Marco Associates, Inc. v. Comptroller of Treasury

• Decision Date: 07 June 1972
• Docket Number: No. 183,183
• Citation: 291 A.2d 489,265 Md. 669
• Parties: MARCO ASSOCIATES, INC. v. COMPTROLLER OF the TREASURY of the State of Maryland.
• Court: Maryland Court of Appeals

Page 669

265 Md. 669

291 A.2d 489

MARCO ASSOCIATES, INC. v. COMPTROLLER OF the TREASURY of the State of Maryland.

No. 183.

Court of Appeals of Maryland.

June 7, 1972.

Steven A. Winkelman (Winkelman & Delaney, Washington, D. C., on the brief), for appellant.

Jon F. Oster, Asst. Atty. Gen. (Francis B. Burch, Atty. Gen., Baltimore, on the brief), for appellee.

Argued before HAMMOND ^*, C. J., and BARNES, McWILLIAMS, SINGLEY, SMITH and DIGGES, JJ., and JAMES MACGILL, Special Judge.

SINGLEY, Judge.

When the Comptroller assessed an income tax deficiency of $6,794.23 for the fiscal period ended 30 April 1968 against Marco Associates, Inc. (Marco), the taxpayer sought to overturn the assessment on an appeal to the Maryland Tax Court. From an adverse ruling there, Marco appealed to the Circuit Court for Montgomery County, which affirmed, and from the circuit court to this Court.

Marco, a Maryland corporation, had elected to be taxed, for federal income tax purposes, as a Subchapter S corporation, as permitted by Internal Revenue Code, 26 U.S.C. § 1371 et seq. with the consequence that its earnings were attributed to the stockholders of Marco, who paid the federal income tax thereon.

In 1964, Marco sold certain real estate which it owned for $1,015,000.00, and realized a long-term capital gain of $704,903.93, or 69.4487% of the sale price, a gain which it elected to recognize, for purposes of federal income tax, on an installment sale basis, as permitted by 26 U.S.C. § 453. Installments of the sale price were received in 1964, 1966 and 1968 in amounts of $100,000.00, $167,696.70 and $117,696.70, respectively.

In 1968, the stockholders of Marco liquidated the corporation and there was then distributed to the stockholders the installment payment collected in that year, as well as the note representing the then unpaid balance of purchase price. As an incident to the liquidation, and in compliance with the provisions of 26 U.S.C. Subchapter C-Corporate Distributions and Adjustments, Part II. Corporate liquidations, Marco was required to recognize on its federal tax return not only the gain attributable to the 1968 payment, but also the remainder of the gain which had been deferred. Accordingly, Marco reported a long-term capital gain of $189,368.35 on line 9(b) of its 1968 federal income tax return, form 1120-S.

Marco's 1968 federal income tax return is not a part of the record, but it would seem to be conceded that it reported taxable income of $211,138.06, of which the $189,386.35 gain was a part. Presumably, Marco paid no federal tax on this income, which was passed through to the stockholders because of its Subchapter S status, Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders, 6.09(2), at 6-32 (1971).

By virtue of the provisions of Maryland Code (1957, 1969 Repl.Vol.) Art. 81, § 288(b) and (c), corporate taxpayers pay a Maryland income tax of 7% on net income as defined by § 280A(a) as the 'taxable income of such taxpayer as defined in the laws of the United States' modified by certain additions and deductions not applicable here, except the subtraction of 50% 'of the excess of net long-term capital gain over net short-term capital loss,' permitted by § 280A(c)(2).

On its 1968 Maryland return, Marco deducted the entire amount of the capital gain, on the theory that it was a 'capital gain transaction * * * not subject to tax under Maryland law in effect in year in which sale occurred,' but paid a tax of $1,205.24 on other income of $22,956.95. The Comptroller's reinstatement of 50% of the gain gave rise to an additional tax liability of $6,628.52 with interest of $165.71, or a total of $6,794.23.

Marco makes much of the fact that the land had been sold in 1964, when the gain was realized, and that all that happened in 1968 was that the lion's share of the indebtedness represented by the note, still unpaid, had been distributed to its stockholders in the course of the liquidation.

The summary of the historical background of portions of Chapter 142 of the Laws of 1967, Maryland Code (1957, 1969 Repl.Vol.) Art. 81, §§ 279-283, 287-289, 323-323A (the Act) which substantially revised Maryland's income tax law, which may be found in Katzenberg v. Comptroller of Treasury, 263 Md. 189, 191-192, 282 A.2d 465 (1971) need not be repeated here.

When the Act, in § 280A(a) adopted as net income for State income tax purposes the taxable income which a corporate taxpayer reported for federal income tax purposes, subject to the modifications contained in § 280A(b) and (c), it brought capital gains and losses of a corporate taxpayer within the ambit of the Maryland income tax for the first time, as we noted in Katzenberg, supra, 263 Md. at 192, 198, 282 A.2d 465.

Marco argues that the assessment of the additional tax was invalid for four reasons, which we shall consider in the order presented.

(i) The attempted imposition of the tax was retroactive.

The thrust of this argument is that a statute which seeks to impose a tax in 1968 upon a transaction entered into in 1964 is impermissibly retroactive. The same argument was advanced in Katzenberg, supra, where after noting that a tax is not necessarily invalid simply because it is retroactive, Diamond Match Co. v. State Tax Comm., 175 Md. 234, 200 A. 365 (1938), we said 'As we understand this argument, it is in essence that the gain was realized when the notes in question were accepted by the Katzenbergs, and that the imposition of the Maryland tax on the proceeds collected in satisfaction of the notes is tantamount to the imposition of a tax on the collection of a debt.

'We do not see it quite that way. Under our view, the existence of a capital gain was realized when the sales were made (assuming the notes were paid or could be disposed of), but the Katzenbergs preferred to defer the recognition of the gain for federal tax purposes until the time when and if the notes were paid or otherwise disposed of. It was the deferral of some part of this recognition until the years 1967 and 1968, when the Maryland Act was fully operative which brought the gains recognized in those years within the scope of the Act.' 263 Md. at 200-201, 282 A.2d at 471.

See also Commonwealth v. Electrolux Corp., 362 Pa. 333, 67 A.2d 105 (1949); Commonwealth v. Warner Bros. Theatres, Inc., 345 Pa. 270, 27 A.2d 62 (1942); Ebling Co. v. Graves, 259 App.Div. 427, 20 N.Y.S.2d 123 (1940), aff'd without

                opinion, 284 N.Y. 689, 30 N.E.2d 726
                 (1940). (ii) The attempt by the State of Maryland to tax
                the subject transaction was an attempt to tax an
                appreciation in property rather than income and, therefore
                a property rather than an income tax
                

In Katzenberg, supra, we dealt with the same contention. At 204-205 of 263 Md., at 473 of 282 A.2d, we said:

'To accept this argument requires us to close the gap between taxes on income, to which the uniformity requirement of Article 15 of the Declaration of Rights was held not to apply by Oursler v. Tawes, supra (178 Md. 471, 13 A.2d 763 (1940)), and taxes on property, to which the uniformity requirement does apply. The Katzenbergs would bridge this void by arguing that accumulations of income become property and that an increase in the value of an asset represents either an accumulation of income or the increase in the value of a capital asset, which is a property right.

'Appealing as this argument may be, it overlooks a basic element: that the whole thrust of the Maryland Act is to impose a tax on the amount determined under the Internal Revenue Code as the adjusted gross income of an individual or the taxable income of a corporation. This is a formula or yardstick objectively derived which initially takes no account of the source, nature or composition of the funds; it is simply a figure developed by the federal return.

'Attempts to draw analogies from the federal cases offer little help, for as we pointed out in Oursler v. Tawes, supra there is a wide disparity between state and federal power in this area. The State's power to tax is a basic attribute of sovereignty, and Article 15 of the Declaration of Rights is not a grant of such power, but rather a limitation upon it. No similar power rested in the government of the United States, which is the reason why it was necessary to adopt the 16th Amendment to the Constitution in order to permit the passage of valid federal income tax laws and why draftsmen have taken particular care not to extend the reach of federal legislation before 1 March 1913. The State is subject to no such limitation, compare City National Bank of Clinton v. Iowa State Tax Comm., supra (251 Iowa 603, 102 N.W.2d 381 (1960)) with McLaughlin v. Alliance Ins. Co., 286 U.S. 244, 52 S.Ct. 538, 76 L.Ed. 1083 (1932).'

(iii)

Attempted imposition of the tax in 1968 by Maryland actually results in double taxation in violation of Section 304, Article 81 of the Annotated Code of Maryland.

Code (1957, 1969 Repl.Vol.) Art. 81, § 304 sets up the general guidelines under which the Act is to be administered. The thrust of Marco's argument is this:

'Maryland, prior to 1967, did not recognize an installment sale as...