Mercantile-Safe Deposit & Trust Co. v. State ex rel. Shaughnessy

Singley, J., delivered the opinion of the Court. Mercantile-Safe Deposit and Trust Company (the Mer-r ⁴⁵⁸ cantile), in its capacity as trustee of a trust estate created by the late Dr. Alexius McGlannan and as executor of his will, is stoutly resisting an effort by the State to enjoy what has been characterized in the Mercantile’s brief as a “second helping” of inheritance taxes. It was the State which accepted a curious turn of events as an invitation to return to the taxpayer’s table. In 1934, Dr. McGlannan transferred certain securities to the Mercantile’s corporate predecessor as trustee, to be held under the terms of an inter vivos deed of trust, revocable during the settlor’s lifetime.

Under the deed, income was to be paid to Dr. McGlannan for life; from and after his death, to his wife for life; from and after the death of the survivor of the settlor and his wife, to their son, Alexius McGlannan, III, for life, and upon the death of the last survivor, the trust assets were to be distributed to the then living children and descendants of deceased children, per stirpes, of Alexius McGlannan, III, and if there were none, the assets were to be divided among such of ten named nephews and nieces of the settlor as were then living. Dr. McGlannan died in 1940 without having revoked his deed of trust. Mrs. McGlannan survived her husband and died in 1943. Alexius McGlannan, III, died in 1967, leaving no descendants surviving.

Within 90 days of Dr. McGlannan’s death in 1940, the trustee had filed in the Orphans’ Court of Baltimore City a petition which recited, in part: “THAT said Alexius McGlannan executed a revocable Deed of Trust to your Petitioner, as Trustee, on January 29, 1934, comprising certain stocks and bonds, to pay the net income to himself for his life, and after his death to pay the net income to his wife, Sally McGlannan, for her life, and upon the death of the survivor of said Settlor and his said wife the net income is directed to be paid to Alexius McGlannan, 3rd, son of said Settlor, for his life, and upon ⁴⁵⁹ the death of the last survivor of said persons the trust fund is tobe divided and distributed to and among the children of said Alexius McGlannan, 3rd, as shall be then living and the descendants then living of any deceased children of his, per stirpes, free, clear and discharged of all trusts; “THAT said Alexius McGlannan was a resident of Baltimore, Maryland, and died on February 25, 1940; “THAT your Petitioner desires to pay the entire amount of Maryland Inheritance Tax on the net value of the trust estate in its hands(Emphasis supplied) and prayed that an order be passed appointing appraisers and fixing the rate of tax. The value of the trust assets was determined to be $256,456.86; the rate of tax, 1%, and the amount of tax, $2,564.57, which amount was paid to the Register of Wills. The rub comes from the fact that Code (1939) Art. 81, § 109 (now Code (1957, 1969 Repl. Vol.) Art. 81, § 149) imposed a tax of 1 % on property passing to a spouse and lineal descendants, while Art. 81, § 110 (now Art. 81, § 150) taxed property passing to collaterals at the rate of Since the clear value (market value after deducting expenses) of the trust assets which passed to the nephews and nieces at the death of Alexius McGlannan, III, was $436,624.94, there was a possible additional tax liability of $32,746.87, before crediting payments of inheritance and estate taxes made in 1940.

Following the death of Alexius McGlannan, III, the trustee instituted an equity proceeding in Baltimore City against the Register of Wills of Baltimore City, the Comptroller of the Treasury of Maryland and Dr. McGlannan’s nine surviving nephews and nieces, seeking something in the nature of declaratory relief, in an effort to achieve a resolution of the problem. The Register and the Comptroller demurred; their demurrers were overruled, and ⁴⁶⁰ the case was transferred to a law court, where the defendants again demurred. This time the demurrers were sustained, and on appeal to us, Mercantile-Safe Deposit & Trust Co. v. Register of Wills, 257 Md. 454, 463 , 263 A. 2d 543 (1970), we remanded the case, without affirmance or reversal, in order that the State might institute a suit at law for the recovery of the inheritance taxes which it claimed to be due. It is from a judgment for $30,182.30 in the State’s favor entered in that case that this appeal has been taken. 1 The Mercantile’s argument is posited on the fact that when Dr. McGlannan died in 1940, there were three sections. of the Maryland Code which might have been applicable to the appraisal of the assets of his trust estate.

At the time of Dr. McGlannan’s death, Code (1939) Art. 81, § 124 provided: “Whenever any life-estate, or interest for a term of years or other interest less than an absolute interest, in trust or otherwise, shall pass to a person, and a contingent or remainder or reversionary interest shall pass to another person, the Orphans’ Court of the County or City in which administration is granted, or any other Court having jurisdiction over the administration or distribution of such property, shall determine, before any distribution thereof shall be authorized, the value of the life-estate, or interest for a term of years, or other interest less than an absolute interest, in accordance with the equity rules of the Supreme Bench of Baltimore City for the valuation of dower interests, and assess the tax against said interest. The tax so ascertained shall be paid within thirty days from the date of such determination. The tax so determined shall he and remain a lien upon such ⁴⁶¹ interest for a period of four years after the date of death of the decedent, in the case of real estate, or from the date of distribution, in the case of personalty. From any order or determination of the Orphans’ Court, or any other Court having jurisdiction, an appeal shall lie to the Court of Appeals by the Register of Wills on behalf of the State, or by any person in interest, to the same extent and in the same time and manner as from other orders of the Orphans’ Court.” This provision remained virtually unchanged except that the valuation of interests less than absolute shall be made in accordance with regulations promulgated under the Internal Revenue Code, and no petition need be filed for the appraisal of interests distributed by a court-approved administration account.

It is now found in Code (1957, 1969 Repl. Vol.) Art. 81, § 160. In 1940, Code (1939) Art. 81, § 125 (now, as substantially revised, Code (1957, 1969 Repl. Vol.) Art. 81, § 161) provided: “Whenever a life-estate, or interest for a term of years, or other interest less than an absolute interest, shall be valued by the Orphans’ Court, or other Court having jurisdiction, as provided in the preceding section, the person entitled to the property after the termination of such estate, by way of contingent interest, remainder or reversion, may apply to the Orphans’ Court, or other Court having jurisdiction, for the valuation of such contingent interest, remainder or reversion.

In making such valuation, the Court shall determine the value of the whole corpus and deduct therefrom the value of the preceding estate or estates, to the end that the tax collected shall equal that which would have been payable, if an absolute interest in such property had passed. The tax so ascertained shall be paid within thirty days from its ascer ⁴⁶² tainment. But if said person entitled to the property after the termination of the preceding estate shall fail to apply to the Orphans’ Court within a reasonable time after the valuation of the preceding estate, or to pay the tax so assessed after application within thirty days from the date of such determination, then such person shall at the time when the same vests in possession at the termination of the preceding estate, pay a tax on the whole value thereof, without deduction of the tax or taxes previously paid. Upon the termination of said preceding estate, the Orphans’ Court, or other Court having jurisdiction, shall value the property as of the date when the same vests in possession, and assess the tax thereon.

The tax so ascertained shall be and remain a lien upon said property for a period of four years from the date when the same vests in possession. Any order or determination under this section shall be subject to the same right of appeal as provided in the last preceding section.” As we shall see, Art. 81, § 161 was significantly amended in 1966. The third provision was found in Code (1939) Art. 81, § 133 (which now appears without significant change as Code (1957, 1969 Repl. Vol.) Art. 81, § 169) : “In all cases where estates or any interest therein pass, and there is no formal administration subject to the jurisdiction of any court, it shall be the duty of every trustee or other person making distribution of any property passing subject to the inheritance tax imposed by this sub-title, to file in the Orphans’ Court of the county or city where the decedent had his or her residence at the time of his or her death, or in case of real estate, in the Orphans’ Court of the county or city in which the real estate is ⁴⁶³ situated, within ninety (90) days after the death of such person, a full and complete inventory of the property passing subject to the inheritance tax imposed by this sub-title and which said trustee or other person making distribution thereof is about to distribute; and in all such cases where any property passes subject to the taxes imposed by this sub-title, and there is no trustee or other person to make distribution thereof, it shall be the duty of the person receiving such estate or any interest therein, to file the inventory within the time and in the manner hereinabove provided.

Upon the filing of the inventory as required by this section, the Orphans’ Court shall appoint at least two appraisers to value the property listed in any such inventory for the purpose of determining the amount of tax due and payable hereunder; and the tax so ascertained to be due shall become payable at once to the Register of Wills, for the nonpayment of which he is authorized to institute suit for and on behalf of the State of Maryland in any court of competent jurisdiction.” By Ch. 696 of the Laws of 1966, Code (1957) Art. 81, § 161 (formerly Code (1939) Art. 81, § 125) was repealed and reenacted with amendments and may now be found in Code (1957, 1969 Repl. Vol.) Art. 81, § 161. The essence of the amendment was to provide first that: “(b) In the event any interest shall ultimately vest in possession in someone other than the person by or on whose behalf application may have been made (and the tax paid thereon) under subsection (a) hereof, such person shall pay a tax according to his relationship to the original decedent and based upon the value of the property or interest therein at the time when the same vests in possession; provided, how ⁴⁶⁴ ever, that the tax or taxes previously paid with respect to such property shall be credited to such new tax and only the balance shall be assessed.” and second that: “this Act shall take effect according to its terms June 1, 1966, regardless of the date of death of the decedent.” See Mercantile-Safe Deposit & Trust Co. v. Register of Wills, supra, 257 Md. at 456-57 . The purpose of § 161 (formerly § 125) is to give a vested or contingent remainderman an option: once the estate for life or the estate for years has been valued, and the tax paid, as provided by § 160 (formerly § 124) the remainderman may, within a reasonable time, prepay the portion of the tax attributable to his interest, at the appropriate rate on the then value of the entire interest, taking credit for the tax paid by the life tenant or tenant for years.

Alternatively, the remainderman may elect not to take advantage of § 161 and to postpone the payment of the tax until it is due when his interest comes into possession, if vested, or vests in interest and possession, if contingent. If the remainderman elects not to prepay, whether the interest is vested or contingent, he pays a tax on the value of the interest at the time it comes into possession, Lilly v. State, 156 Md. 94, 103 , 143 A. 661 (1928). For a careful discussion of this procedure, see Shaughnessy v. Perlman, 198 Md. 619 , 85 A. 2d 38 (1951). It is a fair surmise that Ch. 696 of the Laws of 1966 was enacted in order to harmonize three opinions of the Attorney General: 34 Op.

Att’y Gen. 259 (1949), 43 Op. Att’y Gen. 355 (1958) and 51 Op. Att’y Gen. 204 (1966), all dealing with the taxation of life estates and remainders under the provisions of Art. 81, § 160 and § 161. The first ruled that where it is impossible to determine which of two or more vested or contingent remain ⁴⁶⁵ der