Comptroller of the Treasury v. Taylor

Panel: Wright, Leahy, Shaw Geter, JJ. Shaw Geter, J. ¹⁴¹ This case arises from a judicial review of the assessment of estate taxes owed by the Estate of Margaret Beale Taylor in the Circuit Court for Washington County. Appellee Richard Reeves Taylor, the estate's personal representative, in determining the amount of tax due, subtracted the value ⁸⁰¹ of Mrs. Taylor's interest in a marital trust created by her husband from the total value of her Maryland estate tax valuation. The Comptroller of the Treasury, appellant, disallowed the exclusion, resulting in an increase in the Estate's tax liability.

The ¹⁴² Comptroller also imposed penalties for the interest accrued and late filing. Appellee petitioned the Tax Court, seeking reversal and an abatement of the assessments. The Tax Court affirmed the Comptroller's inclusion of the value of the interest in the marital trust and the assessments of interest, but waived and abated the late payment penalty. Appellee filed a timely petition for judicial review in the circuit court, and appellant filed a cross-petition.

After a hearing, the circuit court reversed the Tax Court's assessment of taxes and interest against the estate. We have consolidated appellant's questions presented 1 as follows: 1. Does Maryland have the statutory or constitutional authority to include the value of Margaret Beale Taylor's interest in the trust transferred to her under her predeceased husband's will - the "QTIP" trust - in her Maryland estate, and therefore subject the trust to Maryland estate tax? 2. Did the Tax Court improperly waive a late-filing penalty based upon the conclusion that the taxpayer "demonstrated with affirmative evidence that reasonable cause exists" for waiver of the penalty?

For the reasons set forth below, we shall affirm the judgment of the circuit court. ¹⁴³ BACKGROUND The trust in question was created by the will of John Wilson Taylor, Margaret Beale Taylor's husband, who predeceased her on December 1, 1989. At the time of Mr. Taylor's death, the Taylors were residents of Wayne County, Michigan. Mr. Taylor died with a valid will, which directed the creation of a "residuary marital trust," valued on his date of death at $2,299,893.20. His will further directed that all of the net income from the residuary marital trust be paid to Mrs. Taylor at least annually for and during her lifetime.

Upon his death, Mr. Taylor's Estate filed a timely federal tax return with the Internal Revenue Service, in which his 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 QTIP until the death of the surviving spouse. The marital deduction is allowed for the entire value of the QTIP. Following Mr. Taylor's death, Mrs. Taylor continued to reside in Michigan until 1993, when she moved to Washington County, Maryland.

She died testate on January 15, 2013. ⁸⁰² Appellee, the personal representative of Mrs. Taylor's Estate (the "Estate" or "appellee"), Richard Reeves Taylor, filed a federal Estate (and Generation-Skipping Transfer) Tax Return with the Internal Revenue Service, which included Mrs. Taylor's terminable life interest in the marital trust. On the federal estate tax return, appellee reported an estate value of $5,582,245. Appellee also filed a Maryland estate tax return, in which the personal representative excluded the value of the marital trust, decreasing the reported value of Mrs. Taylor's federal gross estate by $4,108,048.02. Appellee explained his deduction of Mrs. 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) of the Maryland Tax-General Code Annotated, the marital trust created under the Last Will and Testament of decedent's deceased spouse, ¹⁴⁴ 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 Taylor's Estate Maryland estate tax return, the Comptroller of the Treasury (the "Comptroller" or "appellant"), disallowed the claimed exclusion of Mrs. 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 appellant a Deficiency Notice, which added $406,752.32 in taxes, as well as additional interest charges and penalties, including a late payment penalty of $40,675.03.

The personal representative thereafter petitioned the Tax Court, seeking reversal and abatement of the assessments and penalties. After a trial on May 6, 2015, the Tax Court affirmed the estate tax and interest assessments in a written decision dated September 3, 2015. The Tax Court found that "the Maryland estate tax is directly linked to the federal estate tax, and completely integrated with it," specifically "by adopting...the federal definition of 'gross estate,' " citing § 7-301(b) of the Maryland Tax-General Code Annotated. "There is no statute or statutory provision that authorizes [appellant] to subtract the value of Mrs. Taylor's QTIP property from her federal gross estate for Maryland estate tax purposes." Taylor filed a timely petition for judicial review to the Circuit Court for Washington County.

The Comptroller responded to the petition and filed a cross-petition for review of the Tax Court's decision to abate the late-payment penalty. The Comptroller argued there was no final appealable order ¹⁴⁵ because the Tax Court had failed to respond to the propriety of the assessment of a late fee. Appellee thereafter filed a Motion for Clarification of the Memorandum and Order. The Tax Court, in response, amended its May 3 memorandum, and affirmed the additional estate tax and assessed interest, but waived the 10% late payment penalty.

After a hearing, the circuit court reversed the Tax Court's assessment of taxes and interest against the Estate. This appeal followed. ⁸⁰³ DISCUSSION I. The Comptroller does not have the authority to tax the value of the QTIP. The Maryland Tax Court is "an adjudicatory administrative agency," and, thus, "decisions of the Tax Court receive the same judicial review as other administrative agencies." Gore Enterprise Holdings, Inc. v. Comptroller of Treasury , 437 Md. 492 , 503, 87 A.3d 1263 (2014) (internal citations and quotations omitted). "In this context, our review looks through the circuit court's...decisions...and evaluates the decision of the agency." Id.

(internal citations and quotations omitted). "A court's role in reviewing an administrative agency adjudicatory decision is narrow; it is limited to determining if there is substantial evidence in the record as a whole to support the agency's findings and conclusions, and to determine if the administrative decision is premised upon an erroneous conclusion of law." Maryland Aviation Admin. v. Noland , 386 Md. 556 , 571, 873 A.2d 1145 (2005) (internal citations and quotations omitted). "We cannot uphold the Tax Court's decision on grounds other than the findings and reasons set forth by" the Tax Court. Gore , 437 Md. at 503 , 87 A.3d 1263 (internal citations and quotations omitted).

The Tax Court in the case sub judice found that § 7-309(b)(6) of the Maryland Tax-General Code Annotated does not "prohibi[t] the Comptroller from assessing an estate tax deficiency" for a QTIP for which no election was made on a ¹⁴⁶ Maryland tax return. It held that "the Maryland estate tax is directly linked to the federal estate tax, and completely integrated with it." "This linkage and integration is accomplished by adopting, at the outset, the federal definition of 'gross estate.' " The Court continued: [T]he Maryland 'estate' is not restricted to the federal gross estate and is augmented by property not otherwise included in the federal gross estate. 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. The Comptroller argues the Tax Court correctly found the value of the QTIP should be included in the value of Mrs. Taylor's estate, and that Maryland had the authority to tax the transfer of the QTIP.

It argues that "[u]nder the plain language of § 7-301, Mrs. Taylor's Maryland estate included the same property as her federal gross estate, including the assets contained in the QTIP marital trust." They contend the language in § 7-309(b) of the Maryland Tax-General Code is not intended to limit the Comptroller's ability to tax the QTIP, but to provide an opportunity for a first-dying spouse to benefit from the marital deduction if their estate fell below the federal filing threshold. "Because in such a case there would have been no federal QTIP election by the first-dying spouse, the QTIP would not be included in the surviving spouse's federal gross estate, and § 7-309(b)(6)(i) thus requires augmentation of the Maryland estate of the surviving spouse to account for the value of the Maryland QTIP and to ensure that the Estate does not receive a windfall." At oral argument, appellant focused its argument on the idea that they were taxing the transfer of Mrs. Taylor's interest in the income of the QTIP at the time of her death, and that therefore, Maryland did have the authority to include the value of the QTIP trust. The Comptroller asserted Maryland had "protected" Mrs. Taylor's right to receive the income from the trust while she lived in Maryland, and that, at ⁸⁰⁴ her death, the right ¹⁴⁷ to receive that income "transferred" to the owners of the trust. Appellee, conversely, argues that Maryland lacks the authority to tax the QTIP because there was no transfer of assets at Mrs. Taylor's death.

He argues that, although § 7-301(b) includes a "federal gross estate," and thus, a QTIP, in the definition of "estate," the QTIP is not included in the definition of the "Maryland estate" under § 7-301(d). As a result, Maryland lacks the "power to subject [it] to the Maryland estate tax." Estate taxes are taxes on the transmission of property by the decedent, and, therefore, appellee argues Maryland would only have the "power to tax" the QTIP if those assets were transferred upon Mrs. Taylor's death. "Because both legal and equitable title to the assets of the QTIP trust were transferred at the time of Mr. Taylor's death in Michigan when the Trust was created, there was nothing for Maryland to tax when Mrs. Taylor died in Maryland 24 years later." "Mrs. Taylor did not own or have any rights to the assets comprising the QTIP." Section 7-302 of the Maryland Tax-General Code Annotated, "Tax Imposed on Transfer of Estate," states that "a tax is imposed on the transfer of the Maryland estate of each decedent who, at the time of death, was: (1) a resident of