Comptroller of the Treasury v. Mack Truck, Inc.

RODOWSKY, Judge. This case involves the construction of the statute of limitations on claims for refund of Maryland income tax. Part of the Maryland statute incorporates by reference the section of the Internal Revenue Code (IRC) providing time limits on claims for refunds of federal taxes. The federal statute includes a special period of limitations where the Internal Revenue Service (IRS) and a taxpayer, pursuant to another section of the IRC, have agreed to extend the period for assessment of additional tax.

The issue before us is whether a taxpayer, whose claim for refund of Maryland income tax is independent of any adjustments to the federal income tax return for the same year, obtains the benefit of the special time limit solely as a result of an extension agreement with the IRS, or whether the Comptroller of the Treasury (Comptroller) must also have sought and obtained an assessment extension agreement applicable to the same year. The taxpayer, Mack Truck, Inc. (Mack), overreported its income on its 1987 Maryland income tax return by one hundred million dollars ($100,000,000.00). The error involved one item, a dividend in that amount paid to Mack by a wholly owned, domestic subsidiary, Mack Financial Corporation. As the common parent company of an affiliated group, Mack filed a consolidated federal income tax return for 1987.

Mack included the item in gross dividends received on its federal return, where it also later deducted the same item as an inter-company dividend. See IRC § 243(a)(3) (1986). Under Maryland income tax provisions, each member of an affiliated group of corporations is required to file a separate return. Mary ⁶⁰⁸ land Code (1988), § 10-811 of the Tax-General Article, formerly Md.Code (1957, 1987 Cum.Supp.), Art. 81, § 295. 1 On its separate Maryland return Mack erroneously included the dividend, reporting its federal taxable income as $60,222,539.

That Maryland return was timely filed on September 13, 1988. The effect of the error was that Mack overpaid its Maryland corporate income tax for 1987 by $936,763. On August 30, 1990, Mack entered into an agreement with the IRS under the provisions of IRC § 6501(c)(4) extending the period for assessment of federal income tax against Mack for 1987 to January 17, 1993. On March 16, 1993, Mack filed with the Comptroller an amended 1987 Maryland corporate income tax return, reducing its federal taxable income by the dividend received deduction and resulting in a loss of $39,777,-461.

Accompanying the amended return was a copy of Mack’s extension agreement with the IRS and a request for refund in the principal amount of $936,763. The Comptroller rejected the claim, essentially because “[t]he State of Maryland did not request an extension of time within which to assess the taxpayer. Had such a request been made, and the taxpayer agreed, then pursuant to [IRC] § 6511, the statute of limitations would have been extended.” Mack appealed to the Maryland Tax Court where the matter was heard on agreed exhibits, stipulated facts, and the testimony of an audit supervisor in the Comptroller’s Office, described infra. The Tax Court ordered the refund.

On judicial review of the Maryland Tax Court decision, the Circuit Court for Anne Arundel County affirmed. The Comptroller appealed to the Court of Special Appeals, and, prior to consid- • eration of the matter by that court, we issued the writ of certiorari on our own motion. For the reasons hereinafter stated, we shall affirm the circuit court. ⁶⁰⁹ The legal issue before us revolves around § 13 — 1104(c)(1) which we present below in relevant context. “§ 13-1104. Time for filing claims for refund. “(a) In general — Except as otherwise provided in this section, a claim for refund under this article may not be filed after 3 years from the date the tax, interest, or penalty was paid. “(c) Financial institution franchise tax and income tax. — (1) Except as provided in paragraph (2) of this subsection, a claim for refund ... of ... income tax may not be filed after the periods of limitations for filing claims for refund ... set forth in § 651.1 of the Internal Revenue Code. “(2) A claim for refund ... may not be filed later than 1 year from the date of: “(i) a final adjustment report of the Internal Revenue Service; or “(ii) a final decision of the highest court of the United States to which an appeal of a final decision of the Internal Revenue Service is taken. “(3) Except as provided in paragraph (4) of this subsection, a refund ... allowed upon a claim filed under this subsection may not exceed the amount of the Maryland tax resulting from the application of the limits set forth in § 6511 of the Internal Revenue Code. “(4) A refund ... allowed upon a claim filed under paragraph (2) of this subsection shall be limited to the amount of the reduction in Maryland tax resulting from the federal income tax adjustment.” The portions of the incorporated federal statute, IRC § 6511, that are most relevant to the issue before us read as follows: “SEC. 6511.

LIMITATIONS ON CREDIT OR REFUND. “(a) Period of Limitation on Filing Claim. — Claim for ... refund ... of any tax ... in respect of which tax the ⁶¹⁰ taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.... “(b) Limitation on Allowance of Credits and Refunds.— “(1) Filing of claim within prescribed period. — No ... refund shall be allowed ... after the expiration of the period of limitation prescribed in subsection (a) ... unless a claim for ... refund is filed by the taxpayer within such period. “(2) Limit on amount of credit or refund.— “(A) Limit where claim filed within 3-year period. — If the claim was filed by the taxpayer during the 3-year period prescribed in subsection (a), the amount of the ... refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return---- “(c) Special Rules Applicable in Case of Extension of Time by Agreement. — If an agreement under the provisions of section 6501(c)(4) extending the period for assessment of a tax imposed by this title is made within the period prescribed in subsection (a) for the filing of a claim for ... refund— “(1) Time for filing claim. — The period for filing claim for ... refund ... provided in subsections (a) and (b)(1), shall not expire prior to 6 months after the expiration of the period within which an assessment may be made pursuant to the agreement ... under section 6501(c)(4). “(2) Limit on amount. — If a claim is filed ... after the execution of the agreement and within 6 months after the expiration of the period within which an assessment may be made pursuant to the agreement ..., the amount of the ... refund shall not exceed the portion of the tax paid after the execution of the agreement and before the filing of the claim ⁶¹¹ ..., plus the portion of the tax paid within the period which would be applicable under subsection (b)(2) if a claim had been filed on the date the agreement was executed.” The areas of agreement and dispute between the parties can be demonstrated by a walk through the statutory language. It is agreed that resolution of the dispute is determined by the construction of § 13 — 1104(c)(1) and that subsection (c)(3) is companion thereto with respect to the limit on the amount of refund. The parties also agree that if a final adjustment to a taxpayer’s federal tax liability resulted in a reduction in Maryland tax, the time limit for the taxpayer’s claim for a Maryland refund would be controlled by subsection (c)(2) and the amount of the refund would be limited by subsection (c)(4). In cases controlled by § 13-1104(c)(2) and (c)(4) it is undisputed that the taxpayer need not have alerted the Comptroller, prior to the final federal adjustment, that a refund of state taxes might result from ongoing activities involving the federal tax authorities.

Those subsections, however, do not apply here because Mack’s refund claim does not result from a federal adjustment. Section 13-1104(c)(1) incorporates IRC § 6511. The parties agree that the directly relevant portion of IRC § 6511 is subsection (c)(1). Mack submits that its agreement under the provisions of IRC § 6501(c)(4) with the IRS of August 30, 1990, extended the period for assessment of federal tax to January 17, 1993, and that, pursuant to incorporated IRC § 6511(c)(1), the period for filing claim for a Maryland refund did not expire until six months thereafter.

Thus, Mack’s claim for refund, accompanying its amended return filed March 6, 1993, was well within that six months. The Comptroller disputes Mack’s reading of the effect of the incorporation by reference of IRC § 6511(c). The theme of the Comptroller’s position is that incorporation by reference of the federal statute into the state statute incorporates only the federal rules, but not the particular federal events. For example, the Comptroller submits that the references in IRC ⁶¹² § 6511(a) to “the time the return was filed” and to “the time the tax was paid” mean, after incorporation into § 13-1104, the filing of the Maryland return and the payment of the Maryland tax.

The Comptroller argues that the timeliness of a claim for a very substantial refund must be determinable from facts or events that are part of the tax system from which the refund is sought. Consequently, submits the Comptroller, the reference in IRC § 6511(c) to an IRC § 6501(c)(4) extension agreement cannot be transported literally into § 13-1104(c)(1); rather, upon incorporation into the Maryland tax system, the federal agreement must be taken to mean an agreement with the Comptroller. Because there was no agreement between the Comptroller and Mack, the Comptroller says that incorporated IRC § 6511(c) does not apply. Accordingly, there is no special time limit applicable to Mack’s refund claim, and the general rule stated in IRC § 6511(a) applies.

Here, the longer period is three years from the filing of the 1987 Maryland return on September 13, 1988. Mack filed its claim on March 16, 1993, so that the refund was properly denied under the Comptroller’s construction of IRC § 6511(c)(1). At oral argument Mack conceded that it was reasonable to construe IRC § 6511(a), when incorporated into § 13-1104, to refer to the Maryland return and the Maryland tax. IRC § 6511(a), however, is irrelevant, Mack submits, to its claim.

That claim rises or falls on IRC § 6511(c), specifically addressing a federal assessment extension agreement. If Mack is correct concerning the effect under Maryland law of a federal agreement, then the parties agree that Mack is entitled to the full refund, with interest. It is agreed that under IRC § 6511(c)(2), and regulations interpreting it, the limit on the amount of Mack’s refund claim would equal the total of the tax paid after execution of the federal agreement and the amount paid within three years immediately preceding execution of that agreement. Mack is well within that limita ⁶¹³ tion inasmuch as its estimated tax payments in September and December of 1987 totaled $1,100,000.

In their arguments the parties have addressed the construction of § 13 — 1104(c)(1) from the standpoint of (1) the language of the provision, read in light of the statute as a whole, (2) the legislative history and purpose, and (8) the administrative practice. We shall follow that outline as well. I Section 13 — 1104(c)(1) incorporates “the periods of limitations ... set forth in § 6511 of the Internal Revenue Code,” including the special rule in IRC § 6511(c)(1) which measures the time limit from the