Page v. Comptroller of the Treasury

Singley, J., delivered the opinion of the Court. Stripped of its not inconsiderable complexities, this case turns on the question whether the State may collect interest on that portion of the Maryland estate tax payable by a decedent’s estate which was not paid until final distribution of the estate, at a time more than 15 months after the death of the decedent.* 1 ⁷²⁷ Alice Carter Middendorf died domiciled in Baltimore County, Maryland on 27 August 1967, leaving an estate in excess of $2,500,000.00. Her will, which named her husband, J. William Middendorf, Jr., and Charles G. Page as executors, was admitted to probate. On 22 November 1968, the executors filed a timely federal estate tax return which developed a gross tax of $277,875.00; claimed a credit for State death taxes of $29,321.66, 2 and recognized a net federal estate tax liability of $248,553.34, which was paid when the return was filed.

Three days later, on 25 November, the executors filed a Maryland Estate Tax Return with the Comptroller of the Treasury. This developed a gross Maryland estate tax liability of $29,321.66 (identical with the amount of credit for State death taxes claimed on the federal return); credit was taken for Maryland collateral inheritance tax and Maryland direct inheritance tax which had been paid, in amounts of $405.40 and $124.00 respectively, 3 as well as for an additional Maryland direct inheritance tax in the amount of $17,895.26 which the executors estimated would be paid upon final distribution of the estate. It can be seen that the aggregate amount taken as credits against the tax liability of $29,321.66 totalled $18,424.66, reducing the net amount of the Maryland estate tax to $10,897.00, which was paid when the return was filed. On final audit of the federal estate tax return, the gross federal estate tax was increased from $277,875.00 to $283,079.70, causing a corresponding increase in the credit for State death taxes from $29,321.66 to $30,109.36.

An additional federal estate tax of $4,417.00 was then paid by the executors together with interest of $446.78. ⁷²⁸ Upon completion of the audit of the federal estate tax return, the executors were then in a position to make final distribution of the estate, which would generate the proof of payment of State death taxes required by the District Director of Internal Revenue. 4 Accordingly, they then filed an amended Maryland Estate Tax Return, reflecting the increase in the State tax credit from the original figure of $29,321.66 to $30,109.36; claimed allowance for Maryland collateral inheritance taxes previously paid in the amount of $405.40 and for direct inheritance taxes in the amount of $18,656.56, which by then had been paid, as well as the Maryland estate tax payment of $10,897.00 made when the return had originally been filed. There then remained a deficiency of $150.40, which was paid together with two years’ interest at 6%, or $18.05. The Comptroller’s response was something less than enthusiastic. Apparently relying on 54 Op.

Att’y Gen. 438 (1969), and 44 Op. Att’y Gen. 382 (1959), he countered with a suit against the executors in the Baltimore County District Court for the recovery of $2,140.50, being 6% interest on $18,424.66 — the aggregate of credits claimed against the original Maryland estate tax liability — from 27 November 1968 to 30 October 1970, the date when the amended Maryland Estate Tax Return showing a Maryland estate tax balance of $150.40 due was filed and thereupon paid. The case was transferred to the Circuit Court for Baltimore County, where the executors pleaded the general issue. While the suit was pending on 6 March 1973, Mr. Middendorf died.

On suggestion of Mr. Middendorf’s death, Charles G. Page and The Equitable Trust Company, his personal representatives, were substituted as co-defendants. The case was tried by the court, without a jury, on a stipulation of facts from which our narrative is largely derived. After a consideration of the comprehensive ⁷²⁹ memoranda submitted by the parties, judgment was entered in favor of the Comptroller for $2,140.50 and costs. Mrs. Middendorf’s estate has appealed.

A maximum 80% credit for State death taxes was first allowed against the federal estate tax by Section 301(b) of the Revenue Act of 1926, 44 Stat. 9 , 70. No effort was made by the General Assembly to take advantage of this early example of revenue sharing until the enactment of Chapter 275 of the Laws of 1929, see Cross v. Downes, 164 Md. 216, 218-19 , 164 A. 758 -59 (1933), apparently because the then Governor, Albert C. Ritchie, regarded the idea of the credit as an interference with his concept of States’ Rights. 5 Whatever the reason for the delay, Maryland has since 1929 imposed an estate tax, now found in Maryland Code (1957, 1972 Repl. Vol.) Art. 62A, § 2, which is coordinated with the federal estate tax law. In simple terms, a tax is imposed in an amount by which the aggregate of inheritance taxes paid to the State incident to the settlement of a decedent’s estate is less than the credit allowed by the Internal Revenue Code.

Article 62A, § 2 provides: “In addition to the tax and/or taxes imposed by Article 81, a ‘Maryland estate tax’ is hereby imposed upon the transfer of the ‘Maryland estate’ of every ‘decedent,’ the amount of which ‘Maryland estate tax’ shall be equal to the extent, if any, of the excess of the ‘credit’ over the aggregate of ‘State taxes’ paid by or out of the ‘Maryland estate’ of the ‘decedent’ or any part thereof, provided, however, that such ‘Maryland estate tax’ hereby imposed shall in no case exceed the extent to which its payment will effect a saving or diminution in the amount of the ‘federal estate tax’ payable by or out of the ‘Maryland estate’ of the ‘decedent’ had this article not been enacted.” Although the thinking behind the legislative scheme can ⁷³⁰ be simply stated, the practical application of the law is fraught with complexity, see Page, Maryland Death Taxes, 25 Md. L. Rev. 89 , 104-10 (1965); Eney, Death and Taxes — Maryland Style, 17 Md. L. Rev. 101 , 111-12 (1957). In the administration of substantial estates, it is customary to delay distribution of a major portion of the assets until the federal estate tax liability is finally determined, which may come a year or more after the date of death. Anticipating our decision in Comptroller v. Davidson, 234 Md. 269 , 199 A. 2d 360 (1964) (holding that in the event of an overpayment of Maryland estate tax, any excess was refundable with interest), it was the practice to pay the Maryland estate tax within the prescribed period of 15 months from death, and later seek a refund to the extent that the amount of Maryland estate taxes was reduced by inheritance taxes paid at the time of final distribution. 6 Immediately following the decision in Davidson, supra, Chapter 794 of the Laws of 1965 amended Article 62A, § 5 to comport with the contention made by the Comptroller in that case: that interest was payable only on a refund of Maryland estate tax occasioned by a reduction of federal estate tax liability, and not on a refund resulting from the subsequent payment of inheritance taxes. As amended, Code (1957, 1972 Repl.

Vol., 1973 Cum. Supp.) Art. 62A, § 5 now provides: “If the amount of ‘federal estate tax’ shall, upon the final determination of the same, be increased or decreased as affecting an ‘estate’ the transfer of any part whereof is taxable hereunder subsequent to the payment of the ‘Maryland estate tax,’ the said ‘Maryland estate tax’ imposed shall be changed accordingly. Any additional ‘Maryland estate tax’ shall be payable at the same time or times at which the additional ‘federal estate tax’ is payable and ⁷³¹ shall bear interest thereon at the rate of 6% per annum from fifteen months after the date of death of the ‘decedent’ to the date of payment of such additional ‘Maryland estate tax.’ The rate of interest shall be reduced to agree with a reduced federal interest rate. In the event that there shall be a decrease in said ‘federal estate tax,’ said ‘executor’ shall file with the Comptroller of the State of Maryland an affidavit in such form as is prescribed by said Comptroller.

Said Comptroller shall thereupon cause to be paid to said ‘executor’ [from the fund retained by him, as provided in § 4 of this article,] the amount of refund found to be due, together with interest thereon at the rate of six per centum (6%) from the date of payment of the ‘Maryland estate tax.’ Refund shall be paid by the Comptroller because of payment of Maryland inheritance taxes subsequent to the payment or payments of the ‘Maryland estate tax’ or because