Comptroller of Treasury v. Phillips

• Citation: 865 A.2d 590,384 Md. 583
• Decision Date: 13 January 2005
• Docket Number: No. 46,46
• Court: Court of Appeals of Maryland
• Parties: COMPTROLLER OF the TREASURY v. Blaine T. PHILLIPS, Executor of the Estate of Donald P. Ross, Jr.

865 A.2d 590

384 Md. 583

COMPTROLLER OF the TREASURY v. Blaine T. PHILLIPS, Executor of the Estate of Donald P. Ross, Jr.

No. 46, September Term, 2004.

Court of Appeals of Maryland.

January 13, 2005.

Gerald Langbaum, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen., John K. Barry, Asst. Atty. Gen., on brief), for petitioner.

Thomas P. Sweeney (Michael R. Stein, Richards, Layton & Finger, Wilmington, Richard L. Counts, III, Leigh R. Melton, Wheeler, Parker, Thompson & Counts, LLP, Easton, on brief), for respondent.

Argued before BELL, C.J. RAKER, WILNER, CATHELL, HARRELL, BATTAGLIA and GREENE, JJ.

RAKER, J.

In this case, we determine whether the Comptroller of the Treasury may impose Maryland estate tax on an estate that has no federal estate tax liability due to its utilization of the federal credit for tax on prior transfers. The Maryland Tax Court and the Circuit Court for Talbot County held that the Comptroller may not assess Maryland estate tax in such circumstances. We affirm.

I. Background

Since 1926, the federal government has shared estate tax revenue with states through an eighty percent credit for state death taxes, now codified as I.R.C. § 2011 (2004).¹ See Page v. Comptroller, 270 Md. 725, 729, 313 A.2d 691, 693 (1974)

. The General Assembly enacted the Maryland estate tax in 1929, 1929 Md. Laws Chap. 275, to take advantage of this federal revenue sharing. See Page, 270 Md. at 729,

313 A.2d at 693. As such, the Maryland estate tax, unlike the Maryland inheritance tax, is linked directly to the federal estate tax. In Comptroller v. Jameson, 332 Md. 723, 633 A.2d 93 (1993), we provided an overview of the interplay between these three taxes:

"The United States imposes a federal estate tax which is payable nine months after death. On the federal estate tax return, estates are permitted to claim a credit, up to a specified amount, for state death taxes actually paid to any of the fifty states. This credit is a method of revenue sharing in which the federal government is diverting some federal estate tax revenue to the states.

"The Maryland inheritance tax is a tax imposed on the privilege of receiving property. See Maryland Code (1988) § 7-202 of the Tax-General Article.... The Maryland inheritance tax is not integrated with the federal estate tax; in other words, the calculation of the Maryland inheritance tax is not dependant upon the federal estate tax system in any way.

"On the other hand, the Maryland estate tax is completely integrated with the federal estate tax. The structure of the Maryland estate tax is referred to as a `pick-up' tax. This means that, if the federal credit for state death taxes allowable by the Internal Revenue Code exceeds the Maryland inheritance tax, an estate must pay Maryland estate tax to pick up the difference between the credit and the state inheritance tax. Stated more succinctly, the inheritance tax is deducted from the federal estate tax credit to determine the amount of Maryland estate tax. By providing for full use of the federal credit for state death taxes, the Maryland estate tax statute shifts taxes that would otherwise be paid to the federal government to the state treasury...."

Id. at 725-26, 633 A.2d at 94 (citations omitted).

II. Facts

Appellant is Comptroller of the Treasury of Maryland, an official charged with, inter alia, the duty to assess and collect Maryland estate tax.

Appellee is executor of the estate of Donald P. Ross, Jr. ("decedent"), a Delaware resident who died on June 30, 2000. The majority of decedent's estate was located outside Maryland, but he left a one-third, undivided interest in real property known as 6523 Shingle Row Road in Royal Oak, Talbot County. The date-of-death value of this interest was $1,750,000. Decedent also left a one-third interest in the tangible property located at that address. The date-of-death value of the tangible property for federal estate tax purposes was $29,053.67.

Pursuant to decedent's will, his interest in the Maryland tangible property passed to his issue, per stirpes.² The residue of decedent's estate, which included his interest in the Maryland real property, passed to a trust established on November 1, 1999 (the "1999 Trust"). Under the terms of the 1999 Trust, the residue of the estate was distributed immediately into two new trusts: the "Marital Trust" and the "Residuary Trust." The amount of property to be set aside in the Marital Trust was specified as follows in the 1999 Declaration of Trust:

"Trustee shall set aside, as the `Marital Trust,' property with the smallest aggregate value needed to reduce Trustor's federal estate tax to the lowest possible amount after taking into account all credits and deductions against such tax available to Trustor's estate, except to the extent that the use of any such credit (other than the unified credit) would increase state death taxes."

Accordingly, sufficient assets were distributed from the 1999 Trust into the Marital Trust to reduce decedent's federal estate tax liability to zero. Among these assets was the Maryland real property.

Decedent's mother, Wilhelmina duPont Ross, predeceased her son by only five days. From her estate, decedent inherited assets valued at $5,030,307.86. Because Wilhelmina Ross predeceased decedent by less than two years, decedent's estate was entitled to a $2,263,471.57 credit for tax on prior transfers under I.R.C. § 2013 (2004).³ This credit exceeded all federal estate taxes owed on the inherited assets. On behalf of decedent's estate, appellee filed a United States Estate (and Generation-Skipping Transfer) Tax Return ("Form 706") on October 1, 2001. On Form 706, appellee made, inter alia, the following entries:

"10. Gross Estate Tax: 2,484,021.57

* * *

13. Allowable unified credit: 220,550.00

* * *

15. Credit for state death taxes: 0.00

* * *

19. Credit for tax on prior transfers: 2,263,471.57

* * *

21. Net estate tax: 0.00"

Appellee filed a Maryland Estate Tax Return ("Form MET 1") on the same date. On Form MET 1, appellee made, inter alia, the following entries:

"8. Maximum credit for state death taxes (from line 15, federal Form 706): 0

* * *

10. Percentage of Maryland estate to total gross estate: 13.18

* * *

11. Maryland apportioned credit (line 10 times line 8): 0.00

* * *

12. Maryland estate tax liability (from line 8 or line 11, whichever is applicable): 0.00"

Decedent's estate did not remit any Maryland estate tax to appellant.

On October 18, 2001, appellant sent a Deficiency Notice to appellee, indicating a Maryland estate tax liability of $48,451.09 plus interest. Appellee filed a Protest, setting out a legal argument in support of his computation of zero Maryland estate tax liability. Appellant subsequently sent appellee an Assessment for the deficient tax plus interest,⁴ and appellee appealed to the Maryland Tax Court (an administrative agency).⁵ The Tax Court held a hearing on November 14, 2002 and issued an oral decision reversing the Assessment, finding that no Maryland estate tax was due. The Tax Court issued an order to this effect on April 1, 2003.

Appellant sought judicial review in the Circuit Court for Talbot County. Judge William S. Horne held a hearing on November 21, 2003 and issued an opinion affirming the Tax Court on December 8, 2003. Appellant next appealed to the Court of Special Appeals. Before that court could consider the case, we granted certiorari on our own initiative to resolve an area of confusion in Maryland estate tax law. 381 Md. 677, 851 A.2d 596 (2004).

On appeal, appellant raises one issue: whether the Maryland Comptroller may assess state estate tax against an estate that has no federal estate tax liability due to its utilization of the federal credit for tax on prior transfers.⁶

III. Standard of Review

This case raises only an issue of law, as the parties agreed to a stipulation of facts before the Tax Court. When this Court reviews an administrative agency's decision, we employ the same statutory standards as would the Circuit Court; the inquiry is whether the administrative agency erred, not whether the Circuit Court erred. See Spencer v. State Board of Pharmacy, 380 Md. 515, 523-24, 846 A.2d 341, 346 (2004)

. Under the Maryland Administrative Procedure Act, Md.Code (1984, 2004 Repl.Vol.), § 10-222 of the State Government Article, we determine the correctness of the agency's legal conclusions and may substitute our judgment for that of the agency. Id. at § 10-222(h)(3)(i)-(iv); see Charles County v. Vann, 382 Md. 286, 295, 855 A.2d 313, 319 (2004). Specifically, in reviewing questions of law answered by the Tax Court, we have said that "a reviewing court is under no statutory constraints in reversing a Tax Court order which is premised solely upon an erroneous conclusion of law." Comptroller v. Gannett, 356 Md. 699, 707, 741 A.2d 1130, 1135 (1999) quoting Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825, 834, 490 A.2d 1296, 1301 (1985). We have held, though, that agency legal interpretations of the statute it administers are entitled to some deference. See Vann, 382 Md. at 295-96,

855 A.2d at 319.

Determining whether the Comptroller may assess estate tax in this case depends upon an interpretation of the Maryland statute defining the relationship between federal and state estate taxes: Md.Code (1988, 1997 Repl.Vol., 2001 Cum.Supp.), § 7-304 of the Tax-General Article. The cardinal rule of statutory construction is to ascertain and effectuate the intent of the Legislature. Collins v. State, 383 Md. 684, 688, 861 A.2d 727, 730 (2004). In ascertaining legislative intent, we first examine the plain language of the statute. Melton v. State, 379 Md. 471, 476-77, 842 A.2d 743, 746 (2004). We do not examine the plain language in isolation. Rather, we consider the particular and broad objectives of the legislation and the overall purpose of the statutory scheme. See Handy v. State, 357 Md. 685, 705, 745 A.2d 1107, 1117 (2000)

(quoting Rose v. Fox Pool...