Comptroller of Treasury v. Taylor, 56
| Decision Date | 29 July 2019 |
| Docket Number | No. 56,56 |
| Parties | COMPTROLLER OF THE TREASURY v. RICHARD REEVES TAYLOR |
| Court | Court of Special Appeals of Maryland |
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 §§ 7-301 and 7-309(b) of the Tax-General Article in the Maryland Code. The Court concluded that absent any additional property subject to Maryland estate tax, Ms. Taylor's interest in the marital trust was subject to the same tax by operation of the federal and Maryland estate tax schemes.
ESTATE TAXES - LATE PENALTY WAIVER - The Court of Appeals held that, pursuant to Tax-Gen. § 13-714, the personal representative provided sufficient affirmative evidence to permit waiver of the Comptroller's 10% late penalty. The Court held that the Tax Court adequately considered the personal representative's arguments and concluded that those arguments met the threshold of "reasonable cause" to waive the late penalty.
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.
Circuit Court for Washington County
Case No. 21-C-15-055059
Barbera, C.J., * Greene, McDonald, Watts, Hotten, Getty, Raker, Irma S. (Senior Judge, Specially Assigned) JJ.
Opinion by Hotten, J.
*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 This case arises from the Comptroller of the Treasury's ("Comptroller") assessment of estate tax and penalties against a Maryland estate that included the value of a particular type of marital trust. The marital trust, which was created in Michigan, consisted of qualified terminable interest property or "QTIP" that was reported on the decedent's federal estate tax return, but was omitted from the Estate's corresponding Maryland estate tax return.
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:
The personal representative filed a cross-petition with the following issues:
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.
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.
Mr. Taylor died with a valid Will dated September 1, 1982. The Will directed the creation of a "residuary marital trust," consisting of a portfolio of eleven different parcels of stocks and bonds valued on Mr. Taylor's date of death at $2,299,893.20. Mr. Taylor's Will directed that the net income from the residuary marital trust be paid to Ms. Taylor atleast annually for and during her lifetime and that upon Ms. Taylor's death, the trust assets would be dispersed to the trust beneficiaries, Mr. Taylor's son and grandchildren.
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 26 U.S.C. §§ 2044(a), (c); 2056(b)(7)(B).
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."
In a letter to the Comptroller dated January 20, 2014, the personal representative protested the Deficiency Notice and objected to the Comptroller's demands. The personal representative asserted that Maryland had no taxable interest in the trust assets, citing toMaryland Code, Tax-General ("Tax-Gen.") §§ 7-309(b)(6)(i), 7-302, and 26 U.S.C § 2044, discussed infra.
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.
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 Tax-Gen. §13-714 and Frey v. Comptroller, 422 Md. 111, 29 A.3d 475 (2011), as relevant authority.2
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:
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