Register of Wills for Baltimore County v. Arrowsmith

BATTAGLIA, Judge. We issued a writ of certiorari in this case to determine whether Maryland’s statute of limitations with respect to filing a claim for refund of inheritance taxes was rendered inapplicable by the Treaty ratified pursuant to the Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Estates, Inheritance, and Gifts. 1 I. BACKGROUND A. Facts This controversy arose in connection with the estate of Harold Arrowsmith (hereinafter “decedent”), who died intestate in Germany on August 15, 1989. The decedent was bom, raised, and educated in Baltimore, Maryland and received a degree from the Johns Hopkins University in 1950. The decedent continued to live in Maryland until 1974 when he sold his house and put his furniture in storage.

He briefly resided in an apartment-hotel in Washington, D.C., but moved to Germany in 1975. Although the decedent remained a U.S. ²⁴¹ citizen his entire life, filed U.S. income tax returns, and maintained a Maryland driver’s license, he returned only occasionally to the United States to present the results of his research and writings. The decedent’s assets in Maryland consisted almost entirely of intangible personal property, specifically publicly-traded securities worth nearly $30 million, held at the Mercantile Safe Deposit and Trust Company. 2 The decedent’s heirs 3 initially filed a petition for probate in Baltimore County in September 1989, asserting that because “the decedent was domiciled in Maryland and a majority of his assets are located in this state,” the Register of Wills for Baltimore County (hereinafter “the Register”) was the proper office in which to file the petition. 4 On May 14, 1990, the appellees paid $2,000,000 to the Register in inheritance taxes. 5 About that time, the estate ²⁴² also paid Maryland and Federal estate taxes, in the amount of $1,957,164 and $11,010,462, respectively. 6 Concurrent with the administration of the decedent’s estate in the United States, parallel probate proceedings were initiated in Germany. Unable to ascertain the decedent’s heirs, the German tax authorities appointed a curator to administer his estate under German law.

Concluding that at the time of his death the decedent was domiciled in Germany, the German tax authorities asserted that Germany was entitled to the inheritance taxes on his entire worldwide estate. The total German tax assessed was approximately $17,511,145. The German curator turned over all of the decedent’s assets ²⁴³ located in Germany, 7 totaling $1,022,355, to the German tax authorities as partial payment of the assessed taxes, leaving an unpaid German inheritance tax balance of approximately $16,488,790, exclusive of interest and administrative penalties for failure to file timely returns or make timely payment. To avoid being subjected to double taxation, and pursuant to the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on Estates, Inheritances and Gifts (the “Treaty”), the heirs sought relief from the Competent Authority of the United States (hereinafter, “CAUS”) 8 in resolving the dispute as to which country death taxes should be requited.

On November 9, 1995, the CAUS, agreeing with the position taken by the Competent Authority of Germany, (hereinafter, “CAG”) 9 declared that the decedent was domiciled in Germany at the time of his death, and that therefore Germany had the primary right to tax the estate’s worldwide assets under the Treaty. Armed with the mutual agreement of the Competent Authorities, the heirs requested a refund of the federal estate taxes. Pursuant to the agreement, the United States Internal Revenue Service (“IRS”) ultimately agreed to make the refund payable directly to the German government. On November 9, 1998, three years after the determination of domicile by Mutual Agreement, the heirs filed for refunds of the Maryland estate and inheritance taxes.

The Maryland ²⁴⁴ Comptroller of the Treasury granted the heirs’ request for refund of the state estate tax in the amount of $1,717,578.61. 10 The Register, however, denied the request for refund because it was not filed within the statute of limitations prescribed by Tax-General Article 13-1104(a). 11 Because the Register’s denial and the subsequent litigation was based on the statute of limitations, the Register never reached the merits of the appellees’ claim, i.e. whether the heirs were entitled to a refund of the inheritance tax. B. The Treaty A brief explanation of the objectives of the Convention Between the United States of American and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion, and the design of the resulting Estate and Gift Tax Treaty [hereinafter “Treaty”] is both prudent — as the decisions of the Maryland Tax Court and the Circuit Court for Baltimore County rest upon interpretations of this bilateral Treaty — and necessary to ensure ²⁴⁵ the faithful comprehension of the Treaty provisions. The United States and Germany [hereinafter, collectively “the Contracting States”] entered into the Convention for the Avoidance of Double Taxation on December 3, 1980, and the resulting Treaty was ratified by the Senate on June 27, 1986. The express purpose of the Treaty was to prevent the double taxation of the estates of citizens or residents of the two countries.

See Treaty, Preamble. Double taxation arises because the definition of “domicile” differs in each country, making it possible for an individual to be deemed a domiciliary of both the United States and Germany. See Report of the Senate Committee on Foreign Relations on Treaty Doc. No. 97-1 at 2, 97th Cong., 1st Sess.

(Nov. 10, 1981) [hereinafter “Senate Treaty Doc. No. 97-1”]. An individual is considered domiciled in the United States if the person is “a resident or citizen thereof’ and is considered domiciled in Germany if that person has a “domicile” or “habitual abode” there. See Treaty, Art. 4.

Thus, in circumstances such as those before us today, a person can be a citizen of the United States but have an habitual abode in Germany, and each country could rightfully declare itself the domicile. The Treaty addresses this possibility by outlining a hierarchy of considerations which assist the nations in settling potential disputes as to which country has primary taxing authority on a decedent’s estate. Because both the heirs and the Register have now stipulated that-under the terms of the Treaty — the decedent was domiciled in Germany at the time of his death, we will forego further discussion of these particular provisions. The Treaty specifically discusses the taxable status of certain real or tangible properties, namely immovable property (Article 5), business property of a permanent establishment (Article 6), ships and aircraft (Article 7), and interest in partnerships (Article 8).

Because the disputed property involved in the present case does not fall into any of these categories, we will avoid the exercise of such partitioning and simply refer to these properties in general terms, as “itemized property.” When the property in dispute is not “itemized ²⁴⁶ property” under the Treaty, then, pursuant to Article 9, it is subject to taxation in the Contracting State in which the decedent is declared domiciled. See Treaty, Art. 9. Thus, as between the two countries, Germany had the primary right to tax the decedent’s worldwide assets. That Germany is declared the primary taxing jurisdiction, however, does not preclude the United States of America from taxing the estate in accordance with its laws.

The authority granted to the “domiciliary” country in Article 9 is not exclusive. Article 9 is expressly limited by the provisions in Article 11, which devise a system of “credits” so that when both countries rightfully tax a decedent’s estate, double taxation is avoided by requiring one country to provide a credit against the tax calculated in the other. 12 The Treaty details circumstances under which one country is obligated to furnish a credit against the tax calculated. Most pertinent to the case at hand, the Treaty explicitly provides that the credits allowed by Germany must include taxes levied by political subdivisions, e.g. Maryland.

See Treaty, Art. 11(4). While the provision appears to ordain such a credit only with respect to “itemized property,” 13 it is worthy of note that the Contract ²⁴⁷ ing States were conscious of the taxing authority of political subdivisions at the time the Treaty was drafted. If any difficulties arise in applying the credit system, the Treaty requires resolution by the Competent Authorities under Article 13. See Treaty, Art. 11(5).

Under Article 13, the Competent Authorities of the Contracting States are given broad authority to resolve, by Mutual Agreement, “any difficulties or doubts” which arise when interpreting or applying the Treaty. See Treaty, Art. 13(3). The Competent Authorities may also consult for cases or circumstances not explicitly covered by the Treaty. Id.

Therefore, any person, believing that the actions of the Contracting States result in double taxation, may present his or her case to the Competent Authorities for review and the Competent Authorities “shall endeavor ... to resolve the case by mutual agreement.” See Treaty, Art. 13(2). Finally, the Treaty provides that, “[i]n the event that the competent authorities reach such an agreement, taxes shall be imposed and, notwithstanding any procedural rule (including statutes of limitations) applicable under the law of either Contracting State, refund or credit of taxes shall be allowed ...” See Treaty, Art. 13(5). C. Legal Proceedings After the Register’s denial of the refund request, the heirs noted a timely appeal to the Maryland Tax Court, presenting two issues for consideration by the Tax Court: whether the Treaty preempted the Maryland statute of limitations, and whether the heirs were entitled to a refund of the inheritance tax on the grounds that the Competent Authorities of the United States and Germany agreed that the decedent was not domiciled in the United States at the time of his death, and hence, according to appellees, no Maryland inheritance taxes were ever owed. The Tax Court affirmed the Register’s ²⁴⁸ denial, concluding that the provisions of the Treaty are binding on the U.S. Government but not its political subdivisions, and therefore, does not apply to state inheritance taxes and statutes of limitations therein.

The heirs appealed to the Circuit Court for Baltimore County, Case No. 03-C-0-000273. The Circuit Court reversed the Tax Court and ruled that Article 13, paragraph 5 of the Treaty, which provides that “[i]n the event that the competent authorities reach such a [mutual] agreement, taxes shall be imposed and, notwithstanding any procedural rule (including statute of limitations) applicable under the law of either Contracting State, refund or credit of taxes shall be allowed by the Contracting States in accordance with such agreement,” applies to political subdivisions of the United States as well. See Treaty, Art. 13. The Circuit Court maintained that “[s]ince the drafters recognized, in Article 11, that credits by Germany should be allowed for taxes paid into either our federal or state coffers, it necessarily follows that the Mutual Agreement Procedure in Article 13 was not intended to relate only to actions of the United States Government that result in double taxation.” Concluding that the heirs could not avoid double taxation by obtaining an Article 11 credit from Germany because intangible assets were not specifically mentioned in the Article 11 credit system, the Circuit Court ordered the Register to approve the refund claim.

The Register appealed to the Court of Special Appeals, and we issued a writ of certiorari, on our own motion, to resolve this conflict.

II

STANDARD OF REVIEW Our review of an order by the Maryland Tax Court, an administrative agency, is “under no statutory constraints ... [when] a Tax Court order ... is premised solely upon an erroneous conclusion of law.” Supervisor of Assessments of Baltimore County v. Keeler, 362 Md. 198, 207 , 764 A.2d 821, 826 (2001) (quoting Ramsay, Scarlett & Co. v. Comptroller of the Treasury, 302 Md. 825, 834 , 490 A.2d 1296, 1301 (1985)); ²⁴⁹ see Maryland Code, § 13-532(a) of the Tax General Article (stating that “[a] final order of the Tax Court is subject to judicial review as provided for contested cases in §§ 10-222 and 10-223 of the State Government Article”). The Annotated Code of Maryland State Government Article instructs that a court may reverse administrative decisions where such a decision is affected by an error of law. See Maryland Code, § 10-222(h)(3)(iv) of the State Government Article (1984, 1999 Repl.Vol.). Where the Tax Court’s order is based on a factual determination, however, the reviewing court may reverse only if the findings and conclusions are unsupported by substantial evidence in the record.

See Comptroller of the Treasury v. Disclosure, Inc. 340 Md. 675, 683 , 667 A.2d 910, 914 (1995). The interpretation of an international treaty and specifically, the treaty’s application to conflicting state law, are inherently issues of law, and thus, as is consistent with our review for all questions of law, we review the order and judgment de novo. See State Dep’t of Assessments and Taxation v. Consumer Programs, Inc., 331 Md. 68, 72 , 626 A.2d 360, 362 (1993) (stating that when an agency “erroneously determines or erroneously applies the law,” a reviewing court is authorized to reverse that decision).

III

DISCUSSION A. Plain Meaning Interpretation As the “Constitution and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby ...” there is no question that state courts are obligated to obey and respect treaties made under such authority. See U.S. Const, art. VI, cl. 2. Similar to statutory interpretation cases, adherence to the text of a treaty is the primary objective in interpreting the rights and duties therein.

See Maximov v. United States, 373 ²⁵⁰ U.S. 49, 54, 83 S.Ct. 1054, 1057 , 10 L.Ed.2d 184, 188 (1963) (construing a double taxation treaty with Great Britain and stating that “it is particularly inappropriate for a court to sanction a deviation from the clear import of a solemn treaty between this Nation and a foreign sovereign, when, as here, there is no indication that application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectations of its signatories”). The interpreter may look not only to the text of the treaty but to “the context in which the written words are used” to give sensible meaning to the treaty provisions. See Air France v. Saks, 470 U.S. 392, 397 , 105 S.Ct. 1338, 1341 , 84 L.Ed.2d 289, 295 (1985). In the case presently before us, the plain meaning of the Treaty text compels the conclusion that the Treaty acts as a limitation on federal taxing authorities and not on the states.

Article 2 of the Treaty, entitled “Taxes Covered” expressly provides: 1. The existing taxes to which this Convention shall apply are: a) In the case of the United States of America: The Federal estate tax and the Federal gift tax, including the tax on generation-skipping transfers; b) In the case of the Federal Republic of Germany: the inheritance and gift tax. See Treaty, Art. 2 (emphasis added). Appellees argue that the scope of the Treaty must necessarily encompass state as well as federal taxes because viewed otherwise, the express purpose of the Treaty — to avoid double taxation — would be defeated.

Presently limiting our review to the “plain language” of the Treaty, we find two problems with appellees’ theory. First, the Treaty explicitly considers the potential for taxation by “political subdivisions” of the United States when discussing the credit system in Article 11, paragraph 4: “The credits allowed by the Federal Republic of Germany according to the provisions of paragraph 3 shall include taxes levied by political subdivision of the United States of America.” Treaty, Art. 11(4) (emphasis ²⁵¹ added). Use of the term “political subdivision” demonstrates that the drafters were clearly cognizant of the double taxation issues that might arise as a result of estate taxation imposed during state probate proceedings. Had the drafters intended the Treaty to “necessarily” apply to state estate and inheritance taxes, there would be no need for a separate provision that unequivocally refers to the credits afforded for state taxation.

Just as we reprehend rendering portions of statutes surplusage, see e.g. Sinai Hospital of Baltimore, Inc. v. Dep’t of Employment and Training, 309 Md. 28, 39-40 , 522 A.2d 382, 388 (1987), so too do we find it beyond our proper judicial capacity to render provisions of Federal treaties meaningless by an interpretation which would fail to give effect to all provisions absolutely. The Treaty, as viewed through the lenses of the appellees, would be riddled with redundancy: Paragraph (3) of Article 11 provides that Germany shall allow credit for taxes imposed by the United States on “itemized property.” If taxes imposed “by the United States” necessarily encompassed taxes imposed by the political subdivisions, it would be senseless to include a distinct provision which directs Germany to allow credit for taxes levied by the political subdivisions on “itemized property” as well. Second, the purpose of the Treaty is not eviscerated by virtue of state taxation of non — “itemized property” — e.g. the intangible assets taxed in this case. 14 In the event that a ²⁵² credit is not allowed by an express provision, the Treaty directs the Competent Authorities to consult for the purpose of avoiding double taxation.

See Treaty, Art. 13(3). Contrary to what the appellees argue, the Treaty does not mandate that the political subdivisions forbear state probate proceedings in the event that a credit is not allowed; rather, the Treaty requires convergence of the Competent Authorities to endeav- or to resolve these cases. See Treaty, Art. 13(3). B. Extratextual Materials: Report by the Senate Committee on Foreign Relations The President has the “Power ... to make Treaties,” U.S. Const., art.

II, § 2, cl.2, but in order for a treaty to become the supreme law of the land, it must receive the “Advice and Consent of the Senate ... provided two thirds of the Senators present concur.” Id. The Senate may lawfully condition its advice and consent on the adoption of any number of reservations, declarations, or interpretations. See United States v. Stuart, 489 U.S. 353, 368 , 109 S.Ct. 1183, 1192 , 103 L.Ed.2d 388, 406 (1989); see also Restatement (Third) of Foreign Relations Law of the United States § 313, comment (g) (1987). With respect to the Treaty under scrutiny today, the Senate Committee on Foreign Relations provided an express declaration of understanding that is supportive of this Court’s conclusion. 15 In explaining Article 2 of ²⁵³ the Treaty (the “Taxes Covered” provision), the Senate stated, “[a]s is generally true of other U.S. estate tax treaties, the proposed treaty does not apply to death or gift taxes imposed by state or local governments.” See Senate Treaty Doc.

No. 97-1, at 6 (emphasis added). The Senate continued, “[i]n determining the amount of credit to allow, Germany -will allow a credit for taxes imposed by political subdivisions of the United States. Thus, although state inheritance and gift taxes are not covered by the proposed treaty, Germany has agreed to permit a credit against its taxes for state taxes.” Id. at 12 (emphasis added). Thus, not only does a textual reading of the Treaty clearly indicate that it exclusively applies to Federal death taxes, but the Senate’s express language, e.g. “the proposed treaty does not apply to ... taxes imposed by state or local governments,” impedes the ability to put forth any rational challenge to such application.

C. The Court of Appeals of Maryland Rarely has this Court had occasion to review the impact of international treaties on state probate matters. In fact, we must venture back to 1940, and prior to that, 1919, to reveal precedent which may provide a framework for our review today. On both of these occasions, we considered the effect of foreign treaties on state probate matters (namely, the appointment of administrators for estates of foreign citizens). In Schneider v. Hawkins, 179 Md. 21 , 16 A.2d 861 (1940), we considered whether the Treaty of Friendship, Commerce and Consular Rights between the United States and Germany superseded the statutory law of Maryland by divesting the Orphans’ Court of its discretion to appoint estate administrators.

Id. at 24 , 16 A.2d at 863 . The Treaty in Schneider provided: In case of the death of a national of either of the High Contracting Parties without will or testament, in the territo ²⁵⁴ ry of the other High Contracting Party, the consular officer of the State of which the deceased was a national and within whose district the deceased made his home at the time of death, shall, so far as the laws of the country permit and pending the appointment of an administrator and until letters of administration have been granted, be deemed qualified to take charge of the property left by the decedent for the preservation and protection of the same. Such consular officer shall have the right to be appointed as administrator within the discretion of a tribunal or other agency controlling the administration of estates provided the laws of the place where the estate is administered so permit. Id. at 25 , 16 A.2d at 863 -64 (quoting 44 Stat. 2132 , 2153, art. 24).

We interpreted this clause as retaining both the discretion of the Orphans’ Court and the primacy of our state probate laws. Id. at 25, 16 A.2d at 864 . The pertinent treaty provision in Schneider more clearly expressed the conditional nature of the foreign consul’s authority as limited by the “laws of the place where the estate is administered,” yet through Schneider our Court developed vital principles pertaining to the balance between deference to federal treaty-making authority and state authority in probate matters. In so doing, we referred to the Supreme Court of California’s holding in a similar treaty interpretation case, [t]he question presented is also of grave importance because its solution in favor of the [Consul General of Italy] necessarily ascribes to the federal government the intent, by means of its treaty-making power, to materially abridge the autonomy of the several states and to interfere with and direct the state tribunals in proceedings affecting private property within their jurisdictions.

It is obvious that such intent is not to be lightly imputed to the federal government and that it cannot be allowed to exist except where the language used in a treaty plainly expresses it, or necessarily implies it. Id. at 26-27 , 16 A.2d at 864 (quoting In re Ghio’s Estate, 157 Cal. 552 , 108 P. 516, 523 (1910) (emphasis added)). In affirm ²⁵⁵ ing the Supreme Court of California’s judgment that the treaty did not supercede state probate proceedings, the United States Supreme Court stated, “... treaties ... are drawn by persons competent to express their meaning, ... to embody the purposes of the high contracting parties. Had it been the intention to commit the administration of estates ... exclusively to the consul of the foreign nation, it would have been very easy to have declared that purpose in unmistakable terms.” Rocca v. Thompson, 223 U.S. 317, 332 , 32 S.Ct. 207, 210 , 56 L.Ed. 453, 458 (1912).

While treaties, like contracts, are liberally construed to effectuate the ultimate purpose of contracting parties, the Supreme Court has recognized that probate proceedings in this country are matters primarily committed to state law and not so easily superceded. See id. at 329 , 32 S.Ct. at 209 , 56 L.Ed. at 457 . In a prior case involving a conflict between a foreign treaty and the administration of an estate under Maryland probate laws, Chief Judge Boyd, speaking for this Court in Chryssikos v. Demarco, 134 Md. 533, 539 , 107 A. 358, 360 (1919), stated, “[i]t would not be just to assume that in making a treaty with a foreign country laws of the different States were intended to be repealed or ignored, in the absence of express language or clear implication showing such intent.” The Treaty before us today neither expressly limits the authority of a state to issue estate and inheritance taxes, nor does the Treaty, by necessary implication, restrain a state from acting pursuant to its proper constitutional authority. D. Interpretation of Similar Estate Tax Treaties Between the United States and Other Countries The Treaty between the United States and Germany is not unique.

In fact, the United States is party to more than seventeen bilateral treaties, virtually identical in form and purpose. 16 While it does not appear that other state courts ²⁵⁶ have had the opportunity to review the Treaty before us today, similar estate tax treaties have been considered by state courts and held not to apply to taxes imposed by state governments. In In re Ward, 168 Mont. 396 , 543 P.2d 382 (1975), the Supreme Court of Montana reviewed a treaty between the United States and United Kingdom constructed for the “avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on the estates of deceased persons.” Id. at 385 (quoting 60 Stat. 1391 ). The question before the Montana Supreme Court was whether Montana had jurisdiction to levy an inheritance tax on English trust property under the provisions of the tax treaty. Id. at 384.

The Montana court held that the tax treaty had no application to its state inheritance taxes. Id. In so holding, the court relied on the express language of the U.S.—U.K. Treaty which, similar to the U.S.-Germany Treaty presently in dispute, provided that the taxes subject to the treaty are, “[i]n the United States, the Federal estate tax....” Id. at 385 (quoting The Convention Between the United States of America and the United Kingdom for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion, Article I, Sec. 1). The Montana court also referred to regulations adopted by the Department of Treasury when implementing the treaty which stated that “the provisions ... do not comprehend any of the estate, inheritance, legacy, and succession taxes imposed by the States, Territories, the District of Columbia, and possessions of the United States ...” Id.

(quoting Treasury Dept. ²⁵⁷ Regulations, Sec. 82-102), language which is strikingly similar to the Senate declarations with respect to the U.S.-Germany Treaty presently before this Court. The United States District Court for the Northern District of Indiana also had the opportunity to review a United States Canada Estate Tax Treaty upon a claim by plaintiff that he was entitled to receive a credit from the United States government for a tax paid to a political subdivision of Canada, an inverse of the claim presented today. See Borne v. United States, 577 F.Supp. 115 (N.D.Ind.1983). Again, the United States Canada Treaty limited the scope of the taxes covered to “for the United States of America: the Federal estate tax ...” Id. at 116 (quoting Article I of the United States Canada Estate Tax Treaty).

The District Court concluded, without reservation, that the Estate Tax Treaty applied “only to those taxes imposed by the respective governments and not to taxes imposed by political subdivisions of those respective governments.” Id. In concluding as such, the District Court referred to the Senate Committee Report, which, like the Report produced for the U.S.-Germany Estate Tax Treaty, explained the U.S.-Canada Estate Tax Treaty provisions and the intended taxes to be included: This Convention is similar to all of the other death tax conventions to which the United States is a party insofar as it does not apply to taxes imposed by state and local governments of the United States and is similar to all but two other death tax conventions (the conventions with Finland and Switzerland) in that it does not apply to taxes imposed by political subdivisions of the other country. Id. at 117 (quoting Federal Estate and Gift Tax Reports, ¶ 22,567 at 22,542)(emphasis added). The court then discussed the credit system established by the U.S.-Canada Estate Tax Treaty with respect to taxation by political subdivisions, and ultimately concluded that the United States was not obligated to provide a credit for foreign tax paid.

Id. The importance of the District Court’s opinion lies not in its ultimate holding, but rather in its unequivocal determination that the treaty does not supercede the probate proceedings of the political subdivi ²⁵⁸ sions of the contracting parties, except to the extent that a credit may be applied by the contracting parties themselves. While we are one of a small number of courts to consider the impact of federal estate tax treaties on state probate proceedings, we are not the first. Given that the substance and purpose of these bilateral agreements are virtually identical, given that other