinion by Watts, J.
Filed: July 29, 2019
*Greene, J., now retired, participated in the hearing and conference of this case while an active member of this Court; after being recalled pursuant to the Maryland Constitution, Article IV, Section 3A, he also participated in the decision and adoption of this opinion.
Respectfully, I concur. I agree with the Majority that the Maryland estate tax applies to a Maryland resident‘s interest in a qualified terminable interest property (“QTIP“)1 trust that was created in another State. See Maj. Slip Op. at 1-2. I write separately because I arrive at this conclusion for reasons similar to, but slightly different from, the Majority‘s.2
For purposes of calculating Maryland estate tax, a decedent shall be deemed to have had a qualifying income interest for life under
[26 U.S.C.] § 2044(a) 3 with regard to any property for which a marital deduction [QTIP] election was made for the decedent‘s predeceased spouse on a timely filed Maryland estate tax return under[TG § 7-309(b)](5) [.]
(Emphasis added). And,
(i) With regard to an election to treat property as marital deduction [QTIP] in calculating the Maryland estate tax, an irrevocable election made on a timely filed Maryland estate tax return shall be deemed to be an election as required by
[26 U.S.C.] § 2056(b)(7)(B)(i), (iii), and (v) [].4(ii) An election under this paragraph made on a timely filed Maryland estate tax return shall be recognized for purposes of calculating the Maryland estate tax even if an inconsistent election is made for the same decedent for federal estate tax purposes.
In my view,
Nor does
This interpretation of
Like
For purposes of calculating Maryland estate tax, a decedent shall be deemed to have had a qualifying income interest for life . . . with regard to any property for which a marital deduction [QTIP] election was made for the decedent‘s predeceased spouse on a timely filed Maryland estate tax return under
[TG § 7-309(b)](5) [.]
In turn,
Read together,
Nothing in
Unlike the majority and concurring opinions, the dissent takes the position “that Maryland lacks the power to tax a []QTIP[] trust that was never claimed on a Maryland tax return.” Dissent Slip Op. at 1. The dissent does not reach this conclusion by simply interpreting the plain language of
Like their plain language,
Notably, since 2002—i.e., both before and after the 2006 amendments to the statutes that govern the Maryland estate tax—
Subject to
[TG] § 7-309 [], in this section, “federal credit” means the maximum credit for death taxes paid to any state that is allowable . . . against the federal estate tax of a decedent as reduced by the proportion that the amount of the estate not included in the Maryland estate bears to the amount of the entire estate of the decedent.
In 2006, the General Assembly effectively lowered the Maryland estate tax by amending
The Department of Legislative Services observed that, under proposed TG (2006) § 7-309(b)(5)(i), “the estate of the first spouse to die may make a QTIP election to reduce the decedent‘s estate below the $1.0 million Maryland filing threshold, which results in no Maryland estate tax being due.” Id. The Department of Legislative Services also noted that, under proposed TG (2006) § 7-309(b)(5)(ii), a QTIP “election on a timely filed Maryland estate tax return must be recognized for the purposes of calculating the Maryland estate tax even if an inconsistent election is made for the same decedent for federal estate tax purposes.” Id. at 1. The Department of Legislative Services explained that proposed TG (2006) § 7-309(b)(5)(ii) was not expected to affect revenues from the Maryland estate tax because the Comptroller‘s existing practice was to allow an estate to make a QTIP election in a Maryland estate tax return even if the estate made an inconsistent election in a federal estate tax return. See id. at 4.
Two matters are conspicuously absent from the Fiscal and Policy Note. First, nowhere did the Department of Legislative Services state or imply that the 2006 amendments to the statutes that govern
Indeed, if we adopted Taylor‘s position that the 2006 amendments created an exception from the Maryland estate tax for a Maryland resident‘s interest in a QTIP trust that was created in another State, that would mean that the General Assembly essentially created a tax loophole by enacting
In sum, under
For the above reasons, respectfully, I concur.
IN THE COURT OF APPEALS OF MARYLAND
No. 56
September Term, 2018
COMPTROLLER OF THE TREASURY v. RICHARD REEVES TAYLOR
Barbera, C.J., *Greene, McDonald, Watts, Hotten, Getty, Raker, Irma S. (Senior Judge, Specially Assigned), JJ.
Dissenting Opinion by Getty, J.
Filed: July 29, 2019
*Greene, J., now retired, participated in the hearing and conference of this case while an active member of this Court; after being recalled pursuant to the Maryland Constitution, Article IV, Section 3A, he also participated in the decision and adoption of this opinion.
I respectfully dissent from the Majority‘s conclusion as to the first issue and would hold that Maryland lacks the power to tax a qualified terminable interest property (“QTIP“) trust that was never claimed on a Maryland tax return. The QTIP deduction is premised on an exchange of benefits between the surviving spouse and the government granting a tax deferral. See Estate of Mellinger v. C.I.R., 112 T.C. 26, 35 (1999) (“Inclusion in the estate of the second spouse to die . . . is the quid pro quo for allowing the marital deduction for the first spouse to die.“). While the co-executors of John Taylor‘s estate claimed a
The Majority rests its holding on the idea that “the value of Ms. Taylor‘s estate is the same for federal and Maryland estate tax purposes.” Majority Slip Op. at 11. See also Concurrence Slip Op. at 3 (“[W]here a Maryland resident‘s interest in a QTIP trust that was created in another State is subject to the federal estate tax, it is also subject to the Maryland estate tax.“). As framed by the Majority,
The deficiencies in the Comptroller‘s view are exemplified by the longstanding constitutional rule against taxation of tangible property with a permanent situs outside the taxing state. City Bank Farmers Trust Co. v. Schnader, 293 U.S. 112, 118-19 (1934) (“The power to regulate the transmission . . . of tangible personal property rests exclusively in the state in which the property has an actual situs, regardless of the domicile of the owner.“); Frick v. Pennsylvania, 268 U.S. 473, 492-93 (1925). Had Mrs. Taylor owned real property located in Michigan, that property would be governed exclusively by Michigan law and remain wholly beyond Maryland‘s estate tax jurisdiction. See Bish v. Bish, 181 Md. 621, 627 (1943) (finding “real estate is governed by the law of the place where it is situated, and solely by such law.“). Any such property would be included in her federal gross estate, but not within her Maryland estate.
Accordingly, by concluding that the QTIP‘s inclusion in Mrs. Taylor‘s federal gross estate is dispositive of its inclusion in her Maryland estate, the Majority overlooks the essential question of whether Maryland has the statutory and constitutional authority to tax the assets of this trust. As no transfer of assets occurred in Maryland, and no QTIP election was made on a timely filed Maryland tax return, I would hold that Maryland lacks the statutory
A. Maryland Lacks Statutory Jurisdiction to Tax this QTIP, as no Transfer of Assets Occurred in Maryland, and no Corresponding Election was Claimed on a Timely-filed Maryland Tax Return.
Building upon the erroneous assumption that the federal estate and the Maryland estate are entirely coextensive, the Majority leans on
As summarized by the Majority, the federal QTIP provisions “create two fictional legal transfers so that the full value of the QTIP assets is captured by the estate tax upon the surviving spouse‘s death.” See Estate of Brooks v. Comm‘r of Revenue Serv‘s, 325 Conn. 705, 711-12 (2017) (explaining that “a fictional transfer occurs from the first to die spouse to the surviving spouse, and a second fictional transfer occurs upon the death of the surviving spouse to the remainder beneficiaries.“).3 However, pursuant to
Comparatively, the Maryland estate tax “is imposed on the transfer of the Maryland estate of each decedent who, at the time of death, was a resident of this State.”
Maryland‘s statutory arrangement grants the personal representative an option to defer any tax of this transfer until the death of the surviving spouse. As with the federal scheme, Maryland achieves this result by “deeming” the QTIP assets a part of the surviving spouse‘s estate as quid pro quo for an initial deferral.
For purposes of calculating Maryland estate tax, a decedent shall be deemed to have had a qualifying income interest for life . . . with regard to any property for which a marital deduction qualified terminable interest property election was made . . . on a timely filed Maryland estate tax return under paragraph (5) of this subsection.
When the personal representative claims a QTIP deduction on a timely-filed Maryland tax return, they have deferred the tax associated with the transfer of assets from the first-dying spouse — it is this benefit that enables the State to reciprocally include the QTIP as part of their estate absent an actual second transfer. See Bracken, 290 P.3d at 108 (emphasizing that “QTIP property does not actually pass to or from the surviving spouse.“). Where neither transfer nor deferral occurred in Maryland, the State lacks both the power and the justification to impose an estate tax — irrespective of the fictions employed at a federal level.
Applying this framework to the present case, a cursory review of the facts makes
Because both legal and equitable title to the assets of the QTIP trust were transferred at the time of Mr. Taylor‘s death in Michigan, there was nothing for Maryland to tax when Mrs. Taylor died in Maryland 24 years later. . . . Mrs. Taylor did not own or have any rights to the assets comprising the QTIP. . . . [W]ithout either ownership or the power to dispose of the assets, Mrs. Taylor had nothing to tax in relation to the QTIP.
Resp. Br. at 13.
The Majority‘s holding transplants federal statutory fictions into a context incongruous with their design, and results in an overbroad construction of Maryland law. Neither the language nor the purpose of either the Maryland or federal schemes is fulfilled by imposing Maryland‘s estate tax on a QTIP trust without a corresponding Maryland election. Any taxable transfer of the QTIP assets occurred upon the death of Mrs. Taylor‘s predeceased husband in Michigan. Mrs. Taylor did not defer a state tax on these transfers by claiming a QTIP deduction on a timely-filed Maryland tax return, nor did she retain control over the assets distributed in her husband‘s will to the QTIP trust. Accordingly, I would affirm the judgment of the Court of Special Appeals and hold that Maryland lacks the power to tax this trust.
B. Taxation of This QTIP is Unconstitutional, as the Assets of the Trust Have no Nexus to Maryland, and Taxation under These Facts Would Produce Arbitrary and Unreasonable Results that Violate Due Process.
Assessment of a Maryland estate tax on a trust that is not located in Maryland and has not been afforded the protection of Maryland law contravenes the
Under the
Addressing this argument, the Comptroller relies heavily on the principle that states may tax the intangible assets of their domiciliaries. Greenough v. Tax Assessors of Newport, 331 U.S. 486, 492-93 (1947). See also Bonaparte v. State, 63 Md. 465, 472 (1885) (holding “the domicile of a testator when living determines the situs of his personal property of an intangible nature, not permanently located elsewhere, for purpose of taxation[.]“). While this is true in the abstract, Mrs. Taylor neither owned nor controlled the assets Maryland seeks to tax. “‘The federal QTIP election did not miraculously convert these QTIP assets so that they became the property of [Mrs]. Taylor.’ ‘They were merely “deemed” by the statute to be taxable as part of her federal estate.‘” Taylor, 238 Md. App at 150. See Mellinger, 112 T.C. at 35 (“This property is ‘treated as property passing from the’ surviving spouse . . . and is taxed as part of the surviving spouse‘s estate at death, but QTIP property does not actually pass to or from the surviving spouse.“). The statutory fictions that enable inclusion of the trust as part of Mrs. Taylor‘s federal estate within the limited scope of a federal tax provision cannot be used to circumvent the constitutional predicate of ownership.
Moreover, due to the structure of Maryland‘s estate tax scheme, the Majority‘s approach may produce arbitrary and unreasonable results that infringe due process. Since 1924 the federal government
A simple twist on the facts of this case, briefly considered at the hearing of the Circuit Court, illustrates this result. Consider a scenario in which Mr. Taylor died in Maryland, and his Maryland estate made an identical inconsistent filing, claiming the QTIP deductible only on its federal tax return. In these circumstances, Maryland could impose its estate tax on the initial transfer of Mr. Taylor‘s assets, occurring in Maryland at the time of his death and the creation of the trust through his will. Nevertheless, the trust assets will still be “deemed” a part of Mrs. Taylor‘s federal estate under
Alternatively, suppose Mr. Taylor was a Massachusetts resident at the time of his death and his estate made both a federal and state-level QTIP election. Like Maryland, Massachusetts enacted legislation following the 2001 EGTRRA that decoupled its estate tax from the federal credit to avoid phasing out its tax alongside the federal credit. See
The Comptroller‘s contrary assertion that avoiding taxation of this trust will create a tax loophole and grant a windfall to the estate is without merit. As noted by the Circuit Court, no information on record suggests that Mr. Taylor‘s estate deferred the Michigan estate tax by making a QTIP election on a Michigan tax return in 1984. Moreover, Michigan‘s estate tax remains linked to the federal estate tax credit and is therefore implicitly abrogated by the 2001 EGTRRA. See
In summation, Mrs. Taylor neither owned the corpus of the QTIP, nor received derivative privileges from the government of Maryland. The Comptroller is now attempting to tax these assets absent any nexus between the trust and the state of Maryland. Lacking any exchange of benefits, Maryland is not authorized to impose its estate tax under the
For the foregoing reasons, I respectfully dissent.
Notes
For purposes of calculating Maryland estate tax, a decedent shall be deemed to have had a qualifying income interest for life under
QTIP is
[p]roperty that passes by a [] trust from a deceased spouse to the surviving spouse and that (if the executor so elects) qualifies for the marital deduction on condition that the surviving spouse is entitled to receive all income in payments made at least annually for life and that no one has the power to appoint the [QTIP] to anyone other than the surviving spouse. [] The purpose of the marital deduction is to permit deferral of estate taxes until the death of the surviving spouse. But [QTIP] is included in the surviving spouse‘s estate at death, where it is subject to the federal estate tax.
Qualified-Terminable-Interest Property, Black‘s Law Dictionary (10th ed. 2014). In turn, the marital deduction is “[a] federal tax deduction [that is] allowed for lifetime and testamentary transfers from one spouse to another.” Marital Deduction, Black‘s Law Dictionary (10th ed. 2014) (citations omitted).
The term “co-executors” will be used throughout to refer collectively to the National Bank of Detroit and Margaret Taylor, who signed IRS Form 706 as co-executors of Mr. Taylor‘s estate. Maryland and Michigan employ the term “personal representative” to refer to the executor of an estate. See(b) Limitation in the case of life estate or other terminable interest.
(1) General rule[:] Where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail, no (marital) deduction shall be allowed * * *.
Estate of Smith v. Commissioner of Internal Revenue, 565 F.2d 455, 456, n.2 (7th Cir. 1977).
[t]he surviving spouse has a qualifying income interest for life if--
(I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property, and
(II) no person has a power to appoint any part of the property to any person other than the surviving spouse.
Id.
UnderAccording to the Comptroller:
A taxpayer [may opt to make a Maryland QTIP election without making a corresponding federal QTIP election] if, for example, the first-dying spouse’s estate fell below the federal filing threshold, thus eliminating the tax benefit of a QTIP election. Because in such a case there would have been no federal QTIP election by the first-dying spouse, the QTIP would not be included in the surviving spouse’s federal gross estate. Section 7-309(b)(6)(i) thus requires augmentation of the Maryland estate of the surviving spouse to account for the value of the Maryland QTIP and to ensure that the Estate does not receive a windfall. (emphasis added).
Where a Maryland resident dies, all of his or her property that is subject to the federal estate tax is also subject to the Maryland estate tax. Where a nonresident dies, however, the property that is subject to the Maryland estate tax is limited to “(i) real property permanently located in this State; or (ii) tangible personal property that has a taxable situs in this State.”The dissent provides that
We agree that there are limited circumstances in which the Maryland estate is different from the federal gross estate. For example, estates in this State with nonresident owners are subject only to taxation on the value of in-state property. See generally City Bank Farmers Trust Co. v. Schnader, 293 U.S. 112, 55 S.Ct. 29 (1934) (holding that taxing authority rests with the state where the property has an actual situs); see also
(a) The Tax Court has jurisdiction to hear appeals from the final decision, final determination, or final order of a property tax assessment appeal board or any other unit of the State government or of a political subdivision of the State that is authorized to make the final decision or determination or issue the final order about any tax issue, including:
***
(4) the application for an abatement, reduction, or revision of any assessment or tax[.]
***
The personal representative and dissent contend that this State cannot constitutionally tax Ms. Taylor‘s Estate, because the QTIP assets have no nexus with Maryland. However, we determine that under the federal statutory scheme, Ms. Taylor was treated as having a (federal) property interest in the marital trust. By operation of the Maryland statutory definition of an “estate,” Ms. Taylor‘s federal gross estate was one and the same as her Maryland estate, and the full value of the QTIP assets can be properly taxed by this State. See
According to the dissent, an estate tax deferral provides the quid pro quo that allows a state to tax the estate upon the death of a second spouse. Because this State did not provide any kind of “deferral benefit” to Ms. Taylor, the dissent contends that Maryland has no right to a belated estate tax collection. However, Ms. Taylor was a Maryland resident and had a property interest that transferred upon her death. Therefore, a “deferral benefit” indeed existed, and this State has a constitutional right to tax the full value of the QTIP. If we accept the dissent‘s posture, the reported value of Ms. Taylor‘s federal gross estate decreases by $4,108,048.02 at the state level. This is contrary to an even exchange of benefits that characterizes the quid pro quo arrangement.
Furthermore, the dissent provides that “taxation under these facts would produce arbitrary and unreasonable results that violate due process[ ]” due to “a serious risk of double or inconsistent taxation.” Dissenting opinion at 8, 11. However, the tit-for-tat nature of the quid pro quo contemplates an equal trade-off.