Quantico Realty Co. v. Comptroller of the Treasury

Couch, J., delivered the opinion of the Court. ⁶⁶¹ Benjamin Franklin once wrote, “But in this world nothing can be certain, except death and taxes.” 1 Quantico Realty Company, appellant, has learned the wisdom of Mr. Franklin’s statement when it (Quantico) suffered defeat before the Tax Court and the Baltimore City Court, and will not avoid the inevitability of taxes in this Court. Quantico and the Comptroller, the appellee, proceeded on an agreed statement of facts before the Tax Court. Quantico was engaged in the sale and rental of improved residential real estate. When a purchaser from appellant needed to finance the purchase and the principal amount of the loan exceeded the fair market value of the property, the lending institutions required Quantico to place a required sum of money in an hypothecated savings account with the lending institution as additional security for the loan.

While appellant could not usually draw on this account until the purchaser had paid back to the lender an amount equal to twice the amount hypothecated, it did receive interest on these accounts. During the tax years in issue over one-half of appellant’s capital was tied up in the various hypothecated accounts. Quantico deducted the amount of interest income earned from the hypothecated accounts from its net income 2 in computing its 1971, 1972, 1973 and 1974 Maryland income under the purported authority of former Annot. Code Art. 81, § 280A (c) (4).

The Comptroller disallowed these deductions, determined deficiencies, and made assessments against appellant; an appeal to the Maryland Tax Court ensued which affirmed the assessments. Quantico then appealed to the Baltimore City Court, which upheld the decision of the Tax Court. This appeal followed, in which Quantico raises two questions: “1. Whether the lower Court erred in affirming ⁶⁶² the Tax Court which construed former Sec. 280A (c) (4), Art. 81, Maryland Code Annotated (1975 Repl.

Yol.) so as to deny an exemption from the corporate income tax for interest income earned on hypothecated savings accounts. 2. Whether the lower Court erred in affirming the Tax Court despite the failure of that court to discuss or rule on the issue whether the assessments were improper because the Comptroller of the Treasury issued a private letter ruling to a competitor of Quantico’s which allowed the same exemption that was disallowed to Quantico.” The standard of review of Maryland Tax Court orders is circumscribed; we may only consider whether a reasoning mind reasonably could have reached the factual conclusion which that agency reached. Comptroller v. Diebold, Inc., 279 Md. 401, 407 , 369 A. 2d 77 (1977); Fairchild Hiller Corp. v. Supervisor of Assessments, 267 Md. 519, 521 , 298 A. 2d 148 (1973); Bethlehem Steel Corp. v. Supervisor of Assessments of Baltimore County, 38 Md. App. 543, 545 , 381 A. 2d 1185 (1977). Mindful of our limitations we proceed to a consideration of Quantico’s contention that the Tax Court’s decision was erroneous as a matter of law and was not supported by substantial evidence appearing in the record. 1.

Article 81, § 280A (c) (4), 3 since repealed but applicable for the tax years contested here, provides the battleground for Quantico and the Comptroller. Corporations are subject to taxation on their “net income”, plus certain additions, set forth in subsection (b) of § 280A and certain subtractions, set forth in subsection (c). Quantico has taken the position that the interest it received on its hypothecated savings accounts may be subtracted from its net income under former subsection (c) (4). This subsection provided in pertinent part as follows: “There shall be subtracted from taxable income of ⁶⁶³ such taxpayer the following items to the extent included in federal income: (4) dividend income to the extent included in taxable income and any interest income other than interest earned in the conduct of a business, or loans made under the provisions of Article 58A of this Code, and interest earned on business accounts, notes receivable, and installment contracts.” (Emphasis added.) The Tax Court in considering Quantico’s claimed exemptions cited its opinion in Swarthmore Co. v. Comptroller, aff’d, 38 Md. App. 366 . 381 A. 2d 27 (1977).

Its construction of § 280A (c) (4) is set forth below: “We are not aware of any situation where interest income earned by a profit making corporation would not be earned in the conduct of its business. Accordingly, we are of the opinion that the proper construction of Section 280A (c) (4) can be illustrated as follows: .... (4) dividend income to the extent included in taxable income and any interest income other than interest earned in the conduct of a business, on (1) loans made under the provisions of Article 58A of this Code, (2) and interest earned on business accounts, (3) notes receivable and (4) installment contracts.” The Tax Court concluded that the interest earned by appellant on the hypothecated savings accounts was interest earned under the category of business accounts and, as such, could not be subtracted from federal taxable income (net income) in