Comptroller of Md. v. FC-Gen Operations Invs. LLC

• Citation: 482 Md. 343,287 A.3d 271
• Decision Date: 19 December 2022
• Docket Number: 7, Sept. Term, 2022
• Parties: COMPTROLLER OF MARYLAND v. FC-GEN OPERATIONS INVESTMENTS LLC
• Court: Court of Appeals of Maryland

482 Md. 343

287 A.3d 271

COMPTROLLER OF MARYLAND

v.FC-GEN OPERATIONS INVESTMENTS LLC

No. 7, Sept. Term, 2022

Supreme Court of Maryland. *

December 19, 2022

Argued by Murray Singerman, Asst. Atty. Gen. (Brian Oliner and Jessica Wisner, Asst. Attys. Gen., Brian E. Frosh, Atty. Gen. of Maryland, Annapolis, MD), on brief, for Petitioner.

Argued by Herman B. Rosenthal and Jordan M. Halle (Whiteford, Taylor & Preston L.L.P., Baltimore, MD), on brief, for Respondent.

Argued before: Fader, C.J., Watts, Hotten, Booth, Biran, Gould, Eaves, JJ.

Booth, J.

In this case, we are asked to determine whether the Tax Court erred in reversing the Comptroller's denial of a pass-through entity's claim for a refund of estimated tax payments that it made during the 2012 tax year after the pass-through entity determined that it had no tax liability. We are also asked to determine whether, when undertaking judicial review of errors of law associated with a Tax Court's decision, our modern cases correctly state that agency deference principles apply to the Tax Court's interpretation of tax laws instead of the Comptroller's interpretation. We consider these questions within the context of the factual background and procedural history discussed below.

I.Factual Background and Procedural History

FC-GEN Operations Investments, LLC ("FC-GEN"), is a limited liability company organized and existing under the laws of the State of Delaware. Through its subsidiaries, FC-GEN operates skilled and long-term care medical facilities and provides ancillary healthcare services throughout Maryland. Under Maryland tax laws, FC-GEN falls within the definition of a "pass-through entity."¹ A pass-through entity is any business entity that is not itself a taxable entity, so the income, loss, deductions, and credits of the entity pass through to its stockholders, partners or members who are then taxed on that income in the same manner as other income.² It is treated as a partnership for federal and Maryland income tax purposes with a tax year that is on a calendar year basis.

In the 2012 tax year, FC-GEN had 28 members, consisting of four individuals who were not residents of Maryland, 20 nonresident pass-through entities, two resident pass-through entities, one trust, and one not-for-profit foundation.

Under Maryland law, a pass-through entity with a Maryland nexus is responsible for the payment of Maryland income tax if it has any nonresident individual or entity members that have any taxable income attributable to the entity's Maryland operations that passes through to the nonresident members for the taxable year. See Md. Code Ann., Tax-Gen. ("TG") § 10-102.1(b) (1988, 2010 Repl. Vol.).³ The tax imposed on the pass-through entity is treated as a tax imposed on the nonresident individuals or entities, which the pass-through entity pays on their behalf.⁴ In connection with the administration and collection of the taxes paid by the pass-through entity, the General Assembly has delegated authority to the Comptroller to "provide by regulation for the treatment of the tax imposed[.]" TG § 10-102.1(c)(2).

A pass-through entity is also subject to the provisions of Maryland tax law that require a corporation or partnership to file a declaration of estimated income tax if the entity reasonably expects estimated income tax for a taxable year to exceed $1,000⁵ and to make quarterly estimated income tax payments in an amount of at least 25% of the estimated income tax shown on the declaration or amended declaration for the taxable year.⁶

In this case, FC-GEN complied with these requirements. Based upon projected 2012 income, FC-GEN made quarterly estimated tax payments that totaled $601,467. However, when FC-GEN prepared its 2012 federal income tax return, it determined that it had a taxable loss in the amount of $729,863 attributable to Maryland for the 2012 tax year. As a result of this loss, FC-GEN sought a refund of its estimated payments in the amount of $598,131.⁷ After obtaining an extension to file its tax return for the 2012 tax year, FC-GEN timely filed a Maryland Pass-Through Entity Income Tax Return Form (Form 510) ("Income Tax Return"), associated Schedules K-1, and a Maryland Composite Pass-Through Entity Income Tax Return (Form 510C) ("Composite Return"). In completing these tax forms and associated schedules, FC-GEN's tax department reviewed the Comptroller's applicable Maryland rules, instructions, and regulations to determine how to properly request a refund of its estimated tax payments. FC-GEN ultimately claimed its refund in the amount of $598,131 on the Composite Return.⁸

A pass-through entity may file a composite return on behalf of all or some of its nonresident members who are qualified to be included on the return. COMAR 03.04.02.04A(1). To qualify, the member must be a nonresident individual whose only Maryland income derives from the pass-through entity filing the composite return. COMAR 03.04.02.04B. The requirements for filing a composite return include a statement of verification that the nonresident individuals included in the composite return are qualified to be included. COMAR 03.04.02.04C(1).

To determine who was eligible to participate in the Composite Return, FC-GEN sent its individual nonresident members a 2012 Composite Election Form ("Election Form"). Among other things, the Election Form listed eligibility criteria for inclusion in the Composite Return and advised its members to consult with their tax advisors in completing the Election Form.⁹ Only two nonresident individuals, Christopher Sertich and Michael Jones, indicated that they were eligible to be included in the Composite Return. Based upon the completed Election Forms, FC-GEN included Mr. Sertich and Mr. Jones on the Composite Return.

In connection with the preparation of its income tax filings, FC-GEN also issued Schedules K-1 to its members. None of the members’ Schedules K-1—except for one nonresident individual who had received a guaranteed payment—showed a value for the member's distributive pro rata share of the estimated nonresident tax paid by FC-GEN. Additionally, Section D on each member's Schedules K-1 entitled "Nonresident Tax" was left blank, except for the individual who received the guaranteed payment.

FC-GEN timely submitted its Income Tax Return, Schedules K-1, and Composite Return for the 2012 tax year to the Comptroller. In 2015, FC-GEN began contacting the Comptroller to request information regarding the status of its refund request. During one telephone inquiry in November 2016, FC-GEN was told that a refund in the amount of $598,131 had been scheduled, but that additional time was needed to process it. During another inquiry in December 2016, FC-GEN was told by a representative in the Comptroller's office that the refund was scheduled to be made. After years of email, telephone, and fax communications between FC-GEN and the Comptroller regarding the status of FC-GEN's refund request, the Comptroller ultimately denied FC-GEN's refund request on March 17, 2017, on the ground that the statute of limitations had expired.

FC-GEN timely appealed to the Comptroller's Office of Hearings and Appeals. During the hearing before the Comptroller's Office of Hearings and Appeals, the Comptroller's representative acknowledged that the refund request was indeed timely. However, the Comptroller's representative asserted that the refund should still be denied on the ground that the two nonresident members identified on the Composite Return, Mr. Sertich and Mr. Jones, were ineligible to be included in the Composite Return. Later, on July 26, 2018, the Comptroller issued a Notice of Final Determination denying FC-GEN's refund on the basis argued by the Comptroller's representative.

A. Tax Court Proceedings

On August 23, 2018, FC-GEN appealed to the Tax Court to request an order that the Comptroller issue its requested refund and order interest to be paid. The Tax Court ordered the Comptroller to issue a refund to FC-GEN in the amount of $598,131, finding that FC-GEN "properly followed the Maryland Tax Form instructions" and "complied with the applicable tax laws" in requesting its refund. The Tax Court denied the request for interest, and FC-GEN did not file a petition for judicial review of the denial. The Comptroller filed a petition for judicial review to the circuit court, which affirmed the Tax Court's order. The Comptroller then appealed to the Appellate Court of Maryland (at the time named the Court of Special Appeals of Maryland).¹⁰

B. The Appellate Court of Maryland

In an unreported opinion, the Appellate Court of Maryland affirmed the judgment of the Tax Court. Comptroller of Maryland v. FC-GEN Operations Investments, LLC , 2022 WL 325940. In upholding the decision of the Tax Court, the intermediate appellate court pointed out that judicial review of the Tax Court's factual findings, inferences therefrom, and findings of mixed fact and law is pursuant to a substantial evidence standard. Id. at *3 (quoting Frey v. Comptroller , 422 Md. 111, 136, 29 A.3d 475 (2011) (additional citations omitted)). The court noted that in Frey , this Court elaborated on how courts should review an agency's legal conclusions when interpreting statutes or regulations, stating that a reviewing court "afford[s] great weight to the agency's legal conclusions when they are premised upon an interpretation of the statutes that the agency administers and the regulations promulgated for that purpose." Id. at *5 (quoting Frey , 422 Md. at 138, 29 A.3d 475 ). Applying the deferential standard as articulated in Frey , the intermediate appellate court determined that it must "defer to the Tax Court's interpretation of the legal regulations as well as its factual findings." Id. Based upon its review of the record, the Appellate Court of Maryland determined that there was substantial evidence in the record to support the Tax Court's determination that FC-GEN met the filing requirements for the...