Brown v. Comptroller of Treasury

BYRNES, Judge. R. Edwin Brown and Winsome S. Brown, appellants, filed a petition for judicial review in the Circuit Court for Montgomery County of a decision of the Maryland Tax Court affirming a notice of final determination of assessments of additional Maryland income tax entered against them by the Comptroller of the Treasury (“Comptroller”), appellee. The circuit court affirmed the judgment of the tax court. On appeal, the ⁵²⁹ Browns pose one question for review, which we have rephrased: Did the tax court err in ruling that the Comptroller’s May 6, 1996 final assessment is not barred by the statute of limitations set forth in § 13-1101 (a) of the Tax General Article?

FACTS AND PROCEEDINGS The Browns filed Maryland income tax returns for the four years at issue in this case: 1986, 1987, 1988, and 1989. Sometime before November 5, 1992, the Comptroller was notified by the Internal Revenue Service (“IRS”) that the Browns’ taxable income for the years 1986 and 1987 had been increased by $163,948 and $109,110, respectively, thereby increasing their federal income tax liability by $50,702 and $42,547, respectively. The Browns challenged that determination in the United States Tax Court. On August 14,1992, the United States Tax Court entered an order, pursuant to an agreement of the parties, establishing tax deficiencies attributable to the Browns for the years 1986 and 1987 of $50,702 and $42,547, respectively.

On November 5, 1992, the Comptroller wrote to the Browns and advised them that it was in receipt of the information from the IRS regarding the adjustments to the Browns’ federal income tax returns. The Comptroller’s November 5, 1992 letter provided a computation of the Maryland income tax on the increased income and demanded payment. The Comptroller made no adjustments to the Browns’ income other than the adjustments that had been made by the IRS. The amount of additional Maryland income tax as reflected in the November 5, 1992 letter was $12,296.10 for 1986 and $12,727.44 for 1987 (before computation of interest and penalty).

Approximately two months later, on January 13, 1993, the Comptroller issued formal assessments to the Browns assessing income tax corresponding to the amounts reflected in the November 5, 1992 letter. The assessments imposed a 25% penalty and interest updated to the date of the assessments. ⁵³⁰ Likewise, with respect to the Browns’ taxable income for the years 1988 and 1989, the Comptroller was notified by the IRS that the Browns’ taxable income for those years had been increased by $276,214 and $105,412, respectively, thereby producing additional federal income tax liability of $58,005 and $22,302, respectively. Subsequently, the IRS significantly reduced the adjustment to the Browns’ 1988 taxable income. The revised information from the IRS reflected that the increase in the Browns’ taxable income for 1988 was $72,569, thereby producing a revised increase in the Browns’ 1988 federal income tax liability of $15,239.20.

The Browns appealed the federal income tax deficiency determination for 1988 and 1989 to the United States Tax Court also. On April 19, 1994, the United States Tax Court entered an order, by agreement of the parties, establishing that there were federal income tax deficiencies of $15,239 for 1988 and $8,047 for 1989. On November 17, 1995, the Comptroller was notified by the IRS of the federal adjustments to the Browns’ 1988 and 1989 taxable income. Thereafter, the Comptroller issued assessments to the Browns that were computed on the basis of the increase in federal taxable income for the Browns set forth in the order of the United States Tax Court: additional taxable income for 1988 of $72,569 and for 1989 of $105,412.

Prior to the Comptroller’s assessments, the Browns made a payment of $7,083.50. In computing its assessments, the Comptroller gave the Browns credit for this payment. In their challenge to the assessments in the Maryland Tax Court, the Browns raised the defense of limitations. The tax court took evidence on that issue, including the testimony of Pamela Porter, the Comptroller’s revenue administrator.

Ms. Porter testified that the Comptroller’s assessments were based only on the increases in federal taxable income, and not on the Browns’ total taxable income. She also stated, in affidavit, that at no time had the Browns notified the Comptroller of the IRS’s increase in their federal taxable income. ⁵³¹ The tax court denied the Browns’ motion for summary judgment on limitations on March 5, 1997. Thereafter, it affirmed the Comptroller’s assessments, observing that “the numbers that were being used by the Comptroller’s office are the precise numbers that were used by the Internal Revenue Service in making the adjustments they made.” The tax court entered an order affirming the assessments on October 17, 1997. The Browns filed a timely petition for judicial review.

The circuit court affirmed the judgment of the Maryland Tax Court affirming the Comptroller’s assessments. The Browns then noted a timely appeal to this Court. STANDARD OF REVIEW Whether the reviewing court is an appellate court or a circuit court, it is well settled that judicial review of a final order of the Maryland Tax Court is limited. Genie & Co. v. Comptroller, 107 Md.App. 551, 563 , 668 A.2d 1013 (1995).

The standard of review is governed by State Government Article, Md.Code (1988, 1997 RepLVol.), § 13-532(a) of the Tax— General Article (“TG”), which distinguishes between the review afforded to decisions rendered on the basis of fact and those rendered on legal grounds. Genie & Co., 107 Md.App. at 563 , 668 A.2d 1013 . 1 A reviewing court will not reverse the tax court’s factual determinations if there is substantial evidence to support them. Dun & Bradstreet Corp. v. Comptroller, 86 Md.App. 258, 264 , 586 A.2d 752 (1991). A reviewing ⁵³² court will not accord deference to the tax court’s decision on a question of law, however, and will review such a question de novo.

Id. As the questions presented in this case are questions of law, we will apply the latter standard. DISCUSSION The Browns appeal from the Comptroller’s assessment of income taxes against them for the years 1986, 1987, 1988, and 1989. They contend initially that the assessments are barred by the statute of limitations contained in TG § 13 — 1101(a), which provides that, in general, “an assessment of ... income tax may not be made after 3 years from the later of ... the date that the return is due; or ... the date that the return is filed.” The Browns maintain that the Comptroller exceeded this limitation when it made assessments against them for the years in question. 2 The Comptroller counters by citing the provisions of TG § 13-1101 that specifically address the time allowed for assessments to be made after a federal adjustment to a taxpayer’s taxable income.

In particular, TG § 13 — 1101(b) states that “[a]n assessment of ... income tax may be made at any time if ... a report of federal adjustment is not filed within the period required under § 13-409 of this title.” The Comptroller takes the position that because the Browns did not file a report of the federal adjustments of their income within the appropriate time limit, there was no time limitation as to when the Comptroller could make assessments against the Browns. ⁵³³ The Browns counter that argument by pointing out that the assessments made against their federally adjusted income fall within the provisions of TG § 13 — 1101(c), which states that “[i]f a report of federal adjustment is filed within the time required under § 13-409 of [TG] of this title, the [Comptroller] shall assess the ... income tax within one year after the date on which the [Comptroller] receives the report.” TG § 13-409 requires that the report of the federal adjustment be made “[w]ithin 90 days after the Internal Revenue Service issue[s] ... the final determination” of its adjustment. The Browns do not contend that they ever reported the IRS’s adjustments to their income. Instead, they maintain that the reports made by the IRS of the adjustments to their income satisfied the reporting requirement of TG § 13-1101(c), so as to allow them to invoke its time limitation against the Comptroller. According to the Browns, the Comptroller exceeded that time limitation when it failed to arrive at a final determination as to the Browns’ deficiencies until May 6, 1996, more than a year after the IRS reported the adjustments. 3 The Comptroller maintains that because the Browns did not report the adjustment within the time allowed by TG § 13-409, TG § 13-1101(c)’s limitation on the time frame in which it could make assessments did not apply.

The Comptroller takes the position that even if it receives a report of an adjustment to a taxpayer’s income from a third party within the time specified by TG § 13-409, the limitation set forth in TG § 13-1101(c) still is not triggered unless the taxpayer timely reports the adjustment himself or herself. Thus, because the Browns never filed a report of the adjustments made to their income within the time period specified by TG § 13-409, they could not avail themselves of TG § 13~1101(c)’s time limitation. Instead, as a consequence of their failure to report, the Browns came under the scope of TG § 13- ⁵³⁴ 1101(b)(5), which removed any time limitation from the Comptroller’s ability to make assessments. The Browns’ first argument — that the Comptroller is barred by TG § 13-1101(a)’s general three-year limitation against making assessments upon tax returns from the date they are filed or are due — is without merit.

TG § 13-1101(a) imposes a three-year limitation for the assessment of income tax from the date that the return is filed or due, “[ejxcept as otherwise provided in [TG § 13-1101].” TG § 13-1101 contains two provisions dealing explicitly with the time allotted to the Comptroller to make assessments against taxpayers whose income has been adjusted by the IRS. TG § 13-1101(b)(5), relied upon by the Comptroller, applies when a report of federal adjustment has not been filed within the appropriate time period, in which case the Comptroller may assess income taxes against the taxpayer at any time. When a report of a federal adjustment has been filed within the applicable period, however, TG § 13-1101(c) proscribes the Comptroller from making assessments against the adjusted income more than one year after its receipt of the report of the adjustment. Under this statutory scheme, if a report is properly filed, TG § 13-1101(c)’s one-year limitation on the Comptroller’s ability to make assessments applies; if no report is filed, TG § 13-1101(b)(5)’s removal of all limitations applies.

In either case, the three-year limitation contained in TG § 13-1101(a) is inapplicable. Our analysis of the legal issue in this case turns on whether TG § 13-1101(c) or TG § 13-1101(b)(5) applies. That, in turn, depends upon whether the reporting requirement of TG § 13-1101(c) was satisfied and, if so, whether the assessments in question were made in compliance with TG § 13-1101(c)’s time limitation. At first blush, it would appear that the plain language of TG § 13-1101(c) favors the interpretation urged upon us by the Browns: that a report of adjustment filed by anyone is sufficient to trigger the limitation contained in TG § 13-1101(c).

TG § 13-1101(c) states that “[i]f a report of a federal ⁵³⁵ adjustment is filed within the time under [TG § 13 — 409(b) ], the [Comptroller] shall assess the ... income tax within 1 year after the date on which the [Comptroller] receives the report.” TG § 13 — 409(b) requires that such a report be filed within 90 days of the IRS’s final determination of the adjustment. The statute does not state expressly that a report of federal adjustment filed by the taxpayer is necessary to trigger the one-year limitation. Rather, it states only that a report of federal adjustment is needed. This seems to indicate that so long as the federal adjustment is reported to the Comptroller’s office, irrespective of the source, within 90 days of the IRS’s final determination, the filing requirement of TG § 13-1101(c)is satisfied and the taxpayer may invoke its limitation.

Upon closer examination, however, that interpretation of TG § 13 — 1101(c) does not obtain. TG § 13-1101(c)requires that a report of federal adjustment be filed with the Comptroller in order to trigger its time limitation, but does not define what constitutes a report of federal adjustment. TG § 13-409, which is cross-referenced in TG §§ 13 — 1101(b)(5) and 13-1101(c), establishes the requirements of such a report: Report required. — Within 90 days after the Internal Revenue Service issues to a person the final determination [that increases the taxpayer’s federal taxable income], the person shall submit to the [Comptroller] a report of federal adjustment that includes: (1) a statement of the amount of the increase; and (2) if the person contends that the final federal determination is erroneous, an explanation of the reasons for the contention. (Emphasis added.) Thus, TG § 13-409 establishes the requirements of a report of federal adjustment to satisfy TG § 13-1101(c)’s reporting requirement.

Such a report must consist of a statement of the amount of the increase and, if the increase is disputed, the reasons why the taxpayer believes that the increase was incorrect. Moreover, it must be filed by the taxpayer. ⁵³⁶ The requirement that the taxpayer file the report of adjustment is further borne out by the legislative history of TG §§ 13 — 1101(c) and 13-1101(b)(5), both of which were derived in part from Md.Code (1957, Repl.Vol.1984) Art. 81, § 309. That section stated: If at any time the amount of a taxpayer’s federal net taxable income reported on his federal income tax return for any taxable year is increased by the Internal Revenue Service, the taxpayer shall report such increase of federal net taxable income within ninety days after the Internal Revenue Service has made a final determination. In such report the taxpayer shall accept the accuracy of such final determination or shall set forth the grounds upon which he contends that such final determination is erroneous.

If a taxpayer fails to file such a report within the time period prescribed herein, the Comptroller may make an assessment at any time. If a taxpayer files a timely report, the Comptroller must make an assessment within one year after the receipt of such report. (Emphasis added). Thus, the predecessor statute to TG §§ 13-1101(b)(5), 13-1101(c), and 13-409 expressly provided that it was the taxpayer who had to file the report of adjustment and that, if he failed to do so, the Comptroller could make assessments against him at any time.

Although the wording is somewhat different in the successor provisions, this difference does not indicate a substantive change. The Re-visor’s Note to TG § 13-1101 states that the “new language [is] derived without substantive change from ... the third and fourth sentences of [former Art. 81, § 309(c) ](3), as those sentences relate[ ] to limitations.” We agree with the Comptroller’s position that it is the taxpayer who must file a report of adjustment within the prescribed time period, so as to satisfy the reporting requirement of TG § 31-1101(c). If the taxpayer fails to file a report of adjustment within the prescribed time period, the Comptroller may make assessments against that taxpayer at any time. In this case, it is undisputed that the Browns corresponded with the Comptroller after they received notices informing ⁵³⁷ them, inter alia, that the IRS had reported to the Comptroller the adjustments made to their income.

The Browns contend that their correspondence, when combined with the prior reports of the adjustments by the IRS, 4 satisfied TG § 13-1101(c)’s reporting requirement. With respect to the 1986 and 1987 returns, the correspondence in question took