Comptroller of Treasury v. Taylor

• Citation: 213 A.3d 629,465 Md. 76
• Decision Date: 29 July 2019
• Docket Number: No. 56, Sept. Term, 2018,56, Sept. Term, 2018
• Parties: COMPTROLLER OF the TREASURY v. Richard Reeves TAYLOR
• Court: Court of Special Appeals of Maryland

465 Md. 76

213 A.3d 629

COMPTROLLER OF the TREASURY

v.Richard Reeves TAYLOR

No. 56, Sept. Term, 2018

Court of Appeals of Maryland.

July 29, 2019

Argued by Michael J. Salem, Asst. Atty. Gen. (Brian E. Frosh, Atty. Gen. of Maryland, Annapolis, MD), on brief, for Petitioner/Cross-Respondent.

Argued by K. Donald Proctor (Margaret M. McKee, Proctor & McKee, P.A., Towson, MD), on brief, for Respondent/Cross-Petitioner.

Argued before: Barbera, C.J.,^* Greene, McDonald, Watts, Hotten, Getty, Irma S. Raker (Senior Judge, Specially Assigned) JJ.

Hotten, J.

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:

1. 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?

2. 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 personal representative filed a cross-petition with the following issues:

1. Is [the Comptroller's] taxation of the QTIP trust in the [E]state unconstitutional?

2. 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.

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 at least 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 to Maryland 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.

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 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:

[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 federal gross estate consisted entirely of personal property, because the trust assets "were not and never were" the property of Ms. Taylor. According to the circuit court, Ms. Taylor never had legal title to the trust assets because legal title was transferred to the trust beneficiaries. That property right vested in the...