Register of Wills for Baltimore County v. Arrowsmith

• Decision Date: 15 August 2001
• Docket Number: No. 122,122
• Citation: 365 Md. 237,778 A.2d 364
• Parties: REGISTER OF WILLS FOR BALTIMORE COUNTY v. Jeffrey A. ARROWSMITH, et al.
• Court: Maryland Court of Appeals

778 A.2d 364

365 Md. 237

REGISTER OF WILLS FOR BALTIMORE COUNTY v. Jeffrey A. ARROWSMITH, et al.

No. 122, Sept. Term, 2000.

Court of Appeals of Maryland.

August 15, 2001.

Julia M. Andrew, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen. of Md., on brief), Baltimore, for Appellant.

Kurt J. Fisher (Sandra P. Gohn, Kenneth S. Aneckstein of Piper, Marbury, Rudnick & Wolfe, L.L.P., on brief), Baltimore, for Appellees.

D. Robert Enten, Gordon, Feinblatt, Rothman, Hoffberger & Hollander, L.L.C., Baltimore, on brief of the Maryland Bankers Ass'n, Inc. as Amicus Curiae in support of Appellees.

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

BATTAGLIA, Judge.

We issued a writ of certiorari in this case to determine whether Maryland's statute of limitations with respect to filing a claim for refund of inheritance taxes was rendered inapplicable by the Treaty ratified pursuant to the Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Estates, Inheritance, and Gifts.¹

I. BACKGROUND

A. Facts

This controversy arose in connection with the estate of Harold Arrowsmith (hereinafter "decedent"), who died intestate in Germany on August 15, 1989. The decedent was born, raised, and educated in Baltimore, Maryland and received a degree from the Johns Hopkins University in 1950. The decedent continued to live in Maryland until 1974 when he sold his house and put his furniture in storage. He briefly resided in an apartment-hotel in Washington, D.C., but moved to Germany in 1975. Although the decedent remained a U.S. citizen his entire life, filed U.S. income tax returns, and maintained a Maryland driver's license, he returned only occasionally to the United States to present the results of his research and writings.

The decedent's assets in Maryland consisted almost entirely of intangible personal property, specifically publicly-traded securities worth nearly $30 million, held at the Mercantile Safe Deposit and Trust Company.² The decedent's heirs³ initially filed a petition for probate in Baltimore County in September 1989, asserting that because "the decedent was domiciled in Maryland and a majority of his assets are located in this state," the Register of Wills for Baltimore County (hereinafter "the Register") was the proper office in which to file the petition.⁴ On May 14, 1990, the appellees paid $2,000,000 to the Register in inheritance taxes.⁵ About that time, the estate also paid Maryland and Federal estate taxes, in the amount of $1,957,164 and $11,010,462, respectively.⁶ Concurrent with the administration of the decedent's estate in the United States, parallel probate proceedings were initiated in Germany. Unable to ascertain the decedent's heirs, the German tax authorities appointed a curator to administer his estate under German law. Concluding that at the time of his death the decedent was domiciled in Germany, the German tax authorities asserted that Germany was entitled to the inheritance taxes on his entire worldwide estate. The total German tax assessed was approximately $17,511,145. The German curator turned over all of the decedent's assets located in Germany,⁷ totaling $1,022,355, to the German tax authorities as partial payment of the assessed taxes, leaving an unpaid German inheritance tax balance of approximately $16,488,790, exclusive of interest and administrative penalties for failure to file timely returns or make timely payment.

To avoid being subjected to double taxation, and pursuant to the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on Estates, Inheritances and Gifts (the "Treaty"), the heirs sought relief from the Competent Authority of the United States (hereinafter, "CAUS")⁸ in resolving the dispute as to which country death taxes should be requited. On November 9, 1995, the CAUS, agreeing with the position taken by the Competent Authority of Germany, (hereinafter, "CAG")⁹ declared that the decedent was domiciled in Germany at the time of his death, and that therefore Germany had the primary right to tax the estate's worldwide assets under the Treaty.

Armed with the mutual agreement of the Competent Authorities, the heirs requested a refund of the federal estate taxes. Pursuant to the agreement, the United States Internal Revenue Service ("IRS") ultimately agreed to make the refund payable directly to the German government.

On November 9, 1998, three years after the determination of domicile by Mutual Agreement, the heirs filed for refunds of the Maryland estate and inheritance taxes. The Maryland Comptroller of the Treasury granted the heirs' request for refund of the state estate tax in the amount of $1,717,578.61.¹⁰ The Register, however, denied the request for refund because it was not filed within the statute of limitations prescribed by Tax-General Article 13-1104(a).¹¹ Because the Register's denial and the subsequent litigation was based on the statute of limitations, the Register never reached the merits of the appellees' claim, i.e. whether the heirs were entitled to a refund of the inheritance tax.

B. The Treaty

A brief explanation of the objectives of the Convention Between the United States of American and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion, and the design of the resulting Estate and Gift Tax Treaty [hereinafter "Treaty"] is both prudent—as the decisions of the Maryland Tax Court and the Circuit Court for Baltimore County rest upon interpretations of this bilateral Treaty—and necessary to ensure the faithful comprehension of the Treaty provisions. The United States and Germany [hereinafter, collectively "the Contracting States"] entered into the Convention for the Avoidance of Double Taxation on December 3, 1980, and the resulting Treaty was ratified by the Senate on June 27, 1986. The express purpose of the Treaty was to prevent the double taxation of the estates of citizens or residents of the two countries. See Treaty, Preamble.

Double taxation arises because the definition of "domicile" differs in each country, making it possible for an individual to be deemed a domiciliary of both the United States and Germany. See REPORT OF THE SENATE COMMITTEE ON FOREIGN RELATIONS ON TREATY DOC. NO. 97-1 at 2, 97th Cong., 1st Sess. (Nov. 10, 1981) [hereinafter "SENATE TREATY DOC. NO. 97-1"]. An individual is considered domiciled in the United States if the person is "a resident or citizen thereof" and is considered domiciled in Germany if that person has a "domicile" or "habitual abode" there. See Treaty, Art. 4. Thus, in circumstances such as those before us today, a person can be a citizen of the United States but have an habitual abode in Germany, and each country could rightfully declare itself the domicile. The Treaty addresses this possibility by outlining a hierarchy of considerations which assist the nations in settling potential disputes as to which country has primary taxing authority on a decedent's estate. Because both the heirs and the Register have now stipulated that-under the terms of the Treaty—the decedent was domiciled in Germany at the time of his death, we will forego further discussion of these particular provisions.

The Treaty specifically discusses the taxable status of certain real or tangible properties, namely immovable property (Article 5), business property of a permanent establishment (Article 6), ships and aircraft (Article 7), and interest in partnerships (Article 8). Because the disputed property involved in the present case does not fall into any of these categories, we will avoid the exercise of such partitioning and simply refer to these properties in general terms, as "itemized property." When the property in dispute is not "itemized property" under the Treaty, then, pursuant to Article 9, it is subject to taxation in the Contracting State in which the decedent is declared domiciled. See Treaty, Art. 9. Thus, as between the two countries, Germany had the primary right to tax the decedent's worldwide assets.

That Germany is declared the primary taxing jurisdiction, however, does not preclude the United States of America from taxing the estate in accordance with its laws. The authority granted to the "domiciliary" country in Article 9 is not exclusive. Article 9 is expressly limited by the provisions in Article 11, which devise a system of "credits" so that when both countries rightfully tax a decedent's estate, double taxation is avoided by requiring one country to provide a credit against the tax calculated in the other.¹² The Treaty details circumstances under which one country is obligated to furnish a credit against the tax calculated. Most pertinent to the case at hand, the Treaty explicitly provides that the credits allowed by Germany must include taxes levied by political subdivisions, e.g. Maryland. See Treaty, Art. 11(4). While the provision appears to ordain such a credit only with respect to "itemized property,"¹³ it is worthy of note that the Contracting States were conscious of the taxing authority of political subdivisions at the time the Treaty was drafted. If any difficulties arise in applying the credit system, the Treaty requires resolution by the Competent Authorities under Article 13. See Treaty, Art. 11(5).

Under Article 13, the Competent Authorities of the Contracting States are given broad authority to resolve, by Mutual Agreement, "any difficulties or doubts" which arise when interpreting or applying the Treaty. See Treaty, Art. 13(3). The Competent Authorities may also consult for cases or circumstances not explicitly covered by the Treaty. Id. Therefore, any person, believing that the actions of the Contracting States result in double taxation, may present his or her case to the Competent Authorities for...